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Century: Lagging behind

Aug 4, 2004

Introduction to results
After a disappointing FY04, the Indian textile industry is looking forward to capitalise on the opportunities post 2005, when quota restrictions on exports to EU (European Union) and the US is likely to be removed. Century Textiles, Asia's largest 100% cotton textile mill, with around 10 million meters (mm) of denim capacity is also likely to have a share of the growth in the global sourcing business. We take a look at the company's performance in FY04 and the future growth prospects.

(Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
Net sales 5,844 6,373 9.0% 22,073 22,535 2.1%
Other income 229 422 84.3% 780 1,159 48.7%
Expenditure 5,267 5,726 8.7% 19,612 20,710 5.6%
Operating profit (EBDITA) 577 647 12.0% 2,462 1,825 -25.9%
Operating profit margin (%) 9.9% 10.1%   11.2% 8.1%  
Interest 194 155 -20.0% 1,004 691 -31.2%
Depreciation 378 350 -7.4% 1,331 1,280 -3.8%
Profit before tax 234 563 140.6% 906 1,013 11.8%
Extraordinary items (25) (61)   (134) (162) 20.7%
Tax 27 56 105.6% 70 85 20.7%
Profit after tax/(loss) 182 446 144.9% 702 766 9.1%
Net profit margin (%) 3.1% 7.0%   3.2% 3.4%  
No. of shares (m) 93.4 93.4   93.4 93.4  
Diluted earnings per share (Rs)* 7.8 19.1   7.5 8.2  
P/E ratio (x)         14.3  
(* annualised)            

Century Textiles, established in 1897, is a flagship company of BK Birla group. Initially, Century started as textile mill but over the years the company has diversified into rayon yarn, tyre cord, minerals/chemicals, cement, and pulp/paper. Its textile division is one of the largest units in India. Recently, the company has entered into ready to wear segment too. Century's cement production capacity is around 5 mtpa (million tonnes per annum).

Textiles subdues growth: A marginal growth in the topline (up 2%) in FY04 was due to poor performance by the company's textile segment. As can be seen from the table below, revenues from this segment declined by 1% owing to lackluster demand in the global markets, which was prevalent in the first three-quarters of FY04. Total exports, as percentage of sales, stood at 19% for the year. However, due to revival of demand (especially denim) from the international markets during the last quarter, revenues of the textile segment grew by 9% during 4QFY04.

Revenues from the cement division grew by around 3% for the year and around 13% during the quarter. The outlook for cement segment remains positive because the demand supply gap in the country is narrowing, which will improve realisations. The government's thrust on infrastructure and strong demand from the housing sector will boost cement demand going forward. Whether Century will be the key beneficiary of the same remains to be seen owing to lack of economies of scale and much more focussed competitors with strong balance sheets.

Segmental results 4QFY03 4QFY04 Change FY03 FY04 Change
Textile revenues (Rs m) 1,982 2,169 9.4% 8,038 7,949 -1.1%
PBIT Margin (%) 9.2% 2.5%   11.5% 5.5%  
Cement revenue (Rs m) 2,532 2,851 12.6% 9,088 9,356 3.0%
PBIT Margin (%) 1.9% 9.3%   2.6% 1.9%  
Paper business revenues (Rs m) 905 962 6.3% 3,352 3,634 8.4%
PBIT Margin (%) 12.5% 12.7%   14.8% 16.8%  

Mixed performance at the operating level: Due to the lack of demand, realisations for denims and other textile products remained on the lower side. Firmness in cotton prices, both in the domestic and international markets, affected the margins adversely. While the paper business margins remained more or less stable during the quarter (more or less comparable with the likes of ITC's paper division margins), the cement division's margins increased sharply in FY04 (still significantly lower than competitors).

Extraordinary gains boost bottomline: Inspite of 26% fall in operating profits, net profits increased by around 9% during the year. This rise is due to higher other income during the year (up 49%), due to surplus on a sale of company's ship (Rs 85 m).

What to expect?
At the current price level of Rs 117, the stock trades at a P/E multiple of 14.3x FY04 earnings, which is on the higher side as compared to peers like Raymond (P/E 10.4x). Century is increasing its presence in the ready-to-wear segment and plans to open more retail shops going forward. We believe that it may take some time for this division to contribute meaningfully to total revenues. Having said that, it is definitely a better margin business. Though there are opportunities for Century to enter international markets in the ready-to-wear segment post 2005, one has to be realistic while assigning valuations to this expected growth.

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