1992 batch of Sensex stocks: Bombay Dyeing - Views on News from Equitymaster

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1992 batch of Sensex stocks: Bombay Dyeing

Sep 26, 2012

A famous quote by Charles Darwin, the man who changed the way the world thought about evolution, goes thus: "It is not the strongest or the most intelligent who will survive but those who can best manage change." The brilliance of Mr Darwin's ideas shows in the fact that they hold true across all aspects of life. Fashions and trends come and go. Old technology gets replaced by new and better technology. Governments rise and fall out of power. Ideologies change over time. As the cycle of change evolves, only the fittest survive. The same goes for business and economics. Some businesses tend to prosper immensely, creating great wealth for their shareholders. Others fade away with the trials of time.

Take the Indian textile industry for instance. This was a highly lucrative business a few decades back. Some of the major business empires made big fortunes in this industry. Reliance Industries, Century Textiles, Bombay Dyeing and Indian Rayon (now Aditya Birla Nuvo) are some very pertinent examples. The popularity of the textile sector is evident from the fact that back in the early 1990s, all these four companies were part of the BSE-Sensex. However, in August 1996, Century Textiles, Bombay Dyeing and Indian Rayon were dropped from the benchmark index.

In a previous article, we discussed the reasons that led to the decline of Indian Rayon and its elimination from the BSE-Sensex. In this article, we will discuss the reasons for a similar fate of Wadia Group textile firm Bombay Dyeing.

Corporate rivalries amidst a changing economy

Established in 1879 by the Wadia family, Bombay Dyeing has been a major textiles player in India. While the company flourished for over one century, it saw its fortunes dwindling on account of the changing dynamics of the textile industry, its long-drawn battle with Dhirubhai Ambani-led Reliance Industries and its inability to capitalise on its legacy in the textile industry. Bombay Dyeing was the largest manufacturer of DMT (dimethyl terephthalate), a chemical used in the manufacture of polyester. On the contrary, Reliance chose the cheaper and efficient PTA (purified terephthalic acid), an alternative key ingredient for polyester. The stiff competition from PTA, unfavourable government policies and a flood of cheap imports severely hampered Bombay Dyeing's DMT business. The textile business, too, suffered on account of increased competition and high costs.

Core business falters, land bank remains sole saviour

Over the years, the company lost several big business opportunities to its competitors, while struggling to restructure its businesses. In 2008, the company sold off its DMT plant in Patalganga which accounted for 65% of its total revenues. Instead, it ventured into the manufacture of polyester stable fibre. However, this shift doesn't seem to have worked well for the company. Even in the latest financial year, the division reported losses.

Let's have a look at how the company has performed over the long term. The company's topline has increased from Rs 11.9 bn in FY96 to Rs 22.3 bn in FY12. That implies a meagre compounded growth rate of 4%. On the profitability front, the company has done even worse. While sales have nearly doubled during the 16 year period, the company has never been able to achieve the same level of profits that it did in FY96. While in FY96 profit after tax stood at about Rs 1.2 bn, the same for FY12 was less than half at about Rs 594 m. Moreover, the company's debt has gone up substantially since FY07. In fact, in FY09, its debt to equity ratio shot up as high as 10.2 times.

The company's only saving grace has been its old land bank at near zero cost. Under its arm, Bombay Realty, it is developing and undertaking real estate projects of the company. It also plans to develop the land bank of the Nusli Wadia group (its promoter). It is worth noting that the Wadia Group has about 10,000 acres of land across India. Of this, 64 acres is owned by Bombay Dyeing.

During FY12, the real estate business contributed 25% to the company's topline. The remaining came in from the textile (19%) and polyester division (56%). On the profitability front, the real estate business contributed 97% of the profits. While the textile division accounted for about 3% of the profits, the polyester division incurred losses of about Rs 8.6 m. The company hopes to reduce its debt with cash accruals from its real estate business.

In conclusion, Bombay Dyeing's decline is a classic example of how legacy became a liability.

1992 batch of Sensex stocks Series - Previous: Hindustan Motors | Next: Mukand Ltd.

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