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Indian Rayon: Input cost worries

Mar 14, 2005

Performance summary
Indian Rayon, the A V Birla Group Company, announced mixed 3QFY05 results. While the company witnessed a decent topline growth of nearly 20% YoY, the bottomline rose marginally on the back of rising input costs and the VRS announced at the rayon division. For 9mFY05, the topline grew by 17% YoY while the bottomline has actually dipped by nearly 29% YoY.

What is the company's business?
Indian Rayon is a diversified company belonging to the A. V. Birla group. The company has presence in various sectors like viscose filament yarn (VFY), carbon black, garments, textiles, insurance and information technology. The company's presence in software (PSI Datasystems) and insurance (Birla Sun Life Insurance) businesses are through its subsidiary holdings. It has hived off its insulator division into a separate joint venture with NGL of Japan.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 4,117 4,933 19.8% 11,772 13,737 16.7%
Expenditure 3,490 4,239 21.5% 9,893 11,962 20.9%
Operating profit (EBDITA) 627 694 10.7% 1,880 1,774 -5.6%
EBDITA margin (%) 15.2% 14.1%   16.0% 12.9%  
Other income 24 17 -28.5% 110 74 -32.4%
Interest 24 45 84.8% 113 131 16.0%
Depreciation 202 206 1.7% 667 601 -9.9%
Profit before tax 424 460 8.5% 1,210 1,117 -7.6%
Extraordinary items - 20   (200) (22)  
Tax 139 154 11.2% 372 397 6.8%
Profit after tax/(loss) 286 287 0.3% 1,037 742 -28.5%
Net profit margin (%) 6.9% 5.8%   8.8% 5.4%  
No. of shares (m) 59.9 59.9   59.9 59.9  
Diluted earnings per share (Rs)* 19.1 19.1   23.1 16.5  
Price to earnings ratio (x)         27.0  
(* annualised)            

What has driven performance in 3QFY05?
A mix of volumes and realizations:  During 3QFY05, the company witnessed a topline growth of nearly 20% YoY. This comes on the back of improved realizations in the garments business, which contributes to nearly 27% of the company's revenues while at the same time, the viscose filament yarn and carbon black (24% of the revenues) segments witnessed a surge in volumes. Better quality products in the garments business coupled with high capacity utilization in other business segments helped achieve the all round growth of higher output and improving realizations.

Realisation story...
Improved realizations 3QFY04 3QFY05 (%) change
Garments 1,008 1,299 28.9%
Textiles 1,032 1,163 12.7%
Volume snapshot
(Tonnes) 3QFY04 3QFY05 (%) change
VFY 3,952 4,667 18.1%
Carbon Black 29,846 41,499 39.0%

Input costs, a worry:  During 3QFY05, Indian Rayon witnessed a decline in operating margins by 110 basis points on the back of rising input costs, which constitute nearly 62% of the entire expenditure. Further, the company also witnessed an outgo towards VRS at the rayon division. Rising crude oil prices and high freight costs have impacted the performance during the said period. We believe that this trend is likely to continue over the medium term.

Expenditure Table
(%) of sales 3QFY04 3QFY05 9mFY04 9mFY05
Consumption of raw materials 51.7% 53.2% 49.8% 52.5%
Staff cost 7.2% 6.7% 7.4% 7.4%
Other expenditure 25.8% 26.0% 26.8% 27.2%

Reflecting in the bottomline:  Indian Rayon witnessed a marginal rise in the bottomline by nearly 30 basis points in 3QFY05 on a YoY comparison. This lower profitability growth could be attributed to the higher than proportionate rise in operating costs, while another important factor is the fact that other income has dropped by nearly 29% YoY. Also, a sharp rise in interest expenditure has created a further dent in the bottomline.

What to expect?
At Rs 446, the stock is trading at a price to earnings multiple of 27 times its annualized 9mFY05 earnings. High demand for VFY and carbon black in the domestic as well as overseas markets have led to the company increase capacities. This shall help the company increase the volumes. However, we believe that in the medium term, crude oil prices are likely to remain firm and to that extent operating margins are likely to witness pressure. Further, with the opening up of the textile markets, realizations are likely to decline although the volumes might compensate for the same.

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