Business Standard

Monetising land bank to prop up textile firms

While companies are utilising their realty assets to help pare debt, many are witnessing an improvement in their core business

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Textile companies like , and , once a part of scrips (about two decades ago) and among investors’ favourites, are again attracting investors’ attention. While their core businesses are witnessing improvements in fundamentals, expectations that these companies will use their land banks to unlock value are helping boost their stocks.

Bombay Dyeing and Century are up between 60 and 70 per cent each, while Arvind is up 23 per cent since the start of 2012. In fact, even after the run, there are good values in some of them.

Arvind
The world’s largest denim player, Arvind, is an integrated textile company that sells its products under leading global brand names like Arrow, Lee and Tommy Hilfiger, some of which are owned by the company. It has 500 acres of land in and around Ahmedabad in Gujarat. It is monetising the land bank through the joint venture route. Arvind expects to use the proceeds from the real estate business to deleverage its balance sheet, which has a debt of Rs 2,529 crore.

MIXED BAG
In Rs crore Arvind Bombay Century
Dyeing

Textiles
Net sales 3,618.8 1,320.6 3,513.6 2,688.9
% change y-o-y 27.2 6.1 4.9 22.0
PBIDT 790.1 28.5 332.0 434.6
% chg y-o-y 89.2 -74.2 -36.3 188.0
Net profit 366.3 -125.8 46.0 152.6
% chg y-o-y 236.2 NA -75.0 530.3
*Consolidated figures for nine months ended Dec 2011,  Source: BS Research

The management expects the real estate business to generate Rs 1,000 crore worth free cash over the next four years. Given its debt and current market capitalisation of Rs 2,000 crore, the enterprise value of the company works out to be Rs 4,500 crore. This is 15 per cent lower than the valuation of Rs 5,300 crore for its core business, estimated by analysts, and suggests there is value in the stock. Notably, the company’s core business is doing well and the trend is likely to continue. Analysts are expecting 20 per cent overall growth in Arvind’s earnings over the next two years, led by an increase in capacities.

UNLOCKING VALUE
In Rs crore

Land

Market
Cap
Enterprise
Value *
CMP
(Rs)
Acres Value
Arvind 500 1,000 2,099 4,500 82
Bombay Dyeing 58 2,500 2,351 3,687 580
Century Textile 40 6,000 3,430 6,400 369
Raymond 125 1,500 2,605 3,900 424
Source: Analysts' estimates, CMP is current market price, * EV is Enterprise value (market cap + debt)

Bombay Dyeing
Bombay Dyeing has big plans in the real estate space. It has formed a real estate arm, Bombay Realty, which will not only develop and/or undertake the real estate projects of the company, but also develop the land bank of the (its promoter). The management has said the group has 10,000 acres of land across India, including 64 acres owned by the company.

Bombay Dyeing has already sold about six acres of land and is planning to monetise the remaining in phases. On the flip side, its core businesses of textiles and polyester (which account for 87 per cent of its revenues) are not in great shape. It is only the real estate business that is growing and contributing to the company’s profitability. In terms of valuations, the company’s enterprise value works out to be Rs 3,687 crore (market capitalisation of Rs 2,300 crore and debt of Rs 1,387 crore). If the value of land bank, estimated to be worth Rs 2,500 crore, is adjusted, the value of its core business comes to Rs 1,187 crore, reflecting that gains of the reality business are more or less in the stock price.

Century Textiles
Century Textiles & Industries has a land bank of 40 acres and most of the area is in Mumbai’s emerging business area, Worli). Of the 40 acres, about 10 acres are in dispute with Bombay Dyeing. With regards to the rest, the company has started the first phase of development. It is estimated the company can develop up to six million square feet of space over the next four to five years.

Though the share price has moved up in the recent past, the company’s current market capitalisation does not fully reflect the value of its businesses, including real estate. At the current market price of Rs 369 a share, the company’s market capitalisation works out to be Rs 3,400 crore. Add another Rs 3,000 crore of debt in the books, its enterprise value translates to around Rs 6,400 crore.

On the other hand, investors get about 11 million tonne cement capacity (including 2.8 mt to be commissioned in 2013-14), which alone is valued in the vicinity of Rs 9,000 crore, based on realistic valuations of $135 per every tonne of capacity. Players like India Cements and Shree Cement, with 16.5 and 13.5 mt capacity, are quoting at an enterprise value of $90 and $162 a tonne, respectively. Analysts value Century Textiles’ other businesses like paper and textile at Rs 1,800 crore. And, if the value of the real estate business, pegged at Rs 6,000 crore, is considered, there is still good amount of value in the stock.

Raymond
Raymond is a well-known player in the domestic textile industry, with strong brands in its portfolio. “Raymond, with its range of brands, high-brand recall and a solid distribution network, should be very well positioned to benefit from rising demand, especially in tier-III/IV/V cities and towns,” says Saion Mukherjee of Nomura Equity Research. Raymond has a land bank of 125 acres in Mumbai and near-by Thane area, which it plans to monetise in the coming years. The company has a market capitalisation of Rs 2,600 crore, which adjusted with debt in the books translates into an enterprise value of Rs 3,900 crore.

After excluding the estimated value of the land worth Rs 1,500 crore, the market values Raymond’s core business at Rs 2,400 crore, about half its expected revenue in 2012-13. This, along with good earnings growth over the next two years, indicates scope for price appreciation. The stock is trading at about 13 times its estimated FY12 earnings, which is not expensive.

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