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Reshma Krishnan

The brands acquired from Madura Garments clothe Indian Rayon better.

INDIAN Rayon is going through a bad patch. The company's performance for the third quarter ended December 2001 was mediocre, mainly because of internal factors. While the acquisition of Madura Garments is helping topline growth, the figures for latest quarter suggest that the garments division is yet to match its expected bottomline contribution.

For the quarter-ended December 2001, Indian Rayon's net profit fell 72 per cent to Rs 3.6 crore. Sales (after excise) fell 2 per cent to Rs 372.74 crore from Rs 380.28 crore. The fall in revenue is accounted for by the strike at the Veraval rayon plant, which probably affected both profitability and sales. While the issue has since been resolved, it resulted in losses for the rayon division. Because of the strike, the viscose filament yarn production dropped 49 per cent at 2,020 tonnes. Sales volume declined 36 per cent to 2,574 tonnes. However, higher average realisations on viscose filament yarn helped offset some losses. The bottomline has been hit severely as operating profit margins fell to 12.16 per cent from 13.83 per cent.

The rayon division posted a loss of Rs 57 lakh for the quarter ended December 2001. Looking at this figure in the context of the profit of Rs 24.95 crore for the nine-month period ended December 2001 indicates that the third quarter performance was mainly responsible for the poor profitability. The carbon black division posted a turnover of Rs 69.60 crore, down 5 per cent from the previous period.

As per the segment-wise report, Madura Garment's revenue during the quarter rose 23 per cent to Rs 109.8 crore. Among the brands, Peter England posted 40 per cent sales growth.

While the segment's contribution to the topline has been growing, margins appear less than satisfactory, especially considering that prices were raised in response to the imposition of a 16 per cent excise duty in the previous Budget.

The garments segment posted a loss of Rs 12 lakh for the quarter. This loss is probably the result of amortisation of the acquisition costs of the garment business of Rs 18.56 crore.

The insulator division sales rose 33 per cent to Rs 59.8 crore from Rs 44.8 crore in the corresponding previous period. Exports stood at Rs 25.9 crore, up 39 per cent.

The textile division is feeling the heat of the global recession. Turnover was down 16 per cent to Rs 73.5 crore from Rs 87.4 crore for the corresponding previous period. The company has been emphasising on value-added products, removing bottlenecks in machine imbalances and rightsizing.

For the company as a whole, the nine-month figures are slightly better, with sales at Rs 1,077.99 crore, up 1.40 per cent from Rs 1,063.10 crore. Operating profit, however, fell 2 per cent to Rs 143.68 crore. This was on the back of a fall in margins from 13.74 per cent to 13.33 per cent. There is unlikely to be a recovery for the textile division as the fabric industry is in midst of over-capacity problems.

Carbon black growth prospects are uncertain as it depends on the pick-up of economy fundamentals.

In the last two years, Indian Rayon has tried to restructure and move its operations up the value chain. Madura Garments is the only real driver of growth. Once margins improve in the garments division, the bottomline is expected to pick up.

As of now, a fair amount is going into amortisation and the division will continue to have low margins until the capital spent on garments is completely amortised.

The next quarter will probably make up for the losses made in the December 2001 quarter as the rayon plant strike has been resolved and the VRS payment is a one-time expenditure.

The earnings per share stands at Rs 9.74, translating into a price-to-earnings multiple of 6.7, based on the current market price of Rs 67. Shareholders can hold on to the shares.

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