A Stretched Fabric

It is a year the top management of Century Textiles and Industries Ltd will not forget in a hurry. One hundred years after it was formed, the Rs 1990 crore company posted one of its worst-ever financial performance in 1996-97, with net profits crashing by 98 per cent to Rs 2.6 crore from Rs 194.75 crore.

In fact, Century is a classic case of a company paying for its diversification in the License Raj. Like most Birla companies, the Rs 3,800 crore B K Birla group flagship began with textiles and later moved into businesses as varied as cement, paper and shipping. And it is the last three businesses which have given Century an eroding bottomline.

 

Today, Century has shelved most of its projects, is on a cost cutting spree and is modernising existing plants for optimal use. But the company might have to traverse a very long distance before it bounces back.

Indications of a downhill trek were evident even in the first half of the year. Though sales had risen 22 per cent, net profit was down 66.66 per cent, thanks to falling other incomes, a huge rise in interest burden and depreciation. Of this, interest was the main killer, rising more than four times to Rs 78.35 crore.

In the second half, performance literally nose-dived with interest costs rising once again by Rs 84 crore and depreciation by Rs 64 crore. Against a profit of Rs 34.18 crore in the first half, Century posted a loss of over Rs 30 crore in the second half.

For the full year, sale was higher by 11.9 per cent, net profit lower by 98 per cent and interest costs higher by 218 per cent. B K Birla, chairman of Century, admitted that the times were tough.

For, like the other Birla companies, Centurys diversifications were mostly into commodity businesses. As a result, it was hit by poor sales and falling prices in cement and paper. The situation was further aggravated by bad industry conditions in shipping. These three sectors were the culprits. We made money in the first half, when industry conditions were better, but in the second half, we couldnt do anything, said Birla.

Century Textiles is the flagship of the B K Birla group, which has other companies like Century Enka, Kesoram Industries, Birla Tyres and Mangalam Cement. A conglomerate, Century Textiles began as a textile company in 1897, making and exporting cotton grey fabrics from its mill in Mumbai. It later diversified into other areas like rayon yarn, paper and pulp, cement, shipping, cotton yarn and denim.

In cement, it emerged as one of the largest producers with a capacity of nearly five million tonnes at locations in Madhya Pradesh and Maharashtra. It is one of the few producers of rayon grade wood pulp in India along with AP Rayons and Grasim. In viscose filament yarn (VFY), the company is one of the top producers of the commodity along with Indian Rayon and NRC Corporation.

In the late eighties, Century invested more than Rs 1,000 crore diversifying into cement and shipping. It also looked at extending its mainline textile business. For instance, the denim project planned for exports is currently under implementation.

A major thrust was planned in paper and an 84,600 tonne plant was set up in Uttar Pradesh. Three more were planned in Punjab and Uttar Pradesh; a 200 tonne per day rayon and paper grade pulp plant in Punjab, a 300 tonne per day paper project at Aliganj and a 300 tonne per day paper board plant at Lalkua in Uttar Pradesh. Also in the pipeline was a pig iron project in West Bengal, for which a separate division, Century Iron and Steel, was set up last year. The Century board had cleared the pig iron project early last year at an investment of Rs 225 crore. Total investment in all these projects was estimated at over Rs 2,500 crore.

Most of these projects were financed through debt and internal accruals. Though a GDR issue was floated in 1993-94, new investments like the denim project and the new one million tonne cement plant at Maihar were funded mostly through debt.

A Crisil study published in December 1996 had warned of the increase in the companys debt burden. The high reliance on debt for the projects completed in the past few years and those on hand are likely to have an adverse impact on the financial risk of the company, the study had stated.

Unfortunately for Century, the debt burden increased at a time when industry conditions were bad and one of its new plants was struggling to achieve full capacity utilisation. The bagasse-based paper plant in Uttar Pradesh had been commissioned two years ago, but was operating at less than 50 per cent capacity utilisation. In 1995-96, it produced around 40,000 tonnes of writing and printing paper, which slipped to around 35,000 tonnes this year.

Company sources attributed the fall in production to teething troubles. But in the end, the inability to run the plant at full capacity meant the company had to settle for less revenues from the plant, while at the same time paying high interest and depreciation.

Secondly, an increasing debt burden was taking its toll on the profitability of existing businesses. The Century story is a classic case of insufficient revenues to meet high fixed cost obligations, said an analyst with a foreign broking firm.

Besides, the commodity nature of the Birla businesses made them vulnerable to any kind of industry slowdown. According to Birla, conditions in the paper industry were bad and Century could not increase its realisations. The domestic paper industry is currently facing oversupply to the extent of 1.2-1.3 lakh tonnes leading to prices falling by 12 to 15 per cent over 1996. We hope to do well next year. Already, in April, our production has touched 4,000 tonnes. We plan to increase it to 5,000 tonnes in May, said Birla.

Conditions were much worse in cement. A recession in the cement industry saw general demand growth slip from over 10 per cent two years ago to 8.5 per cent in 1996-97. For Century, the problem was compounded by the fact that it had all its three plants in the surplus regions of Madhya Pradesh and Maharashtra.

Realisations fell from Rs 1,375 per tonne to Rs 1,325 per tonne for the company due to overcapacity and falling prices. Year-on-year prices in that region fell from Rs 130 per bag to Rs 114 per bag before climbing to Rs 118 per bag.

B L Jain, president of the cement division, says, Falling prices and bad markets prevented us from passing on increased input costs to consumers. Plus, government buying in Madhya Pradesh was completely down last year and we were forced to transport cement over long distances, thereby incurring higher freight costs.

The Madhya Pradesh government was buying nearly 15 per cent of the cement produced in the state. When they withdrew due to a cash crunch and cutbacks in expenditure, companies like Century were forced to haul their produce over long-distance markets like Delhi and Punjab in the north and even Assam in the north-east. And the additional cost stood at anything between Rs 200-800 per tonne.

The 50-60 per cent power cuts in the state also forced Century to cut down production. At Maihar and other places, for example, capacity utilisation was only at 80 per cent. Today, Century has a captive power plant. This should bring down our costs as we will save around Rs 95 crore, said Jain.

To cap it all, Century also had to face losses on its rayon wood pulp division because of cheap imports. Global wood pulp prices had fallen from over $1,200 per tonne to close to $600 per tonne and domestic prices had followed suit. From over Rs 35,000 per tonne early 1996, prices have now slid to Rs 23-24,000 per tonne. Century sells a lot of wood pulp to its rayon division, and while rayon has benefited, the pulp division found its realisations dipping.

To get back in stride, Century is trying to cut costs, install captive power wherever possible and stop further expansions and diversifications. Century sources say the emphasis now will be on cost-cutting. Most of the new projects, except the paper board plant, have been dropped. But unless the cement and paper market improves, the companys margins will continue to be under pressure. As Birla put it, We hope next year will be better, but for the moment we are keeping our fingers crossed.

We hope next year will be better, but for the moment we are keeping our fingers crossed.

B K Birla, chairman, Century Textiles and Industries Ltd