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Betting on garments to add value… - Views on News from Equitymaster
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  • Apr 7, 2001

    Betting on garments to add value…

    The Aditya Birla companies have one common trait. They are one of the most efficiently managed companies. Indian Rayon & Industries is no exception to that. It is one of the major players in the Indian carbon black industry. The company has an aggregate capacity of 110,000 tonnes and commands 22 percent market share. But it ranks second in terms of capacity next only to Philips Carbon Black, which is the market leader in this segment.

    The carbon black division contributed to 19 percent of turnover for the fiscal year 2000. Though volumes grew by a healthy rate of 55 percent in FY00, average per unit realisation has been on the decline for the last three years. On the other hand, carbon black feedstock prices (CBFS), the main raw material for manufacturing carbon black, shot up 50 percent to US$ 130 per tonne in FY00 due to a spurt in the international crude prices. As a result, the gross margins of this division fell from 23 percent in FY99 to 19 percent in FY00.

    The formidable mix...
    (% sales) 3QFY00 3QFY01
    Garments - 23.0%
    Textiles 31.0% 23.0%
    Viscose Filament Yarn 24.0% 19.0%
    Carbon Black 24.0% 19.0%
    Insulators 16.0% 12.0%
    Others 5.0% 4.0%
    Total 100.0% 100.0%

    Further, the prospects of the industry are also not encouraging. The market size of the industry is estimated at Rs 8 billion (US$ 170 million) and the industry has grown at an average rate of 12 percent over the last six years. However, growth has tapered considerably over the last three years. For instance, the market size grew at a marginal rate of 4.1 percent in FY00 as against 30 percent and 23 percent in 1996 and 1997 respectively. One important aspect to note is that imports have jumped by 200 percent (in volume terms) in 1998. The reason could be the cheaper imports from South East Asian countries, which slashed prices during the currency crisis.

    The rise in crude prices in the current year has had negative implications on the industry, with CBFS prices rising by 38 percent to US$ 180 per metric tonne during the year. Added to the woes, automobile sales in the current year have declined significantly due to unfavorable monsoon and natural calamities in various parts of the country. Since carbon black demand is largely dependent on automobile sales, volume growth has been lacklustre in the current year.

    As a result, the company’s capacity utilisation declined to 84 percent in the first nine months of the current year from 99 percent in the corresponding period of the previous year. Despite a one percent decline in production, aggregate sales have gone up sharply by 23 percent to Rs 1.9 billion (US$ 40 million) during the same period. The primary reason is a sharp growth in exports by 126 percent to Rs 206 million (US$ 4 million) due to the company’s aggressive stance to increase exports in order to combat slow down in the domestic market. What is also interesting is the fact that the company has been able report a 20 percent growth in realisations for the first nine months of the current year. This has helped the company in maintaining its margins intact.

    Apart from carbon black, the company is also the market leader in Viscose Filament Yarn (VFY), insulators and garments. However, one of the key growth drivers for the company would be the garments division, where the company commands almost 27 percent market share of the branded readymade garment business. For the first nine months of the current year, the garment business contributed to 24 percent of Indian Rayon’s turnover. The company’s turnover for 1HFY01 was Rs 7.5 billion (US$ 160 million), of which Madura Garments contributed to Rs 2.5 billion (US$ 53 million). The Indian readymade garment market is expected to grow at the rate of 25 percent per annum. Of this, the projected growth rate of the shirting segment is around 40 percent per annum.

    Indian Rayon, with its strong brands (which include Peter England, Allen Solly, Louis Philippe and Byford) in both trousers as well as in shirts, is well positioned to become the market leader in this sector. Even the export potential of this segment is promising. In the current year, readymade garment exports have gone up by 224 percent for the first nine months of the current year. Going forward, exports are expected to show robust growth since the company has won the international rights to market its brands in the third quarter of the current year.

    But the prospects of the other two divisions are dreary. Both the insulator as well as the VFY divisions have been witnessing decline in realisations for the last three years. While VFY is a mature industry, sluggish reforms have subdued growth of the insulator division. But, the budget 2002 seems to have injected the right dose to boost auto sales. Though overall automobile sales are down, passenger car sales have showed positive trends in March 2001 as majority of auto companies passed on the benefit of excise reduction to the customers. This should benefit the company’s carbon black division.

    Nevertheless, the transformation from a commodity player to a brand-oriented player is expected to provide the impetus for growth for Indian Rayon in the coming years.



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