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Indian Rayon: Another diversification?

Jun 26, 2001

After garments and insurance, Indian Rayon (IRYN), the Aditya Birla Group company diversifies once again! The company has entered into an definitive agreement to acquire a 50.35% controlling stake from Groupe Bull France (Bull) in PSI Data Systems Ltd (PSI) in an all cash deal at a price of Rs 187 per share aggregating Rs 710 m. In line with the SEBI takeover code, Indian Rayon will make an open offer to acquire a further 20% stake from public shareholders at the price of Rs 187 per share. This will take the total shareholding of Indian Rayon in PSI to 70.35%, for a final consideration of Rs 992 m. The market capitalisation to sales of the deal is 1.2 times. After hearing the acquisition news, PSI Data was down by 16% as the markets were anticipating the acquisition price in the range Rs 250 and above. Bull has been on the look out for prospective buyers to sell off its stake in PSI for quite sometime and Indian Rayon’s offer seems to have given it the exit route sooner.

About PSI…
After its lackluster performance in FY01, PSI Data Systems is looking at a growth rate of 50% in revenues for FY02. The FY01 performance was lackluster on two counts. Firstly, the growth rate for FY01 compared to FY00 at 39% was way below industry standard. Secondly, the operating margins of the company were 20.8%. This too was way below the industry average. The company’s operating margins were low mainly due two reasons. One was primarily because, a significant proportion of its revenues come from Indian operations (23%). The operating margins are low in domestic operations. Secondly, its ATM business had lower operating margins (it has now been sold off).

European operations under cloud…
(Rs m) FY01 FY02E Change
Sales 830 1,245 50.0%
Other Income 20 25 26.2%
Expenditure 657 934 42.1%
Operating Profit (EBDIT) 173 286 80.0%
Operating Profit Margin (%) 20.8% 25.0%  
Interest 4 5 15.7%
Depreciation 25 25 1.3%
Profit before Tax 164 281 87.0%
Extraordinary item 11 0  
Tax -8 12  
Profit after Tax/(Loss) 183 269 47.2%
Net profit margin (%) 20.6% 23.6%  
No. of Shares (eoy) (m) 7.6 7.6  
Diluted number of shares 7.6 7.6  
EPS 24.0 38.7  
P/E (x)   7.2  

The company plans to improve margins by increasing contribution to revenues from Europe (47% of FY01 revenues, predominantly from Groupe Bull) and US (30% of revenues). PSI is hoping to raise operating margins by 2-3% through this move. The margins from US and European operations were in the region of 28% in FY01.

Continuous restructuring…
Indian Rayon is already a diversified major with interest in Viscose Filament Yarn (VFY), carbon black, insulators and garments. It sold its cement division to Grasim, another Birla Company, in FY99. The company also exited from the seawater magnesia businesses in FY00. Later in FY00, it acquired Madura Garments and its brands from Coats Viyella. With IRDA freeing the Indian insurance sector, Indian Rayon ventured into the business in partnership with Sun Life of Canada. Previously, Birla Global Finance, the holding company for the Aditya Birla Group, had plans to venture into insurance. But since it did not have the minimum required net worth of Rs 1 bn, Indian Rayon was used as an investment vehicle. The company has invested Rs 820 m in the insurance joint venture (for a 69% stake).

Concerns…
It seems that Indian Rayon is being used as a vehicle for diversification for the Aditya Birla Group. Last year, when we spoke to Mr. Adesh Gupta, the CFO of the company, he was of the opinion that Indian Rayon will not be used as a vehicle for diversification Interview. In FY01, apprehensions were raised about the company’s venture into insurance in light of the competitive nature of the industry.

Indian Rayon is one of the cash rich companies under the Birla Group (it generates more than Rs 2.5 bn as free cash every year). Though this acquisition will provide impetus for growth of the company (barring garments, prospects for other divisions are gloomy for FY02), acquisitions always have its own glitches like integration and management style. Besides, with the US economy slowing down, smaller companies might lose out their clients to bigger software companies. Consolidation, both domestically and internationally, is bound to happen sooner or later. Besides, revenues from its European operation might take a hit with the exit of Groupe Bull from the company. It remains to be seen whether Bull continue its business relations with PSI Data.

After touching its 52-week high of Rs 108, the scrip has been hovering around Rs 79 for quite some time. The second buy-back announcement at Rs 95 also failed to enthuse markets, the price was just at a 15% premium to the then prevailing market price. The scrip currently trades at a P/E multiple of 3.1x the FY02 projected earnings.


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