Century Enka Ltd: A worthy buy
(BSE Code: 500280) (CMP: Rs.389.85) (FV: Rs.10)
The robust results posted by Century Enka Ltd (CEL) have resulted in large-scale buying at declines by discerning investors. Going forward, CEL is expected to post an EPS of Rs.52 in FY18. The stock hit an all-time high of Rs.692 in March 1992.
CEL was promoted by the BK Birla group in 1965 in technical and financial collaboration with Enka International, Netherlands, part of the Akzo group and it went public in 1967. A few years ago, it acquired the entire 38% stake of Enka International and reduced its equity capital from Rs.30 crore to Rs.20 crore.
CEL has two manufacturing units – one at Pune (Maharashtra) and the other at Rajashree Nagar (Bharuch - Gujarat), known as RajashreePolyfil. It manufactures Polyester Filament Yarn (PFY), Nylon Filament Yarn (NFY), Polyester Partially Oriented Yarn (POY), Polyester and Nylon Chips of industrial and fabric grade and Nylon Industrial Yarn and Nylon Tyre Cord Fabrics (NTCF). Its Pune plant produces High Tenacity Nylon (Polyamide 6) and Polyester Industrial Yarns, GreigeTyre Cord Fabrics, etc. It has texturising facilities and twisting machines at Mahad in Raigad district of Maharashtra. Its polymer chips capacity is 1,46,000 TPA, synthetic filament yarn capacity is 1,25,200 TPA and tyre cord fabric capacity is 22,000 TPA.
CEL’s products are used by the tyre, textile and belt industries as reinforcing material in tyres, conveyor belts, V-belts, hoses, ropes & cordage and broad/narrow wovens. They are also used in plastics and engineering products. It offers a wide range of POY products for
Draw Texturising, Air Texturising, Draw Twisting and Draw Warping applications. Besides clothing, polyester is also used in technical textiles like Geo
Textiles for road construction, fire retardant textiles, air bags in passenger cars, non-woven disposable products, etc. Another major application of polyester is in
PET (Polyethylene Terephthalate) bottling and containers.
CEL supplies yarn on Jumbo
Beams for sizing with quality unmatched in terms of runnability, superior and uniform fabric dyeing. Its
Jumbo Beams are a preferred choice for all sizers and quality fabric manufacturers.
It offers an entire product mix for sizing and weaving on Cops/Paper tubes. Its range of speciality yarns includes Bi-shrinkage/Bi-component yarns, NSY (for Non-Sized
Direct Warp) and Interlaced Textured yarns that are developed for high quality fabrics with a distinct feel and effect.
For FY17, CEL’s net profit soared 53% to Rs.91 crore on 18% higher sales of Rs.1354.7 crore fetching an EPS of Rs.42. During Q4FY17, its net profit climbed 19% to Rs.23.3 crore on 44% higher sales of Rs.406.4 crore fetching an EPS of Rs.11. A dividend of 70% has been proposed.
CEL’s performance improved in line with the business engineering work undertaken in the previous year. It converted some more polyester spinning lines at its Bharuch site to produce NFY. The demand for NFY witnessed good growth due to lower raw material prices. Further, the Company expanded its customer base and sold higher quantity of NTCF. One of the factors that boosted its performance was the saving in energy costs due to access to open power purchase at the Pune site and generation of power by its own DG sets at the Bharuch site. With an equity capital of Rs.21.9 crore and reserves of Rs.834 crore, CEL’s share book value works out to Rs.391. Total debts are Rs.45 crore whereas investments, cash and current assets stand at Rs.124 crore. Its gross block of assets as at FY17 was Rs.1687 crore. It incurred interest cost of Rs.5.6 crore v/s Rs.9.6 crore in FY16. The promoters hold 25.3% of the equity capital, DIs hold 8.1% (LIC 6.9%), FIIs hold 12% and PCBs hold 10.3%, which leaves 44.3% stake with the investing public.
CEL invested an additional Rs.98 crore in various Mutual Funds (MFs). It has investments worth Rs.8.5 crore in Kesoram Industries, the market value of which currently stands at Rs.19.5 crore. The Company is all set to post cash profit of Rs.140 crore in FY18. This will help repay all loans and fetch higher other income from investments in MFs. The demand for NTCF is dependent on the transport and commercial vehicle industries and CEL foresees a further rise in the domestic demand. The Indian textile sector is growing at 9% p.a. and the extension of the Textile Upgradation Fund (TUF) will bolster further investment in this sector. Moreover, the government's stimulation package to safeguard the textile sector at large and its sympathetic action in addressing GST implementation will boost the industry’s capital expenditure.
The per capita consumption for polyester in India (1.6 kg) is fairly low in comparison to the world average (3 kg) and in relation to other countries such as China (6 kg) and USA. Thus, there appears to be a vast growth potential for the use of polyester in the country.
CEL is closely watching the developments in the Synthetic Yarn industry, imports from China, high dependency on raw material imports and single source of domestic supply. Against this background, it evaluates various options that may be available for its growth strategy. It continues to put thrust on re-engineering its existing operations and carry on balancing investment in modification of existing equipment and some fresh investments in energy conservation schemes.
The demand for Nylon Textile Yarn in the Apparel industry has witnessed good growth over the last two years due to lower raw material prices. Part of the demand has also come from growth in warp knitting, narrow weaving and high speed automatic weaving looms sector.
CEL is strengthening its financials by improving interest coverage and operational efficiencies and investing in balancing equipment to improve its capital usage ratio. At the CMP of Rs.389.85, the stock trades at a P/E of 9.28x on FY17 EPS of Rs.42. The Company is expected to post cash profit of Rs.140 crore in FY18. A reasonable P/E of 12x on FY17 EPS will take its share price to Rs.504 in the medium-term. The stock’s 52-week high/low is Rs.454/204.25.