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Indo Rama: Move to higher gear - Views on News from Equitymaster
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  • Jul 18, 2002

    Indo Rama: Move to higher gear

    In our earlier reports, we had indicated that Indo Rama Synthetics (India) Ltd. is exhibiting volatility in topline growth. After slipping 15% in the preceding quarter, net sales have remained flat, YoY, for 1QFY03. Having said that, over the past two years the company has significantly improved performance. Restructuring efforts on part of the company is yielding gains.

    (Rs m) 1QFY02 1QFY03 Change
    Net Sales 4,613 4,614 0.0%
    Other Income 19 15 -18.9%
    Expenditure 3,802 3,516 -7.5%
    Operating Profit (EBDIT) 811 1,098 35.5%
    Operating Profit Margin (%) 17.6% 23.8%  
    Interest 337 164 -51.3%
    Depreciation 263 275 4.8%
    Profit before Tax 229 674 193.7%
    Extraordinary items (38) -  
    Tax 69 272 293.8%
    Profit after Tax/(Loss) 122 402 229.3%
    Net profit margin (%) 2.6% 8.7%  
    No. of Shares 166 166  
    Diluted earnings per share* 2.9 9.7  
    P/E Ratio   3.3  

    Polyester and polyester intermediate prices rose considerably in the first quarter ended June '02, compared to the preceding quarter. The rise is likely to have been led by expectations of better regional demand, primarily China and higher crude oil costs, which could have reflected in feedstock prices. On YoY basis, prices have increased marginally. With re-stocking, production seems to have increased but it does not seem to have resulted in higher volume sales. We reckon, volumes could have declined in the concerned period. Also, polyester intermediate prices rose commensurate to final product prices, keeping margins under check.

    However, the company has reported sequential and annual margin improvement. These gains are likely to have materialised from higher operating efficiencies. The company is emphasizing on I.T to further streamline business processes, which seem to have facilitated reduction in marketing and logistic expenses. Indo Rama has appointed Accenture for better deployment of I.T resources. In our last report, we mentioned likelihood of improved margins.

    Interest costs have continued to decline. The company has reduced its outgo on interest over the past five successive quarters. This is largely due to capital restructuring and debt re-financing efforts. Over FY00 and FY01, the company converted debt amounting to Rs 127.7 m into equity. Also, in the past year, Indo Rama re-paid loans amounting to Rs 1.9 bn.

    The company has announced an equipment & technology tie-up with Zimmer AG, Germany. Over the next two years, the company is expected to invest Rs 4.9 bn to expand by almost double its staple fibre capacity to 300,000 tonnes per annum (TPA). Ernst & Young (E&Y) has been appointed as external financial advisors to help develop strategic initiatives. As a possible upshot, the company has decided to spin off the spun yarn business into a separate company with effect from FY03.

    At Rs 32, the scrip is trading on a multiple of 3.3x 1QFY03 annualised earnings. Over the past year, valuations of the company have climbed from 1.5x to 3.5x annualised earnings. Over the concerned period, the scrip has sky rocketed from Rs 7 levels to Rs 32 levels. Considering a turnaround in the domestic economy, performance of the company is likely to continue into FY03.



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