The Hindu Business Line : Century Textiles: Buy

SHAREHOLDERS of Century Textiles can remain invested and also accumulate the stock, as there could be scope for appreciation linked to fundamentals and clarity on ownership and management control. But the effect of the Maharashtra floods on its yarn and chemical manufacturing operations could be a drag on profitability in the July-September period. As this is an exceptional event, it will not affect the stock valuation.

We had recommended a `buy' on the stock in January at about Rs 160, retaining our bullish view since 2003. In June, we had suggested a `hold' following the sharp rise in price. In view of the latest developments involving ownership and management control, we upgrade the recommendation to a `buy'. Investors with one/two-year perspective can consider taking exposure. Especially any decline in the stock price linked to broad market weakness can be used to accumulate the stock.

The B. K. Birla and Kumar Mangalam Birla groups have acquired firm control over Pilani Investments, which holds about 40 per cent in Century Textiles. The settlement of cross holdings by the various Birla group companies in Pilani Investments has been in the works for several years now and clarity has emerged only over the past fortnight.

Following this settlement, there are indications that control of Century Textiles and Century Enka would eventually pass to the Kumar Mangalam Birla group. An active involvement of the latter can be expected even ahead of the shift in control. This augurs well for Century Textiles, as there could be cost benefits , especially in the cement business.

We view this shift in control to the Kumar Mangalam Birla group as a major positive for Century Textiles and that could get reflected in the valuation accorded to the stock. The settlement has also paved the way for any restructuring the businesses of Century Textiles. In two of its interests — cement and textiles — there will be synergy with Grasim and Indian Rayon. Gains from such an exercise may flow only over the longer term.

Century Textiles' earnings are likely to get a boost from the cement business and would also be bolstered by the higher profitability in its paper business.

There could be a turnaround in textiles if the earnings for the first quarter are an indication. Given the anaemic profitability levels over the past few years, the story in textiles is likely to get better and not be the drag on earnings as in the past few years.

With considerable room for volume growth, Century Textiles is well-placed to capitalise on the robust trend in cement demand and superior average price levels that are likely to prevail over the next few years.

As its expansion plans, on a modest outlay, are set to take its capacity to about eight million tonnes by end-2006, capacity constraints are unlikely to stymie growth.

Over the next 18 months, new capacities in paper and captive power are likely to be commissioned.

With spurt in earnings and cash flows, and a reduction in debt levels over the past couple of years, the company is comfortably placed to bankroll the expansion plans without adding to equity. These investment initiatives will provide space for robust revenue and earnings growth.

A sharp rise in energy and transportation costs that could impact profitability is the principal risk to our recommendation.

If the company manages to maintain its performance parameters at first quarter levels, the damage can, however, be contained and earnings growth will be impressive.

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