New forays will provide the spark to Indian Rayon growth

Indian Rayon and Industries Ltd (IRIL), having identified its diverse businesses as asset-intensive and not so asset-intensive, expects its new businesses to provide a major boost to its turnover growth.

Our existing businesses such as VFY, carbon black, insulators and textiles will continue as mainstay as they have created and continue to create value in continuum. The new businesses will help accelerate topline growth,’’ Mr Adesh Gupta, Chief Financial Officer, IRIL, said in an interview with Business Line.

IRIL’s growth drivers have been identified as garments, insulators and carbon black businesses. What is the scenario on your rayon business and how important is it in your future business plan?
Viscose filament yarn (VFY) will continue to be a major business. IRIL is among the two top producers of VFY in India and has a significant cost advantage. Traditionally, VFY has been and continues to be highest contributor to the operating profit of the company. A matured demand and continued competition from cheaper product substitutes had hampered growth very briefly.

A worldwide rationalisation of capacities and the closure of the plants in the West have provided a stimulant for the growth of VFY exports.

These new markets should fuel growth for the rayon business. Besides, exploring new markets, our ongoing thrust is on the continuous improvement of the quality of yarn and cost structures through the shop floor efficiencies, higher yield, consumption norms and productivity.

The result is visible in the last few quarters. These efforts will help yield better results and be the strong pillar for the profitability of the company.

Regardless, given the mature nature of the business, we expect overall growth rates to be relatively lower than some of the other businesses - garments, insulators and carbon black.

It is in this context we expect these three businesses to be key drivers of revenues over the next two years. After touching a peak of Rs 1,814.54 crore turnover in 1997-98, IRIL’s topline growth has been somewhat impacted.

What is your strategy for growing turnover?
In the restructuring exercise, the cement businesses of the group were brought under Grasim from September 1998 by demerging the cement division of IRIL. Consequently, the cement turnover is no longer part of the IRIL balance sheet.

In 1999-2000, we acquired Madura Garments. It has contributed Rs 382 crore in the financial year 2002. The company is committed to push its topline with the support of its existing businesses.

Even the insulator hive-off should not affect the turnover in any major way as the company has retained the domestic marketing of insulator business.

The growth from new businesses - life insurance and IT sectors - will be reflected in the consolidated balance sheet.

IRIL has gone through too many portfolio changes in the last 2-3 years. What kind of revenue mix would you like the company to settle down with?
Going forward, our intent is to create a portfolio which has a balance between the asset-intensive and not so asset- intensive businesses. Our existing businesses such as VFY, carbon black, insulators and textiles will continue be our mainstay as they have created and continue to create value in continuum. The new businesses will help accelerate topline growth.

Growth from garments will be reflected in the company’s turnover while that from the high growth insurance and software businesses will be factored in the consolidated revenue.

What is the way ahead for your software business?
When do you see profitability in both PSI Data Systems and Birla Technologies Ltd? IRIL has acquired PSI Data Systems to strengthen its foray into the software business. Unfortunately, the global slowdown, prolonged due to post 9/11 events, has severely affected investments and commitments made in the people and technology areas. This is a temporary phase. We are taking necessary steps to make it profitable. We are confident that in the long-term, the IT industry will revive.

An improvement in sentiment and the positive efforts taken by the management should help our software subsidiaries show a positive results. Maybe in the next year itself.

Could your throw light on IRIL’s carbon black business. What kind of new applications are you looking at?
The major consumer of carbon black is the tyre industry, accounting for over 75 per cent of the production. The auto industry was going through tough market conditions in the past. The revival in the tyre and auto sector is being reflected in the better working of the company for the last quarter.

Carbon black is being used as reinforcement material along with rubber for tyre. Other applications include ink, paint and conveyor belts. Our R&D centre at our Chennai plant is continuously into research for newer applications. New grades of carbon black have been recently developed for the tyre industry, especially for low rolling resistance for truck tyre.

Outlook on insulator business?
The insulator business presents a promising outlook as the fortunes of this industry depend upon the development in the power sector.

Currently, the Government is giving an extra push to the power sector; hence, the long-term outlook is promising. The generating capacity of the power sector is expected to grow from 100,000 MW currently to 200,000 MW by the year 2010.

This would need extensive augmentation of transmission and distribution network for the country. Being the largest producer and exporter of insulators, IRIL is well poised to encash this opportunity. To grab this opportunity, IRIL has decided to collaborate with Japan’s NGK Insulators.

IRIL will demerge its insulator business into a separate joint venture wherein 50 per cent equity will be held by IRIL and 50 per cent by NGK Insulators. The partnership with NGK will provide the necessary platform to catapult the company into a significant insulator entity with outstanding technological competence, strength in innovation and customer orientation.

As a part of our long-term strategy, IRIL will continue the sale of insulators in the domestic market while NGK Insulators will do the export marketing. Such an arrangement will enable the insulator business to grow substantially in turn improving IRIL’s profitability.

In the medium term, what is IRIL’s outlook on its textile business? Could you elaborate on some of the initiatives you are taking to propel growth? Restructuring of our textile business is an ongoing process. The operations of the synthetic yarn division, where we are a marginal player are are being continuously rightsized. We are focusing on linen and worsted yarns, our niches., besides being high value addition.

In line with our philosophy, we closed the hose pipe division last year and reduced our labour force significantly by offering VRS. We are continuously reviewing our business to reduce the cost and maximising the use of assets.

You brought down interest cost by 26 per cent to Rs 45.53 crore. Could you elaborate on your debt management plans?
Interest costs have come down to Rs 45 crore through reduction of debt out of internal generations. We have repaid debentures of Rs 47 crore in the last year. By optimising our borrowing mix - export packing credit, commercial paper and Mibor-linked instruments, we could lower our working capital borrowing rate. This has substantially reduced our interest cost. Reduction in interest rates enabled us lower interest on short-term borrowings.

In the absence of a significant capex programme, healthy cash generations are being used for reducing the long-term debt. We had total long-term debt of Rs 263 crore at the beginning of the year. This will come down to Rs 174 crore during the year. We will be paying off debt worth Rs 89 crore as well.

In 2001-2002, IRIL’s other income at Rs 9.53 crore was the lowest in the last nine years. Is this a deliberate decision to reduce the other income portfolio or other factors contributed to it?

The other income represents the dividend income, profit on sale of investments including short-term investments in mutual funds and other miscellaneous income like rent.

The income from surplus funds is reducing continuously. Over the last few years, IRIL utilised its cash surplus for various growth initiatives, like the acquisition of Madura Garments - Rs 188 crore, investment in life insurance business - Rs 105 crore and acquisition of PSI Data Systems - Rs 100 crore. The benefit of these investments should reflect in the coming years and will improve the bottomline to a great extent.

What is your outlook for IRIL in the current fiscal?
The outlook for IRIL is bright as the global and domestic economies are on the path of recovery. Our key business will benefit with growth trends in the economy. During the first quarter, the company recorded a 52 per cent growth in net profit. The performance postulates that we should end up doing better in the full year too.