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Indo Rama Synthetics: Festivities delayed… - Views on News from Equitymaster

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Indo Rama Synthetics: Festivities delayed…

Dec 14, 2004

Introduction to results
Indo Rama Synthetics (IRS), the largest polyester manufacturer and exporter in the country, had recently announced poor results for the quarter and half year ending September 2004. For the quarter, while the topline declined by 10% YoY, the bottomline was down by over 40% YoY. Operating margins have also witnessed a sharp dip of 320 basis points during this period.

What is the company’s business?
IRS is India’s largest dedicated polyester manufacturer and exporter with an integrated polyester plant of capacity of 350,000 tonnes per annum. In order to benefit from the expertise across the value chain, the company has created another entity named Indo Rama Textiles. The company has spread operations globally and has entered into a joint venture in the US, with the name of StarPet Inc., which would help grow its presence in the mature US markets, while using opportunities in other global vicinities.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 5,168 4,630 -10.4% 8,852 8,797 -0.6%
Expenditure 4,184 3,897 -6.9% 7,613 7,319 -3.9%
Operating profit (EBDITA) 984 733 -25.5% 1,239 1,477 19.2%
EBDITA margin (%) 19.0% 15.8%   14.0% 16.8%  
Other income 41 28 -30.1% 99 62 -37.5%
Interest 114 98 -13.9% 288 218 -24.3%
Depreciation 246 250 1.7% 492 495 0.7%
Profit before tax 664 413 -37.9% 558 826 47.9%
Extraordinary Expenditure 81 70 -13.3% 227 (230) -201.1%
Tax 309 223 -27.8% 314 270 -14.0%
Profit after tax/(loss) 436 260 -40.4% 472 327 -30.8%
Net profit margin (%) 8.4% 5.6%   5.3% 3.7%  
No. of shares (m) 131.8 131.8   131.8 131.8  
Diluted earnings per share (Rs)* 13.2 7.9   7.2 5.0  
Price to earnings ratio (x)   9.3     14.7  
(* annualised)            

What has affected performance in 2QFY05?
Delayed festive season affects business: IRS witnessed an over 10% YoY dip in the topline during 2QFY05 as compared to the corresponding period last fiscal. Historically, the company has witnessed robust business in the domestic markets during the festive season and as a result, it benefited from the festivals during the corresponding period last fiscal. Delayed festival season in this fiscal is thus likely to rake in improved performance for the company in 3QFY05.

(%) of sales 2QFY04 2QFY05 1HFY04 1HFY05
Consumption of raw materials 68.1% 69.3% 72.5% 68.2%
Staff cost 1.8% 1.9% 1.9% 1.9%
Other expenditure 11.1% 12.9% 11.5% 13.2%

Operating margins: IRS witnessed a dip of 320 basis points (3.2%) in the operating margins in 2QFY05. This was seemingly on the back of higher raw material and feedstock prices (which constitute over 80% of total expenditure). And, as input costs were not passed on entirely to the consumers, the company’s margins were hit in the quarter.

Lower realizations affect bottomline: The bottomline witnessed a dip of over 40% during 2QFY05 as compared to corresponding period last fiscal. Rising costs and a 30% decline in other led to this large fall in the bottomline. But for the fall in interest and tax obligations, the company could have witnessed a greater decline in profits.

Quarterly performance
  3QFY04 4QFY04 1QFY05 2QFY05
Sales 4097.7 3686.7 4166.4 4630.2
(%) YoY growth -20.7% -10.0% 13.0% 11.1%
Op. profits 859.2 841.9 743.9 733.3
OPM (%) 21.0% 22.8% 17.9% 15.8%
Net profits 717.4 527.8 367.2 259.6
NPM (%) 17.5% 14.3% 8.8% 5.6%

What to expect?
At Rs 73, the stock is trading at a price to earnings multiple of 9.3 times its annualized 2QFY05 earnings. Currently, share of polyester consumption in the entire fibres segment stands at 36% and is expected to touch 50% by 2010. In order to capture the growing market, IRS has planned a capacity expansion from the existing 350,000 tonnes per annum to 600,000 tonnes per annum at a cost of Rs 8.6 bn. Post quota textile regime is likely to help Indo Rama Synthetics grow its business. However, duty structure at the present levels and government policies regarding the sector going forward could prove to be detrimental.


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