Van Heusen, Allen Solley, Louis Philippe, Peter England, Byford, and San Frisco… Indian Rayon has transformed itself from a mere commodity player to a brand oriented company. With its core businesses also showing positive trends, the company deserves a re-look.
Though the company’s core businesses like Viscose Filament Yarn (VFY), carbon black and insulators suffered as a result of lower growth both in terms of volumes and values in FY00, the future driver is likely to be garment business. The company has more than 30%-32% market share of the branded apparel market. The market is growing at the rate of 30% per annum. By FY04, assuming that the company maintains the same market share i.e. 32%, we are looking at a turnover of more than Rs 5 bn just from garment business alone. Garments currently contribute towards 18% of turnover for FY00 (on an annualized basis).
After a prolonged slump in its other businesses, the outlook seems to be changing for the better. The prospects for the VFY business are improving since the prices of Polyester Filament Yarn (PFY) hitting new highs thanks to the persistent rise in crude prices. PFY, is a substitute to VFY as the former was a relatively cheaper alternative. This would result in better volume growth for VFY in the current year. (Indian Rayon is the 2nd largest manufacturer of VFY in India.)
The insulator demand is also likely to pick up coming years with the entry of private players in the power sector. The demand for insulators as a whole depends on the power sector reforms and investment in power generation and distribution networks.
Though the carbon black division registered a 24% growth in sales in 1QFY01, realisations were under pressure due to rise in feedstock prices by 87% (overall margins for the company have fallen by more than 2% in 1QFY01). This is more likely to continue as crude prices touched US $ 35 last month, which will have its effect on the feed stock prices.
To sum it up, even if the garment division posts report good growth for the current year, overall turnover growth is expected to be around 15% for FY01 as both realisations and margins are expected to come under pressure. However, growth lies in the garment business where Indian Rayon intends to spend around Rs 300 m towards brand building and enhancing distribution network that includes Trouser Town, Dress Circles and franchisee showrooms. Increasing customer focus, strong brands, focused management would enable the company to leverage on brands and emerge as the market leader in coming years.
The stock is trading at Rs 64 at a P/E multiple of 4.8x on the annualised 1QFY01 earnings. The market capitalisation to sales ratio works out to 0.32 (Market cap – 3,832 m)
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