| Redevelopment of its prime property in Mumbai along with expansion in other businesses make Century Textiles a good investment.
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| The hammering witnessed by the real estate sector in the past few months has also led to correction of stock prices of companies holding vast land parcels, thereby making their valuations attractive.
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| One such company is Century Textiles and Industries (Century), engaged primarily in the businesses of cement, paper and textile; which is expected to make a fortune by developing its 40-acre of prime land at Worli for IT and ITeS, hospitality, and commercial space.
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Real Estate
High costs of operating mills in Mumbai along with soaring realty prices have prompted mill owners to shift their manufacturing units elsewhere, making available the land for sale or redevelopment.
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| Century Textile chose the latter option when it shut its mill in Mumbai in December 2006 and shifted it to Bharuch, Gujarat. Out of the 40-acres of land in Worli controlled by Century, 10 acres has been leased to it for 999 years (only 109 years over) by the Wadias of Bombay Dyeing, while the balance is owned by the company.
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| While Century has fully compensated its 6,600 workers, 82 of them have challenged the decision and the matter is pending before the Industrial Tribunal.
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| The company has also applied for the requisite approval for redeveloping the land and hopes to commence construction in a year's time.
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| Considering the scale and importance of the project, the company has appointed one of the leading architectural firms in Singapore, RSP International to plan the project; indicating the company's firm plans.
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| Analysts expect Century to allot a lion's share of the land to the IT Park and hotel as they enjoy a higher floor space index (FSI) of 2.66 (against 1.33 to others). The company has no plans to sell the property but to give it on lease. But, will IT companies rent offices in the heart of the city, where the rentals are sky-high (Rs 225-400 per square foot) is yet to be seen. Taking a conservative FSI of 1.5, we arrive at a saleable area of 3.8 million square feet, with net asset value (NAV) of Rs 471.6 per share.
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| The funds raised from the development bring in a new revenue stream and unlock funds for Century's expansion across segments. Century has planned an aggressive capex of Rs 3,250 crore to expand capacities across all key businesses over the next two to three years.
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Cement
With the textile operations in Mumbai shut FY08, cement was the key contributor to the company's business, forming 56 per cent of the total sales and 76 per cent of EBITDA.
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| While the company is currently operating at full capacity, volume growth over the next two years would be driven by de-bottlenecking 1.5 mtpa (million tonnes per annum), which got commissioned in March 2008, taking the total to 7.8 mtpa. While the company's profitability in this segment has been consistently lower (by 20-25 per cent) than the industry average due to Century's vintage plants and high power consumption, the company is trying to address these issues.
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| It is setting up new plants in Maharashtra and West Bengal to enhance its capacity by 4 mtpa, which includes a 1.5-mtpa cement grinding unit (for higher blending) and a captive thermal power plant of 40 MW.
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| These would provide some relief, even if there is a moderation in margins as expected by analysts, given the potential oversupply situation by FY10. Nevertheless, the long term prospects of the industry still continue to be positive on the back of increased infrastructural thrust in India.
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Paper
With regards to the pulp and paper division, Century currently has hitherto been in writing and printing paper segment and now plans to diversify into high growth segments like tissue paper and packaging board.
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| The paper business has been a steady performer with revenue and EBIT CAGR (FY05-08) of 20 per cent each, benefiting from the ongoing upturn in the paper cycle. While the paper margins may come under pressure due to higher raw material and energy prices and change in product mix (higher packaging board sales), the company is trying to compensate for the same by increasing backward integration.
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The company is increasing its existing wood pulp capacity from 30,000 tpa to 162,000 tpa, and setting up a chemical recovery boiler of 1,200 tonnes along with a captive power plant of 40 MW.
| STABLE GROWTH |
| Rs crore |
FY08 |
FY09E |
FY10E |
| Net sales |
3442.6 |
3956.5 |
4489.7 |
| Operating profit |
679.3 |
778.8 |
861.5 |
| Net profit # |
401.4 |
437.4 |
482.5 |
| EPS |
43.2 |
47.0 |
51.8 |
| P/E |
11.4 |
10.5 |
9.5 |
| E: Analysts estimates # Adjusted for extraordinary items |
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Textile
Century's textile business has been impacted by the rising cotton prices, high labour cost, relatively older textile mill, and a depressed denim market.
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| The company has taken steps to improve efficiency by closing down its textile mill in Mumbai and setting up a new mill in Gujarat. It has invested Rs 730 crore to set up a new textile mill with a 30 MW captive power plant at Bharuch with a capacity to manufacture 25 million metres per annum.
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| This will help the company improve margins on account of cheaper input and labour costs. The new mill is currently undergoing trial production and is expected to be fully operational by October 2008 and generate estimated revenues of around Rs 250-300 crore in FY09 and Rs 500 crore in FY10.
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The company has also attempted to move up the value chain by retailing of garments under the brand, Cottons by Century. Although the company has created a sizeable presence with around 135 outlets across the country, retailing still forms of a small portion of the overall business.
| EXPANSION MODE |
| FY08 |
Cement |
Paper |
Textile |
| Net sales (Rs in cr) |
1922.20 |
869.1 |
623.7 |
| EBDITA (Rs in cr) |
514.1 |
169.2 |
10.8 |
| Existing capacity |
7.8 mtpa |
1.98 lakh tpa |
21 mpa |
| Increased capacity |
11.8 mtpa |
4.17 lakh tpa |
46 mpa |
| Timeline |
FY11 |
FY10 |
H2FY09 |
| Capex (Rs in cr) |
1,800 |
1,450 |
730* |
| * Amount already disbursed; mpa: million metres per annum |
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Investment Rationale
Century, which the market believes is a play on real estate, is expected see its textile and paper businesses contribute to growth rates over the next two years, thereby compensating for any slowdown in the cement business. It's earnings are expected to grow at a CAGR of about 10 per cent over FY08-10.
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| The company's capex plans of Rs 3,250 crore to be spent over two years, will further strengthen its foothold in its businesses. The same will be funded by a mixture of internal reserves and debt, which should not be an issue considering the strong cash flow from operations of about Rs 2,450 crore (over FY08-10E).
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| With the NAV of Worli land at Rs 400 per share (assuming a discount of 20 per cent on NAV; considering potential profits on only 30 acres) and the stock trading at Rs 493.25 at present, investors are in effect getting the other businesses at a deep discount.
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| These calculations do not include the company's other properties in Dadar (3.5 lakh sq. ft.) and in Kalyan (over 100 acres).
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| Also, once an understanding of profit-sharing is reached between Century and Bombay Dyeing over the 10-acre leased land, expect further upside from the Worli project. Investors with an investment horizon of 24-36 months can expect handsome returns from this stock. |
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