INDIAN RAYON AND INDUSTRIES LIMITED - Aditya Birla Nuvo, Ltd

VISCOSE FILAMENT YARN
1999-00 1998-99 % Change
Installed Capacity (TPA) 15,000 15,000 —
Production (Tonnes) 12,621 14,685 (-)14.1
Sales Volume (Tonnes) 13,507 13,662 (-)1.1
Gross Turnover (Rs. Crores) 244.6 279.8 (-)12.6
Gross Realisation (Rs./Kg) 181.1 204.8 (-)11.6
Operating Margin (%) 14.8 24.8
Review of Operations
Depressed domestic demand, sluggish exports and cheaper imports of substitute materials as well as end products impacted the Viscose Filament
Yarn (VFY) business severely. Labour unrest and water scarcity at Veraval (Gujarat) compounded the problem further. As a result, despite
outperforming domestic peers, the Division reported lower asset utilisation, drop in sales volumes and lower realisation. This affected overall margins
and profitability of the Division adversely during the year.
Depressed domestic demand
The VFY sector in India witnessed one of worst years in its recent history. Industry demand dropped by 9% year-on-year (YoY) from 55,500
tonnes in 1998-99 to 50,600 tonnes in 1999-2000. This was primarily due to a slump in demand from the user segments, notably the garments, dress
materials and fashion fabrics. Such a poor trend was the result of a continued shift in consumption from VFY to Polyester Filament Yarn (PFY), prices
of which remained substantially lower than the VFY prices despite firm global petrochemical prices. Further, relatively lower demand for fabrics also
had adverse impact on the demand and prices of PFY in the local markets.
Despite such an adverse market condition, the Company was able to maintain sales volumes at 13,507 tonnes during the year. Domestic sales
improved from 11,440 tonnes in 1998-99 to 12,222 tonnes during the year, an increase of 7% YoY. Such a performance is a reflection of the
Company’s continued focus on improved quality, strong brand image and aggressive marketing efforts. The Company’s market share has risen from
24% in 1998-99 to 27% in 1999-2000.
Sluggish exports
The Company reported a sharp fall in export volumes, down 42%YoY to 1,285 tonnes in 1999-2000. We attribute this to sluggish global
demand, change in fashion trends and increasing competition from cheaper substitutes.
Lower asset utilisation
Keeping in mind the poor demand situation and build-up of inventory towards end of last year, the Company decided to effect a 10-15% cut
in production for most part of the year. This was lifted only during the last quarter of 1999-2000. The Company also faced an illegal strike at the
VFY plant in Veraval, Gujarat for a brief period during March 2000. As a result of these, aggregate production fell 14% from 14,685 tonnes in 1998-
99 to 12,621 tonnes in 1999-2000 and plant utilisation dropped from 98% to 84% during the year. Overall inventories are lower at 23 days and
compare well with 39 days reported for 1998-99 and a peak inventory of 53 days in May 1999.
Lower average realisation impacted margins adversely
The Company reported a 12% YoY fall in gross realisation from Rs.204.8 per kg in 1998-99 to Rs.181.1 per kg in 1999-2000. Industry average
price fell even sharper (by 15% YoY) and was due largely to the unfavourable demand situation and aggressive selling strategy followed by a few
large players in the industry.
This sharp fall in prices, together with lower volumes, negatively impacted margins during the year. Divisional margins fell from 25% in 1998-
99 to 15%. A sharp rise in input costs also took its toll on margins. The average cost of wood pulp (the key raw material) moved up 18% YoY to
US$630 per tonne, which together with rise in water costs added towards a major part of rise in input costs. The Company suffered on account of a
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