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"Indian Rayon is not a vehicle of diversification for the group" - Views on News from Equitymaster
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  • Jun 8, 2000

    "Indian Rayon is not a vehicle of diversification for the group"

    Indian Rayon is one of the flagship companies of the Aditya Birla group, the second largest industrial house in India. The company is a dominant player in Viscose Filament Yarn (VFY), Carbon Black, Insulators and Textiles. Indian Rayon also emerged as the market leader in readymade garments, with the acquisition of Madura Garments last year. The Company owns leading apparel brands including Van Heusen, Allen Solley, Peter England, Byford and San Frisco.

    Mr. Adesh Gupta is the President and Chief Financial Officer of the Company. Mr. Gupta has been working with the Aditya Birla Group for over 20 years now and has experience in the areas of financial services, corporate finance, legal and corporate taxation. He has held various positions in the Aditya Birla Group companies, prior to joining Indian Rayon as CFO in April 1999. He is Chartered Accountant and also a qualified Company Secretary.

    In an interview to equitymaster, Mr. Adesh Gupta spoke about the various business divisions, their prospects for the current year and scope for any possible restructuring in the near future.

    EQM: Could you kindly elaborate on the prospects for viscose vis--vis cotton and polyester?

    Mr. Gupta: Given the mature nature of the VFY industry, domestic demand is expected to grow only by around 2-3% per annum over the next few years. We expect demand surge from the export markets, where VFY is more preferred due to its properties of a natural fibre.

    Though cheap PFY affected the demand for VFY in select application areas, it is not a major cause of concern any more. The possible shift towards cheaper PFY has already taken place and any further shift will have only marginal impact on the long-term prospects of the industry. The biggest challenge for the industry is the changing fashion trends in India and global markets.

    We may see a consolidation in the Indian VFY Industry, if the present demand supply gap and pressure on margins persists in the local markets. This will benefit large players, including Indian Rayon going forward.

    Our strategy for the VFY business is two pronged:

    • Developing the alternative markets / uses for our products; and
    • Improving the quality and properties of our products by research and development.

    EQM: What could be the future of power-looms and the composite mills in India in the post WTO scenario?

    Mr. Gupta: The textile mills would be affected in the post WTO scenario, unless they will gear up themselves by improving efficiency, modernising their production facilities and cutting costs aggressively. We are quite aware of this and are fully geared to face the challenges and are confident of overcoming competition in the post WTO environment.

    EQM: How about the scenario in the cotton textiles segment?

    Mr. Gupta: The textile business in general suffers from increasing competition and falling margins. Indian Rayon's textile division however remains profitable. We will be concentrating more on research and development, aimed at enhancing product quality and utility. We will also concentrate on strengthening the yarn and developing alternative applications.

    EQM: Your fourth quarter result was impressive in terms of growth in carbon black. However, if one looks at the last business cycle, none of the Indian carbon black manufacturers made money? Do you see that scenario changing and will carbon black manufacturers be able to grow?

    Mr. Gupta: The carbon black division of the company benefited last year from the automobile boom as increased demand for vehicle eventually results in increased demand for tyre and hence carbon black. The outlook for carbon black industry is positive, given forecasts of a strong outlook for the automobile sector in the near future.

    In terms of margins, we suffered due to sharp rise in global prices of carbon ---black feed stock (CBFS), which is the key input accounting for over 65% of production costs. CBFS prices jumped over 50% last year, due to sharp rise in global crude oil prices. The current price of CBFS is probably around the highest level seen in the recent past. We expect global CBFS prices to stabilise around these levels, even assuming a continued firm trend in global crude oil prices.

    Given the fact that CBFS prices are already at its peak and are unlikely to rise sharply in the near future and our volumes are likely to rise significantly benefiting from an upturn in the automobile industry, we expect divisional operating margins to pick-up over the next two years. The division will thus report improved earnings over the next few years.

    Indian Rayon's focus will be on ensuring profitable growth and our strategy is to

    • Improve volumes through increase in market share, widening product range and development of new markets.
    • Improve capital productivity through de-bottlenecking of existing facilities and unlocking full potential of existing assets
    • Enhance margins through focus on new grades, which offer higher realisation

    EQM: The power sector reforms have not taken off really despite the introduction of reforms years ago. What would drive growth in the insulators business in the coming years?

    Mr. Gupta: I agree that the year just gone by was one of the difficult years for the Insulators business. The domestic demand situation turned sluggish due to poor off-take from the State Electricity Boards, the biggest user segment at present. With SEBs going through a restructuring process, development activities slowed down substantially. This, together with lower than budgeted investments for development of power infrastructure by the Government and increased competition from overseas producers affected the insulator business severely last year.

    However, the outlook for the insulator business is improving. We have seen considerable developments in Orissa, Punjab, Uttar Pradesh and the SEBs here have made substantially progress in terms of financial and organisation restructuring. With the completion of the restructuring process, demand for insulators from the existing users (i.e., SEBs) would grow strongly. The entry of private sector players is also likely boost demand further. After a period of slow progress, the positive impact of power sector reform is gaining momentum now. With the likely entry of private sector in the transmission and distribution business and commencement of operations by IPPs, we expect insulator demand to grow strongly in future.

    Indian Rayon's focus will be on ensuring profitable growth through

    • focus on high value products
    • exploring new markets
    • leveraging existing relationship with customers
    • cutting costs through improvement in operational efficiencies and lower rejections

    EQM: You have decided that the textiles part (flex yarn and synthetic yarn) as a non-core area. What are the parameters you've used to distinguish between the core and the non-core businesses and are you open to hiving off the non--core business?

    Mr. Gupta: We have identified Garments, Insulators, Carbon Black and VFY as our core business areas for Indian Rayon going forward. We have identified core businesses based on their growth prospects and our relative strength / leadership in the industry. In case of non-core businesses, either Indian Rayon is not a significant player or the industry prospects are not encouraging and hence we are unlikely to make any large investment in these businesses in future.

    Non core business does not mean that we have exit from it. These businesses are non-core since they do not offer significant growth prospects due to the mature nature of these businesses and/or due to relative positioning of Indian Rayon in the industry. These business still contribute positively and there is more money to be made in these businesses, especially given the resources and efforts invested in the past towards creating physical, brand and distribution assets in these businesses.

    We will divest these non-core businesses if they destroy value for shareholders. The exit from the s sea water magnesia plant is a case in point. As far as divesting other non-core businesses (i.e., textiles is the only non-core area in our business portfolio at present), we will consider them at an appropriate time. After all coming out of textile business is not easy and it contributes to the bottom-line even now.

    EQM: Your annual report mentions Cash Value Added (CVA) as an important parameter. Could you elaborate on that?

    Mr. Gupta: It is only a slight variant of Economic Value Added (EVA) and the basic objective remains the same - to generate more than your cost of capital. The significant difference between these two is the methodology used for calculating capital employed in the business. The CVA process inflates the assets to their present value using an agreed inflation rate and then compares with current earnings. We preferred to use CVA as a measurement metric since our assets are created long back and most of them are depreciated now.

    The basic objective is to create value for shareholders by generating returns in excess of its cost of capital. CVA is just another measure to judge our performance.

    EQM: Now the cement operations have been consolidated in Grasim, aluminium in Hindalco, and fertilisers and copper in Indo Gulf, is it possible that Indian Rayon would emerge as a vehicle for the Birla Group's textile operations?

    Mr. Gupta: The core businesses for Indian Rayon are readymade garments, carbon black, viscose filament yarn and insulators. Indian Rayon will remain in these businesses in future.

    The garments business was added to its portfolio last year, keeping in mind the high growth potential in the garments business. Indian Rayon's core business portfolio consisted of VFY, Carbon Black and Insulators. These businesses have positive outlook, but are expected to offer only stable earnings growth in the near future. We thus felt the need for a high growth business in the Company (especially after having divested the cement business) and thus the ready-made garments were added to its portfolio last year.

    We will now remain only in the identified four core business areas viz., Garments, Insulators, Carbon Black and VFY.

    EQM: Will Indian Rayon be used as a vehicle for diversification?

    Mr. Gupta: Indian Rayon will not be a vehicle for diversification in to other areas by the Aditya Birla Group. As mentioned earlier, ready-made garments was added after the careful thought that it required a growth business to maintain the earnings momentum. With Indian Rayon's presence in textile related business (which accounts for 27% of revenues now), getting into garment business is not a diversification in its true sense. It's just another growth opportunity for us.

    EQM: If I take textiles and garments together, your existing textiles business itself forms a very substantial portion of your turnover. Grasim also has a textile business and has brands like Grasim Suitings, Graviera and Scabal. Is an integration possible?

    Mr. Gupta: The textile fabric business and garments business have different dynamics in terms of the branding and promotion, marketing and distribution as well as trade mechanism. We do not see any significant synergy gains arising out of the merger and hence would run them as two separate entities. However, we are not closed to this idea. If it makes economic sense, we are willing to look at this option in future, but do not have any concrete plans at the moment.

    Grasim will continue to focus on suiting fabrics and Indian Rayon will look at ready-made garments and traditional textile businesses.



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