Indian Rayon net profit up 61% - Views on News from Equitymaster

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Indian Rayon net profit up 61%

Oct 20, 2000

Indian Rayon, a Aditya Birla group company, has posted a 44% growth in turnover from Rs 2,526 m in 2QFY00 to Rs 3,634 in 2QFY01. The growth has been driven by both value as well as volume growth from the recently acquired garment business. Indian Rayon acquired Madura Garments last year along with its popular brands that includes Van Heusen, Louis Phillipe, Allen Solly, Peter England and Byford.

(Rs m) 2QFY00 2QFY01 Change
Sales 2,526 3,634 43.9%
Other Income 134.9 67.5 -50.0%
Expenditure 2,211 3,115 40.8%
Operating Profit (EBDIT) 314 520 65.3%
Operating Profit Margin (%) 12.4% 14.3%  
Interest 150 202 34.4%
Depreciation 197 176 -10.5%
Profit before Tax 102 209 104.8%
Other Adjustments - 23  
Tax - 22  
Profit after Tax/(Loss) 102 164 60.6%
Net profit margin (%) 4.0% 4.5%  
No. of Shares (eoy) (m) 67.5 59.9  
Diluted number of shares 59.9 59.9  
Diluted Earnings per share* 6.8 11.0  
*(annualised)      

Garments contributed to around Rs 922 m in the current quarter primarily due to 102% growth in exports. The company exports garments to Tommy Hilfiger and Marks & Spencers on contract basis as well to Middle East and SAARC countries on branded sales basis. Margins have shown notable improvement on the half yearly basis from 16% for FY00 to 19% in 1HFY01. The company intends to expand its reach by increasing the number of fashion outlets such as Trouser Town and Planet Fashion. Currently, the company has 5 Trouser Towns in India and 2 Planet Fashion outlets (UAE and Bangalore). It has also planned to extend its market share by introducing a number sub-brands, women wear and through phased promotional campaigns.

However, the other businesses of the company continue to languish. Despite marginal increase in prices of Viscose Filament Yarn (VFY), average realisations have gone down by 6%. This was largely due to the fact that prices started to move up in the later half of August after consistent erosion for more than two consecutive years. Sales have also dropped by 4% due to shift in preferences of consumers and competition from polyester filament yarn. But, the company has increased its presence in the exports by branding its products. As a result exports have grown by 23% for the second quarter.

Though sales dipped by 4% for carbon black division, average realisation has increased by 27% compared to respective quarter in the previous year. The company has increased prices to offset the increasing feedstock prices. Sales are anticipated to decline further as automobile sales have slowed considerably in the current year. This in turn affects tyre sales (carbon black is used as a raw material for manufacturing tyres). However, the company has planned to increase its market share through better asset utilisation and increasing volumes.

Despite slower power sector reforms, the insulators division has posted a 50% growth in sales compared to previous quarter backed by improved order flow by state electricity boards and original equipment manufacturers. But realisations have dropped by 2% due to severe competition. The outlook for this division basically depends power sector reforms, which anyway does not seem to happen.

Indian Rayon in a joint venture with Sun Life Insurance of Canada is venturing into life insurance business for which the company has committed Rs 900 m for a 70% stake (the entire amount is to be spent in the current year itself). Given the longer gestation nature of the business, returns are expected only after five years. In 15 years frame, it expects a returns of around 21% (IRR).

The company is expected to post net profit of around Rs 480 m for FY01 compared to a loss of Rs 2,413 m in FY00. However, operating margins are expected to fall from 11.5% in FY00 to 9% in FY01. The stock is currently trading at Rs 63 at a P/E multiple of 5.7x on the annualised 2QFY01 earnings.


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