A mixed performance

Reshma Krishnan

THE performance of cotton yarn companies in 1999-2000 was mixed. Nevertheless most posted sales increases and managed to be in the black again.

Mahavir Spinning Mills sales increased 16.7 per cent to Rs 773.06 crore in 1999-2000 from Rs 661.46 crore in the previous year. The growth rate more than doubled from previous year, where growth was stagnant at around 6 per cent. This was accompanied by an increase in operating profits by 12.7 per cent, indicating rising costs and lower efficiency. This is possibly due to rising power and wage costs in the last two years. This has also been reflected in a marginal fall in operating profit margins from 20.09 per cent to 19.38 per cent.

Despite the high raw cotton prices, for the half-year ended September 2000, Mahavir Spinning Mills increased profits despite a fall in sales. Margins increased slightly. The earning per share stands at Rs 21.76 (annualised) from Rs 18.91 the previous corresponding period. This translates into a price-earnings multiple of about 2. The return on capital employed was 15.68 per cent for 1999-2000 compared to 15.30 in the previous year. Despite the low valuation, investors can avoid this stock due to the poor market sentiment towards the universe of stocks in this industry.

But not all companies have witnessed a similar upswing in fortunes. GTN textiles, for instance, reported an increase in sales but a severe fall in operating efficiencies. Sales grew 19.06 per cent to Rs 200.74 crore in 1999-2000 from the previous year's Rs 168.91 crore. Operating profits, however, declined by 5 per cent to Rs 28.42 crore from Rs 29.93 crore in 1998-99. As a result, the operating profit margin also declined to 13.31 per cent in 1999-2000 from 17.33 per cent the previous year.

GTN seems to have been the exception. In 1999-2000, like most major companies in the sector, it posted an increase in operating efficiency. EPS plummeted from Rs 11 in 1997-98 to Rs 1.14 in 1999-2000. The returns on capital employed fell to 5.31 per cent in 1999-2000 from 7.14 per cent the previous year.

In the first half of the financial year ending September 2000-01, margins improved to 17.12 per cent from 15.93 per cent the previous year. The share price also fell from Rs 35 in the beginning of last year to trade around Rs 20 last month. Investors would be wise to avoid taking exposure in this company.

Precot Mills, of the Coimbatore-based Elgi group, is one of the better-placed mills in the spinning sector. It weathered the harsh restructuring through constant technological upgradation and a conservative management policy. It has witnessed inconsistent, but always positive, year-on-year top-line growth in the last five years. The year 1999-2000 was particularly good for the company and it took advantage of the slight upturn in the industry's fortunes.

Sales increased 14.21 per cent to Rs 210.20 crore in 1999-2000 from Rs 184.06 crore the previous year. Margins rose from 12.69 per cent to 13.52 per cent. They had been falling in the last couple of years. The liquidity position is comfortable as both debt-equity and long-term debt-equity ratios are increasingly on the positive side.

The performance for the half-year ended September 2000-01 are also promising. Sales grew 15.67 per cent from the same period last year. It is still uncertain how the high raw cotton prices will affect the second half performance. The EPS stands at Rs 15.85. The share was last traded at around Rs 50. The share price has, as with the rest of the stocks in this sector, fallen from the Rs 80 levels prevailing at the same time last year.

Due to the uncertainties and the cyclicality associated with cotton prices, and the vulnerability to policy changes, the shares of textile companies have been suffering from poor valuations, though a few companies turned in reasonable earnings. Therefore, taking exposure to these stocks may not be lucrative.