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S. Vaidya Nathan

The company's capacity to cater to the market where a finer balance between demand and supply has started to emerge could ensure a more stable revenue and earnings stream.

SHAREHOLDERS of Century Textiles can remain invested, as there could be scope for improvement in the earnings profile. The cement business has begun contributing significantly to the earnings stream in recent quarters. This is likely to continue, as cement prices may stabilise at higher levels.

With structural changes imminent in the textile industry, the stock could also attract attention, as it is one of the larger players in this sector. Textiles and cement account for about 80 per cent of the revenues and 70 per cent of the pre-tax earnings. As these two sectors are likely to remain in the sight of institutional investors, the valuation accorded to the Century Textiles stock could improve. The diversified nature of the business may, however, mean lower price-earnings multiple compared to that enjoyed by pure cement or textile plays.

If the earnings levels have not been as impressive as one would expect, with the boost provided by the cement business, it is because of a decline in profitability in the paper and textiles segment, which has neutralised the momentum. This tempers our bullish view on the stock.

The stock trades at about Rs 150. Valuation levels may appear stiff going by historical earnings. That would, however, not be the case if the profitability of the textiles business improves as expected, if the paper business contributes more, and if the buoyancy in the cement business remains over one/two years.

In the near term, rising input costs could impact profitability, but margins may not decline to levels lower than what the company reported over the first two quarters of FY-05.

With its foray into ready-made garments, marketed under the Cottons brand name, Century Textiles has emerged as an integrated player in textiles. It has ramped promotional campaigns for the Cottons brand, and is also widening its distribution network, which also includes exclusive outlets.

The costs associated with these moves and higher raw material prices have impacted profitability. It may take a few more quarters for the margins to improve to the levels of about 5 per cent that it managed in FY-03.

The competition in the ready-made garments segment is stiff, but Century Textiles can emerge as a player that would last the course. Its strength is in 100 per cent cotton fabrics.

With the quota system expected to be dismantled in about a month's time, outsourcing from India is expected to gradually rise from the present levels. The larger players would be at an advantage in this emerging milieu.

Century Textiles, with an established track record, could emerge a fabric supplier of choice to other exporters. Its export revenues are also likely to get a fillip. The effects of the new system may translate into higher profitability only over a one/two-year period. The cement business is likely to be the fulcrum of earnings growth over the next few quarters.

Century Textiles has now abandoned plans to sell this business after a futile search for buyers.

With the fundamentals of the business improving, it is well-placed to remain in the fray; anyway it can take heart that it can secure a far superior price, if it decides to exit the business.

The company's capacity to cater to the market where a finer balance between demand and supply has started to emerge could ensure a more stable revenue and earnings stream than over the past five years. The company has also moved to debt that is financed at lower rates.

There may not be scope for further improvement, but the re-pricing gains of the past couple of years are likely to be a positive as the company is now well-placed to bankroll growth plans. Any exercise at restructuring to ensure more focussed operations would be a positive, though there has been no indication of this.

In the textiles business, this is an emerging theme as companies seek scale economies and visibility. Most of Century Textiles' peers are focussed textile plays. Remain invested with a one/two-year perspective.

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