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Indian Rayon: Garment pick up

Oct 22, 2003

Indian Rayon has reported a topline growth of 14% YoY for the September quarter, aided mainly by impressive growth in garments, textile and VFY (viscose filament yarn) segments. Also, for the same period, the company has reported a substantial 73% YoY growth in its bottomline, which has been helped by extra ordinary income and a steep fall in interest cost. However, the topline growth for 1HFY04 is not very impressive, affected by the dismal performance of it VFY and textile divisions in 1QFY04.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Sales 3,733 4,263 14.2% 7,378 7,653 3.7%
Other Income 66 59 -10.6% 76 88 15.8%
Expenditure 3,128 3,572 14.2% 6,084 6,420 5.5%
Operating Profit (EBDIT) 605 691 14.2% 1,338 1,288 -3.7%
Operating Profit Margin (%) 16.2% 16.2%   18.1% 16.8%  
Interest (net) 89 45 -49.2% 219 89 -59.4%
Depreciation 188 225 19.5% 373 410 9.9%
Profit before Tax 394 480 21.9% 822 877 6.7%
Extraordinary item - 200   - 200  
Tax 84 144.1 71.5% 187 233 24.6%
Profit after Tax/(Loss) 310 536 72.7% 635 844 32.8%
Net profit margin (%) 8.3% 12.6%   8.6% 11.0%  
Number of shares 59.9 59.9   59.9 59.9  
Diluted Earnings per share* 20.7 35.8   21.2 28.2  
P/E (x)   5.5     6.9  

The major cost, which is on account of raw materials have remained constant at around 50%, as percentage of net sales, and this has helped operating margins for 2QFY04 to remain stable at 16.2%. Interest expenses of the company reduced by around 38% as the company has repaid debentures worth Rs 770 m in last nine months. Combined with this decline in interest expenses , a 17% increase in interest income has resulted the net interest paid to decline by 49% during 2QFY04. Also, extraordinary earning of around Rs 200 m arising out of the company’s disposal of its holding in Indo Gulf Fertilizers, have helped in improving the net profit margins by around 430 basis points.

Indian Rayon is a diversified company and, as such, a segmental break-up would help in a better understanding of the company’s financial performance. Take a look at the table below.

Revenue mix
(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Garments 900 1125 25.0% 1,680 2,017 20.1%
VFY 866 952 9.9% 1,676 1,649 -1.6%
Carbon black 813 881 8.4% 1,573 1,628 3.5%
Insulator 162 166 2.5% 608 301 -50.5%
Textiles 856 1000 16.8% 1,658 1,867 12.6%
Others 135 129 -4.4% 184 192 4.3%
Total 3,732 4,253 14.0% 7,379 7,654 3.7%

As seen from the above table, revenues from the garment segment have grown by 25% on the back of higher volumes (up 34%). In its strategy to counter competition from lower end cheap suppliers, Indian Rayon has been successful in introducing lower price point products (through its Peter England brand), which has helped it in improving its volumes. For this (garment) segment, the PBDIT margins have remained stable at little higher than 8%.

VFY revenues for the quarter were up by around 10%. For 2QFY04, volumes increased by around 10% YoY for this segment, but the realisations remained at same levels as compared to 2QFY03. PBDIT margins for the segment also remained stable at around 26%. The outlook for VFY business is positive, as VFY is gaining increasing acceptance in the fashion industry. The company has stated that it will focus on premium segment and will try to increase the sale of first quality yarn to 76% (from 62% at present) of total VFY business. Its also plans to set up dyed yarn units going forward, which will further strengthen the product portfolio of the company.

Textile revenues for the quarter increased by around 16% YoY. However, the margins lowered mainly due to increase in prices of wool, which forms the major chunk of raw material for worsted yarn, which contributed around 43% of the textile segment revenues. Since 50% of the textile revenues comes from exports, strengthening of rupee also affected the realisations.

Coming to the carbon black business, for the September quarter, its revenues went up by around 8% YoY mainly due to higher volumes. However, realisations came down marginally. The outlook for the segment remains positive due to growth prospects in auto sector. The company is expanding its carbon black production by around 36%, which is expected to come up by the end of last quarter of FY04.

At the current price of Rs 195, the stock trades at a P/E multiple of 6.9x its annualised 1HFY04 earnings. However, excluding extra ordinary income, which is not recurring in nature, the stock trades at P/E multiple of 18.1x. Indian Rayon’s divestment into unrelated businesses is still a cause of concern. The company had already burnt its fingers in acquiring stake in MRPL, which it later sold off to ONGC, registering a one-time loss. Even recently, the company has completed acquisition of Trans Works, a BPO business. Investors need to remain cautious considering the company’s diversified (into unrelated areas) business interest.

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