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Indian Rayon: Consistency, an issue?

May 5, 2005

About the company
Indian Rayon is the Aditya Birla Group's most diversified conglomerate, with a turnover in excess of Rs. 17.1 bn. The company has a presence in key business segments, which include viscose filament yarn, carbon black, textiles and garments. The company has also made a foray into insurance, IT services and Business Process Outsourcing (BPO) fields. It has hived off its insulators business into a joint venture with Birla NGK Insulators Pvt Ltd.

Business profile
Indian Rayon has a 28% market share and is the second largest producer of VFY in India. With a capacity of 16,000 tonnes per annum (tpa), Indian Rayon also accounts for 33% of VFY exports from India. It is also the world's fourth, and India's second largest producer of carbon black. Through the acquisition of Madura Garments in 2000, the company owns power brands such as Allen Solly, Peter England, Louis Phillipe and Van Heusen.

Performance over the years
A snapshot
(Rs m) FY02 FY03 Change FY04 Change FY05 Change
Net sales 14,082 14,438 2.5% 15,738 9.0% 18,606 18.2%
Expenditure 12,258 12,143 -0.9% 13,248 9.1% 16,067 21.3%
Operating profit (EBDITA) 1,824 2,295 25.8% 2,490 8.5% 2,539 2.0%
EBDITA margin (%) 13.0% 15.9%   15.8%   13.6%  
Other income 95 107 12.6% 143 33.6% 101 -29.4%
Interest 455 217 -52.3% 148 -31.8% 186 25.7%
Depreciation 735 717 -2.4% 870 21.3% 807 -7.2%
Profit before tax 729 1,468 101.4% 1,615 10.0% 1,647 2.0%
Extraordinary items-gain/(loss) 13 (187)   200   (77)  
Tax 306 227 -25.8% 502 121.1% 434 -13.5%
Profit after tax/(loss) 436 1,054 141.7% 1,313 24.6% 1,136 -13.5%
Net profit margin (%) 3.1% 7.3%   8.3%   6.1%  
No. of shares (m) 59.9 59.9   59.9   59.9  
Diluted earnings per share (Rs)*           19.0  
Price to earnings ratio (x)           22.0  
(* annualised)              

FY02: The company reported a marginal dip in revenues by 1% YoY. VFY and textiles divisions had to operate in a tough business environment. VFY division was plagued with an illegal strike disrupting production for 67 days in the latter half of the year. Textiles division too, faced difficulties due to prolonged slowdown in the global markets, sluggish demand, falling prices and competition from overseas players. However, carbon black and insulator divisions helped maintain the revenues. As a result, operating profits were under pressure and declined by 8% YoY on account of mixed performance of the businesses. Bottomline declined by 36% YoY on account of provision of deferred tax liability to the tune of Rs 256 m, which was not provided in the previous year.

FY03: Revenues grew by a modest 3% YoY. It must be noted that revenues from insulator business were not factored in, as it was hived off into a separate joint venture. However, bottomline jumped by 142% YoY on account of a lower base taken in the previous year (strike in the VFY division disrupted production). VFY, carbon black and textiles contributed around 23% each of revenues. However, garments division proved to be a dampener, as its share in the revenue pie fell from 25% to 23%. Higher levels of inventory, increased supplies and pricing pressure affected this division.

FY04: The company recorded a topline growth of 9% YoY largely driven by garments and textiles division, each contributing 24% and 25% to the revenues respectively. Rise in input costs by 9% YoY led to a slower increase in operating profits by 6% YoY. The VFY division was plagued by steep rise in wood pulp prices, steam coal prices and lower realisations due to cheaper imports from China.Carbon black was also affected by volatile CBFS prices, increasing sea freight and a transporters strike. The company divested its stake in Indo Gulf Fertilisers Ltd resulting in extraordinary gains to the tune of Rs 200 m, resulting in a 25% YoY growth in the bottomline. In the textiles division, despite the growth in revenues by 13%, operating profits were impaired and dipped by 17% YoY due to high input costs and a significant appreciation in the rupee by 8%.

FY05: The company clocked 18% YoY growth in revenues, led by the garments division. 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 marginal growth in the operating profits can be attributed to the rise in raw material costs. Bottomline dipped by 13% YoY due to VRS cost borne by the company. Excluding the VRS impact and the extraordinary gains made in FY04 on the back of its divested stake in Indo Gulf, the bottomline actually grew by 9% YoY. Thus, over the years, garments has been a revenue and profit driver for the company. VFY continues to be a slow growth division (though very high cash generator) while carbon black segment has been showing steady revenues and operating profits.

What's in store for the future?
At Rs 417, the stock is trading at a price to earnings multiple of 22 times FY05 earnings. Going forward, though the overall performance of the company over the years has been encouraging, the completely diversified nature of its operations is a cause for concern. Though the rise in raw material costs globally is beyond the company's control, prudent materials management (taking advantage of lower costs) should augur well for the company in the medium term. Garments will continue to remain the company's key growth driver. Increased retail initiatives combined with the right positioning of its major brands is likely to provide an impetus for further growth in this division. Post-MFA, the company is also expected to enhance its presence in the international markets thereby boosting growth in the textiles division too.

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