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Indian Rayon: Paying the price - Views on News from Equitymaster
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  • Dec 7, 2001

    Indian Rayon: Paying the price

    Indian Rayon, the diversified major of the Aditya Birla Group, has managed to grow at a brisk rate in the last one year. Full credit to the garments acquisition, growth has been impressive despite a weak economy. Nonetheless, there are some concerns.

    After the garment business acquisition, sales growth has been impressive. It has been expanding its presence through 'Planet Fashion' and 'Trouser Town' apart from extending its product line for some of the its famous brands like 'Peter England'. Turnover of the garments division grew by 9% for 1HFY02 on the back of a 10% and 15% increase in shirts and trouser volumes respectively during the same period. The company's aggressive stance on the export front has also yielded positive results. While branded exports doubled to Rs 100 m for 1HFY02, contract exports grew sharply by 40% to Rs 185 m. The performance of the garments division is impressive considering the rise in excise duty to 16% and a slowdown in the economy.

    While garments division provided the impetus to growth, other divisions of the company namely, viscose filament yarn (VFY), carbon black and insulator divisions have been reeling under the slowdown for the last few years. However, there seem to be a hope of revival for its VFY division. Average realisation per Kg has been on the rise since 1QFY01 and the reasons for this are multifold. One, the company has branded its products to cater to the international markets, as a result of which it has benefited from higher prices. Two, closure of capacities in international markets has also enabled the company to improve margins. Exports during 1HFY02 grew by 83%.

    But the scenario is not so impressive for carbon black, insulator and textiles divisions. Carbon black demand in the domestic as well as the international markets has slowed down in light of a sluggish automobile demand. Indian Rayon has managed to pass on the rise in carbon black feed stock prices (CBFS), the key raw material, to the consumers and consequently realisations have increased 18% in 1HFY02. Though auto demand has picked up in recent months, prospects are challenging for the rest of the year. Given the Enron saga and the lack of progress on the power reforms front, insulator volumes have been on the decline. Turnover fell by 9% to Rs 722 m for 1HFY02 on the back of a 34% fall in exports.

    After touching its 52-week high of Rs 106 in February 2001, the stock has been languishing at Rs 75 levels. Post garment acquisition, the company has further diversified into insurance and software. Indian Rayon is highly cash rich and the Aditya Birla Group seem to be using the company as a vehicle for the Group's diversification. Though it is one of the lowest cost producers of VFY, carbon black and textiles in the country, recent diversifications have raised apprehensions about the focus of the management. Indian Rayon currently trades at Rs 75 implying a P/E multiple of 8.9x annualised 1HFY02 earnings.



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