Indian Rayon: Hold

Recommendation: Hold

Reshma Krishnan

INDIAN Rayon is a diversified conglomerate with a presence in viscose filament (VFY), worsted, synthetic and flax yarns, readymade garments, insulators, carbon black and argon gas.

It has been restructuring its portfolio, resulting in the consolidation of its business and finances. So from being basic manufacturers of commodities, it has moved up the value chain.

The company began restructuring by hiving-off its cement division to Grasim (also part of the Aditya Vikram Birla Group) in September 1998. In 1999-2000, it wrote off the sea water magnesia unit, commissioned in 1996, resulting in a one-time loss of Rs 300 crore. This was a better prospect than continuing with a losing project.

This was followed by the acquisition of Madura Garments (formerly a division of Madura Coats) for Rs 187.75 crore in January 2000. Madura Garments has a 30 per cent share of the readymade apparels market and is a leading player. On the financial front, the company also pre-paid non-convertible debentures worth Rs 200 crore. It bought back 11 per cent of its equity at Rs 85 per share on a Rs 64 crore outlay.

While Indian Rayon is the leading manufacturer in both VFY and carbon black, the realisations in both are low. The VFY sector has been stagnating, with prices remaining flat, as it competes with the international market. The situation does not seem optimistic for the carbon black sector either. With a slowdown in the automobile sector underway, the demand will be affected. It is possible that the company might sell its carbon black division to consolidate its business and focus entirely on textiles.

This reinforces the fact that readymade garments will be the key driver for growth in the company. The Madura Garments acquisition was meant to help it move up the value chain and gain better realisations. A weakness of Indian Rayon was that it was a commodity conglomerate where, characteristically, growth had saturated and required huge volumes. Acquiring Madura Garments was crucial as it allowed the company to corner a 30 per cent market share of the garment's business and some of the industry's top brands such as Allen Solly, Van Heusen, Louis Philippe, and Peter England. The market is growing at around 15 per cent per annum and is estimated to be worth Rs 4,000 crore. The latest development, involving the deregularisation of the readymade garment industry, gives the company scope to increase investment and capacity. This should augur well for Indian Rayon. It has also picked up global rights for these brands, except in the US and UK markets. It could open up export opportunities.

The year has witnessed major cash outflows, reflected in the company's 1999-2000 financial performance. Considering that the major restructuring affected the 1999-2000 performance, the 2000-01 half-yearly performance should provide a better picture of the company's financial health and what may be in store.

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For the first half of 2000-01, the net profit rose 37 per cent to Rs 27.01 crore from Rs 19.97 crore and the turnover increased 35 per cent to Rs 682.82 crore from Rs 502.39 crore in corresponding previous period. On the other hand, margins declined. Operating profit margins fell from 19.25 per cent to 15.40 per cent, perhaps partly due to the pressures in the synthetic fibres and carbon black businesses. The major contributor to growth was the readymade garments.

It is certain that this division may give Indian Rayon its much-needed bottomline growth. All the restructuring attempts point to the formation of a focussed company. The possibility of further restructuring, involving the branded garments business of Grasim Industries, cannot be ruled out. But it may take time to get reflected in the earnings growth.

The earnings per share (EPS) for the half year stands at Rs 4.56, up from Rs 2.96 the previous year. This translates into a price-to-earnings ratio of 9.27 on the current market price of Rs 84. With the company trying to make it big in the retail business, a re-rating of the stock over time is a distinct prospect. In this context, shareholders can stay invested in the stock and fresh exposures avoided for now.