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Indo Rama: A play on the cycle - Views on News from Equitymaster
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  • Jun 22, 2001

    Indo Rama: A play on the cycle

    Indo Rama Sythetics Ltd, the Lohia group company, has made a return from the red in FY01. The company recorded losses for three consecutive years prior to fiscal ended March '01. However, the company's sales had been sliding since FY95. The company is primarily into the manufacture of polyester staple fibre (PSF), polyester filament yarn (PFY) and polyester chips. Polyesters contribute 72% of the revenue. Other key product of the company is texturised yarn. With declining profits since mid-nineties the company slid into the red with the polyester cycle taking a downturn from FY98.

    Over FY98 and FY99 polyester prices continued to dip taking the company down along with it. Also, the heavy debt burden put added pressure on the company's earnings. The heavy debt burden meant that any downturn in business would lead to the company being over leveraged.

    In FY00 and FY01 polyester prices have recovered enabling the company to come back into the black. However, FY01, was a challenging year for the polyester industry with end products not registering commensurate rise in prices as compared to feedstock prices, PTA and MEG. Prices of polyester end products have weakened over 1QFY02 with domestic and global economic growth slowing down. Weakness in feedstock prices is a consoling factor, which could protect margins. Though revenue growth could take a hit.

    Debt pulls it down
      FY99 FY00 FY01
    Net sales 11,624 14,871 17,495
    EBITDA 1,256 2,664 2,868
    OPM 10.8% 17.9% 16.4%
    Interest 1,791 1,707 1,739
    Interest cover 0.7 1.6 1.6
    PAT (1,596) (77) 187
    Net Worth 3,088 5,842 5,842
    Debt 14,321 13,611 13,611
    Debt/equity 4.6 2.3 2.3

    The company continues to remain highly leveraged. The decline in debt / equity ratio is due to the company revaluing its assets in FY00, which added Rs 2886 m as revaluation reserve to the networth. Adjusting for this book entry the debt / equity remains at the previous level of 4.6x. Although during the up-cycle in polyesters the interest burden is manageable any downtrend in business prospects could put the company back in the red. The high leverage prevents the company from enjoying a buffer in case of a slowdown in business.

    The stock price of Indo Rama has ranged between Rs 5 and Rs 9 during the past 12 months. At the current price of Rs 7 the company trades on a multiple of 6.2x FY01 earnings of Rs 1.1.



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