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Saturday, 05 March 2011 00:00
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Which would you rather buy, a company that has a R4,660 crore turnover or one with a R13,124 crore turnover? The answer is pretty obvious until you take a look at the profits. The first firm had a profit of R2,118 crore, while the latter had, believe it or not, a profit of just R832 crore in 2009-10. Both firms are owned by the same group, Vedanta. The first is the group’s mining firm Sesa Goa and the latter is its copper firm Sterlite—Sesa Goa’s profit margins are 46%, while Sterlite’s are a relatively modest 6%. Cut to the AV Birla Group, and things aren’t too different there either. Essel Mining, it is true, has a lower profit of R768 crore in comparison with aluminium firm

 

Hindalco’s R1,916 crore. But while Essel has a turnover of only R2,560 crore, Hindalco’s turnover is a mammoth R19,536 crore—while Hindalco’s turnover was 7.6 times that of Essel in 2009-10, its profits were just 2.5 times higher. The net profit margins for the two firms were 10% and 30%, respectively. In general, the FE analysis of mining and metals firms found net profit margins were around 45% for mining firms, 8% for copper firms, 15% for aluminium ones and 17% for steel companies in 2009-10.

All of which suggest their own policy actions. One, the government has to go in for auctions as a way to allot mines in the future, otherwise this is going to be the next big scam after the telecom one. The way things are right now, the firm that gets a captive mine gets a huge advantage over the rest, so the government has a lot of scope for favouritism. The Tatas had filed a case against the government for the allotment of an ultra-mega power plant project where, while the government had initially said the coal from the mine could not be used for other projects, they later allowed it—naturally, it made a huge difference to the viability of the plant. The case is listed to come up before the court in the next few weeks. Hopefully the committee that is examining the issue of allocation of natural resources will recommend this course of action. The second course of action that suggests itself relates to royalty rates. Right now, per tonne of iron ore, the government earns R700 or so in terms of excise duty and various royalties—this will go up to around double that amount with the higher export levy. But compare this with around R5,500 for iron and steel. Once again, higher royalty rates are a good idea. Indeed, a hike in royalty rates is a better way to fund local development than the 26% profit sharing the government is in favour of—unlike profits that depend upon how the P&L is constructed, the royalty payments are a lot more certain.

 

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