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Century: Not so encouraging

Dec 3, 2003

Like other major textile companies, Century's 2QFY04 results was disappointing for the investors. The topline of the company grew marginally but the bottomline turned negative as compared to profits in the same quarter last year. However, on the half yearly basis, the picture looks better as the bottomline grew by 70% YoY.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Net Sales 5,171 5,200 0.6% 10,591 10666 0.7%
Other Income 159 231 44.9% 296 484 63.7%
Expenditure 4,548 4,966 9.2% 9,421 9832 4.4%
Operating Profit (EBDIT) 623 234 -62.5% 1,170 833 -28.8%
Operating Profit Margin (%) 12.1% 4.5%   11.0% 7.8%  
Interest 273 179 -34.6% 559 365 -34.6%
Depreciation 354 341 -3.7% 706 697 -1.3%
Profit before Tax 155 (55)   201 255 27.2%
Tax 55 (5)   64 22 -65.0%
Profit after Tax/(Loss) 100 (51)   137 233 70.0%
Net profit margin (%) 1.9% -1.0%   1.3% 2.2%  
No. of Shares (m) 93 93   93 93  
Earnings per share (Rs)* 4.3 -2.2   5.9 5.0  
Current P/E ratio (x)   -56.3     24.4  

In brief, due to decline in the revenues from company's cement and textile segments, the topline failed to impress. However, the paper division prevented the dip in topline. Due to higher increase in expenses, operating margins came down by around 630 basis points. Good results in the first quarter and a significant reduction in the interest outgo has improved the 1HFY04 numbers.

Let's have a look at the segmental performances

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Textiles 1995 1977 -0.9% 3967 3731 -6.0%
PBIT 209 120 -42.7% 381 261 -31.3%
PBIT Margin 10.5% 6.1%   9.6% 7.0%  
Cement 2017 1917 -5.0% 4238 4288 1.2%
PBIT 105 -184   124 -68  
PBIT Margin 5.2% -9.6%   2.9% -1.6%  
Writing & Printing Paper 724 899 24.2% 1579 1826 15.6%
PBIT 87 140 60.8% 241 341 42.0%
PBIT Margin 12.0% 15.6%   15.2% 18.7%  
Others 435 407 -6.4% 806 821 1.8%

Textile segment of Century includes yarn, shirting fabric, denim and viscose filament yarn. The company has decided to reduce exposure in the international markets and is shifting towards domestic markets slowly because of strong competition from the cheap supplies by countries like Pakistan and Bangladesh in the global markets. One of the reasons why these developing nations are more competitive is because cotton prices are relatively cheaper, which gives manufactures an advantage (cheap labour is also an added advantage). Moreover, cotton prices are also lower in these countries as compared to India. In denims, Century has a 100% export-oriented plant, which takes advantage of the lower cotton prices in neighboring countries. Being 100% EOU, it can import cotton at lower duty. Though revenues from this segment dipped marginally, we expect a revival in the medium term. The main reason for the decline in margins could be higher raw material costs (cotton).

Apart from selling fabric, Century has 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, it is definitely a better margin business. There are opportunities for Century to enter international markets in ready to wear segment post 2005.

Revenues from the cement division dipped marginally. Cement demand grew at a slower rate of 4% for the industry in 1HFY04 due to prolonged monsoon. This was accompanied by lower price realisations. But the rise in revenues from the paper division has compensated for the weakness in other businesses.

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.

At the current price level of Rs 122, the stock trades at a P/E multiple of 24.4x annualised 1HFY04 earnings. Century's cost control efforts will help it to improve bottomline. In order to reduce the staffing cost, the company has already completed one round of VRS. The entry in ready to wear segment will help company to revive its textile business. However, the readymade market is highly competitive and it remains to be seen how Century manages this aspect. In the past few years, Century is not known for its pro-activeness.

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