Ruddy Show

Updated: Jul 28 2002, 05:30am hrs
Indian Rayon & Industries (IRIL) has done exceedingly well during the quarter to June 2002, thanks to a better show of viscose filament yarn (VFY), carbon black and insulator divisions.

VFY, a part of rayon division, is by far the best business. Its topline grew 18 per cent at Rs 81.30 crore with a 6 per cent increase in volume and a 12 per cent rise in sales realisation. Lower cost of wood pulp and higher production of quality yarn that fetches higher price further boosted operating profit of the business. Carbon black division’s sales was up by 25 per cent at Rs 76.50 crore owing to 43 per cent higher volume. However, a part of the volume growth was offset by a 13 per cent decline in realisation. Insulator division also recorded 29 per cent higher sales at Rs 44 crore with 14 per cent volume growth. Total turnover moved up 6.8 per cent to Rs 365.30 crore.

A 6.5 per cent reduction in other expenditure at Rs 107.70 crore reflects that the company’s cost cutting initiatives are paying off. Operating profit rose 26.3 per cent to Rs 58.30 crore.

OPM went by nearly 250 basis points to 16 per cent (13.5 per cent). PAT soared 52.2 per cent to Rs 15.10 crore.

IRIL has decided to hive off its second most profitable (20 per cent margin) and capital efficient (in terms of ROCE of 30 per cent) business of insulators in the latest restructuring move. Though the insulator business contributes only 12 per cent to the IRIL’s topline, its share in PBIT is close to 23 per cent. The apparent idea behind the hive off is to facilitate the entry of NGK Japan in a 50:50 joint venture (JV) to be named as Birla NGK Insulators Private.

IRIL will receive total consideration of Rs 125 crore, out of which Rs 12.50 crore will be in the form of equity shares of the joint venture. NGK Japan will bring in Rs 125 crore (Rs 12.50 crore towards equity capital of JV and balance as share premium) for 50 per cent stake.

Since IRIL will have 50 per cent stake in the JV, it may be concluded that the entire insulator business has been valued at Rs 250 crore. The valuation seems to be on the lower side as it is almost equal to one year’s turnover of the business and the fact that the business has excellent prospects. The Indian power sector is on the threshold of a massive expansion and growth, and with another 41,000 MW to be added as per the tenth plan, the total market for insulators during the tenth plan in India alone should be around Rs 25,000 crore.

The deal may not look very attractive from IRIL’s point of view if purely valuation aspect is considered. However, NGK is ranked number one in the insulator business, and has a strong marketing network world-wide. Its technological assistance may help in increasing the yield of insulator manufacturing from 40 per cent at present to at least 75 per cent. While NGK will be responsible for marketing the products in the export markets, IRIL will continue to handle domestic sales.