The Hindu Business Line : Century Textiles: Hold

The stock has trebled over the past couple of years and trades at a price-earnings multiple of 17 times its earnings for FY-05. The stock is likely to attract attention for its significant presence in textiles and cement.

Gains are likely to be at a steadier pace in contrast to the spurt over the past couple of years. The profitability parameters in these two businesses are low by industry standards and have scope for considerable improvement. As the company embarked on an aggressive promotional campaign in textiles, margin expansion in this business may happen only gradually over the next couple of years.

The paper business was a drag on the earnings growth in FY-05. This may change this fiscal, as paper prices are likely to post modest increases. The possibility of higher energy costs, which account for about 25 per cent of the expenses, acting as a drag on earnings growth, is the principal risk to our recommendation. The cement business is bound to bolster profitability, as prices are likely to stabilise at higher levels and exhibit an upward bias in the markets that Century Textiles caters to. In the North and the East, a tight demand-supply balance could provide an impetus to profitability for cement producers with a presence in these markets.

In textiles, the company is one of the larger players with revenues of about Rs 800 crore. It has an integrated business profile with a sizeable presence in the export market. Over the past year, it has aggressively promoted its readymade garment business in India under the brand `Cottons'.

This is yet to pay off in terms of revenue growth. As the company is a late entrant in this space, it may be able to scale up revenues only in phases. The company is likely to benefit from the improvement in export prospects for the textiles industry, given its strengths as a supplier of quality fabric.

The January-March performance indicates that the profitability levels have begun to improve. Paper manufacturers have effected a modest price hike over the past couple of months. If this trend continues — a very likely prospect — earnings are likely to stabilise in contrast to the sharp decline in FY-05.

Century Textiles has managed to take advantage of the decline in interest rate to lower its interest burden. Even this year, when interest rates have remained stable, the company reported a lower interest cost driven by a decline in debt levels and finer pricing.

Gains on this score could be limited. The company is, however, now well-placed to cut debt with cash flows of about Rs 250 crore. An initiative to restructure the businesses has the potential to unlock value.

This could take time, as there are many issues at stake. Any progress on this front could provide upside to the stock. We have not factored gains on this score in our recommendation.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page