Indian Rayon: Hold

Recommendation: Hold

S. Vaidya Nathan

THE shareholders of Indian Rayon did not get the best of deals in the transfer of its cement business to Grasim Industries. But the company appears to be getting its act together in the subsequent phase. A buyback offer at Rs 85 per share to return surplus cash did not evoke an enthusiastic response. The company has managed to cut its equity by 11.26 per cent to Rs 59.88 crore.

The company's intent to return surplus funds to shareholders was a positive sign though the price was not attractive. Its decision to scrap the sea water magnesia plant and take charge of Rs 299.81 crore in fiscal 1999-2000 also appears to have improve business focus. The one-time charge led to a loss of Rs 241.23 crores in 1999-2000.

The company had used the surplus cash to buy Madura Garments from Coats Viyella. The profile of brands acquired could fit in well with the branded presence of Grasim. The company is also opening up exclusive outlets and strengthening its distribution reach.

The company is well-established in its various lines of businesses now and without the burden of the sea water magnesia project, the financial contours have taken a turn for the better. The company has reported revenues of Rs 682.82 crore for the first six months of fiscal 2000-2001 with an operating profit margin of 21 per cent and post-tax earnings of Rs 27.01 crores.

The company is also likely to receive one-time cash flows from the sale by pieces of its sea water magnesia plant. The cash inflow, which is likely to be around Rs 40 crore, could improve the operational profile by helping the company cut debt. The stock now trades at a price-earnings multiple of 8 times its annualised earnings and the scope for improvement in the valuation exists.

In this backdrop, existing shareholders can stay invested while fresh exposures in small lots can be contemplated by investors with an appetite for risk. If the restructuring story plans to make Indian Rayon the focal point for the fabric and garments retailing thrust of the group, a re-rating of the stock may be in store, but that is a big `if' in terms of the time and mode adopted for restructuring.