By Tejas MDCentury Textiles and Industries started as a single-unit textile mill but evolved into a diversified conglomerate with sources of revenue beyond the textile segment. Currently, it gets only 25% of its revenue from the textiles segment.
The business also operates in real estate, which contributed around 4% of the total revenue in Q3FY22. This is set to increase as the company focuses on residential real estate development, with potential revenue of over Rs 16,000 crore on the land parcels owned by the group.
Whether this potential revenue materialises quickly and gives a boost to Century’s future prospects, remains to be seen. As of now, the company says it has got stellar bookings for its various real estate projects being implemented by its real estate arm. However, at the end of 9MFY22, nearly 69% of its Rs 2,880 crore revenue came from paper and pulp.
In a conference call with analysts last week, Century’s management was asked questions mainly on the real estate business as the company is in the process of developing its five land parcels. According to the company, these projects’ potential revenue is over Rs 16,000 crore. For context, Century’s total annual revenue was Rs 2,678 crores in FY21.
Currently, real estate revenue contributes only 4% of the total revenues. If the real estate arm manages to deliver the Rs 16,000 revenues it estimates from its projects, that will change the whole revenue mix towards real estate. But how quickly can this happen? The management says revenues will start trickling in from FY24 onwards, so investors will have to wait. Is it worth their while?
Quick takes
- Potential revenue of over Rs 16,000 crore from the development of land parcels to drive growth from FY24
- Profit stayed flat YoY at Rs 33.6 crore in Q3FY22, despite a 33% increase in its revenue to Rs 1,070 crore due to high input costs
- The paper and pulp segment’s capacity utilisation for 9MFY22 stood at 108% as compared to 74% in 9MFY21
- High imported pulp costs hurt EBITDA margin in the paper segment
- In the textile segment, bed linen sales volume decreased 19% YoY to 4,06,481 due to high inflation in the US
Are revenues from real estate business sustainable in the long run?
Century is focusing on developing the land parcels owned by the group. Currently, real estate revenues include revenue from two commercial real estates in Worli, Mumbai – Birla Aurora and Birla Centurion. Birla Estates, a wholly-owned subsidiary of Century Textiles and Industries, has a total of five residential projects and one commercial project under development.
The projects are spread over four locations – Bengaluru, Gurugram, Kalyan, and Worli. According to the company, the development project at Worli, which is spread over 14.2 acres, has a revenue potential of over Rs 10,000 crore.
On March 10, Century announced that its Worli project recorded a Rs 1,000 crore booking value, making it the most successful launch in the region in recent years. However, the booking value will not be reflected in the revenues until it is actually realised, which happens after the completion of the sale. The real estate revenues are expected to add to total revenues only from FY24 onwards.
Investors would be wondering how long revenues from the real estate projects will continue once they kick in from FY24 onwards. As the company is using land parcels owned by the group, it remains unclear if it can sustain this level of real estate development going forward. When asked about Century’s plans on expanding real estate developments, the CEO of Birla Estates K. T. Jithendran said, “We are currently focussing only on the geographical locations we are currently developing, but we always keep an eye on lucrative opportunities”.
This might be a hint that Birla Estates might look beyond land parcels its group companies own. But the roadmap isn’t clear. Century’s biggest strength is the Birla brand and the valuable portfolio of premium land parcels. With operating profit margin on a downtrend since the advent of Covid-19, Century plans to increase its overall profitability by focusing on high-margin residential development with an opportunistic approach to the commercial segment.
Revenues rising, but high input costs hurt profitability
High inflation levels and elevated commodity prices affected most companies’ EBITDA margins in Q3FY22. Century was no different. The company’s net profit was flat YoY in Q3FY22 at Rs 33.6 crore despite a 33% increase YoY in its revenues.
The revenue increased on the back of rising capacity utilisation in both textiles and paper manufacturing segments. However, the net profit fell due to increased input costs as the operating profit margin fell 34 basis points YoY to 9.31%. Forecaster estimates see flat YoY revenue growth in Q3FY22 but expect revenues to grow at 12.5% YoY over FY23.
The pulp and paper segment contributes about 69% to total revenues. Although revenue from this segment rose 49% YoY to Rs 731 crore in Q3FY22, annual sales and EBITDA margins are still struggling to reach pre-Covid levels. With the advent of the Covid–19 pandemic, tissue demand went up, and revenue contribution from the tissue segment rose 400 basis points in 9MFY22 to 12%. The company imports 100% of the pulp needed to manufacture tissue. With import costs like freight charges rising sharply, the profit margin will be under pressure.
When asked about price hikes amid the rise in input costs, the management answered, “We plan to continue the price hikes going forward as we believe the demand in the paper and pulp segment will increase with the reopening of the schools and offices”. However, as the company already took multiple price hikes in Q3FY22, the demand in this sector may not pan out as the management expects.
The management also said that there ‘is a big deal in the works’ that they will announce within a month or so, but did not elaborate further.
High-cost inflation dents exports of bed linen - a high margin product
Revenue from textiles increased 21.8% YoY to Rs 263 crore on the back of strong apparel demand in the domestic as well as the international market in Q3FY22. However, bed linen contribution to the textile revenue decreased by 10 percentage points in 9MFY22 against FY21 to 37%.
This is a high-margin segment, which gets most of its revenues from exports to the US. However, it saw revenues fall because of high retail inflation levels in the US market, as consumers shift their spending toward essential items. With a sharp price rise in raw materials, the management expects product costs to increase further by about 45-50%. This persistent increase in raw material prices will eat into profit margins.
With the Russia-Ukraine war affecting the commodity prices, the rise in input costs will continue to negatively affect profit margins. However, Century’s quarterly topline growth increased over the last four quarters as demand picked up with the Covid-19 pandemic waning.
For now, investors would be hoping that the higher real estate revenue contribution over the long term will help the company shore up its net profit, which has been falling. This is due to acute cost escalation, despite multiple price hikes, leading to shrinking margins. The real estate business could give a medium-term boost to Century’s profit from FY24 onwards, but its sustainability over the long run is not clear. With persistent cost pressures affecting the company’s margins, Century’s Q4FY22 results will show how it fared as commodity prices continue to rise.