Bombay Rayon Fashions: integrating ahead

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In these tough situations, Bombay Rayon Fashions is steadily increasing its competitive advantage in the market place and is one of the stocks being watched closely by analysts. This is because it has a high rate of profitability with a 22% return on equity and 16.8% return on the capital employed.

The management, by way of integrating operations along the value chain, has seen operating margins grow. From a level of 10.9% in FY05 they have doubled to 21.3% in FY08.

This is happening because the share of value added garments as a percentage of its sales have risen from the 3%-level in FY05 to 43% in FY08. It now captures value right from the fabric and design stage to garment manufacturing taking it right to international retailing. It recently entered into an agreement to purchase Italian retail GURU for 33 million euros. Also, the company has acquired three other firms in FY08 and along with its own capacity expansion plans, the company will be able to more than double its garment capacity by end of the current fiscal. This will boost volumes considerably and hence the optimism. However, at the moment the company has a negative operating cash flow and its huge capacity expansion plans have caused the debt to equity ratio to jump to 1.5:1 levels in FY08 from 0.7:1 in the previous year. This is seen as a major concern by analysts.

Analysts at Motilal Oswal Securities say that usually raw material inventory build up ahead of a high growth scenario lessens the cause of concern. And, on the matter of the high debt to equity concern, Indian textile companies have a 5% interest subsidy on loans for capex under TUFS (Textile Upgradation Fund Scheme), hence the interest outflow is not significantly high.