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Indian Rayon: Trying its best!

Apr 28, 2005

Introduction to results
Indian Rayon posted lacklustre results for the fourth quarter and FY05. While the topline grew by a decent 18% YoY on account of improved realisations of its garments and textiles divisions, bottomline dipped by 13% on account of VRS cost to the tune of Rs 95 m. Excluding the VRS impact, net profit has actually risen by 9% in FY05.

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) 4QFY04 4QFY05 Change FY04 FY05 Change
Net sales 3,966 4,869 22.8% 15,738 18,606 18.2%
Expenditure 3,356 4,194 25.0% 13,248 16,067 21.3%
Operating profit (EBDITA) 610 675 10.7% 2,490 2,539 2.0%
EBDITA margin (%) 15.4% 13.9%   15.8% 13.6%  
Other income 33 27 -19.7% 143 101 -29.6%
Interest 35 55 57.7% 148 186 25.7%
Depreciation 203 206 1.6% 870 807 -7.3%
Profit before tax 405 440 8.6% 1,615 1,647 2.0%
Extraordinary items - 9   (200) 77  
Tax 129 36 -71.9% 502 434 -13.6%
Profit after tax/(loss) 276 395 43.1% 1,313 1,137 -13.4%
Net profit margin (%) 7.0% 8.1%   8.3% 6.1%  
No. of shares (m) 59.9 59.9   59.9 59.9  
Diluted earnings per share (Rs)* 18.4 26.4   21.9 19.0  
Price to earnings ratio (x)           21.9  
(* annualised)            

What has driven performance in FY05?
Garments, the leading growth driver: Garments business clocked an impressive 21% YoY growth for FY05 on the back of improved realisations from the sales of high price-point products. The power brands 'Louise Phillipe' and 'Peter England' maintained their top status in the fashion segment by recording revenues above Rs 1.0 bn.

Textiles records profits across all ranges: Revenues in this division grew by a decent 15% YoY. Stable wool prices, value-added yarns and increased retail initiatives in linen fabric contributed to the increase in revenues.

Cost Breakup
(% of sales) 4QFY04 4QFY05 FY04 FY05
Raw materials 58.9% 54.2% 51.9% 53.5%
Staff cost 7.5% 6.8% 7.5% 6.7%
Other expenditure 25.3% 25.2% 26.4% 26.7%
(Increase) in stock -6.3% -0.1% -1.3% -0.6%
VFY bogged by low realisations: Though volumes of the VFY division grew by 5% in FY05, realisations were affected due to high inventory pile-up and increased imports from China. Despite that, the division managed to record a 5% YoY growth in its revenues buoyed by a robust growth in the chlor-alkali segment.

CBFS prices, a worry: The carbon black division reported a 37% YoY growth in its revenues and a 40%YoY growth in volumes due to 40,000 tonnes added through brownfield expansion project (completed in March 2004). However, it must be noted that carbon feedstock prices, a major raw material were high on account of rising global crude prices. Having passed this impact to the customers, the realisations of this division improved.

VRS hampers bottomline: The company incurred VRS cost at the rayon division of Rs 95 m. As against this in the previous year, the company had made gains of Rs 200 m when it divested its stake in Indo Gulf Fertilisers. As a result, the bottomline of the company declined by 13% YoY. Excluding extraordinary items from both the years, on a like-to-like basis, net profit has actually risen by 9% in FY05.

What to expect?
At Rs 415, the stock is trading at a price to earnings multiple of 21.9 times FY05 earnings. The management has declared a dividend of 40% for the current year.

As far as the margins are concerned, the decline in FY05 could be attributed to higher raw material costs as a percentage of sales (as is evident from the cost break-up table). However, in 4QFY05, raw material cost as a percentage of sales has declined considerably indicating lower input cost pressure. This explains why operating margins in 4QFY05 are higher than FY05 as a whole.

Having said that, going forward, CBFS prices are likely to be a cause of concern with international crude prices heading northwards. Currently, oil prices are hovering above the US$ 50 per barrel mark. But increased retail initiatives will help improve the volumes in the garments division. Also, the textiles division is likely to benefit in the form of increased export volumes post the quota regime. However, China, Bangladesh and Pakistan are likely to provide stiff competition on the textile exports front. Overall, amidst concerns, the company's full year performance is encouraging.

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