Analysis: Century Textiles & Industries Ltd

Modified: 02-Aug-20

The current section of the “Analysis” series covers Century Textiles & Industries Ltd, a B.K. Birla group company currently involved in the production of paper and textiles products, and real estate activities. The company has recently sold its large cement division.

“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.

 

Century Textiles & Industries Ltd Research Report by Reader

 

Hello Sir,

As requested, kindly provide opinion on my analysis of the company: Century Textiles & Industries Ltd.

Thanks and regards,

Tanmay Ghate

 

Financial Analysis of Century Textiles & Industries Ltd:

The company has not seen constant revenue growth in the last 5 years. In fact, there was de-growth in sales for FY2017 as compared to the previous year. On the other hand, the company has undertaken cost optimization initiatives. During FY2018, the company entered into an agreement with Grasim Industries to operate VFY of its textile division against royalty. These measures have helped the company to reduce its debt and interest cost. Please note that figures for FY2019 in the image include revenue from cement division, which has been demerged, hence not applicable.

As per 9-month financials for FY2020, there has been de-growth in overall turnover for Century Textiles & Industries Ltd. Post demerger of cement division, major revenue comes from Century pulp and paper division.

 

Pulp and Paper Division of Century Textiles & Industries Ltd

In the recent past, the Indian paper industry faced short-term challenges due to structural economic changes like demonetization and GST. Being a capital-intensive industry, consolidation in the domestic market has happened. However, the industry is projected to grow at CAGR 5.5% between FY 20-23.

Previously papers were used for the packaging purpose in FMCG, healthcare etc. sectors. However, with the growth of online shopping, the demand for papers has expanded immensely for the wrapping and packaging purpose in India. Ban or reduction of plastic use by various state governments has influenced the use of paper more for the wrapping and packaging in India in the last few years. Higher spends by governments on education awareness programs and increasing literacy rates could lead to higher demand for paper in India.

 

Textiles Division of Century Textiles & Industries Ltd

To offset certain challenges, the company has been focusing on brand building via International quality standards like Made in Green tag and LEED certification (Leadership in Energy and Environmental Design), for the purpose of exports to USA/European markets, which give importance to such certification.

 

i) Restructuring of Century Textiles & Industries Ltd

During FY 2018, the company entered into an agreement with Grasim Industries to operate Century Rayon segment for 15 years for a commuted royalty, interest-free refundable security deposit and transfer of Century Rayon’s working capital to GIL at actuals. Company has recognized royalty income of INR 600 crores over the period of 15 years along with a security deposit of 200 crores. Pursuant to the agreement, Grasim Industries Ltd. shall incur all capex necessary for profitable operations of Viscose Filament Yarn business.

While looking at the balance sheet items, Century Textiles & Industries Ltd has recognized this transaction under other non-current liabilities as a deferred revenue item. While reading note 33 for deferred revenue, Century Textiles & Industries Ltd mentions that it has received the money from Grasim Industries Ltd.

However, while going through the cash flow statement, the company has recognized this transaction under working capital changes, an item under CFO segment. However, Century Textiles & Industries Ltd is in the business of textiles, cement, pulp and paper and real estate, each segment being a part of its core operations. Century Textiles & Industries Ltd is not in the business of giving its business division to operate on a lease basis to other companies. This type of recognition of the transaction has resulted in significant shoot up of its CFO as well as operating profit and profit after tax for FY 2018 compared the previous year.

This transaction has resulted in a decrease in interest cost and working capital requirement and repayment of high-cost debt, as a part of the cost control measure.

During FY 2018, the company also entered into Business Transfer Agreement (BTA) for its Century Yarn and Century Denim divisions, whose turnover was less than 5% of the total turnover of the company. Century Textiles & Industries Ltd recognized impairment loss on re-measurement of fair value amounting INR 18.12 crores. This resulted in Profit before tax at INR -49.5 crores. Since the date of transfer of Y&D units, workers were on strike and challenged the sale of Y&D units by the Company. After objections of the workers in the court, the company terminated the sale and provided ₹25.49 cr as restructuring cost.

 

Cement Division of Century Textiles & Industries Ltd

In June 2012, Builders Association of India had filed a complaint before Competition Commission of India (CCI) against certain cement manufacturers and the Cement Manufacturers Association (CMA). The accusations were imposed for using CMA platform to fix cement prices, as well as control production and supply of cement in the market (cartel), thereby contravening the relevant provisions of the Competition Act 2002. Cement players like ACC, Ambuja, Ultratech, JK, Century, Binani, Lafarge cement etc. were involved in this case.

CCI had imposed a penalty (percentage of their net turnover) on cement manufacturers amounting 6300 crores. The penalty imposed on Century cement was INR 274 crores. Century along with other manufacturers had appealed this judgement before the Competition Appellate Tribunal (COMPAT). COMPAT had directed cement manufacturers to deposit 10% of the penalty amount. In December 2015, COMPAT ordered CCI to consider it as a fresh case and the interim penalty amount of INR 27.4 crores was refunded.

After rehearing arguments, CCI passed its judgment and once again held cement companies and CMA guilty in violation of Competition Act 2002, and imposed the same penalty as previously imposed in 2012. The order for cease and desist was also imposed. The company once again approached COMPAT, which stayed the CCI order in November 2016 subject to deposit of 10% penalty amount within one month. The Company has accordingly deposited the said amount in December 2016 in the form of Fixed Deposit in favour of COMPAT on behalf of the Company.

Subsequently, the Government has made changes in the constitution and operations of Tribunals under which all matters with COMPAT have been transferred to the National Company Law Appellate Tribunal (NCLAT).

NCLAT has upheld CCI order of imposing penalty INR 274 crores. Now the case is pending at Supreme Court for judgment.

 

i) Demerger of Cement Division:

During FY 2019, Century Textiles & Industries Ltd decided to demerge its cement division and sell to Ultratech Cement (Aditya Birla Group Company) for a share-swap deal. All assets/plants and liabilities including debt amounting 3000 crores of cement division were transferred to Ultratech cement. Contingent Liabilities amounting 740 crores have also been transferred.

As per the valuation report uploaded at the exchanges, two entities were appointed as independent valuation agencies- Bansi S. Mehta & Co and Walker Chandiok & Co.

However, minority shareholders have expressed their concerns with respect to the methodology used by the Board of Century Textiles & Industries Ltd to sale off the cement division. Their opinion was competitive bidding system would have led to a higher realization on the sale off, unlike the market multiple approaches used in the case.

On the other hand, management was of the opinion that cement plants were more than 25 years old with an outdated system. In order to maintain the marginal Century Textiles & Industries Ltd.’s 3% market share in the Indian cement industry, it would have had to carry out capex to upgrade/modify at around 2500 crores. This would have led to higher leverage. Moreover, the profitability of the cement division is not comparable to the industry average. In addition, competitive bidding rounds eats up a lot of time, leading to further deterioration in the cement assets and further delay into the real estate segment.

 

Real estate division of Century Textiles & Industries Ltd:

Century Textiles & Industries Ltd has two commercial properties located at Worli, Mumbai viz. Birla Centurion and Birla Aurora, which are fully leased out. The annual rental income derived from these properties is around 150 crores.

In order to undertake real estate development projects, in December 2017, Century Textiles & Industries Ltd incorporated a wholly-owned subsidiary named Birla Estate Private Ltd. (BEPL) with an initial capital of INR 5 lakh. During FY 2019, the share capital of BEPL has further increased to INR 82.5 crores.

There was also one complaint filed in 2019 against BEPL.

As mentioned during concall in May 2018, management is more focused on NCR and Gurgaon, Pune (Talegaon), Mumbai (Worli and Kalyan) and Bangalore for residential project development.

Out of these pockets, there is a certain land portion in Worli, which is under litigation with Wadia family as disclosed in the call.

 

Management Analysis of Century Textiles & Industries Ltd:

Century Textiles & Industries Ltd is majorly owned by Aditya Birla Group companies with 50.21% since the end of FY 2018.

 

i) Warrants issued by Century Textiles & Industries Ltd:

The company had issued warrants to promoter group companies. As per the agreement, these were to be converted into equivalent no. of shares at INR 354.89 within 18 months from date of allotment.

These warrants were exercised in two phases.

On 30th March 2015, 84,70,000 warrants were converted into equivalent no. of equity shares. As per the AR FY 2015 page 53, the lowest share price of Century Textiles & Industries Ltd in March 2015 was INR 529.65. If promoter group companies had increased their stake by buying shares from the open market, they had to pay at least INR 529.65 in the month of March 2015. However, shares were allotted to them at 354.89 per warrant, thus pocketing gains of INR 174.76 per share. The total amount being 148 crores. [(529.65-354.89)*84,70,000)]

Rest 1,01,80,000 warrants were exercised into equivalent no. of shares on 18th December 2015. As per AR FY 2016 page 48, the lowest share price of Century Textiles & Industries Ltd was INR 531.1. Thus, promoter groups have spent INR 179 crores less cost on the acquisition of shares through exercise of warrants. [(531.1-354.89)*1,01,80,000], when compared to acquisition at market share price.

Century Textiles & Industries Ltd has sold its shares worth INR 530 (lowest market price in March 2015 and December 2015) at a price 354.89 to promoter group companies.

This has also helped promoter group companies to increase their shareholding from 40.23% in April 2014 to 45.22% in March 2015 and further to 47.75% in December 2015. During FY 2018, promoters have acquired shares from the secondary market, which has helped to gain a majority stake in the company at 50.21%.

Regards,

Tanmay Ghate

 

Dr Vijay Malik’s Response

 

Hi Tanmay,

Thanks for sharing the analysis of Century Textiles & Industries Ltd with us! We appreciate the time & effort put in by you in the analysis.

While analysing the past financial performance of the company, an investor notices that until FY2017, the company used to report only standalone financials. However, in FY2018, the company formed its subsidiary Birla Estate Private Limited to focus on real estate development. As a result, the company started to report standalone as well as consolidated financials from FY2018.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of any company, whenever they are present, provide such a picture.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Therefore, in the analysis of Century Textiles & Industries Ltd, we have used standalone financials up to FY2017 and consolidated financials from FY2018 onwards.

 

Business Structure of Century Textiles & Industries Ltd:

When reading about the business of Century Textiles & Industries Ltd, an investor notices that the company is a combination of different independent business segments. At the start of the decade, in FY2010, the company had the following segments:

  1. Cement division (59% of revenue)
  2. Paper & pulp division (21%)
  3. Textiles including Rayon man-made fiber division (Viscose filament yarn & related products) (18%)

Then in FY2010, the company entered real estate business by starting construction of two commercial buildings at its mill land in Worli, Mumbai. The company completed the construction and leasing of the two commercial buildings in FY2016 and since then, it is getting an annual rental income of about ₹140-150 cr.

Credit rating report by CRISIL in July 2019:

Steady annual gross lease rental of Rs 140-150 crore from the commercial real estate assets is expected to support cashflows over the medium term.

Therefore, by FY2016, the company had four independent division:

  1. Cement division (52% of revenue)
  2. Paper & pulp division (24%)
  3. Textiles including denim, yarn and Rayon man-made fiber division (22%)
  4. Real estate division (0.4%)

Thereafter, from FY2018, the company started restructuring its businesses. In FY2018, Century Textiles & Industries Ltd did two business restructurings.

First, it sold its yarn & denim division. (FY2018 annual report, page 10):

During the year under review, the Company sold its Century Yarn and Century Denim Divisions, whose turnover was less than 5% of the total turnover of the Company.

Second, it leased out its Rayon man-made fiber division (Viscose filament yarn & related products) to a group company, Grasim Industries Ltd for 15 years.

FY2018 annual report, page 10:

With effect from 1 st February, 2018, the Company has granted Grasim Industries Ltd. (GIL) the right and the responsibility to manage and operate the Viscose Filament Yarn business…..which comprises of the manufacturing and sale of viscose filament yarn (including pot spun yarn and continuous spun yarn), rayon tyre cord and chemicals…..for a duration of 15 years

Thereafter, in May 2018, Century Textiles & Industries Ltd proposed to demerge its cement division to a group company, Ultratech Cement Ltd., which was completed in Oct. 2019.

FY2020-Q3 results, page 2:

The Scheme of Demerger between the Company and UltraTech Cement Limited (“Resulting Company”) and their respective shareholders and creditors (“Scheme”) was approved by the National Company Law Tribunal (NCLT) on July 3, 2019 and on completion of all conditions precedent, as specified in the Scheme, the Scheme became effective on October 1, 2019. Pursuant to the Scheme becoming effective, the Cement Business Division is demerged from the Company and transferred to and vested in the Resulting Company with effect from May 20, 2018 i.e. the Appointed Date.

As a result, the company updated its financials from May 20, 2018, by excluding the performance of the cement division.

In addition, when the company reported its FY2019 financials in the FY2019 annual report, to provide relevant comparative financials for the previous period, Century Textiles & Industries Ltd provided its FY2018 financials adjusted after removing the performance of the cement division from its operating segments. Instead, the company reported the performance of the cement division under discontinued business segments.

FY2019 annual report, page 18:

Accordingly, the Cement business has been shown as discontinued operations in the financial statements.

In another development during, FY2019, the workers of the sold-out yarn and denim division disputed the sale in the court of law and Century Textiles & Industries Ltd had to cancel the sale process and take back the yarn & denim division that was sold in FY2018. However, the company kept the yarn & denim division as an “asset for sale”, therefore, it classified it under discontinued operations.

FY2019 annual report, page 10:

Pursuant to the objections raised in the Court, against the transaction by the workers of the Y&D units, during the year, the Company has terminated the Business Transfer Agreement and has taken back possession of the Y&D units. The Company is exploring various alternatives for disposal of the units. Accordingly, the assets and liabilities of the Y&D units are classified as assets held for disposal and the operations have been classified as discontinued operations.

Therefore, in the light of all these business restructuring-related developments since FY2018, an investor needs to understand which business segments are included in the sales and profits of Century Textiles & Industries Ltd since FY2018.

While interpreting the numbers reported by different financial databases, an investor should keep in mind that the sales and the operating profit include the performance of business divisions, which are classified as continued operations. Moreover, the performance of discontinued operations is included in the net profits, cash flow statements and the balance sheet.

Therefore, while interpreting the financial table of Century Textiles & Industries Ltd, an investor should read it as follows:

Up to FY2017, the sales, operating profit, net profit & all other financial parameters include the performance of the following four-business division:

  1. Cement division
  2. Paper & pulp division
  3. Textiles including denim, yarn and Rayon man-made fiber division
  4. Real estate division

Since FY2018, Century Textiles & Industries Ltd started business restructuring.

In FY2018 and FY2019, the financial performance in the operating income (sales) and operating profits include the performance of the following divisions:

  1. Paper & pulp division
  2. Textiles excluding denim, yarn and Rayon man-made fiber division
  3. Real estate division

Whereas the net profit, cash flow statement and the balance sheet of FY2018 and FY2019 include the performance of following additional business divisions, which are classified as discontinued operations by the company:

  1. Cement division
  2. Denim and yarn division

In FY2020 and ongoing FY2021, the operating income (sales) and operating profits include the performance of the following divisions:

  1. Paper & pulp division (72% of FY2020 revenue)
  2. Textiles excluding denim, yarn and Rayon man-made fiber division (22%)
  3. Real estate division (4%)

Whereas the net profit, cash flow statement and the balance sheet of FY2020 onwards, includes the performance of following additional business division, which is classified as discontinued operations by the company:

  1. Denim and yarn division

An investor would appreciate that understanding and comparing the financial performance of Century Textiles & Industries Ltd over the years, due to these business-restructuring exercises becomes difficult. However, an investor would have to keep these developments in her mind while she analyses the business performance of Century Textiles & Industries Ltd.

With this background, let us analyse the financial performance of the company since FY2010.

Century Textiles & Industries Ltd Financials FY2010 20

Financial and Business Analysis of Century Textiles & Industries Ltd:

While analyzing the financials of Century Textiles & Industries Ltd, an investor notices that the sales of the company were growing at a pace of about 8% year on year from ₹4,453 cr in FY2010 to ₹7,645 cr in FY2017. However, suddenly, in FY2018, the sales of the company declined to ₹3,898, which have further declined to ₹2,948 cr in the 12 months ended June 2020 (i.e. July 2019-June 2020).

From the above discussion about the business restructuring exercises undertaken by Century Textiles & Industries Ltd, an investor would appreciate that the decline in the operating performance from FY2019 is due to demerger of the cement division, which used to constitute about 52% of the total sales of the company.

Moreover, when the company reported its FY2019 financials, then in the FY2019 annual report, in order to provide relevant comparative financials for the previous period (FY2018), Century Textiles & Industries Ltd provided its FY2018 financials adjusted after removing the performance of the cement division from operating segment and putting it in the discontinued segment.

As a result, it seems that the financial databases like Screener have updated the FY2018 performance of Century Textiles & Industries Ltd by using the adjusted financials of the year from its FY2019 annual report. Therefore, the FY2018 operating performance of the company reported in the financial table above excludes the performance of the cement division even though the appointed date for the demerger was May 20, 2018.

Nevertheless, from the above discussion, an investor would appreciate that the performance of the cement division is included in the net profits, cash flow statement and the balance sheet as a part of discontinued operations. Therefore, while an investor analyses the net profit after tax (PAT) of Century Textiles & Industries Ltd, then she notices that there is no such sudden decline in the PAT of the company from FY2018 onwards.

While analysing the operating performance of Century Textiles & Industries Ltd over the years, an investor notices that the operating profit margin (OPM) of the company has witnessed very sharp movements.

The OPM of the company used to be 19% in FY2010, which declined sharply to 9% in FY2012. Thereafter, the OPM continued to remain suppressed until FY2016 when the company reported its lowest OPM of 8% in the last decade. From FY2017 onwards, the operating margin of the company started improving and it reached 24% in FY2019. Thereafter, the OPM of Century Textiles & Industries Ltd has declined to 13% in the 12 months ended June 2020 (i.e. July 2019-June 2020).

An investor would appreciate from the above cyclically fluctuating profit margins that the overall business of Century Textiles & Industries Ltd is highly cyclical. Such kind of fluctuating profit margins are a characteristic of businesses, which do not have any pricing power over their customers. Most of the times, these businesses deal in commodity products where the customer is indifferent to the source of the product. The customers of such products have the option of buying from multiple suppliers both from India and overseas without much difference in the quality of the product available to them.

As a result, the manufacturers of such non-differentiable commodity products are not able to increase prices of their products when their input costs go up. If a supplier increases its prices, then the customer easily shifts to another supplier or starts importing the products. As a result, the manufacturers have to bear the impact of the increase in raw material products themselves and in turn, take a hit on their profit margins.

Almost all the business divisions of Century Textiles & Industries Ltd like paper, textiles, cement etc. are commodity products. As a result, the company finds it difficult to increase prices to its customers and had to take a hit on its profit margins when its input costs increase.

The credit rating agency, CARE had also highlighted this nature of business divisions of the company in its credit rating report in January 2019:

Cyclical and commoditized nature of business: All the three key businesses of CTIL viz. cement, textiles and pulp & paper are commoditized with intense competition and cyclical in nature makes it vulnerable to demand and supply dynamics and restricts CTIL’s pricing power.

Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

Nevertheless, in order to understand the business performance of the company, it is essential to understand the business dynamics and performance of each of these divisions individually.

 

1) Century Pulp & Paper:

As per the investor presentation of the company released in June 2020 (page 4), pulp & paper division constitutes 72% of the operating revenue of the company. Therefore, in the current business position of the company, pulp & paper is the most important division for the company.

While reading the available annual reports of Century Textiles & Industries Ltd since FY2007, an investor gets insights that the pulp and paper business is a purely cyclical business where the industry undergoes the periods of demand and supply mismatch.

At times, the demand for paper exceeds its supply in the market. As a result, the prices of paper products increase and the paper manufacturers increase their supply significantly. When the new manufacturing capacities start functioning, then the industry faces a situation of oversupply. This leads to price wars when manufacturers undercut prices to stay in the business. During this phase of decline of paper prices, many small & unorganized players find it difficult to survive and in turn, go out of business. The resulting shutdown of plants by these small & unorganized players reduces the supply in the market and the prices of paper products increase.

This seems to be a recurring phenomenon in the paper industry. While reading the developments of the paper industry over the years in the annual reports of Century Textiles & Industries Ltd, an investor can easily understand this cycle of the paper industry.

In FY2007-08, the paper industry in India was facing a shortage of supply. As a result, the country was importing a lot of paper and in addition, many Indian players were expanding their capacities.

FY2008 annual report, page 30:

The Indian paper industry is highly fragmented with numerous small players. The industry is witnessing a healthy demand and its financial performance has also improved. Most players are augmenting capacities, which are expected to come on stream over the next two to three years………With steady demand for paper in India and a surging requirement for higher quality paper, foreign players are exporting to India in a major way.

During this phase when the demand for paper exceeded the production, Century Textiles & Industries Ltd also announced capacity expansions. In FY2007, the company had completed one expansion project and simultaneously, it announced another expansion project to produce tissue paper.

FY2007 annual report, page 16:

The expansion of our paper unit for manufacturing paper from waste paper has been commissioned from 03.02.2007 with a capacity of 211 tonnes per day and the plant is now running smoothly.

It has been decided to set up a 100 tonnes per day Prime Grade Tissue Paper Plant at a total capital outlay of Rs.175 crore based on imported softwood and our own hardwood pulp as raw material…..is expected to be operative by about September, 2008.

The very next year in FY2008, Century Textiles & Industries Ltd announced its plans to establish a multi-packaging board plant along with a fibreline plant.

FY2008 annual report, page 09:

We are setting-up a Multilayer Packaging Board Plant, with a capacity of 500 tonnes per day. This development, requiring a total capital outlay of about Rs. 775 crore, is expected to be operational by December 2009. Additionally, we are planning to set up a Paper Grade Pulp Plant (Fibreline) to produce superior quality wood pulp. The plant demands a capital outlay of Rs. 495 crore and is anticipated to commence operations by December 2009.

An investor would expect that during good times, individuals, as well as companies, become very enthusiastic. As a result, the manufacturers see only the positives. An investor gets a similar feeling when in FY2009 annual report, Century Textiles & Industries Ltd mentioned to its shareholders that the demand for paper would only go up from here.

FY2009 annual report, page 24:

Due to favourable Government policies such as the thrust on education, a growing economy and young population, increasing urbanization, a clear preference for print media and widespread interest in books and publishing, consumption of paper can only increase

However, an investor would appreciate that paper is a cyclical industry where the demand rises and falls over time. In the very next year, FY2010, the upcycle phase of the paper industry was ending and Century Textiles & Industries Ltd saw a reduction in the demand for paper.

FY2010 annual report, page 20:

The Paper Business was under severe pressure due to a substantial increase in the prices of raw materials and reduced demand.

The intense competition in the industry did not allow the company to pass on the increase in raw material costs to its customers. As a result, the company had to take a hit on its profit margins in the paper division.

FY2010 annual report, page 23:

The prices of bagasse and wood which constitute major raw materials for pulp and other input costs have considerably increased without a sizable appreciation in selling prices. This has adversely affected the performance of this Division for a major part of the year.

By FY2012, almost all of previously announced capacity expansion plants by the paper industry, including the expansion plants of Century Textiles & Industries Ltd were operational. As a result, the industry started facing a situation of oversupply. Century Textiles & Industries Ltd also acknowledged that the paper industry is cyclical in nature.

FY2012 annual report, page 25:

The output from several new manufacturing facilities has further increased finished product supply, flooding the market and it will take some time for demand to catch up with these additional quantities.

Being in the commodity sector, the paper industry is cyclical in nature and is strongly co-related with global economic factors.

The very next year in FY2013, Century Textiles & Industries Ltd reported net loss.

FY2013 annual report, page 23:

However, due to higher depreciation in the current year on account of commissioning of Multilayer Packaging Board and Fiberline Plant (Pulp plant) in the Pulp & Paper Division, the Company has incurred a net loss.

By 2014, the paper industry had so much oversupply that the situation of dependence on imports to meet the demand in FY2008 had now given way to exports of paper from India. Due to oversupply, the company was not able to pass on the increase in inputs costs to the customers and as a result, had to take a hit on its profit margins.

FY2014 annual report, page 24-25:

Further, apart from rising production and consumption, erstwhile import dependent India has achieved self-sufficiency and also has witnessed an increase in exports.

While raw material costs have been increasing, the selling prices could not be increased to offset entirely the rising costs which resulted in an adverse financial performance.

By FY2015, the oversupply situation in the paper industry had worsened to such an extent that the small, B-grade, unorganized players started to go out of business and a price war was prevalent in the market.

FY2015 annual report, page 21:

With new installed capacities coming online in the second half of the year, the demand supply equilibrium in the Indian market shifted towards excess supply. This led to players dropping prices to remain competitive…..

The biggest threat for the Indian paper industry is from imports of paper products from China and duty free paper products from the ASEAN region. Products from these regions have priced out many domestic manufacturers and this has resulted in a price war in the Indian market across all grades.

This impacted the profitability of the Indian paper industry, as well as economic viability of ‘B’ grade paper mills.

Soon enough, the newly started division by Century Pulp & Paper, the multilayer packaging board business also experienced oversupply.

FY2016 annual report, page 20:

…..two newly installed capacities becoming operational by other players in the Multilayer Packaging Board business. With new capacities, the demand supply equilibrium in the domestic market shifted towards excess supply.

By FY2017, the oversupply situation in the India paper industry has taken its toll on the paper manufacturers. A few of them had to shut down their business. Now, it was time for the demand to exceed supply and the future of the industry started to look bright.

FY2017 annual report, page 19:

Based on the recent shut down of some domestic capacities and expected growth in the country’s GDP, it is likely that the domestic paper industry will grow at a reasonable pace along with the economy, from a medium to long-term perspective.

By FY2019, the paper & pulp division of the company had started to contribute healthily to the company’s performance and became one of the key reasons for the improving operating profit margins of Century Textiles & Industries Ltd.

FY2019 annual report, page 18:

Pulp & Paper and Real Estates Divisions have primarily contributed to this growth.

The demand in the paper industry exceeds supply and in FY2020, India met about 20% of its paper demand from imports.

Investor presentation, June 2020, page 34:

Total Demand- 19.8 Million MT in FY 20-21

Total Supply:

  • Domestic: ~15.8 Million
  • Imports: ~4 Million

In FY2020, the paper division of the company operated with 100% capacity utilization. Press release for Q4-FY2020 results:

Pulp and Paper Business operated at 100% capacity for FY20.

In light of the same, it does not come as a surprise to the investor that the paper manufacturers have again started increasing the manufacturing capacities. Century Textiles & Industries Ltd announced its plans to expand the manufacturing capacity in FY2019.

FY2019 annual report, page 10:

The Company has undertaken a project to expand the Prime Grade Tissue Paper Plant capacity from 100 tonnes per day to 200 tonnes per day with an Anchor GSM of 19 grams at a total capital outlay of ₹100 crores at the existing Pulp and Paper Plant at Lalkua, District Nainital, Uttarakhand.

The credit rating agency, CRISIL, in January 2020, acknowledged that the paper division of Century Textiles & Industries Ltd has displayed significant improvement in performance over the last 3 years.

Paper segment’s revenue and profitability have consistently improved, backed by increased capacity utilisation and realisation over the last three fiscals. This is expected to continue over the medium term, with completion of capex in high margin tissue segment and de-bottlenecking, despite some headwinds in realisations.

From the above report, an investor would notice that CRISIL expects that the good performance of paper division will continue over the medium term.

The management of the company is also giving a positive outlook about the performance of the paper division.

FY2019 annual report, page 20:

With increased demand for value added products and an improved order booking position, in future, we are hopeful of having further improvement in the business.

However, from the above discussion about the development in the paper industry, an investor would appreciate that the paper industry is cyclical in nature where demand and supply undergo phases. In FY2007-2008, in the Indian paper industry, demand exceeded supply and many manufacturers announced expansion plans. In good times, Century Textiles & Industries Ltd said to the shareholders that the paper demand would only increase. However, soon thereafter, the industry turned into an oversupply situation where price wars broke out. Paper manufacturers started reporting losses and many players went out of business and shut down capacities. As a result, the oversupply corrected itself.

Since FY2017, the paper industry is witnessing another upcycle where demand has exceeded supply. The country is meeting excess demand from imports (just like FY2007-2008) and the manufacturers have announced capacity expansion.

Based on the insights about the cyclical nature of the paper industry, an investor should be cautious before she starts projecting the good performance of the paper division into the future. She should be aware that the paper industry is cyclical where the down-phase follows the upcycle phase and vice versa.

Moreover, while assessing the competition to any company in the paper industry, an investor should not limit her assessment only to other large paper manufacturers. This is because in the paper industry, many times, even the small players are able to produce good quality products and give tough competition to the large players. In the down-phase of the industry in FY2016, Century Textiles & Industries Ltd had disclosed this aspect of the paper industry to its shareholders.

FY2016 annual report, page 20:

Some smaller manufacturing set-ups, which enjoy lower cost of production due to advantageous levels of overhead expenses and taxes, have upgraded the quality of their products, and provide good competition to large units in terms of both, quality and price.

Therefore, an investor should always keep the cyclical and intensely competitive nature of the paper industry while she makes assumptions about the future performance of the paper division of Century Textiles & Industries Ltd.

To understand more about the nature of cyclical industries where supply and demand frequently exceed each other in phases, an investor should read our analysis of following companies where manufacturers announce new capacities when demand exceeds supply; however, by the time, the new plants become functional, the demand cycle turns and the industry faces oversupply. As a result, many manufacturers shut down their business.

 

2) Century Textiles (Birla Century):

As per the investor presentation of the company in June 2020 (page 4), textiles division contributed to 22% of revenue in FY2020. While reading the annual reports of Century Textiles & Industries Ltd, an investor realizes that the textile industry is highly competitive where it is not possible for the manufacturers to pass on the increase in input costs to their customers. As a result, whenever the raw material prices go up, the textile manufacturers end up taking a hit on their profitability margins.

FY2010 annual report, page 20:

the prices of all inputs had gone up which could not be passed on to the end users in view of adverse market conditions prevailing during the major part of the year coupled with low demand. Therefore, the performance of textile segment remained depressed.

FY2011 annual report, page 22:

However, due to the severe increase in the prices of cotton, wages, oil and gas, the cost of manufacturing has been steadily rising whereas the markets were under pressure due to demand recession and prevailing general inflation in consumer goods prices. It has not been possible to increase the selling prices commensurate with the increase in the input costs and therefore, the margins have been under severe pressure.

Moreover, an investor may think that the textile manufacturers might be facing the challenge in passing on the increase in input costs to their customers in the segments of yarn etc. She may think that in the case of the ready-to-wear segment where the manufacturers create brands and sell directly to the end customer, there the manufacturers might be able to increase prices to compensate for the increase in raw material costs. However, while analysing the business of Century Textiles & Industries Ltd, the investor notices that even in the ready-to-wear segment of branded clothes, the textile manufacturers are not able to pass on the increase in input costs to their customers.

FY2011 annual report, page 22:

The sales of our ready-to-wear garments marketed under the brand name ‘Cottons by Century’ have been adversely affected due to the demand recession and increase in costs. The recent introduction of excise duty on the manufacture of ready made garments will further increase the prices, which will be very difficult to pass on to customers.

In the textile industry, the position of players is very difficult. When the raw material prices go up, then they are not able to pass it on to their customers and therefore, have to take a hit on their profit margins. In addition, when the raw material prices go down, then the market prices of their products fall in line with the reduction in input costs. Therefore, they face large inventory losses.

FY2012 annual report, page 22:

Cotton prices reached at an all time high followed by a phase of correction. This left various mills with high cost inventories causing heavy losses as the selling prices of fabrics did not improve.

At present, the market is very reluctant to absorb increased costs in selling prices because of which margins are under severe pressure and we have to wait for markets to improve and costs to stabilize…

By FY2012, the competition in the textile market had become extremely severe from both the domestic manufacturers as well as from imports that many players realized that they could no longer compete in the market.

FY2012 annual report, page 22:

Textile products from Bangladesh permitted to be imported duty free are cheaper and have flooded the markets, pushing out Indian products with prices that cannot compete.

When the intense competition had taken its toll on the textile manufacturers, then the industry cycle showed some improvement in FY2013.

FY2013 annual report, page 23:

The sales at Birla Century have improved by about 65% as compared to last year due to better use of capacity and increasing demand in domestic and US markets.

However, soon enough, in FY2014, the industry again showed its tough face to the manufacturers where the inputs cost increased and they could not increase the prices to the customers. As a result, the profit margins of the players remained depressed.

…those with a presence in weaving, processing or even composite businesses are facing the heat due to increases in input cost without being able to pass on such higher costs to customers as the market is simply unable to absorb the same.

Moreover, an investor notices that the competition in the domestic market is not only from Indian manufacturers but also from international manufacturers like Bangladesh.

FY2019 annual report, page 18:

The duty free import of fabrics from China into Bangladesh and in return the Garments are being imported duty free into India from Bangladesh is hitting hard the Indian Textile Industry.

Nowadays, big brands manufacture their products overseas and then sell them in retail shops in India at cheaper prices.

FY2018 annual report, page 17:

The international brands like Marks & Spencer, IKEA, Zara, H & M, Walmart etc. who have multiple sources to cover fabrics and convert into garments in Bangladesh, Vietnam and Cambodia etc. for retailing in India at better prices will make it difficult for Indian textile industry to compete with them.

An investor learns that the smaller countries like Bangladesh, Vietnam etc. are not only contributing to competition in the Indian market, they are also beating India in competition in the developed markets.

FY2015 annual report, page 18:

Depreciation of the Euro against the Indian Rupee has adversely affected textile business, apart from the 9.6% tariff disadvantage Indian textile products suffer from the European Union. India has already started losing its markets and export orders, and countries like Pakistan, Bangladesh, Sri Lanka and Vietnam which have duty-free access, are now grabbing the market share.

FY2016 annual report, page 16:

Increasing competition from countries like Bangladesh, Vietnam, Pakistan and Sri Lanka due to favorable tariff structures on exports to developed markets like the US, EU, Canada, Australia, etc. poses a significant challenge to Indian exports.

Therefore, an investor notices that the tough business environment of the textile industry of the previous decade is still the same for the Indian manufacturers. In FY2010, the manufacturers were not able to pass on the increase in inputs costs to the customers. Even in FY2019, they are unable to pass on the increase in input costs to the customers. Moreover, nowadays, the shift from cotton to man-made fibers is increasing their challenge.

FY2019 annual report, page 19:

Due to the cash crunch and weak demand in the Indian and Export markets, it is difficult to pass on the cost to end customers, hence the margins are under pressure. Further, globally consumer shifting preference from cotton fibre to man-made fibre, which are available at lower prices, is also putting pressure on prices.

Read: How to do Business & Industry Analysis of a Company

 

i) Yarn & denim unit of Century Textiles & Industries Ltd

While reading about the performance of different segments within the textile division, an investor notices that certain segments like yarn and denim have had a tough time throughout the available period under analysis.

In FY2009, the company had to cut production, as it did not have enough demand.

FY2009 annual report, page 21:

The domestic and export markets for cotton yarn and denim remained quite depressed. We are making every possible effort to develop new varieties of denim to suit the fast changing fashion trends as also regulating the production as per market needs.

Again, in FY2013, when the situation of the denim market did not improve, then Century Textiles & Industries Ltd had to make its denim production plant to produce other material.

FY2013 annual report, page 23:

However the market for denim is depressed. We have, therefore, re-engineered the product line to produce the items that customers prefer, to overcome the slackness.

In FY2015, the company faced severe pricing pressure in the denim segment.

Further, the cotton yarn market remained depressed for a major part of the year under review, which adversely impacted our yarn unit near Indore in M.P. Similarly, the denim market also remained dull and domestic sales and exports from India were facing a severe price crunch.

As a result, it does not come as a surprise to the investor when she reads in FY2018 annual report that Century Textiles & Industries Ltd has sold off its yarn & denim unit that too at a loss of ₹18.12 cr.

FY2018 annual report, page 122:

Pursuant to the Business Transfer Agreement (BTA) the Company has sold its Yarn and Denim (Y&D) units (included in Textile Segment) during the year and has recognized loss on disposal amounting to ₹18.12 Crore. The operations of Y&D units has been classified as discontinued operations (Refer note 35).

As the company reported the performance of yarn & denim unit separately in FY2018 annual report, under the discontinued operations, therefore, an investor could get to know the financial performance of this unit for FY2017 and FY2018. Otherwise, the financial performance of the yarn & denim unit was clubbed with other units under the section “textiles” in the segmental results. As a result, an investor could not know the financial performance of individual units.

As per FY2018 annual report, page 119, the yarn & denim unit had made a net loss of ₹18.9 cr in FY2017, which increased to a net loss of ₹36.8 cr in FY2018.

It is unfortunate for the shareholders that the dissenting workers stalled the sale process of yarn & denim unit and Century Textiles & Industries Ltd had to take back the unit from the buyer and even suffer restructuring cost of ₹25.5 cr.

FY2019 annual report, page 128:

Pursuant to the objections raised by the workers of Y&D units against the said business transfer, during the year the Company has terminated the BTA, refunded the sale consideration and has obtained back the possession of the Y&D units. The Company is currently exploring various alternatives including sale to other buyers and accordingly has classified the operations as Discontinued operations. Further, during the year Company has recognized a provision for restructuring cost relating to the units amounting to ₹25.49 crores.

As per the performance of the yarn & denim unit disclosed under discontinued operations in the FY2019 annual report, page 128, the yarn & denim unit suffered a net loss of ₹48.56 cr in FY2019.

Therefore, the decision of the company to keep looking for other buyers for the yarn & denim unit does not come as a surprise to the investor. The yarn & denim unit seems like a continuous drain on the resources of the company.

 

ii) Rayon (man-made) fiber & chemicals unit of Century Textiles & Industries Ltd:

Rayon unit of the company primarily comprises of the man-made fibers like viscose filament yarn (pot spun yarn and continuous spun yarn), rayon tyre yarn and various other chemicals.

From the above discussions on business restructuring, an investor would remember that currently, Century Textiles & Industries Ltd has given this unit on lease from FY2018 to Grasim Industries Ltd for 15 years and has already received all the lease payments for next 15 years.

Therefore, this unit may not be very relevant from the perspective of business performance. However, we believe that an understanding of this unit is essential for investors because of two reasons. First, after the end of the contract with Grasim Industries Ltd, the company would receive this unit back. Second, the decisions taken by the management of Century Textiles & Industries Ltd with respect to Rayon unit provide insights about the quality of the management of the company.

Century Textiles & Industries Ltd used to be one of the largest manufacturers of rayon in Asia and the largest manufacturer in India. It had a 40% market share in India.

Credit rating report of Century Textiles & Industries Ltd by CRISIL in February 2015:

the company is one of the largest manufacturers of rayon in Asia and is a market leader in India (40 per cent market share).

Such a position may indicate to an investor that the company might enjoy a lot of negotiating and pricing power over its customers. However, it was not true. Century Textiles & Industries Ltd did not command any pricing power and its profit margins were hit when input costs increased as it could not pass on the increase in raw material prices to the customers.

While reading about the rayon unit, an investor notices that right from the first available annual report of FY2007, Century Textiles & Industries Ltd has faced challenges while running its rayon unit.

In FY2007, the company highlighted that there is immense competition in the viscose filament yarn (VFY) segment and many producers are selling it at a discount. Therefore, the company is unable to increase prices to cover higher input costs.

FY2007 annual report, page 26-27:

Producers like us could not increase prices due to yarn being sold at a discount by a few producers.

Higher cost of raw-materials, particularly Wood Pulp and Sulphur may have to be absorbed, as it would be difficult at this stage to pass on this increased burden to consumers.

The situation continued to be grim over the years as cheaper imports from China continued to provide intense competition.

FY2012 annual report, page 22:

the industry in general, in both the PSY and CSY segments, faced pressure on off-take due to substantial arrivals from China,

The excess supply situation in the viscose filament yarn (VFY) segment continued over the years and Century Textiles & Industries Ltd did not expect any respite in the near future.

FY2014 annual report, page 22:

It is expected that the existing trend of excess supply affecting sales volumes as well as prices will continue for some time.

When an investor attempts to understand the reasons for such continued situation of oversupply in the VFY industry (at least since FY2007, the first publicly available annual report of the company), then she notices that the viscose filament yarn is facing substitution from polyester yarn, which is cheaper.

FY2008 annual report, page 28:

Substitution of VFY by Polyester Yarn in a few cases and cheaper prices of Polyester Yarn continue to affect the off-take as well as the prices of VFY.

In addition, the polyester yarn manufacturers seem to do good research and development to produce newer varieties of polyester yarn, which made the situation further difficult for VFY producers.

FY2011 annual report, page 25:

The threat from cheaper polyester yarn continues. Due to continuous research being undertaken by the polyester industry, new varieties of polyester yarn are being introduced, making it suitable for alternative use and compete better against rayon yarn.

Soon, the research efforts of polyester industry borne fruit and it launched Recosilk yarn, which further hit the demand of viscose filament yarn (CFY).

FY2014 annual report, page 22:

The launch of ‘Recosilk’ yarn by the polyester industry for embroidery, weaving and knitting has also made a dent in the market share of viscose filament yarn and could lead to a reduction in VFY consumption.

Soon, the polyester industry introduced new products, which hit the demand for another key product of the rayon unit, rayon tyre yarn (RTY).

FY2016 annual report, page 18:

Efforts by Tyre manufacturers to replace rayon tyre yarn with HMLS Polyester continues to pose a long term threat,

This other key segment of the rayon unit, the rayon tyre yarn (RTY) had been facing oversupply and intense competition since long. In fact, the competition increased to such an extent that in FY2009, Century Textiles & Industries Ltd had to stop its production plant.

FY2009 annual report, page 22:

This has resulted in high inventory due to which production of rayon tyre yarn had to be suspended from end February 2009.

The situation in the rayon tyre yarn (RTY) segment stayed worse for years to come. In FY2010, 50% of the manufacturing capacity was kept shut.

FY2010 annual report, page 21:

High inventory of rayon tyre yarn continues to remain a major concern and 50% of the production capacity remains suspended from February 2009.

The high inventory in the RTY segment improved only after about four years of curtailed production. In FY2012, the company could finally use its full capacity of RTY production.

FY2012 annual report, page 23:

Efforts by the unit to provide quality products have yielded positive results and it is pertinent to mention that for the first time in the last 4 years, full manufacturing capacity is being used

However, the very next year, in FY2013, the company again had to suspend 35% of its manufacturing capacity.

FY2013 annual report, page 24:

Continuing recession in Europe has adversely affected the off-take of rayon tyre yarn which forced our unit to curtail its production by about 35%.

Century Textiles & Industries Ltd could use its full manufacturing capacity again only after two years in FY2015.

FY2015 annual report, page 18:

After a prolonged period, increased demand and consumption of Rayon Tyre Yarn in Europe and Japan have led to full capacity utilization of our Rayon Tyre Yarn production capacity.

However, the full capacity utilization of RTY capacity did not mean that it has got its pricing power back. Instead, in FY2016, the company intimated its shareholders that it is not able to get any price increase for last four years.

FY2016 annual report, page 18:

The unit could procure orders for Rayon Tyre yarn for the year 2016 and is expected to operate at its full capacity. However, it could not get any increase in the price for about four years, which is a matter of concern.

Just when the company was able to get some order to use its manufacturing capacity of rayon tyre yarn (RTY), it realised that the customers are now asking for a new product, dipped fabric instead of Rayon Tyre yarn, which Century Textiles & Industries Ltd is not able to manufacture.

FY2016 annual report, page 18:

Tyre manufacturers are demanding dipped fabric instead of Rayon Tyre yarn, which the unit is not able to supply as it does not have a conversion facility. In the long run, this may threaten our presence in the International market.

FY2017 annual report, page 17:

In Rayon Tyre Yarn, the unit may face the threat of losing its market share due to not having an integrated manufacturing unit for dipped fabrics.

Further advised reading: Understanding the Annual Report of a Company

From the above discussion about the key product segments of the rayon unit, viscose filament yarn (VFY) and rayon tyre yarn (RTY), an investor would notice that these businesses are very tough. In addition, the manufacturing process of these man-made fibers is polluting. As a result, these companies face tough environmental regulations. These tough operating conditions along with intense competition due to oversupply and substitution by polyester make their plants economically unviable. While reading the annual reports of Century Textiles & Industries Ltd, an investor notices many instances where the multiple manufacturers of viscose filament yarn closed their plants and shut down their business.

FY2007 annual report, page 26:

Due to environmental and other problems, one major yarn producing unit in Europe had to close down a couple of years back.

FY2009 annual report, page 22:

During the year, overall demand for viscose filament yarn (VFY) has reduced. However, in view of closure of two Rayon producing units in the country, industry was able to utilize its full capacity and also reduce inventories.

FY2010 annual report, page 21:

The world over, due to stringent environment control, rayon manufacturing units are closing their operations, including one having so well-known a name as Enka Elsterberg, Germany.

FY2013 annual report, page 24:

Production of VFY by domestic producers has dropped by about 23% in the last 5 years and the gap thus created has been met through higher imports as there have been no significant additions to capacities within India.

FY2015 annual report, page 18:

While some additional capacities have been commissioned in China, non viable plants were shut down in Europe & C.I.S. countries due to shift of manufacturing operations away from the western to emerging markets.

Until now, the environmental norms were getting stringent only in western countries. Therefore, VFY manufacturers in countries like China and India were happy to get additional business. However, in FY2016, the VFY manufacturers in China faced closure when the country tightened its environmental norms to reduce pollution.

FY2016 annual report, page17:

New stringent environmental policy norms adopted by China have led to the closure of 2 VFY plants in China, having a capacity of 29000 Tons per annum.

In FY2016, Century Textiles & Industries Ltd also realized that India is also considering tighter environmental norms for VFY production. The company realised that tougher environmental norms are going to create many challenges for it. As a result, the company along with other players requested the authorities to reconsider new environmental norms.

FY2016 annual report, page 18:

A representation made by the unit through Association of Man-Made Fibre Industry of India (AMFII) for reconsideration of the proposed new environmental norms for the man-made fibre industries, are at the hearing stage. If imposed, it would be difficult for the industry to meet the new environmental norms without huge capital investment.

Therefore, from the above discussion, an investor would appreciate that the rayon unit faced multiple challenges like intense competition, oversupply, cheaper imports, substitution by cheaper polyester products, and tougher environmental norms. In addition, the company was not able to keep up with the changing demands of its customers.

As a result, despite being the largest manufacturer of rayon in India and one of the largest in Asia, Century Textiles & Industries Ltd decided to get rid of its rayon unit by handing it over to Grasim Industries Ltd.

It remains to be seen whether Grasim Industries Ltd would be able to run the rayon unit profitably or it would hand it back over to the company before completion of 15 years. In any case, the business of rayon unit has proved to be a tough challenge for Century Textiles & Industries Ltd, which it finally quit in FY2018.

Moreover, it seems that the company has learnt its lesson from the tough business conditions of the textile industry and now, it has decided not to invest any big money in the textile unit.

Conference call transcript, May 2018, page 14:

Management:….we do not want to go for big expansion in textiles because the profits we expect are more in paper and real estate.

 

3) Real estate division of Century Textiles & Industries Ltd:

As per the investor presentation of the company in June 2020 (page 4), real estate division contributed to 4% of revenue in FY2020.

At present, Century Textiles & Industries Ltd has two completed and leased out commercial buildings at Worli, Mumbai, which provide it with an annual rental income of about 140-150 cr.

Credit rating report by CRISIL in January 2020:

Steady annual gross lease rental of Rs 140-150 crore from the commercial real estate assets is expected to support cashflows over the medium term.

In addition, the company has launched sales in three residential projects at Kalyan, Bengaluru and Gurugram.

Investor presentation, Q1-FY2021 results, July 2020:

Strong uptick in demand enquiries and conversions at our launched projects (Birla Vanya, Kalyan and Birla Alokya, Bengaluru) despite the nationwide lockdown

Gurugram project – Birla Navya (JV with Anantraj Ltd) project which is presently in a prelaunch stage, received a strong response. Sold inventory worth around INR 28 Crs (INR 14 Crs in Q1 FY 21) and collected 2.8 Crs, so far.

There are many uncertainties pertaining to the future of real estate industry due to excessively high prices that many times, are out of reach for the common person, and the associated execution risk of real estate projects. These factors have led to the bankruptcy of many established and well-known real estate players and almost all remaining players including the industry leaders are facing a tough time. Therefore, it remains to be seen whether Century Textiles & Industries Ltd is able to complete its projects on time and within the estimated cost.

 

4) Cement division of Century Textiles & Industries Ltd:

An investor would remember from the above discussion on the business restructuring of Century Textiles & Industries Ltd that the company has demerged its cement division to Ultratech Cement Ltd. Therefore, going ahead, the dynamics of cement are not going to affect the business performance of the company. Nevertheless, a brief discussion about the business unit, which the management controlled and operated during the major part of the analysed financial history, provides the investors insights about the decisions taken by the management with respect to business. Such analysis, now, provides more insights about the management quality instead of the business quality.

However, an investor would appreciate that cement is an intensely competitive, cyclical industry, which has always faced a situation of oversupply over the last decade. As a result, the cement division of the company has contributed significantly to the fluctuating profit margins of Century Textiles & Industries Ltd until FY2018 when it was a part of the company.

In FY2007, the cement industry position was very attractive where demand exceeded supply. As a result, many foreign players entered the Indian market.

FY2007 annual report, page 28:

Four of the top five cement companies in the world have entered India through mergers, acquisitions or joint ventures. These include Lafarge, Holcim, Italcementi and Heidelberg. These companies have already garnered about 28% of Indian industry capacity.

In the subsequent years, there was a race among the players to increase capacity. By FY2013, the capacity installed by cement manufacturers in India had exceeded the targets estimated by the planning authorities. As a result, the industry faced a situation of oversupply.

FY2013 annual report, page 27:

The cement industry had surpassed the target set by the working group on this industry for the XIth five year plan (2007-2012). The installed capacity was over 340 million tonnes against a target of 298 million tonnes at the end of the terminal year of the XIth five year plan, resulting in surplus capacity.

By FY2015, the surplus capacity started to have a serious impact on the manufacturers and the capacity utilization of the industry declined to 69%.

FY2015 annual report, page 19:

Cement industry’s capacity utilization during the year 2014-15 was about 69%. Capacity utilization is gradually coming down on account of the mismatch in capacity addition and demand.

By FY2018, the capacity utilization level of the industry declined further to 68%.

FY2018 annual report, page 20:

The Indian Cement industry is grappling with lower capacity utilisation while operating at levels of about 68 per cent.

At one end, an investor may think that the cement industry was grappling with over-enthusiasm shown by the cement manufacturers where they added large capacity initially and thereby faced a situation of oversupply. However, an investor would appreciate that in such situations, the manufacturers stop creating more supply and wait for the demand to recover so that their capacities reach optimal utilization levels before they start additional expansion projects.

However, in the cement industry, it seemed that these normal fair-market principles did not apply and the industry witnessed significant capacity additions even when the utilization levels of existing plants were very low.

The following analysis of Heidelberg Cement India Ltd would indicate to an investor that the cement industry increased its manufacturing capacity from 296 MTPA in FY2011 with 73% capacity utilization to 495 MTPA in FY2019 with 68% capacity utilization.

Further advised reading: Analysis: Heidelberg Cement India Ltd

As a result, the Competition Commission of India (CCI) initiated a probe in the working of cement industry. CCI found that the cement manufacturers were working as a cartel to produce less cement deliberately even when there was a demand in the market. As a result, CCI imposed a penalty of ₹6,300 cr on leading cement manufacturers including Century Textiles & Industries Ltd.

The continuous subdued performance of the cement division due to either genuine oversupply or deliberate under-production had led to the fluctuating profit margins of the cement division of Century Textiles & Industries Ltd.

To understand more about the cement industry, an investor may read the analysis of the following companies, which have a significant presence in the cement industry:

From the above discussion about the business performance of Century Textiles & Industries Ltd over the years, an investor would understand that the company is a mix of a few entirely independent business division. Therefore, in order to understand the company or to make any assumptions of the future business performance of the company, an investor needs to understand each of the business divisions individually.

As per the current business structure of Century Textiles & Industries Ltd, the business divisions of paper, textile and real estate are important. Nevertheless, from the above discussion, an investor understands that each of these divisions is intensely competitive. In paper and textile divisions, the competition is so intense that routinely many manufacturers shut down their plants and businesses as they become economically unviable.

In real estate, even though at the surface, it may look like that demand exceeds supply and the business has excessive profitability margins. However, if an investor studies the experience of different real estate players, including the leading, well-known names, then she gets to know that it is very difficult to stay continuously relevant in this industry. There have been numerous examples of leading players going bankrupt, unable to complete and deliver their projects and even instances of promoters going to jail. Therefore, an investor should be cautious while she starts projecting supernormal profits in the real estate division into her assumptions in order to justify any high valuation.

Going ahead, an investor should monitor the profitability margins and the capacity utilization of paper and textile divisions of Century Textiles & Industries Ltd. In addition, she should track the execution progress of the real estate projects launched by the company. She should also monitor whether, in future, the company resorts to launching many projects in quick succession without focusing on the completion of existing projects. This is because launching more real estate projects than what one can complete in time is the stage where problems start to appear for real estate developers. The greed of getting a lot of money from the homebuyers at a very initial stage of the project when the real estate developer has hardly spent any money on construction makes the projects cash surplus right from its launch stage. As a result, the greed to get more and more money from homebuyers leads to the developers launching more & more new projects without focusing on completing existing projects.

Therefore, the investor should keep a close watch on the new launches of real estate projects by the company. If she notices that the company has launched many projects in quick succession, then instead of becoming very happy, she should become cautious. She should increase her monitoring level of execution of existing real estate projects. By staying cautious and with close monitoring, she would be able to avoid negative surprises from the real estate division of the company.

While looking at the tax payout ratio of Century Textiles & Industries Ltd., an investor notices that for most of the last 10 years (FY2010-2020), the tax payout ratio of the company has been highly fluctuating. Over the years, the tax payout ratio has varied from 2% in FY2012 to 146% in FY2016.

An investor may appreciate that the many products of the company like textile, paper etc. are exported, which have tax incentives from the government for its manufacturing operations focused on exports. These incentives would tend to decrease the tax payout ratio. In addition, the cement plants of the company have fiscal benefits.

Moreover, due to frequent business restructuring exercises, the company’s profits, as well as tax payout, tends to fluctuate significantly.

An investor may contact the company directly for any further clarifications about its tax payout ratio and the incentives available to the company.

Further advised reading: How to do Financial Analysis of a Company

 

Operating Efficiency Analysis of Century Textiles & Industries Ltd:

a) Net fixed asset turnover (NFAT) of Century Textiles & Industries Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Century Textiles & Industries Ltd in the past years (FY2010-19), then she notices that the NFAT of the company has consistently come down from 1.95 in FY2011 to 0.66 in FY2019.

Declining NFAT over the years indicates that the company efficiency of utilization of assets by the company has deteriorated over the years.

If an investor takes the case of cement division, which used to be a part of the company’s financials until FY2017 and used to constitute more than 50% of sales, then she notices that the company faced deteriorating performance of the division due to two factors.

First, the cement industry faced oversupply leading to lower capacity utilization.

Second, the cement plants of Century Textiles & Industries Ltd were old, inefficient and effectively of poor quality. The management of the Century Textiles & Industries Ltd disclosed this aspect of the cement plants of the company in its conference call with investors in May 2018 while discussing the deal with Ultratech Cement Ltd.

As mentioned earlier, the discussion of the business units hived off by the company now provides more insights about the management quality and their strategic decisions that the quality of the business of the hived off units.

First, the management highlighted that its cement plants are inefficient and their profitability is less than the industry average.

Conference call, May 2018, page 2:

Moreover, the profitability of cement division is currently not comparable to the industry average.

The company highlighted that the old plant at Manikgarh, Maharashtra of about 2 MTPA capacity is currently shut down as it is highly inefficient and is effectively an economically unviable plant.

Conference call, May 2018, page 8:

Rajesh Shah: Out of the existing capacity of 4.8 million tonnes at Manikgarh, 2 million is the old capacity and shutdown. It’s an old plant and it has lot of inefficiencies relating to power consumption, heat consumption and to upgrade that it needs a huge investment.

Similarly, another cement plant of the company in Chhattisgarh is very old and is nearing the end of its life. As a result, an investor would appreciate that the plant would have many inefficiencies in its operations.

Conference call, May 2018, page 8:

Management: Again about the Chhattisgarh Plant that is the oldest plant that is a 44 year old plant. And the current life of the plant left is around 6-7 years’ time and maybe after 7 years it need complete new line will have to be put up so that will again call for huge investment

Moreover, the management highlighted that the utilization of the new cement capacity created in West Bengal depends on transporting clinker from Manikgarh, Maharashtra, which is a very expensive and inefficient method.

Conference call, May 2018, page 17:

Gunjan Prithyani: I just have one clarification there is this grinding unit in West Bengal from where was you feeding the clinker to that grinding unit?

Management: So in that grinding unit clinker was largely getting supplied from Manikgarh unit incurring a huge logistic cost.

In addition, the management clarified that it even though it had put up significant 2.8 MTPA new cement capacity at Manikgarh, Maharashtra, the region has immense competition with low demand. The management highlighted that even if they increase the production of cement in Manikgarh plant, then they do not know how to sell it.

Conference call, May 2018, page 8:

Management: I will just come to the power efficiency, but basically demand is also not there in that area. There is huge competitive intensity in that area and we are not able to sell that. That is why that utilization level is low.

Further reading: How to identify if Management is Misallocating Capital

From the above discussion, an investor notices that the cement division led to deteriorating NFAT for Century Textiles & Industries Ltd due to many factors. First, significant cement capacity was old, inefficient and even economically unviable. Therefore, these assets produced lower sales leading to lower NFAT. Second, the new capital expenditure for creation of new cement manufacturing plants was also done in a manner, which resulted in new capacity in the region where the company is either not able to sell (Manikgarh, Maharashtra) or it needs to transport clinker from halfway across the country from Maharashtra to West Bengal to run the new plant there. All these decisions add to the inefficiency in the utilization of the assets leading to lower NFAT.

In addition, an investor would remember from the above discussion that the other business divisions like textile and paper have continuously faced a tough business situation with oversupply, poor pricing power etc., which leads to poor asset utilization and a decline in NFAT.

Moreover, an investor would notice that the absolute level of asset turnover of Century Textiles & Industries Ltd is low in the range of 1.00 and the average net profit margin (NPM) for last 10 years is in the range of 4%.

Please note that as discussed above, the NPM of the company for FY2018 and FY2019 is high because the sales (operating income) excludes the impact of discontinued operations (primarily cement division) whereas the net profit after tax (PAT) includes the profit of discontinued operations. As per FY2019 annual report, page 129, the cement division (discontinued operations) had a profit of ₹129 cr in FY2018 and a profit of ₹222 cr in FY2019. The addition of this profit in PAT without the related revenue in the sales increases the NPM.

With this background, an investor notices that the NFAT of the business operations of Century Textiles & Industries Ltd is about 1.00 and its average NPM is also about 4%, then she acknowledges that the company is making low returns on its assets. Such businesses, which require a lot of investment in assets to generate its sales and in addition, earn low profits on its sales, are particularly vulnerable to excessive debt burdens.

This low asset turnover combined with low profitability has serious implications as a huge amount of incremental investment is needed to show future growth. For example, let us assume that in the first year, such a company targets to achieve ₹1,000 cr. of additional sales.

  • As per the NFAT of 1.00 then it would need to invest INR 1,000 cr. in fixed assets (1,000/1.00, because the fixed asset turnover ratio is 1.00).
  • This ₹1,000 cr. of additional sales would provide additional net profits of ₹40 cr. (assuming average NPM of 4% over the last 10 years).
  • If the company retains entire profits and invests in its operations, then this incremental investment of ₹40 cr. of entire profits would generate only ₹40 cr. of incremental sales in the second year (as the fixed asset turnover ratio is 1.00, 40*1.00=40).
  • If the company wishes to grow sales by another ₹1,000 cr. in the second year as well, then it would have to generate ₹960 of sales (=1,000 – 40) by investing additional ₹960 cr. (=960/1.00 or can be calculated as ₹1,000 cr of total requirement – ₹40 cr. of net profits reinvested). This ₹960 cr. needs to come from either fresh equity infusion or debt.
  • Please note that these calculations would give the same inference even if an investor assumes that the new capital investment in the first year will take about 3 years to reach full utilization and the company will plan a new capital expenditure only after about 3 years of last capacity addition.

Thus, we may see that with a low fixed asset turnover of 1.00 combined with a low net profit margin of 4% results in a situation where the company would have to keep on relying on additional sources of funds to maintain its growth. As a result, it does not come as a surprise to the investor that in the last 10 years, the debt of Century Textiles & Industries Ltd has increased from ₹2,367 cr in FY2010 to ₹5,700 cr in FY2017.

The credit rating agency, CRISIL, highlighted that Century Textiles & Industries Ltd is not able to generate a good return on its assets in its report for the company in February 2015:

Lack of commensurate returns on capex incurred and high working capital intensity in most of Century’s businesses, has added to high debt levels.

CRISIL also highlighted that Century Textiles & Industries Ltd has primarily relied on debt to expand its business in its report for the company in September 2015:

…mainly because of debt-funded capital expenditure (capex) of Rs.60 billion incurred over the six years through 2014-15 to expand its cement, paper board, and real estate businesses.

Such high debt in business operations that have a low return on assets is a very risky situation for any business. As the business is not able to generate sufficient cash/return on their assets, then it faces difficulties to repay its debt.

In light of this understanding, it does not come as a surprise to the investor when she notices that from FY2018, Century Textiles & Industries Ltd started hiving off its assets to reduce debt. In FY2018, it leased out the rayon unit to Grasim Industries Ltd to receive about ₹900 cr to repay debt. However, ₹900 cr was not sufficient to bring the company out from the debt-trap.

The credit rating agency, CRISIL in its report for Century Textiles & Industries Ltd in February 2019 highlighted that the company does not have sufficient liquidity to repay its debt obligations in FY2019.

While the repayment obligations came down with debt reduction post Grasim transaction, the annual cash generation, is not expected to be sufficient to service the obligations in fiscal 2019.

Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

At this stage, an investor may think that when the financial position of Century Textiles & Industries Ltd was not able to service its own debt, then how the credit rating agency, CRISIL, assigned it a good credit rating of AA. In this regard, when an investor reads the credit rating rationale, then she notices that the financials position of Century Textiles & Industries Ltd did not deserve the credit rating of AA; instead, CRISIL assigned it this rating by taking the comfort of support of the promoter group.

Credit rating report by CRISIL, February 2019:

Analytical Approach: For arriving at its ratings, CRISIL has applied its criteria for notching up ratings based on group support.

With the current understanding of low return on investments done by taking huge debt, an investor would appreciate that the company was in a very tough position. As a result, it had to demerge its cement division in order to get rid of another about ₹3,000 cr debt.

When an investor sees the situation of Century Textiles & Industries Ltd with respect to excessive debt taken to create cement, paper, textile assets, which are not giving sufficient return on investment. Moreover, the cash generation in FY2019 was not sufficient to meet debt obligations even after four years from the completion of last major capital expenditure (cement unit in Manikgarh, Maharashtra was completed in September 2014). Then she understands that Century Textiles & Industries Ltd was in a desperate situation to get out of debt trap.

With this background when an investor reads the conference call transcript held by the company in May 2018 to discuss the demerger of cement unit, then she is able to understand the urgency of the management to sell off the cement unit without waiting for an independent bidding process.

Conference call transcript, May 2018, page 4:

If we go for bidding it will take time and delay the growth of the real estate business. So to speed up the real estate development, we have expedited the process of cement outgo and this will help us ramp up the start our real estate activity.

The company tried to speed up the sale of cement sales without going for a bidding process even though many minority shareholders clearly reminded the management that they are not happy with the valuation of the cement assets offered. The minority shareholders also reminded the management that it has a fiduciary duty towards the shareholders to get the best value for the cement assets and therefore, the company should go for bidding.

Conference call transcript, May 2018, page 5 (Dheeresh Pathak from Goldman Sachs):

So obviously the EBITDA multiple is not the right multiple as we have seen with cement. Once the asset is out for multiple players to bid, it fetches n higher value because people think of it as asset value rather than just EV/EBITDA multiple right now because the EBITDA is depressed. For most of the midcap or small cap names you can see EBITDA is depressed. So I would strongly recommend that is your Fiduciary duty also as management of the company to make sure that we get the best value for the asset because we as minority shareholders we are not happy with the valuation we have got so that is my humble request to you.

However, the company went ahead with the demerger of cement assets to Ultratech Cement Ltd without any bidding. In the voting on the proposal, about 18.61% of minority shareholders voted against the proposal (Source: Voting results submitted to BSE dated Oct. 25, 2018, page 11)

Therefore, an investor can understand that Century Textiles & Industries Ltd seemed to be under great pressure to sell off the cement division to get relieved of a major portion of the debt that it had accumulated to create assets, which were not producing any meaningful return for shareholders or to repay the debt. As a result, hiving off the assets in quick succession was the only solution and the company leased out rayon unit and demerged the cement division to group companies in order to get rid of about ₹3,800 cr of debt, which it could not service from its business cash flow.

Due to the sale and leasing out of assets, the total debt of the company declined from ₹4,359 cr in FY2018 to ₹539 cr in FY2019, a reduction of ₹3,820 cr.

However, it seems that the management of the company has a habit of always looking towards raising debt to grow the business. Even when the management had recently seen the result of excessive debt-funded expansion, which finally forced the management to sell assets to repay debt, the management now again wants to go after more debt to grow its business.

In the May 2018 conference call, the management informed the shareholders that once the debt comes down from sale of cement division, then the company would raise more debt to fund its real estate business activities.

Conference call transcript, May 2018, page 4:

Management: The company balance sheet will supports financial leverage after the sale of Cement business; hence we will expedite this activity and go strongly in real estate market.

It seems that the company plans to go aggressively into real estate activities and debt-funded growth seems to be on management’s agenda. In such a situation, an investor should be cautious while monitoring the debt levels of the company going ahead. This is because; high debt has led to the bankruptcy of many well-known & leading developers of the country. Real estate sector has its own set of challenges, which many times companies ignore when they see excessive profit margins on paper. An investor should be cautious to assess whether the management of Century Textiles & Industries Ltd is also going in the same direction.

Conference call transcript, May 2018, page 5:

Management: Worli you know the pricing is around anywhere between Rs. 35,000 to Rs. 40,000 per square foot. So, we expect about Rs. 25,000 per square foot as a profit on an average of the next 10 years.

Conference call transcript, May 2018, page 9:

Harsh Thakkar: Sir, coming to the real estate growth story I just want to know that Mr. Jitendra mentioned that it is around 5 million square feet with a 25,000 of approx. profitability, so it converts to 12,500 crores of profits over the next 10 years?

Management: That is about that approximately you are right. Harsh we are just talking about Worli.

An investor should be cautious that in the prime real estate markets of South Mumbai, where supply is very limited and there is a huge demand of residential real estate at exorbitant prices, there are numerous cases of real estate developers going bankrupt because they could not complete their projects. The profits just stayed on paper.

The execution of projects in real estate is essential. It is a serious risk factor in real estate, which many times, both developers and homebuyers, as well as investors, underestimate.

If one sees the experience of Century Textiles & Industries Ltd while constructing its commercial buildings at Worli, Mumbai, then the investor would notice that the actual time taken by the company to complete the projects was much longer than its first estimates.

In FY2010, when the company had first made the plans of two commercial buildings at Worli, then it had intimated its shareholders that these building will be completed within the next 12 to 15 months.

FY2010 annual report, page 11:

Thus, two buildings having constructed area of about eleven lac square feet including parking spaces etc. should be completed within a period of 12 to 15 months.

Therefore, an investor would expect that the company would be able to complete these buildings by the end of FY2011 (i.e. March 2011, 12 months) or by June 2011 (15 months).

However, the first building, Birla Aurora, was completed in FY2015, after almost 5 years.

FY2015 annual report, page 10:

Construction of an office building (Birla Aurora) adjacent to Century Bhavan, the Registered Office of the Company, has been completed and occupation certificate has been received.

The second building, Century Greenspan, was completed in FY2016, after almost 6 years.

FY2015 annual report, page 10:

Two new office buildings, Birla Aurora, adjacent to Century Bhavan, and Century Greenspan, on erstwhile Century Mill’s land, are complete and both the buildings have been partially leased out.

Therefore, an investor should understand that in the case of real estate it is very common for developers as well as investors to underestimate the risk and only focus on huge profits that appear on paper. However, numerous towers of uncompleted real estate projects should act as a reminder to investors that the sector is not a cakewalk but is full of risks. In real estate, even the established specialized players with multiple decades of experience have gone bankrupt.

Therefore, investors should be very cautious when they assess the real estate developmental activities of the company. Any attempt to launch multiple projects without focusing on the execution of the existing projects should be a sign of caution for the investors.

 

b) Inventory turnover ratio of Century Textiles & Industries Ltd:

While analysing the inventory turnover ratio (ITR) of the company, an investor notices that the ITR of Century Textiles & Industries Ltd was continuously increasing from 4.9 in FY2011 to 6.0 in FY2017 until the time the cement was demerged. After demerger of the cement unit, the ITR has improved to 4.2 in FY2019.

Such a pattern of ITR may indicate that the cement division was leading to the deterioration of inventory utilization efficiency. In addition, the inventory utilization efficiency improved after Century Textiles & Industries Ltd demerged the cement unit.

Read on: How to Assess Operating Efficiency of Companies

 

c) Analysis of receivables days of Century Textiles & Industries Ltd:

While analysing the receivables days of the company, an investor notices that over the years, the receivables days of Century Textiles & Industries Ltd have been continuously in the range of 25-30 days. Range bound receivables days indicates that the company has been able to collect money from its customers without any deterioration in its working capital position.

Looking at the inventory turnover ratio as well as at receivables days of Century Textiles & Industries Ltd over the years, an investor would notice that the company has been able to keep its working capital position under control and not let it deteriorate over the last 10 years (FY2010-2019). As a result, it has not witnessed a lot of money being stuck in the working capital.

An investor observes the same while comparing the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of the company for FY2010-19.

Over FY2010-19, Century Textiles & Industries Ltd Limited reported a total cumulative net profit after tax (cPAT) of ₹1,633 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹8,403 cr. An investor notices that the company has very high cCFO when compared to the cPAT over the last 10 years (FY2010-FY2019).

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Learning from the article on CFO will indicate to an investor that the cCFO of Century Textiles & Industries Ltd is significantly higher than the cPAT due to following factors:

  • Interest expense of ₹3,004 cr (a non-operating expense) over FY2010-FY2019, which is deducted while calculating PAT but is added back while calculating CFO.
  • Depreciation expense of ₹2,681 cr (a non-cash expense) over FY2010-FY2019, which is deducted while calculating PAT but is added back while calculating CFO.

Therefore, an investor would appreciate that during FY2010-FY2019, Century Textiles & Industries Ltd has kept its working capital requirements under check. As a result, it has been able to convert its profits into cash flow from operations.

 

The Margin of Safety in the Business of Century Textiles & Industries Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it is able to convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

While analysing the SSGR of Century Textiles & Industries Ltd, an investor would notice that the company has consistently had a low SSGR (negative to 1%) over the years. One of the key reasons for a low SSGR for the company has been its low asset turnover and low profitability.

As discussed above, Century Textiles & Industries Ltd has consistently had a low NFAT of about 1.00. In addition, the net profit margin (NPM) of the company has been consistently low at an average of 4% over the last 10 years.

While studying the formula for calculation of SSGR, an investor would understand that the SSGR directly depends on the net fixed asset turnover (NFAT) and the net profit margin (NPM) of a company.

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

  • SSGR = Self Sustainable Growth Rate in %
  • Dep = Depreciation rate as a % of net fixed assets
  • NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
  • NPM = Net profit margin as % of sales
  • DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

Therefore, an investor would notice that Century Textiles & Industries Ltd has continuously had a low SSGR (negative to 1%) over the last 10 years (FY2010-FY2019). However, an investor would appreciate that the company had been growing at a rate of 8%-10% until FY2017 after which it started hiving off its assets like rayon unit and cement division.

The historical low SSGR indicates that the company does not seem to have the inherent ability to grow at the rate of 8%-10% from its business profits. As a result, investors appreciate that Century Textiles & Industries Ltd would have to raise money from additional sources like debt or equity to meet its investment requirements.

While analysing the past financial performance of Century Textiles & Industries Ltd, an investor notices that the company relied on additional debt as well as equity dilution to meet the requirement of funds to grow at 8%-10% from FY2010 to FY2017. The total debt of the company increased from ₹2,367 cr in FY2010 to ₹5,700 cr in FY2017 indicating a net increase of ₹3,333 cr (= 5,700 – 2,367) over FY2010-FY2017.

In addition to the debt, Century Textiles & Industries Ltd raised money by diluting its equity when it allotted 1,86,50,000 preferential warrants to its promoters in FY2015 at a price of ₹354.89 per warrant. The total value of the warrants was about ₹661 cr (=354.89 * 1,86,50,000). The promoters exercised 84,70,000 warrants on March 30, 2015, and remaining 1,01,80,000 warrants on December 18, 2015, and in turn, infused money of ₹661 cr in the company.

FY2016 annual report, page 64:

In terms of the shareholder approval obtained at the extra ordinary general meeting held on 4 th June, 2014 the Company issued and alloted 1,86,50,000 preferential warrant to the Promoter Group at a price of ₹ 354.89 per warrant…..

On 30 th March, 2015 the warrant holders had partially exercised their entitlement to convert 84,70,000 warrant into equivalent number of equity shares as per the terms of issue. Further on 18 th December, 2015 warrant holders exercised the balance entitlement and converted 1,01,80,000 warrants into equivalent number of equity share….

Further reading: Stock Warrants to Promoters: How to Analyse

Therefore, from FY2010 to FY2017, Century Textiles & Industries Ltd raised a total of about ₹4,000 cr from additional sources to fund its business expansion i.e. additional debt of 3,333 cr and equity of ₹661 cr.

However, from the above discussion, an investor would note that none of the businesses where Century Textiles & Industries Ltd invested this money produced a required return on this investment. As a result, the company reached a situation where it could not service its debt from its business cash flows and it had to hive off its assets like rayon unit and cement division.

 

b) Free Cash Flow (FCF) Analysis of Century Textiles & Industries Ltd:

While looking at the cash flow performance of Century Textiles & Industries Ltd, an investor notices that by the time, the company completed its capital expenditure program on installing the multilayer board packaging plant with fiberline, new cement units, and the commercial buildings in FY2016, it had done a capital expenditure of about ₹5,403 cr during FY2011-2016. However, during FY2011-2016, it could generate cash flow from operations of ₹3,319 cr.

Century Textiles & Industries Ltd 2011 2016 Free Cash Flow Analysis

Therefore, during this period (FY2011-2016), Century Textiles & Industries Ltd had a negative free cash flow (FCF) of ₹2,084 cr (=3,319 – 5,403). In addition, during this period, the company had an interest expense of ₹2,045 cr. Please note that the amount of interest capitalized by Century Textiles & Industries Ltd is already reflected in the amount of capital expenditure.

As a result, the company had a cash deficit of ₹4,129 cr (= 2,084 + 2,045).

From the above discussion, an investor would note that Century Textiles & Industries Ltd met this cash deficit by way of raising additional debt and issuing warrants to the promoters totalling to about ₹4,000 cr.

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

Free cash flow (FCF) is one of the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

 

Additional aspects of Century Textiles & Industries Ltd:

On analysing Century Textiles & Industries Ltd and after reading its publicly available past annual reports from FY2007 and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

 

1) Management Succession of Century Textiles & Industries Ltd:

While analysing the history of Century Textiles & Industries Ltd, an investor notices that the company was established in 1897 and is currently a part of B.K. Birla group. Mr. B.K. Birla was the chairman of the company until his demise in July 2019. After his death, his grandson, Mr. Aditya Birla became the chairman of the company.

From the remuneration structure of the company, an investor notices that almost all the time, the day to day executive leaders is provided by a whole-time director (WTD) in the company who is also the highest-paid employee of the company.

Until March 31, 2016, Mr. B.L. Jain used to be the WTD of the company and the highest-paid employee. After his retirement, Century Textiles & Industries Ltd appointed Mr. D.K. Agarwal as WTD.

FY2016 annual report, page 13:

In view of the retirement of Shri B.L. Jain on 31 st March, 2016 from the services of the Company, he has ceased to be a Whole-time Director. With effect from 1st April, 2016, Shri D.K. Agrawal has been appointed as Whole-time Director of the Company..

Sadly, Mr. D.K. Agrawal expired on August 24, 2018, and thereafter, Mr. R.K. Dalmia was appointed as WTD from September 15, 2018.

FY2019 annual report, page 10:

The Directors express their profound grief at the sad demise of Shri D.K. Agrawal (DIN: 00040123), their esteemed erstwhile colleague who was President (Corporate Affairs) and Whole-time Director of the Company, on 24th August, 2018

Shri R.K. Dalmia (DIN: 00040951), Senior President, Textile Divisions of the Company, has been appointed as a Whole-time Director of the Company with effect from 15 th September, 2018.

Therefore, it appears that as far as day-to-day execution leadership is concerned, Century Textiles & Industries Ltd relies on the services of professional managers. Moreover, the company is able to find candidates on time.

However, when an investor looks at the voting pattern by public shareholders to the resolutions of the election of members of Birla family for the position of chairman, then she notices that quite a few public shareholders have voted against them.

As per FY2019 annual report, page 53, 8.27% of shareholders voted against the resolution for continuation of Mr. B.K. Birla as chairman of the company on January 28, 2019.

Similarly, in the AGM on July 30, 2019, 6.27% of the overall shareholders (i.e. 23.99% of public institutions) voted against the election of Mr. K.M. Birla as the chairman of the company. (Source: Voting results of AGM submitted to BSE on July 31, 2019, page 6)

An investor would notice that even though the number of votes against the resolution are not sufficient to block the election of members of the Birla family as chairman. However, still, the voting results indicate that a substantial number of public shareholders are not happy with the strategic decisions and business outcome of the decisions of the current leadership of Century Textiles & Industries Ltd.

In the above discussion, an investor may find a few reasons that might have led to the public shareholders to vote against the election of members of the Birla family as chairman of Century Textiles & Industries Ltd. It might be the investment decisions that led to low return on debt-funded capital expansions leading to unserviceable debt levels. In addition, many minority shareholders may disagree with the way the cement division was demerged to a group company without bidding.

Even though, an investor may disagree with the quality of management decisions; however, still from the management succession perspective, an investor should note that Century Textiles & Industries Ltd seems to have continuity at the board position level where members of Birla family take the position of the chairman. In addition, for day-to-day executive leadership, the company relies on the services of professionals where it is able to find candidates in time.

The presence of a well thought out management succession plan is essential in the case of promoter run businesses as it provides for a smooth transition of leadership over the generations and provides continuity in the business operations of any company.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

 

2) Project execution by Century Textiles & Industries Ltd

An investor would appreciate that while assessing the project execution efficiency of any company, the ability to complete the projects within expected time and cost is the key parameter.

While analysing the historical performance of Century Textiles & Industries Ltd, an investor notices that the company had completed quite a few big projects in almost all its industry divisions like paper, cement, and real estate.

In the paper division, Century Textiles & Industries Ltd executed a large project of multilayer packaging board manufacturing along with a paper grade pulp plant (fibreline) project.

In FY2008 annual report, the company intimated its shareholders that it is setting up a multilayer packaging board plant for 500 tonnes per day (500*365 = 182,500 tonnes per annum) plant and a paper grade pulp plant (fibreline) project. The company stated that the total expenditure on these projects would be ₹1,270 cr (=775 + 495) and they will be complete by December 2009.

FY2008 annual report, page 09:

We are setting-up a Multilayer Packaging Board Plant, with a capacity of 500 tonnes per day. This development, requiring a total capital outlay of about Rs. 775 crore, is expected to be operational by December 2009. Additionally, we are planning to set up a Paper Grade Pulp Plant (Fibreline) to produce superior quality wood pulp. The plant demands a capital outlay of Rs. 495 crore and is anticipated to commence operations by December 2009.

However, upon reading the subsequent annual reports, an investor notices that the plants were delayed and were completed in FY2012.

FY2012 annual report, page 13:

The Fibre Line (Pulp Plant) with a capacity of 1.62 lac tonnes per annum and Multilayer Packaging Board Plant with a capacity of 1.8 lac tonnes per annum at Lalkua, Nainital (Uttarakhand) have started production and the quality of the production at each facility is expected to be stabilized in course of time. Further, the 43 M.W. turbine is also now in operation.

While ascertaining whether the delay in completion of the projects had any impact on the cost of the projects, when an investor reads the annual reports, then she is able to find that in FY2010 annual report, the company had revised the cost of the project upwards from earlier ₹1,270 cr in FY2008 to ₹1,660 cr in FY2010.

FY2010 annual report, page 11:

Civil work for the Fibreline (Pulp Plant) and Multilayer Packaging Board Project including 43 MW Turbine is in full swing. Main equipments have already been ordered and have started arriving at the site. Erection of the main machinery and recovery plant is in progress. Orders for auxiliary and balancing equipment are being finalized. Capital outlay on the above projects is estimated to be Rs.1660 crore. Completion of the project is scheduled for December 2010.

An investor may note that in the FY2008 announcement, the project details do not mention 43MW turbine whereas, in the FY2010 annual report, it mentions the 43MW turbine. Therefore, an investor may contact the company directly to understand whether the cost estimates of the project provided in FY2008 included 43MW turbine. If not, then the investor may do her due diligence to ascertain whether the increase in the project cost by ₹390 cr (=1,660 – 1,270) is justified for a 43MW turbine or it is the increase in cost due to time overrun.

In addition, the cost of ₹1,660 cr is for estimated completion of the projects in December 2010. Whereas the projects were completed with further delay in FY2012. Therefore, the additional delay might have led to further cost increments. An investor may contact the company directly to understand what was the final cost incurred for these projects.

For the cement division, Century Textiles & Industries Ltd announced an expansion of manufacturing capacity at two locations by 3.5 MTPA. It planned expansion of 2.0 MTPA at Manikgarh, Maharashtra with a 35MW power plant and an expansion of 1.5 MTPA at Sagardighi, West Bengal. The total cost estimated was ₹965 cr for both the projects.

FY2007 annual report, page 16:

We intend to expand cement manufacturing capacity to 11.30 million tonnes per annum by setting up a new cement plant of 2 million tonnes per annum capacity adjacent to existing plant of Manikgarh cement at Gadchandur, Maharashtra, along with a 35 MW captive thermal power plant and 1.50 million tonnes per annum cement grinding unit at Sagardighi in District Murshidabad, West Bengal. The estimated total capital outlay will be about Rs.965 crore.

During next year, in FY2008, the company increased the scope of the projects. The expansion plan at the Maharashtra plant was increased from 2.0 MTPA to 2.5 MTPA, the plan of power plant increased from 35MW to 40MW. However, an investor notices that the cost of the project increased almost 1.86 times to ₹1,800 cr.

FY2008 annual report, page 16:

Subsequent to our report in the previous year, our proposal for cement capacity expansion is modified to expand the cement manufacturing capacity from 7.80 million tonnes per annum to 11.80 million tonnes per annum. This is expected to be achieved by setting up a new clinker line of the capacity of 2.50 million tonnes and an equivalent cement grinding facility, adjacent to the existing plant of Manikgarh Cement at Gadchandur, Maharashtra, along with a captive Thermal Power Plant of 40 MW and as planned earlier, the 1.50 million tonnes per annum cement grinding unit at Sagardighi in Dist. Murshidabad, West Bengal. The revised total outlay for the aforesaid expansion is estimated to be about Rs.1800 crore.

From the above disclose an investor notices that from FY2007 to FY2008, Century Textiles & Industries Ltd increased the scope of the project by 0.5 MTPA of cement manufacturing capacity and 5MW of the thermal power plant. However, the cost increase due to these changes was ₹835 cr (=1,800 – 965).

The company deferred these projects for some time in light of the 2008-09 global economic recession. Nevertheless, in FY2010, the company restarted the work on these projects. However, an investor notices that in FY2010, the cost of the project has increased further from ₹1,800 cr to ₹2,025 cr (425 + 1,600).

FY2010 annual report, page 11:

The orders have been placed for the main plant and machinery for the grinding unit with a capacity of 1.5 million tpa at Sagardighi, Dist. Murshidabad, West Bengal…….The grinding unit is expected to be operational by the last quarter of 2011-12. The total outlay on the project is estimated at Rs.425 crore.

Manikgarh Cement expansion – 2.5 Million tonnes capacity per annum and 40 MW Captive Thermal Power Plant: …. orders for all main cement manufacturing equipment and for the captive thermal power plant will be placed before June/July 2010. The total outlay on the project is estimated to be about Rs.1600 crore. The enhanced capacity should be fully on stream by the end of the calendar year 2012.

In FY2010, Century Textiles & Industries Ltd said that the West Bengal project would complete by March 2012 and the Maharashtra project would complete by December 2012.

However, the West Bengal project was completed in July 2013.

FY2014 annual report, page 10:

Sonar Bangla Cement – Grinding Unit – 1.5 Million tpa – Village Dhalo, P.O. Gankar, Dist. Murshidabad (West Bengal): Out of two cement mills, one was commissioned in February, 2013 and another in July, 2013.

In addition, the Maharashtra project was completed in September 2014.

FY2015 annual report, page 17:

Our new Cement expansion unit at Manikgarh in Maharashtra State which commenced production in September, 2014 is financed mainly out of loans…

Further advised reading: How to read the Annual Report of a Company

From the above discussion, an investor would notice that in the case of execution of capacity expansion projects in the cement division, Century Textiles & Industries Ltd witnessed significant time and cost overruns.

An investor would appreciate that when projects experience delays in execution, then usually their costs increase. In addition, the increase in costs in completion of the projects brings down the return that the company may earn on its investment. The delay in the completion of projects of units like paper and cement may be one of the reasons that Century Textiles & Industries Ltd could not generate sufficient return on its capital investments.

Let us now look at the execution of another important division of Century Textiles & Industries Ltd, real estate division.

In the above discussion in the net fixed asset turnover (NFAT) section, an investor would remember that the company faced significant delays in the completion of its commercial buildings. Initially in FY2010, the company had expected to complete these building in 12-15 months i.e. by March 2011 and June 2011.

However, the first building, Birla Aurora, was completed in FY2015, after almost 5 years and the second building, Century Greenspan, was completed in FY2016, after almost 6 years.

Let us see if the company faced cost overruns while constructing its commercial buildings.

Initially, in FY2011, Century Textiles & Industries Ltd intimated its shareholders that the approximate cost of these building would be about ₹625 cr.

FY2011 annual report, page 13:

At present, one office building adjacent to Century Bhavan, the registered office of the Company and another office building with an entry plaza on Century Mill’s land at Worli, both meant for leasing, are under construction with a total constructed area of about thirteen lac square feet including parking spaces etc. at a total cost of about Rs.625 crore.

Century Textiles & Industries Ltd decided to classify the completed commercial buildings under the section “Investment Property” in its balance sheet.

FY2016 annual report, page 97:

Investment property representing immovable property intended to be leased out and not intended to be substantially used by the Company are carried at cost less depreciation (computed in the manner prescribed for Fixed assets) and impairment.

When the company completed the construction of both its commercial building; first in FY2015 and the second in FY2016, then in the FY2016 annual report, it showed the value of investment property as ₹1,007 cr.

FY2016 annual report, page 76:

Century Textiles & Industries Ltd 2016 Investment Property

Therefore, an investor would notice that in the case of real estate project execution, Century Textiles & Industries Ltd faced a time overrun of about almost 5-6 years and a cost overrun of about 60% (1,007/625 = 1.61).

From the above discussion, an investor would appreciate that in the case of real estate projects, execution of the projects within budgeted time & cost is the most important characteristic of any developer. Due to the huge shortage of quality homes, real estate developers are able to sell their launched flats; however, timely execution within the original budget that differentiates a good developer from an average one.

Therefore, while ascertaining the potential of the real estate division of the company, an investor should be cautious and always closely monitor the execution of its existing projects. This is because many times, the roadblocks faced by the developers may not be in the control of the company at all. For example, if the company does not get required approvals or the raw material controlled by unorganized/black market like sand etc., then all the estimated projections and the profits will stay only the paper. Moreover, in the case of real estate, such execution challenges are more common than what the developers and investors initially think.

Therefore, it is essential that investors focus prominently on the execution progress of the existing projects of Century Textiles & Industries Ltd all the time.

 

3) Suboptimal capital allocation by Century Textiles & Industries Ltd:

During the conference call in May 2018, while discussing the demerger of the cement unit, the management of Century Textiles & Industries Ltd highlighted that the cement operations of the company are highly inefficient. The management said that in FY2018, the cement unit has an EBITDA per tonne of ₹367/-, which is below the industry average.

Conference call, May 2018, page 2:

Moreover, the profitability of cement division is currently not comparable to the industry average. For the year ended March 31, 2018 it has achieved revenue of Rs. 4306 crore and EBITDA of Rs. 544 crores, which includes net one-time gain of Rs. 51 crore. This translates to EBITDA per ton of around 367 based on the capacity and after adjusting for one-time gain.

When an investor compares EBITDA per tonne of Century Textiles & Industries Ltd with other cement manufacturers in its regions, then she notices that the performance of ₹367 per tonne is very low.

A competitor of the company, Heidelberg Cement India Ltd had an EBITDA per tonne of more than double of Century Textiles & Industries Ltd. In FY2018, Heidelberg Cement India Ltd reported an EBITDA per tonne of ₹781 against the EBITDA per tonne of ₹367 of cement division of Century Textiles & Industries Ltd.

Credit rating report of Heidelberg Cement India Ltd prepared by India Ratings in March 2020:

The company has gradually increased its EBITDA/tonne to INR1,108 in 9MFY20 (FY19: INR987; FY18: INR781) mainly due to increased sales realisation…..

Moreover, an investor would notice that the EBITDA per tonne of Heidelberg Cement India Ltd is continuously on the rise, which had reached ₹1,108 in 9M-FY2020.

You may read the complete analysis of Heidelberg Cement India Ltd in the following article: Analysis: Heidelberg Cement India Ltd

While analysing the business of Century Textiles & Industries Ltd and the responses of the management in the conference call, an investor notices some of the decisions by the company that make the investor think further.

The management clarified that it even though it had put up significant 2.8 MTPA new cement capacity at Manikgarh, Maharashtra, the region has immense competition with low demand. The management highlighted that even if they increase the production of cement in Manikgarh plant, then they do not know how to sell it.

Conference call, May 2018, page 8:

Management: I will just come to the power efficiency, but basically demand is also not there in that area. There is huge competitive intensity in that area and we are not able to sell that. That is why that utilization level is low.

Conference call, May 2018, page 7:

Management: It is not 2 million it is 1.2 million ton. Presently there is a very limited market potential in that area and we are operating at only 64% capacity. 2-million plant capacity is non operationsal since last 3-4 years because there is no market available. Other than that the plant is also cost ineffective at that location

From the above statement, an investor thinks whether it was the right decision to put ₹1,600 cr of capital in the Manikgarh, Maharashtra region to create capacity when the company is not able to sell the cement in the region.

In addition, the company highlighted that the cement plant established in West Bengal does not have any consistent economical source of clinker. As a result, it has to send clinker from Maharashtra to West Bengal, almost halfway across the country, so that the West Bengal plant can produce cement. This transportation of clinker over long-distance adds to the cost of cement production and in turn, reduces the profitability (EBITDA per tonne).

Conference call, May 2018, page 17:

Gunjan Prithyani: I just have one clarification there is this grinding unit in West Bengal from where was you feeding the clinker to that grinding unit?

Management: So in that grinding unit clinker was largely getting supplied from Manikgarh unit incurring a huge logistic cost.

An investor may think that being in the cement business since 1974, the management of the company could have planned its capital allocation better. It could have avoided putting money in Manikgarh or it could have put less money in Manikgarh and instead put some of the money in establishing a clinker plant near to West Bengal plant or any other such combination.

At the end of the day, these are the decisions for which the shareholders appoint experienced management on the board and in executive positions.

Nevertheless, the end result of all the business decisions in the cement division was that in FY2018, Century Textiles & Industries Ltd had less than half of the EBITDA per tonne than its competitors. As a result, it landed up in a situation where it could not service its debt from its cash generation.

The credit rating agency, of Century Textiles & Industries Ltd by CRISIL, February 2019:

While the repayment obligations came down with debt reduction post Grasim transaction, the annual cash generation, is not expected to be sufficient to service the obligations in fiscal 2019.

In light of the above, an investor feels that the capital allocation by the management in the cement decision left room for improvement.

Let us now look at the rayon man-made fiber division.

From the above discussion on the business dynamics of different divisions of Century Textiles & Industries Ltd, an investor would notice that the rayon man-made fiber division was facing a very tough time. The industry was grappling with challenges like:

  • Substitution of viscose filament yarn by cheaper polyester yarn
  • Oversupply in both domestic and export markets. Cheaper imports from China & other countries
  • Tough environment norms leading to expensive measures to control pollution from the manufacturing units
  • Economic unviability due to above challenges leading to the closure of units and shutdown of business by many manufacturers even the well-known names in Europe and others in China and India.

An investor would remember from the above discussion that the rayon unit faced immense challenges to run its plants, which frequently run at below optimal capacity for many years. The company found it difficult to pass on the increase in raw material costs to its customers. At one time, the company could not increase the price of rayon tyre yarn to its customers for four years.

FY2016 annual report, page 18:

The unit could procure orders for Rayon Tyre yarn for the year 2016 and is expected to operate at its full capacity. However, it could not get any increase in the price for about four years, which is a matter of concern.

An investor would appreciate that such tough business conditions remove the possibility of any meaningful return on the investments done by the manufacturers. However, when an investor notices that despite these tough challenges, Century Textiles & Industries Ltd decided to put more money in the rayon unit.

FY2011 annual report, page 15:

The process of installation of 12 machines for production of viscose filament yarn is in progress in order to increase the production capacity of viscose filament yarn by about 5 per cent per annum.

FY2013 annual report, page 17:

Three additional Pot Spun Yarn (PSY) spinning machines with balancing equipment in spin bath and four Continuous Spun Yarn (CSY) spinning machines are expected to be commissioned by June, 2013 and additional six CSY machines by March, 2014. After such commissioning, the capacity of PSY & CSY will increase by about 1800 tonnes per year.

FY2016 annual report, page 10:

During the year, capacity of the doubling & twisting unit has been enhanced from 90 tonnes per month to 150 tonnes per month. Additional capacity for Zero Twist Rayon Tyre Yarn was commissioned by adding 72 winding position during the second half of the year.

An investor thinks when the company knew that the business dynamics of the rayon man-made fiber unit are extremely tough and as a result, the manufacturers are not able to make a meaningful return on their investments. Cheaper substitute products are available in the market. Many established players have found the business to be unviable. Then, under these circumstances, could the company avoid putting more money in this division, which was funded by debt.

Nevertheless, by FY2018, Century Textiles & Industries Ltd reached a situation where it was not possible to repay debt from its business cash flows. As a result, the company felt it better to lease out its rayon unit to Grasim Industries Ltd, earn rent rather than running the business, and earn profits.

An investor may analyse the investment decisions of Century Textiles & Industries Ltd from a higher view. The investor would appreciate that if the capital allocation by the company had been right, then the investments done by the company would have earned sufficient return to pay the interest, make the timely repayments, earn sufficient additional surplus for shareholder for taking the equity risk.

On the contrary, the company landed up in a situation where the money was already spent in the assets and the assets were not generating enough profits. The lenders will ask for their repayments when they fall due whether the company pays it from business profits or sells/leases out its assets. In the end, Century Textiles & Industries Ltd had to hive off rayon unit to Grasim Industries Ltd, demerge the cement division to Ultratech Cement Ltd in order to get rid of the debt.

This indicates that the capital allocation decisions of Century Textiles & Industries Ltd leave a room for improvement. This might be one of the reasons that many minority shareholders voted against the election of members of the Birla family for the post of chairman of the board.

Further reading: How to identify if Management is Misallocating Capital

 

4) Preferential issue of warrants by Century Textiles & Industries Ltd to the promoters:

From the above discussion in the self-sustainable growth rate (SSGR) section, an investor would remember that in FY2015, Century Textiles & Industries Ltd had allotted warrants to its promoters on a preferential basis. The promoters converted some of these warrants into equity shares in FY2015 and the remaining warrants in FY2016.

 

FY2016 annual report, page 64:

In terms of the shareholder approval obtained at the extra ordinary general meeting held on 4 th June, 2014 the Company issued and alloted 1,86,50,000 preferential warrant to the Promoter Group at a price of ₹ 354.89 per warrant…..

On 30 th March, 2015 the warrant holders had partially exercised their entitlement to convert 84,70,000 warrant into equivalent number of equity shares as per the terms of issue. Further on 18 th December, 2015 warrant holders exercised the balance entitlement and converted 1,01,80,000 warrants into equivalent number of equity share….

The following chart shows the share price of Century Textiles & Industries Ltd on the date of allotment of warrants, on the dates of exercise of warrants and on the date when one of the promoters sold 2.46% stake in the company after allotment of warrants. (Source: Moneycontrol)

Century Textiles & Industries Ltd 2014 2016 Share Price History Warrants Allocation

When an investor analyses the above chart, then she observes the following:

  • In the months preceding the allotment of warrants on June 4, 2014, the share price of Century Textiles & Industries Ltd stayed in the price range of ₹300-350/-. As a result, according to the formula approved by the regulator, the company allotted 1.865 cr warrants at ₹354.89 to the promoters. It valued the total warrant transaction at ₹661 cr. At June 4, 2014, the promoters paid 25% of the amount i.e. ₹165 cr (=661 * 0.25) to the company and got the warrants. This transaction fixed the price at which the promoter would get 1.865 cr shares from the company at ₹354.89 irrespective of the share price when they decide to exercise the warrant.
  • On March 30, 2015, the promoters exercised 0.847 cr warrants and paid balance 75% of the value for 0.847 cr shares. At March 30, 2015, the market price of the shares of Century Textiles & Industries Ltd was ₹638.90. Therefore, at March 30, 2015, the promoters got 0.847 cr shares at a cost of ₹300 cr (=0.847 * 354.89) whose market value at March 30, 2015, was ₹541 cr (=0.847 * 638.90). The promoters had an unrealized gain of ₹241 cr (=541 – 300) due to allotment and exercise of warrants.
  • On December 18, 2015, the promoters exercised the balance 1.018 cr warrants and paid balance 75% of the value for 1.018 cr shares. At December 18, 2015, the market price of the shares of Century Textiles & Industries Ltd was ₹572.70. Therefore, at December 18, 2015, the promoters got 1.018 cr shares at a cost of ₹361 cr (=1.018 * 354.89) whose market value at December 18, 2015, was ₹583 cr (=1.018 * 572.70). The promoters had an unrealized gain of ₹222 cr (=583 – 361) due to allotment and exercise of warrants.
  • Moreover, due to the exercise of warrants, the shareholding of the promoters increased from 40.23% on December 31, 2014 (BSE) to 50.21% on December 31, 2015 (BSE). An investor would note that due to the warrant transaction, the promoters could fix the cost of acquisition of about 10% stake in the company at ₹354.89 per shares, which was constant irrespective of the subsequent movement in the share price of the company. An investor may appreciate that if the promoters would have attempted to buy a 10% stake from the market, then it is unlikely that they could get it at ₹354.89 per share. This is because, whenever the stock market notices that the promoters are buying shares from the open market, then it increases the share price significantly.
  • An investor would appreciate that even though the regulatory guidelines state that promoters cannot sell shares received via warrant allocation for a period of 3 years. However, when the promoters already have many existing shares of the company with them, then they can safely sell the existing shares and in turn, get a profit from the warrant allotments.
  • As per FY2016 annual report, page 33, on March 22, 2016, the promoters sold 27,46,100 shares (2.46% stake) in the company. At March 22, 2016, the market price of the shares of Century Textiles & Industries Ltd was ₹524.15. Therefore, when compared to the warrant allotment price of ₹354.89 per share, the promoter realized the gains of ₹169.26 per share (524.15 – 354.89). It amounted to a total realized gain of ₹46.48 cr. (= 169.26 * 27,46,100). Effectively, from the sale of shares, the promoter recovered about ₹144 cr put in by them in the warrants (=524.15 * 27,46,100).

An investor may note that the warrants are considered a way of promoters to infuse equity in the company. However, we believe that the structure of the warrants where the promoters first pay only 25% of the money and would pay the balance 75% later has many issues related to it.

We believe that the warrants are if at all, 25% beneficial to the company and 75% beneficial to the promoters.

Common logic says that no one holding stock warrants would exercise them to get shares at a price, which is higher than the price at which he/she can get shares from the market.

More so, if the intention of the promoters is to infuse money into the company, then they should simply get all the shares at the current market price and give the entire money to the company upfront so that the company may use it for the purpose for which it needs money.

The entire structure of paying 25% at the time of allotment of stock warrants and then keeping the option to pay 75% at the time of exercise, which the promoters would decide based on whether at the date of exercise, the promoters are making money or not, seems challenging.

If the promoters pay 25% now and let the stock warrants expire due to the market price being consistently lower than the exercise price in future, then it effectively means that the promoters did not have the true intention of infusing 100% of the money or that the company did not need 100% of the money.

It might be that the company needed only 25% of the money, which promoters put in by way of stock warrants allotment and the right to get shares in future at a discount is the payoff that promoters would enjoy as a consideration for giving 25% to the company. The company might not have needed the balance 75% at all.

There have been many instances in the past when the markets crashed after the allotment of warrants and the promoters refuse to exercise the warrants and pay the balance money. You may read one such example in our analysis of ADF Foods Ltd, where in December 2007, the promoters paid 10% of the amount of the warrants; however, they refused to pay the balance 90% when the warrants became due after 18 months in June 2009 because the stock markets had crashed by that time.

Read: Analysis: ADF Foods Ltd

In fact, it was one of the main reasons that in February 2009, SEBI increased the upfront payment for warrants allotment from 10% to 25%. The regulator realized that the promoters used warrants to enrich themselves when the stock markets rose while their loss was limited to only 10% if the markets fell. (Source)

There were complaints that promoters allotted warrants to themselves and select investors at a pre-determined price, but didn’t buy them when the due date came if the prevailing stock prices were lower than the decided price. If the prices were higher, they would convert those warrants and at least make a paper profit, and in some cases encash the gains.

It is to discourage promoters from trading profits. Warrants are seen as an instrument that gives an advantage to promoters above retail investors, who have all other rights equal to company founders.

When the markets melted during 2008 and early 2009, promoters of many companies such as Hindalco Industries, Tata Power, GE Shipping and Pantaloon Retail did not convert those warrants, regulatory filings show.

After similar complaints, in February 2009, the regulator had raised the up-front margin to be paid by warrant subscribers to 25% from 10% since the payment lost was insignificant compared with the losses one would have made if forced to buy.

Therefore, we believe that exercise of a structured deal where the promoters get preferential treatment by allotment of warrants by paying 25% and then keeping the option to pay 75% at the time of exercise is not in the favour of public shareholders.

Further reading: Stock Warrants to Promoters: How to Analyse

 

5) Dividends of Century Textiles & Industries Ltd funded by debt:

While an investor analyses the past financial performance of the company, then she notices that during the phase of FY2011 to FY2015, the company was continuously doing debt-funded capital expenditure. During this period, the company was not making sufficient profits and cash flow from operations to meet its investment requirements. Further, during FY2013, the company reported a net loss as well of ₹34 cr.

Century Textiles & Industries Ltd 2011 2015 Dividends Funded By Debt

Therefore, during FY2011-FY2015, the investment requirements of the company exceeded its operating cash flows. As a result, the debt of the company was continuously on a rise every year. The debt increased from ₹2,369 at the start of FY2011 to ₹6,139 at the end of FY2015.

However, when an investor notices the dividend payout by the company during this phase (FY2011-FY2015), then she notices that the company continued to declare dividends. The dividend payout (excluding distribution tax) continued at ₹51 cr per year from FY2011 to FY2014 and it increased to ₹56 cr in FY2015. The company declared dividend (excluding distribution tax) of ₹51 cr even in FY2013 when it had a net loss of ₹34 cr.

An investor would appreciate that during FY2011 to FY2015, the company was investing all the money that it made from operations and more money raised from debt into its capital expansion projects. The debt of the company was continuously increasing. As a result, an investor may infer that the money to be paid to shareholder as dividends is effectively the debt taken by the company from lenders in order to transfer to the bank accounts of the shareholders of the company.

We believe that the dividends distributed by any company should come from the free cash flows (FCF) of the company after meeting the capital expenditure (capex) of the company from its operating cash flow. In the company does not have a surplus free cash flow after meeting capital expenditure and it has to raise debt to meet the capex, then it should not raise more debt to pay dividends to equity shareholders. Instead, it should avoid paying dividends, control its debt levels and reduce the interest costs for the company.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

 

6) Increasing remuneration of whole-time director even when the performance of Century Textiles & Industries Ltd was going down:

While analysing the financial performance of the company, an investor notices that the net profit after tax (PAT) of the company had declined from net profits of ₹339 cr in FY2010 to a net loss of ₹95 cr in FY2016. However, during the same period, the remuneration of the highest-paid employee of the company, its whole-time director (WTD), increased from ₹1.61 cr (FY2010 annual report, page 26) to ₹3.74 cr (FY2016 annual report, page 40).

Century Textiles & Industries Ltd 2010 2016 Remuneration Of WTD

An investor would notice that the remuneration of the WTD increased by 132% (3.74/1.61 = 2.32) during the period when the performance of the company declined from reasonable profits in FY2010 (₹339 cr, 8% net profit margin) to net losses of ₹95 cr in FY2016.

In addition, the investor may note that during FY2013 when Century Textiles & Industries Ltd made a net loss of ₹34 cr, the remuneration of the WTD increased by 23% from ₹1.94 cr (FY2012 annual report, page 29) to ₹2.39 cr (FY2013 annual report, page 30).

From the above disclosures, an investor may feel that the remuneration of the management of Century Textiles & Industries Ltd is not linked to the business performance of the company. Whether the company makes profits or losses, the interests of the management of the company are intact. The increase in the remuneration of the WTD from ₹1.60 cr in FY2010 to ₹3.74 cr in FY2016 amounts to about a 15% increase every year even when the performance of the company was going down. In FY2013, when the company reported losses, then the remuneration of WTD increased by even more i.e. 23%.

An investor may fear that in such remuneration structures, the management may not be much bothered about the financial performance of the company as their monetary interests are intact. Even if:

  • the execution of the projects is being delayed year after year
  • the cost of the projects is increasing year after year
  • the heavily debt-funded capital expenditure is not earning sufficient return
  • the company is taking more debt to pay out dividends
  • the cement assets are earning less than half the EBITDA per tonne than the competitors…

..the management may not be overly concerned. They are getting their salaries with a good annual hike every year.

We believe that going ahead; investors should keep a close watch on the remuneration of the management of the company. In case, the investors notice that the deterioration in the performance of the company is not having any impact on the remuneration of the management of the company, then she may find that in future as well, the company may land up in a situation where the management may not be concerned about capital allocation efficiency. In such a case, in future, the company may again face a situation where it may go for extensively debt-laden projects that may not produce sufficient return on capital and then, once again, the company may have to sell its assets to repay debt.

Linking the remuneration of the management with the performance of the company is essential. Otherwise, the probability of poor capital allocation decisions increases manifold. Moreover, instead of policies on paper, the changing remuneration with changing performance of the company should be clearly visible in the final money paid to the management during the year.

Please note that when the remuneration of the management is unlinked to company’s performance and when the dividends to the shareholders are unlinked to the company’s performance, then it has a high probability of creating conditions leading to inefficient allocation of capital. This is because, in the short-term, no one is getting impacted due to poor capital allocation. The management keeps getting a significant hike in remuneration even when the company makes losses. The shareholders keep getting their dividends even if the company makes losses even if the company raises more debt to pay money to the accounts of shareholders. In such a situation, it is usually very long before everyone realizes that the company is in a debt-trap where it cannot service its debt from its cash flows. It is then that the companies have to sell assets to repay debt.

Further advised reading: How to identify Management extracting Money via High Salaries

 

7) Usage of short-term funds for creating long-term assets by Century Textiles & Industries Ltd:

An investor would appreciate that any company should attempt to fund its long-term assets like fixed assets/manufacturing plants etc. by using long-term money and use short-term money only for short-term usages like funding inventory/trade receivables etc. This is because the company should maintain the asset-liability matching i.e. when the short-term money comes for repayment, then it can repay it by collecting money from the customers while there is no imminent pressure to repay long-term money used to fund the manufacturing plants. A company can safely plan the repayment of long-term funds by accumulating surplus profits over time.

However, when a company tries to use short-term money to fund long-term assets, then it puts itself in a risky situation. This is because, the short-term may become due for repayment when the manufacturing plant created using this short-term money, has not yet started generating sufficient profits.

Such situations are risky because, if the company is not able to refinance the short-term money continuously until the time the manufacturing plant reaches optimal utilization level to produce surplus profits, then the company may face liquidity challenges.

While analysing the annual reports of Century Textiles & Industries Ltd, an investor notices that during the capital expansion phase of the company until FY2014, the auditor of the company has repeatedly highlighted in its report that the company has relied on short-term money to fund the creation of its manufacturing plants.

In FY2014, the company used ₹637 cr of short-term money for a long-term purpose. FY2014 annual report, page 43:

The Company has obtained bank borrowings amounting to ₹ 637.41 Crore on a short term basis, which have been used for investment in fixed assets.

In FY2013, the company used ₹482 cr of short-term money for a long-term purpose. FY2013 annual report, page 41:

The company has obtained bank borrowings amounting to Rs.482.62 Crore on a short term basis, which have been used for long term investment in fixed assets.

In FY2012, the company used ₹777 cr of short-term money for a long-term purpose. FY2012 annual report, page 41:

….according to the information and explanations given to us, funds raised on a short-term basis, aggregating Rs. 777.47 Crore, have been used for long-term investment in Fixed assets.

In FY2011, the company used ₹871 cr of short-term money for a long-term purpose. FY2011 annual report, page 41:

…according to the information and explanations given to us, as at the close of the year, short term loans aggregating Rs.871.18 Crore stand utilized for long term investment.

In FY2010, the company used ₹603 cr of short-term money for a long-term purpose. FY2010 annual report, page 39:

…according to the information and explanations given to us, as at the close of the year, short term loans aggregating Rs.603.76 Crore stand utilized for long term investment.

In FY2008, the company used ₹30 cr of short-term money for a long-term purpose. FY2008 annual report, page 47:

…we are of the opinion that, prima-facie, as at the close of the year, short term funds amounting to Rs.30.15 Crore stand utilised for long term purposes

In FY2007, the company used ₹88 cr of short-term money for a long-term purpose. FY2007 annual report, page 45:

…we are of the opinion that, prima-facie, as at the close of the year, short term funds amounting to Rs. 88.20 Crore have been utilised for long term purposes;

An investor would note that using short-term funds for creating long-term assets is not a prudent practice. Going ahead, an investor should keep a close watch on the sources for funds that the company uses for its expansion plans.

 

8) Related party transactions of Century Textiles & Industries Ltd:

While reading the annual reports of the company, an investor comes across certain instances when the company invested money in other group companies ever since the first publicly available annual report of FY2007.

i) Transactions with Kesoram Industries Ltd:

  • FY2014: invested about ₹19.4 cr in equity shares of Kesoram Industries Ltd (FY2014 annual report, page 58)
  • FY2009: invested about ₹18 cr in equity shares of Kesoram Industries Ltd (FY2009 annual report, page 47)
  • FY2008: invested about ₹12 cr in equity shares of Kesoram Industries Ltd (FY2008 annual report, page 53)

ii) Transactions with Mangalam Cement Ltd:

  • FY2006: gave a loan of ₹45 cr to Mangalam Cement Ltd (FY2007 annual report, page 53)
  • FY2012: invested about ₹3 cr in equity shares of Mangalam Cement Ltd (FY2012 annual report, page 55)

iii) Transactions with Century Enka Ltd:

  • FY2010: invested about ₹9 cr in equity shares of Century Enka Ltd (FY2010 annual report, page 47)
  • FY2011: invested about ₹9.5 cr in equity shares of Century Enka Ltd (FY2011 annual report, page 49)

An investor would notice that the company invested money in the group companies/gave loans to them even in the years FY2010-FY2014 when the company itself was making significant investments in its expansion projects and was raising a large amount of debt to fund them.

In addition, an investor would note that at the time when Century Textiles & Industries Ltd had to hive off its assets in order to control its debt, then the major assets were transferred by the company to its other group entities.

Further advised reading: How Promoters benefit themselves using Related Party Transactions

Century Textiles & Industries Ltd demerged its cement division to a Birla group company, Ultratech Cement Ltd without a bidding process. The company took valuation and fairness reports from independent consultants and demerged the unit to Ultratech Cement Ltd.

In the May 2018 conference call, many investors/analysts expressed their dissent to the process of the demerger and the valuation.

Conference call, May 2018, page 12:

Gautam Dedhia: See this involves technical as far as valuation of plant is concerned. So you mentioned about Bansi Mehta they are a Charted Accountant Firm. So technically I do not know how qualified they would be to value a cement plant of such big capacities.

Conference call, May 2018, page 12:

Dheeresh Pathak: So as minority shareholders we are not happy with the valuation that has been offered and I feel as management we have fiduciary duty to get bidding from other suitors as well. So as to know what the fair market value of the asset is. So I will strongly recommend you to do that exercise so that we can establish a fair market value which is based on what other buyers might also be willing to offer rather than just one particular party because we are not happy we think the asset can give us much more.

However, the company went ahead with the demerger of cement assets to Ultratech Cement Ltd without any bidding. In the voting on the proposal, about 18.61% of the minority shareholders voted against the proposal (Source: Voting results submitted to BSE dated Oct. 25, 2018, page 11)

For rayon unit, Century Textiles & Industries Ltd gave it to another Birla group company, Grasim Industries Ltd for 15 years for an upfront rent of ₹600 cr and transfer of debt (working capital limit) of about ₹165 cr. Grasim Industries Ltd also paid an interest-free, refundable security deposit of ₹200 cr. In this case as well, an investor is not sure whether any other proposal was sought by Century Textiles & Industries Ltd that could have indicated what any other player might be willing to pay.

Therefore, many times, while investing in a company belonging to large corporate houses that are involved in multiple businesses spreading across many group companies, investors would notice that the promoters keep doing business restructuring between their group companies. They keep using the resources and assets of one company for the usage of another group company. Many times, such intra-group transactions are due to the habit of promoters to see their entire group with multiple companies as an entity with a “pool of resources”. In order to get the best usage of the supposed “pool of resources,” the promoters keep moving money and assets out of one group company to another group company that might be in urgent need of money or can use the assets more efficiently.

In such instances of intra-group transfer of money or assets, the public shareholders of one company may think that the resources belonging to their company are being used for the benefits of another company. However, the promoters may not look at these transactions from this same perspective. For them, it might be a question of shifting assets from one group company to another company that might use them more efficiently. In the promoters’ mind, the thought process would be to get the best value of the “pool of resources” spread across their multiple group companies.

To understand more about such intra-group transfers of money & assets and to see live examples, an investor may study our analysis of National Peroxide Ltd belonging to Wadia group and Ashok Leyland Ltd belonging to Hinduja group.

In the case of National Peroxide Ltd, the Wadia group shifted money and equity shares of their group companies from one entity to another to make the best use of it from the overall group perspective. It involved taking loans in National Peroxide Ltd and then lending them further to other group companies like GoAir.

In the case of Ashok Leyland Ltd, the Hinduja group shifted entire business divisions and other assets from one company to another to make the best use of it. It involved shifting the foundry business first from Ashok Leyland Ltd to Hinduja Foundries Ltd and then shifting it back to Ashok Leyland Ltd after almost 10 years.

Therefore, we believe that whether an investor likes it or not, when she invests in companies belonging to large corporate group houses, then she should be ready to witness intra-group transactions where assets are moved by the promoters from one entity to another in the manner they seem best to get the maximum value out of it.

 

The Margin of Safety in the market price of Century Textiles & Industries Ltd:

Currently (July 19, 2020), Century Textiles & Industries Ltd is available at a price to earnings (PE) ratio of about 13.0 based on consolidated earnings of last 12 months (July 2019 to June 2020). The PE ratio of 13.0 provides some margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.

However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

 

Analysis Summary

Overall, Century Textiles & Industries Ltd seems a company that is a combination of multiple independent companies (business divisions). These divisions are largely independent units and in effect, a stake in the company provides an investor with exposure to multiple industries. Nevertheless, an investor notices that all the business divisions of Century Textiles & Industries Ltd suffer from cyclicity, capital intensiveness, commoditized & non-differentiable products, intense competition both from domestic and imports, and poor pricing power. As a result, frequently, manufacturers in these business divisions go out of business.

The tough business conditions of the divisions of Century Textiles & Industries Ltd had an impact on the financial performance of the company as well. Over the last 10 years, the company reported its operating profit margins (OPM) decline from 19% to 8%. Only after hiving of the rayon unit and the cement divisions, the company could witness its OPM improve to previous levels.

Century Textiles & Industries Ltd attempted to grow its business aggressively during FY2010-FY2015. As a result, it started expansion projects in its various business divisions like paper, cement, and real estate. As the business divisions of the company operate in a tough, competitive environment with poor pricing power, they do not generate a large surplus cash flow. As a result, Century Textiles & Industries Ltd had to rely primarily on debt and equity dilution to meet its capital requirements for expansion projects.

However, the fortunes of the businesses remained the same even after putting in about ₹6,000 cr of capital in expansion projects from FY2010-FY2016 and the business divisions did not produce meaningful profits to justify large debt-funded capital expansions. As a result, the company landed up in a situation where its cash generation became insufficient to repay its debt obligations.

Therefore, Century Textiles & Industries Ltd had to resort to hiving off its assets to repay its debt. It attempted to sell its loss-making yarn & denim unit. However, the workers protested and it had to cancel this sale. In addition, it leased out its rayon unit to Grasim Industries Ltd and used the money to repay some of its debt. However, still, the remaining debt was very high and the business divisions like cement were operating at very inefficient levels with about half the profitability of the industry peers. As a result, it had to demerge the cement unit to Ultratech Cement Ltd to reduce its debt.

The poor ability of the company to generate returns on its capital investments i.e. inefficient allocation of capital seems to be the main reason for the sub-optimal business performance of the company. Over the years, the company witnessed significant delays and cost overruns in almost all its expansion projects like paper, cement and real estate. The sub-optimal return generation by the capital investments led to net losses for the company in FY2013 and FY2016.

However, an investor notices that the remuneration of the senior management of the company (its whole-time director) had increased consistently at a significant pace despite the deteriorating business performance of the company. Century Textiles & Industries Ltd gave remuneration hike of 23% to the WTD even in the year when the company had reported net losses. Over FY2010-FY2016, when the company’s net profits declined from ₹339 cr (8% NPM) to a net loss of ₹95 cr in FY2016, the remuneration of the WTD increased at an annual growth rate of 15%. Therefore, it seems that the remuneration of the management of the company was independent of the business performance of the company.

In addition, when an investor looks at the dividend payment history of the company, then she notices that Century Textiles & Industries Ltd paid out consistent dividend even when its profits were declining and even when it made a net loss. As the company paid out dividends even during the years when it was raising large debt to meet its expansion projects, therefore, an investor may infer that the dividends during these periods were funded by debt.

Looking at the above events, an investor finds that in the case of Century Textiles & Industries Ltd, the fate/remuneration of the management was independent of the business performance of the company. In addition, the dividend payments to the shareholders were also independent of the business performance of the company. Such situations tend to make the decision-makers indifferent to the consequences of their decisions and many times lead to inefficient capital allocation decisions. When these sub-optimal capital allocation decisions are funded by debt, then the companies face debt-trap and have to sell their assets to repay debt. The position of Century Textiles & Industries Ltd seems similar.

The Birla family has provided consistency in the succession at the board level and the company has hired professional whole-time directors to manage day-to-day executive leadership. However, it seems that many public shareholders are not happy with the management of the affairs of the company and the decisions of the company to hive off assets to promoter group companies without independent bidding. As a result, many public shareholders have voted against the election of Birla family members as chairman of the company.

The company has recently reduced the debt-burden by hiving off its assets and the management seems eager to go for aggressive expansion in real estate by again leveraging its balance sheet. We believe that going ahead; an investor should keep a close watch on the execution of the launched real estate projects of the company. Real estate business involves significant execution/project completion risk as many factors that stop construction progress are beyond the control of the developers. An investor should be cautious of this fact all the time.

In addition, the investor should continuously monitor the profit margins of paper and textile divisions of the company and its further investments in these divisions to find out whether the company is doing sub-optimal capital allocation.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Century Textiles & Industries Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

I hope it helps!

Regards,

Dr Vijay Malik

P.S:

 

DISCLAIMER

Registration Status with SEBI:

I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:

Currently, I do not own stocks of the companies mentioned above in my portfolio.

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