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Indian Rayon: Acquisition clouds 1QFY02

Jul 31, 2001

Indian Rayon, the diversified Aditya Birla Group Company, has posted an encouraging performance for the first quarter of the current financial year. The company has managed to improve margins as well as reduce its interest costs by restructuring some high cost debts during the first quarter.

(Rs m)1QFY011QFY02Change
Sales 3,194 3,421 7.1%
Other Income 91 74 -19.1%
Expenditure 2,779 2,964 6.7%
Operating Profit (EBDIT) 415 457 10.3%
Operating Profit Margin (%)13.0%13.4%
Interest 199 160 -19.4%
Depreciation 182 183 0.4%
Profit before Tax 125 188 50.5%
Extraordinary item (19) (25)32.3%
Tax 8 64 720.5%
Profit after Tax/(Loss) 98 99 0.8%
Net profit margin (%)3.1%2.9%
No. of Shares (eoy) (m) 59.9 59.9
Diluted number of shares 59.9 59.9
Earnings per share (Rs)* 6.6 6.6
* annualised

Sales in 1QFY02 have gone up 7.1% to Rs 3,421 m, primarily led by a 19% growth in turnover for its garments division. However, margins for this division declined in the current quarter due to a sharp rise in adspend. The viscose filament yarn division clocked an export turnover of Rs 97 m as compared to Rs 63 m in the corresponding quarter of the previous year. But this division continues to suffer on account of subdued demand senario and sluggish prices.

Though the carbon black division has clocked a turnover growth of 7% to Rs 613 m, sales volume were lower by around 8.6% to 19,793 tonnes. This could be attributed to the fact that the commercial vehicle sales in 1QFY02 were lower, which has a direct influence on carbon black demand. The performance of other divisions like insulators and textiles were in line with the industry trend.

A slower growth in expenses compared with the sales growth has resulted in a 30 basis points growth in operating margins to 13.4%. Extraordinary item here refers to the royalty paid to its wholly owned subsidiary towards the garment division. As per the new accounting standard AS-22, Indian Rayon has provided Rs 53.7 m as deferred tax liability, which has resulted in a stagnant growth in profits. Excluding the deferred tax liability, net profit in 1QFY02 has gone up by 55% to Rs 153 m. If one were to adjust for the tax liability in the corresponding quarters, net profit has increased by around 30%.

Indian Rayon, last month, had entered into a share purchase agreement with Bull SA, France for the acquisition of a 50.35% stake in PSI Data Systems at a price of Rs 186.80 per share aggregating Rs 710 m. It is raising its stake further by 20% through an open offer from public at the same price. The total acquisition cost is around Rs 992 m.

The scrip is currently trading at Rs 69 at a P/E multiple of 11.9x the annualised 1QFY02 earnings. The scrip has been languishing at the current levels for quite some time, in light of Group Bull's stake acquisition in PSI Data Systems, a software solution major. The Aditya Birla Group seems to be using Indian Rayon as a vehicle of diversification for the group's venture into the software industry. Consequently, this has raised apprehensions about the focus of the company and has casts doubts about further diversification (the company has ventured into insurance in partnership with Sun Life Insurance of Canada). Though the company has declared good 1QFY02 results, the acquisition of PSI continues to cloud the prospects of Indian Rayon.

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