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Indian Rayon: New IDEAs

Jul 8, 2002

With core businesses like textiles, fabrics and yarn slowly losing sheen, Indian Rayon, the Aditya Birla Group Company, has been on a diversification spree. After its acquisition of Madura Garments, the company ventured into insurance (Birla Sun Life Insurance), software (PSI Datasystems). Indian Rayon also invested a substantial sum in IDEA Cellular (formerly BATATA), a joint venture. Going by the past track record combined with the pressure it is facing in its core businesses, one will not be surprised if the company diversifies yet again in the future.again expressed our concerns regarding the management's diversification strategy and it seems that Indian Rayon is being used as a vehicle for the Group's diversification, since it generates a lot of free cash flows. Apart from two diversifications in FY02 viz. insurance and software, the company also has stake in other group firms like Indo Gulf and Mangalore Refinery. Barring Indo Gulf, investments in all other firms have proved to be costly for Indian Rayon. The following table reveals the book value and market value of its investments in some of its group companies and its recent diversifications.

Key listed investments...
Company Shares
(m)
Book value
(Rs m)
Mkt. price
(Rs)*
Mkt. value
(Rs m)
Profit/Loss
(Rs m)
Gain/Loss
(%)
Indo-Gulf Corporation 19.6 458.5 64.5 1,261.9 803.4 175.2%
Mangalore Refinery 41.0 651.0 11.0 451.1 (199.9)-30.7%
Century Enka 0.1 12.5 112.9 7.1 (5.4)-43.6%
IDBI 0.5 36.9 23.8 12.8 (24.1)-65.3%
PSI Data Systems 5.3 1,002.9 138.9 737.5 (265.4)-26.5%
Total (Rs m) 2,161.8 2,470.4 308.6 14.3%
*price as on 5th July 2002

The company's book value of investment in Indo Gulf works out to Rs 23 per share against the current market value of Rs 60. This is the only profitable investment as of now. MRPL, as known to everyone, is in big trouble. Indian Rayon acquired a major stake in PSI Datasystems from Groupe Bull of France last year at Rs 188 per share. Given the slowdown in the tech sector, it is believed that the software subsidiary also had to bear the brunt in FY02. Though it may be too early to comment on the subsidiary's profitability and future growth prospects, the medium-term prospects remains challenging for smaller tech firms.

Though IDEA cellular has a 11% market share in the Indian cellular segment with a subscriber base of 729,600 as of March 2002, increased competition and a drastic fall in air time charges have dented profits. Besides, cellular operators are at a disadvantage on account of the new Wireless in Local Loop (WiLL) regulations. This could in effect elongate the pay back period. Insurance is a long-term business and one doubts whether this subsidiary will be able to make profits for the next five years atleast.

The unlisted category...
Company Shares
(m)
Book value
(Rs m)
IDEA Cellular 88.8 888.2
Birla Sun Life Insurance 105.0 105.0
Total (Rs m) 993.2

The company's total debt as of March 31, 2002 stood at Rs 4.5 bn. Indian Rayon paid a dividend of Rs 3.3 per share in FY02 with a dividend payout of 45%. However, the payout has to be viewed keeping in mind the sharp fall in net profits in the same period. One fails to understand why the company is venturing into such unrelated businesses instead on concentrating on consolidating its presence in the existing interest areas. On the other hand, why not distribute the surplus money to the shareholders in the form of dividend? Remember the company withdrew its buyback plan in FY02.

ly trades at Rs 108 implying a P/E multiple of 15x FY02 earnings. But on consolidated earnings of Rs 100 m in FY02, the stock trades at an astronomical P/E multiple of 64 times. While the standalone numbers may look impressive, one has to be cautious and take investment decisions based on the consolidated financials of the company.

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