Though Indian Rayon, the market leader in the readymade garment segment, has reported robust growth in sales for the first nine months of the current year, margins might come under pressure due to the recently levied excise duty.
The company has strong brands like Peter England, Van Heusen, Louis Phillipe, San Frisco and Byford. The garment division, for the first nine months of the current year, has recorded a turnover of Rs 2,536 m (24% of turnover). With operating margins of around 19%, this division is expected to be the growth driver for the company in the future because of its well established brands and distribution network.
But, the government in an attempt to boost revenues has levied a 16% excise duty on garment manufacturers, which incidentally has created lot of deliberations from its manufacturers association. This does not augur well for Indian Rayon, as margins would come under pressure (margins are expected to come down by 1.5%). The company has decided to partly pass on the increase in excise duty to the consumers for all its brands in the range of 7%-8%. As a result, even if margins do not fall sharply, sales growth might be affected given the price sensitive nature of the Indian consumer.
After prolonged representations by the garment manufacturers association, the finance ministry has decided to consider the reduction in excise duty. But given the current unstable political scenario, the prospects are bleak.
The stock is currently trading at Rs 72, at a P/E multiple of 7.0x the annualised nine months earnings. On the annualised sales of Rs 14,174 m, the market capitalisation to sales works out to 0.3 times (market capitalisation is Rs 4,331 m).
At current valuations, the scrips has good upside potential given the fact that the company has strengthened its presence in other core businesses like carbon black, insulators and Viscose Filament yarn. Moreover, it has recently won the international rights for all it brands from Coats Viyella, which will also boost revenues and profitability. It has recently ventured into the women’s wear segment, which hitherto has substantial unorganised sector presence. The company is the market leader in the all the segment and is also one of the most cost efficient producers in the country.
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