Indian Rayon, a Rs15 bn diversified conglomerate, is a part of the Aditya Birla Group. The company has presence in various sectors like viscose filament yarn (VFY), carbon black, garments, textiles, garments, insurance and information technology. It is India's second largest producer of VFY and carbon black. The company’s presence in software and insurance are through its holding in subsidiaries.
The topline of the company has grown at a CAGR of 1% over last three years. However, bottomline has grown at a faster pace (35% CAGR). This was mainly due to reduced interest cost (down 66%). As evident from the graph below that details the revenue mix of the company over the last years, contribution from textile and garment segments has been stable at around 24%, where VFY contribution has increased from 19% in FY01 to 23% in FY03. Backed by strong growth in demand from tyre manufacturers in line with the recovery in the auto sector, carbon black business’ contribution has increased over last three years from 18% to 23% in FY03.
Having looked at the broader trend, it is pertinent to look at segment-wise performance in the last three years. The textile division is highly reliant on exports for growth considering the mature nature of the industry in the domestic market. Contribution from exports in FY03 stood at 52% of textile sales as compared to 50% in FY02. Going forward, exports would continue to remain the growth driver, albeit at a slower rate. However, margins are expected to improve in light of expected fall in raw material prices.
VFY segment has grown at a CAGR of 21% in last three years mainly on the back of favorable pricing environment. The outlook for VFY business is positive, as VFY is gaining increasing acceptance in the fashion industry. Besides, the company is increasing the capacity of VFY by about 1,000 tones with an investment of Rs 280 m, which will add to the topline growth in FY04. Going forward, company has stated that it will focus on premium segment and will try to increase the sale of first quality yarn to 76% of total VFY business (62% now).
Higher volumes have helped company to achieve 13% CAGR growth in revenues from carbon black business. The outlook for carbon black division remains positive because of growth in auto sector (carbon black is one of the key raw material for tyre manufacturers). Company’s brown-field expansion involving a capex of Rs 600 m will raise the existing plants capacity by 40,000 tones (36% of existing capacity).
Over a three-year period, revenues from the garment segment have remained stagnant. This was mainly on account of poor performance in FY03 (down 8% YoY), as players were forced to increase prices to pass on higher excise duty incidence. Competition from unorganised and regional brands also increased. The segment posted losses at PBIT level due to heavy expenditure on advertising for its branded products. But, the long-term outlook for the garments business remains positive, fuelled by the economic growth and increasing brand consciousness among the customers. However, things will not be easy, as the competition in garment business will remain high. While the company’s launch of low-end products has provided a fillip to sales in 1QFY04, at the operating profit level, we do not expect significant improvement in the medium-term.
At the current price of Rs 175, the stock trades at the P/E multiple of 10x FY03 earnings. The company's venture into areas like insurance and software has raised apprehension about the focus of the management. Indian Rayon seems to be the vehicle of the Aditya Birla Group’s diversification into new growth areas.