Century Textiles & industries
Never confuse a Bull Market with Brains
From the stable of Aditya Birla group of companies today. Century Textiles and Industries (CTIL) – as the name suggests – is the Textile and Paper arm of the group. As with a lot of old Textile mills, the company has also ventured into Real Estate (given the rich availability of old mill land available on balance sheet at next to nothing value). The stock returns/ performance has been exceptional over the last year (Figure 1). And the divergence vs financial performance has been equally stark (Figure 2). Paper, the core business of the company, witnessed sharp price erosion in 2HFY24 – this is hardly the end of it and we are likely an even tougher environment going into FY25. And Textiles has been such a disappointment for the group that they decided to just shut the vertical down going into FY25E (maybe that is good news to other people) – FY24 losses thus also include a lot of asset writeoffs and recurring losses were probably not high. So 2 out of the 3 legs of this stool called CTIL were not providing much support in FY24. Which brings us to the core topic of today’s writeup – Real Estate. As seen from Figure 1, Real Estate as sector has been on fire in FY24 (and before that in FY21-22). Real Estate is highly pro-cyclical sector – which underwent a downcycle in 2016(even before demon)-2020. Since 2021/FY22 the sector has been in an strong upcycle, with sharply rising prices (10+%) outpacing the expenses (land costs, commodities such as Steel/ Cement). Hence the performance of the Real Estate sector/ stocks in the market. Except – Resi Real Estate is a very weak sector financially (Figure 3) – land is largest and upfront cost borne by the developer and they make money (aka cash returns) only in year 3/4 as the project is delivered. Yet the valuations of Real Estate stocks are hitting the stratosphere (50-100X P/E; 4-5X P/B).
There is a catch. Real Estate companies cannot book sales/ profits from the project while it is ongoing – as per accounting policies, they can only do so at the time of delivery. Hence in an upcycle, they may have launched a lot of projects on which they may be collecting cash (from home buyers/ investors) but this does not show up in their profit and loss account. Hence for CTIL, real estate collections of Rs4000cr (with 25%/20% Op/Net profit margin) is a better proxy for sales/ profits. This also brings down its valuation to more reasonable 25X P/E. But after 3.5 years of upcycle (2021-1H24), the business is peaking out. And the companies are themselves raising red flags (Figure 4 – take note that land cost is the largest and upfront cost for real estate companies) – only the markets refuse to listen.
Determined investments 