Sep 18, 2012|
1992 batch of Sensex stocks: Indian Rayon
Two decades back, textiles and metals were to Indian economy what software and financial services were in 1990s and 2000s. Family run conglomerates were looked upon by investors as the safest way to grow their wealth. Tata , Birla, Modi, Goenka, Wadia, Thapar and Ambani were some families that owned majority of Indian conglomerates. Their group companies also enjoyed a lion's share of the weightage on the BSE-Sensex of 1992. While some retained their competitive edge, many empires split up acrimoniously among family members. As a result, they could not truly keep up with the pace of the liberalisation era. The labour intensive textile sector was particularly the worst hit in the post liberalization era. Import of cheaper inputs, tools for mechanization and labour unrest led to several bluechip companies in this space fall from grace. Indian Rayon, B K Birla group's flagship company, was just one of them.
Between 1990 and 2000, Indian Rayon not just catered to one of India's most flourishing trade segments. The company also enjoyed the second largest (30%) market share in production of viscose filament yarn (VFY) in India. Additionally, it also commanded a large share in the production of carbon black. Its fundamentals, management and future prospects packaged it well enough for the stock to find a place in the portfolio of diligent investors. But what unfolded in the subsequent years were very unlikely to have featured in an investor's wild guess back then. Not all of it was of the company's own making. The fall of competitiveness of Indian textile sector was certainly to blame. But one cannot help not counting some of the other major mistakes that cost the company its place in the benchmark index.
Mistake no 1 - Aggressive retail expansion
Launching a 4,000-square feet retail outlet (Planet Fashion) at Mumbai's Warden Road was an impressive exercise to showcase Indian Rayon's marketing muscle way back in 2000. Nine months prior to the opening of this store, the fabric manufacturer also bought six hi-profile Madura Garments brands, Louis Philippe, Van Heusen, Allen Solly, Peter England, San Frisco, and Byford for Rs 1.8 bn. While most of the brands are still doing well for the company, the foray into retailing in an aggressive manner did cost the company in terms of profits.
In fact, Indian Rayon's contemporary Arvind Mills also launched its flagship stores during the same period. The intention was to sell its top brands-Arrow, Lee, Flying Machine, Ruggers, and Wrangler through exclusive stores instead of through multi-brand outlets. Unfortunately, both the entities failed in their early retailing foray.
Mistake no 2 - Misuse of cash
By 2002, with the impact of liberalization, Indian Rayon's core businesses of textiles, fabrics and yarn had lost sheen. It was then the company went on a diversification spree.
The company's total debt as of March 31, 2002 stood at Rs 4.5 bn. But instead of retiring its debts and rewarding investors (the buyback programme was postponed in FY02), the company ventured into completely unrelated areas like insurance (Birla Sun Life Insurance) and software (PSI Datasystems).
Mistake no. 3 - Too much on its plate
In 2005, the company announced a major restructuring involving the merger of Indo Gulf Fertilisers and Birla Global Finance into Indian Rayon & Industries. The rationale behind such a move was cited as utilisation of the cash flows of Indo Gulf Fertilisers to fund Indian Rayon's capital requirements. Although in an interview to Equitymaster in 2000, the CFO denied claims of Indian Rayon being a vehicle for Birla Group's diversification strategies. Nevertheless, investors chose to de-rate the stock even as it got renamed to Aditya Birla Nuvo.
Investors' verdict - No visibility = No premium
The textile business of Aditya Birla Nuvo still continues to thrive with some of the popular brands that it had acquired. But in the minds of investors, the parent company Aditya Birla Nuvo remains in the shadow of its more illustrious group companies like Grasim and Hindalco. While these stocks have retained their allure and position on the Sensex, even ldea Cellular, despite being a new joinee to the group has earned some brownie points in recent years. This clearly outlines the fact that without adequate visibility with regard to sustenance of shareholder returns, stocks cannot fetch premium valuations. That along with sectoral dynamics, competition and business innovation goes a long way in determining who will retain the prized positions in the benchmark indices.
||Tanushree Banerjee (Research Analyst), is the editor of ValuePro, The India Letter, and Stock Select, Equitymaster's oldest recommendation service. She is also the editor of Equitymaster's most popular newsletter read by over 200,000 subscribers, The 5 Minute WrapUp. Tanushree started her career at Equitymaster covering the banking and financial sector stocks along with scrutinizing the RBI policies. And over the last decade, developed our research processes that have helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham and Joel Greenblatt.
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