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Shanthi Venkataraman

AN INVESTMENT can be considered in the stock of Indian Rayon. Although the stock has run up considerably in recent weeks, it still looks attractively priced from a long-term perspective.

The company's older business divisions — carbon black and textiles — enjoy robust demand and continue to be strong contributors to revenues and profits.

Further growth is, however, likely to be revved by its garments business and investment in insurance.

The business environment for these sectors is undergoing a transformation; a hike in the FDI limit in the insurance sector is on the cards, while the removal of quotas on textiles and garments bodes well for the garments business.

These businesses are likely to make a higher contribution to the profitability over the next two-to-three years.

Focus on new businesses

Readymade garments, insurance, IT and BPO could take the centrestage in Indian Rayon's operations, as they are on a higher growth trajectory. These businesses are still in a fledgling state and hold substantial potential for growth. Indian Rayon is to invest more than Rs 100 crore over the next three years in its subsidiaries, with another Rs 130 crore earmarked for capital expenditure.

The company's focus on these businesses appears to have paid off as they now contribute as much as 45 per cent of aggregate revenues.

While the garments business is beginning to make a healthy contribution to operating profits, the other businesses are yet to make an impact.

Indian Rayon reported a FY-04 profit of Rs 130 crore on a stand-alone basis. On a consolidated basis, however, it recorded a profit of Rs 32 crore, due to the losses suffered by its subsidiaries with the insurance business suffering a loss of Rs 77 crore.

We are bullish on the insurance and garments businesses. Birla Sun Life Insurance, a subsidiary in which Indian Rayon has a 74 per cent stake, is a leading private player.

The insurance division saw premia from new businesses more than double in FY-04. The business already contributes about 20 per cent to aggregate revenues and Indian Rayon expects it to break-even by FY-07.

If the subsidiary sustains the growth momentum, it should be able to cut its losses within the deadline, which would unlock considerable gains.

The garments division (Madura Garments), too, enjoys bright prospects in the domestic and export markets.

The business has a set of established brands — Louis Philippe, Van Heusen, Allen Solly and Peter England — that cater to the premium and mid-priced markets.

The company has strengthened its retail presence (it plans to add another 50,000 square feet in a year's time), which ensured greater prominence in the marketplace, even as it expands the distribution network.

Launches in certain niche segments are on the drawing board, as part of its plans to provide customers a complete range of offerings under each brand.

Such measures are likely to help it sustain growth in an increasingly competitive market.

The removal of quotas on textiles and clothing in January 2005 also offers scope for growth on the export front; exports now account for 17 per cent of the division's revenues.

Indian Rayon has invested about Rs 20 crore to set up facilities to produce shirts and trousers and improve its share of contract exports. Its focus on exporting its garments in own brand name has put it on the export map.

Export of branded products would also enable it to enjoy better pricing power in the international market vis-à-vis its peers.

Near-term profitability stress

Carbon black, VFY (viscose filament yarn) and textiles remain major contributors to Indian Rayon's profits.

As such, pressure on operating margins in these businesses is likely to strain profitability in the near term.

Operating margins declined by 340 basis points in the first half of FY-05. Although the carbon black and textiles division enjoyed robust volumes, lower realisation levels stemmed revenue growth.

Rising input costs added to the pressure on margins. Pressure from higher cost of wood pulp — an input for VFY — and carbon black feedstock — an input for carbon black — is unlikely to ease in the near term.

Capacity expansion plans are being drawn up in these businesses, as demand remains robust for carbon black, caustic soda (sold by the VFY division) and textiles (synthetic yarn and linen).

The enhanced capacity would help expand volumes further; this could counter the effect of lower realisation and improve profitability.

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