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Indian Rayon: 'Striking' fall in profits - Views on News from Equitymaster
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  • Jan 28, 2002

    Indian Rayon: 'Striking' fall in profits

    Indian Rayon, the diversified major under the Aditya Birla Group, has reported a 72% drop in profits for the third quarter ended December 31, 2001. One of the key reasons for this sharp fall in profits is on account of strike in its rayon division, whch lasted for more than 2 months.

    (Rs m) 3QFY01 3QFY02 Change 9mFY01 9mFY02 Change
    Net sales 3,803 3,727 -2.0% 10,631 10,780 1.4%
    Other Income 56 47 -16.5% 215 207 -3.8%
    Expenditure 3,300 3,302 0.1% 9,236 9,420 2.0%
    Operating Profit (EBDIT) 503 425 -15.4% 1,396 1,360 -2.5%
    Operating Profit Margin (%) 13.2% 11.4%   13.1% 12.6%  
    Interest 173 163 -6.0% 574 478 -16.8%
    Depreciation 181 186 2.4% 540 552 2.3%
    Profit before Tax 204 124 -39.4% 497 537 8.1%
    Extraordinary items - (69)   - (69)  
    Tax 74 18 -75.1% 177 181 2.7%
    Profit after Tax/(Loss) 131 36 -72.3% 320 287 -10.5%
    Net profit margin (%) 3.4% 1.0%   3.0% 2.7%  
    No. of Shares (m) 59.9 59.9   59.9 59.9  
    Diluted Earnings per share* 8.7 2.4   7.1 6.4  
    P/E Ratio (x)   29.2     11.1  

    Sales declined by 2% in 3QFY02 due to a 35% fall in revenues in its viscose filament yarn (VFY) division and a 16% fall in its textiles business. In light of weakness in auto sales, carbon black division also registered a 5% fall in revenues. However, in line with expectations, garments and insulator recorded high growth in sales. One of the key factors that led to this sharp rise in sales is the company's renewed thrust on exports. Exports for garments and carbon black division increased by 92% and 88% respectively in the third quarter of the current fiscal.

    Though turnover fell by 36% for its VFY division, the encouraging aspect is the rise in realisation by 10% in 3QFY02. For the first nine months of the current fiscal, realisation has increased by 9% to Rs 160 per kilogram. To put things in perspective, average realisation was around Rs 143 per kg in 1QFY01. But there are severe challenges ahead for this division. Though overseas plant closures have widened the supply-demand gap, China, one of the key competitors in the international markets, has been making significant inroads in the domestic markets. This, coupled with a subdued demand scenario in the domestic markets, is expected to lower prices in the Indian markets.

    Extraordinary item here pertains towards VRS expenses. 361 employees opted for the scheme. Towards expediting the disposal of pending assets of Sea Water Magnesia business, the company has recently entered into a Memorandum of Understanding (MoU) for disposal of land and other infrastructure facilities at Vizag. However, considering the items already sold in the current fiscal, the company expects to generate surplus of Rs 60 m without even considering remaining assets.

    Prospects for other divisions like insulators and textiles continue to remain challenging. Though demand for insulators in the international markets are promising, the domestic power sector continues to suffer on account of slower progress on reforms. Due to recession in key markets, flax and worsted yarn demand have also slowed down. Consequently, prices have come under pressure resulting in a 200 basis points fall in divisional operating margins in 3QFY02. Apart from this, the company's acquisition of PSI Datasystems and venture into unrelated businesses like insurance have also affected sentiment towards the stock. The stock currently trades at Rs 74 implying a P/E multiple of 11.1x annualised nine months earnings.



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