Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to the Rs.250 crore non-convertible debentures (NCDs) of Century Textiles and Industries Ltd (Century). The ratings on the other debt instruments and bank facilities have been reaffirmed at ‘CRISIL AA/Stable/CRISIL A1+’

 

Operating income grew by 64% on-year to Rs 2,920 crore in the first nine months of fiscal 2022, with earnings before interest, tax, depreciation and amortisation (Ebitda) margin improving to 10.9% compared with 8.4% in the corresponding period of the previous fiscal. The improvement reflects demand recovery in the paper and textile segments and commercialisation of the doubled tissue paper capacity from March 2021. Earlier in fiscal 2021, operating income had declined by 24% on-year to Rs 2,618 crore, with Ebitda margin of 8.7%, mainly on account of lower capacity utilisation and realisations, as paper and textile demand was impacted by the Covid-19 pandemic, while rentals in commercial real estate remained steady.

 

Operating performance is expected to witness sustained improvement in fiscal 2022, driven by recovery in paper board, tissue paper and textile demand to pre-pandemic levels and doubling of the tissue paper capacity leading to improved utilisation and realisations. Performance of the commercial real estate segment is likely to remain steady, while writing and printing (W&P) paper demand will remain subdued on account of continued closure of educational institutions. Operating income is expected to rise by 40-45% on-year, with healthy Ebitda margin of 12-13% this fiscal. Residential real estate projects of Century on owned land and joint development agreements (JDA) entered into through the wholly owned subsidiary Birla Estate Pvt Ltd (BEPL) continue to generate healthy sales booking providing cash flow visibility, thereby resulting in comfortable cash flow position with minimum reliance on external debt.

 

As on December 31, 2021, cumulative sales stood at Rs 501 crore for the residential project, Birla Vanya Phase-1 in Kalyan, Mumbai, with almost all of its launched phase 1 inventory being booked. In the Birla Alokya project in Whitefield, Bengaluru, Rs 278 crore or 71% of the project value—was booked by December 31, 2021. The construction activities are continuing as per schedule, and Century continues to generate steady lease rental income from its commercial properties in Mumbai. In December 2021, the company launched its JDA project, Birla Tisya, in Magadi Road, Bengaluru, and received Rs 286 crore, 46% of the total sales potential, within the month. The company also received healthy customer response during the soft launch of its flagship project in Worli, Mumbai, on its 30-acre land. 

 

The investment required in residential real estate development is expected at 400-500 crore per annum given the asset-light model adopted, with projects launched on owned land bank or with JDAs. The company follows a flexible approach towards investments into JDAs and will focus on executing ongoing projects and investment in pre-launch activities for the Worli project. The customer advances from healthy sales bookings are expected to be adequate to meet the construction cost of ongoing residential real estate projects. Furthermore, upfront investment requirement in JDAs and new project launches on owned land are expected to be funded through a mix of healthy cash accrual and debt over the medium term. Any larger-than-expected investment in JDAs or new projects could adversely impact the capital structure of Century and will remain a key monitorable. The company continues to benefit from business diversity, with increased share of the higher-margin paper business, which is well supported by textile and commercial real estate businesses. The ratings are also supported by Century’s healthy financial risk profile. Furthermore, the ratings benefit from strong, need-based and timely financial support from the Aditya Birla (AB) group.

 

These strengths are partially offset by exposure of the residential real estate development business to demand and implementation risks, although it is mitigated by the group’s development track record in commercial real estate and focus on quality and timely project completion. Also, the commoditised nature of businesses and susceptibility to intense competition and cyclical business conditions, renders some volatility to its paper and textile businesses.

Analytical Approach

• CRISIL Ratings has applied its criteria for notch-up of ratings based on group support.
• CRISIL Ratings has consolidated its wholly owned real estate subsidiary, BEPL, given the financial fungibility. 

Please Refer to Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment.

Key Rating Drivers & Detailed Description

Strengths

Healthy financial risk profile: Century’s financial risk profile continues to be healthy, as indicated by sound capital structure and debt protection metrics. Gearing stood at 0.29 time as on March 31, 2021, an improvement from 0.38 time a year earlier, mainly on account of debt reduction. The company’s debt stood at Rs 1,025 crore as on March 31, 2021, and is expected to increase to Rs 1,300-1,400 crore in the ongoing fiscal, with investment in pre-launch activities for the Worli and JDA projects leading to temporary moderation in the credit metrics. Gearing is expected to remain below 0.6 time over the medium term despite expected increase in debt this fiscal. Debt protection metrics had moderated, as indicated by interest coverage ratio of 3.78 times in fiscal 2021, because of moderation in the operating performance and are expected to improve this fiscal. Investments in residential real estate projects are expected to be carried out in a phased manner, with initial funding from Century into the JDA and owned projects through a combination of cash accrual and additional debt.  Furthermore, a large portion of the project cost is being funded from customer advances, with low reliance on external debt. 

 

Diversified business risk profile, supported by established presence in the paper and textile segments: Century benefits from its established market position in the pulp, paper, paper board and textile segments. The paper segment is the major revenue contributor, at about 69% of the total operating income, and is expected to improve with better realisations, commercialisation of tissue paper capacity expansion and healthy demand pick-up from the e-commerce, fast-moving consumer goods and pharmaceutical sectors leading to improvement in capacity utilisation this fiscal. Improvement in both domestic and export demand in the textile segment is expected to drive recovery in operating performance to pre-pandemic levels this fiscal.

 

Expected steady cash flow from paper, textile and commercial real estate assets, albeit offset by investment risk from foray into the residential segment: Cash flow generation is expected to improve this fiscal, with net cash accrual of Rs 350-400 crore, which will be adequate to meet debt obligation of Rs 125 crore. Century ventured into real estate development in 2010. Its 22-storey (15 floors for lease and the rest for car parking) commercial building, Birla Aurora, at Worli in Mumbai, has been fully leased out and generates steady rentals. The company’s second commercial building, Birla Centurion, located at its Worli mill compound, was also fully leased out in fiscal 2021. Both these properties benefit from a diversified clientele, long-term lease contracts with in-built escalation of 9-15% every three years and no delays or renegotiations amid the Covid-19 pandemic. Steady annual lease rental income of Rs 142 crore from commercial real estate assets is expected to support cash flow over the medium term.

 

Century has entered into development of residential projects through a mix of owned land and JDAs through BEPL. The initial project funding will be done by Century, while a large portion of funding will be from customer advances and only 15-20% from construction loan. BEPL is expected to follow a phase-wise development model with an asset-light strategy to capitalise on owned land bank and a cautious growth plan through the JDA route in fiscal 2021. The investment requirement in residential real estate development projects and JDAs would be met through a mix of cash accrual from the manufacturing businesses and additional debt of Century over the medium term. The extent of investment in real estate business, ramp-up of projects and the resultant cash flow and debt levels will be key monitorables over the medium term. 

 

Strong and need-based timely financial support from the AB group: Century benefits from the strong and need-based timely financial support of the AB group. CRISIL Ratings believes the promoter group will continue to provide timely financial support in future, in case of exigencies, as has been demonstrated in the past.

 

Weaknesses

Exposed to demand and implementation risks in the residential real estate business:

BEPL plans to expand substantially its residential real estate business. In April 2019, it launched a project in Kalyan on owned land, entailing a development plan of about 13 lakh square feet (sq ft) in a phased manner over five years. It also launched a project (Birla Alokya) on owned land in Whitefield, Bengaluru, in October 2019 and the JDA project (Birla Tisya) in Bengaluru in December 2021. In October 2020, BEPL launched a JDA with Anant Raj Ltd to develop about 33 lakh sq ft over the next 7-8 years in Gurugram. In fiscal 2022, Century carried out a soft launch of its flagship “Birla Niyaara” project on its 30-acre land bank in Mumbai’s premium locality of Worli. Additionally, the company has plans to make investments in one or two JDAs every year.

 

The residential projects that are planned are at an early stage of development, thus exposing BEPL to demand and implementation risks. The subdued residential real estate environment amidst the pandemic also exposes the company to demand risk, which in turn could impact the overall business risk profile of the company.

 

Nevertheless, BEPL is expected to benefit from the established Birla brand, as demonstrated in healthy sales booking in the Birla Vanya, Birla Alokya and Birla Tisya projects as on December 31, 2021. Furthermore, the development track record of Century of completing 6.6 lakh sq ft of Grade A commercial projects in Mumbai, the phased growth strategy and tie-ups with reputed contractors mitigate project implementation risks. Progress on the projects and ramp-up in scale will, nevertheless, be closely monitored.

 

Commoditised nature of business, intense competition and cyclicality: Century's key businesses of paper and textiles are commoditised, besides being vulnerable to business cycles. This exposes the company's performance to volatile demand conditions and realisations, in addition to variations in input cost, as seen in the past few quarters. Also, its businesses are highly competitive because of the presence of a large number of established and unorganised players. Operating profitability is likely to remain partly susceptible to pricing pressures in both the segments because of intensifying competition, although a direct correlation exists between raw material prices and the finished product.

Liquidity: Strong

Liquidity is backed by healthy net cash accrual and prudent working capital management. Liquid surplus was Rs 287 crore as on September 30, 2021, along with negligible utilisation of the bank limit over the six months through September 2021. Cash flow generation is expected to be strong with average net cash accrual, expected at Rs 350-400 crore per annum, will be adequate to meet debt obligation of Rs 125 crore and capital expenditure (capex) of Rs 100 crore in manufacturing and to partly fund the required investments in the new residential real estate projects. Low gearing, large networth and large owned land bank provide strong financial flexibility. Century is expected to maintain adequate liquidity in the near to medium term.

Outlook: Stable

Century will sustain its healthy financial risk profile and business diversity over the medium term.

Rating Sensitivity Factors

Upward Factors

• Sustained revenue growth of 15% and operating profitability over 30%
• Steady contribution  from the residential real estate business, backed by continued healthy sales momentum and early project implementation
• Improvement in the capital structure, with sustained debt reduction and gearing below 0.3 times

 

Downward Factors

• Moderation in the business risk profile, with decline in revenue and operating profitability falling consistently below 13%
• Large debt raised for manufacturing businesses or funding residential real estate business, resulting in gearing above 0.6-0.7 times on a sustained basis
• Slower-than-expected sales and cash flow in the ongoing real estate projects
• Higher than expected investments in real estate business

About the Company

Incorporated in 1897, Century is promoted by Mr BK Birla and remains the flagship company of the BK Birla group. Following equity infusion in March and December 2015, the AB group is a significant stakeholder in the company. As on June 30, 2021, the promoters held 50.21% stake in the company. Mr Kumar Mangalam Birla was appointed as Chairman of the company effective July 20, 2019, following the demise of Mr BK Birla. Century operated a cotton textile mill until 1951. Since then, it has progressively expanded into diverse fields by setting up manufacturing units in rayon, cement and pulp and paper segments. The company also ventured into the real estate business. It manufactures a variety of paper products (including multi-layer packaging board and tissue paper) with total installed capacity of 4.86 lakh tonne per annum. In fiscal 2018, the company incorporated a wholly owned subsidiary, BEPL, to focus on the residential real estate business.

 

Century reported net profit of Rs 77 crore on operating income of Rs 2,920 crore in the first nine months of fiscal 2022 compared with loss of Rs 24 crore on operating income of Rs 1,777 crore during the corresponding period of the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
INE055A07096	Debentures	Feb-20	7.95%	Feb-2023	400	Simple	CRISIL AA/Stable
NA	Debentures*	NA	NA	NA	250	Simple	CRISIL AA/Stable
NA	Commercial paper programme	NA	NA	7-365 days	1,000	Simple	CRISIL A1+
NA	Rupee term loan	NA	NA	Dec-2024	578	NA	CRISIL AA/Stable
NA	Proposed rupee term loan	NA	NA	NA	87	NA	CRISIL AA/Stable
NA	Cash Credit	NA	NA	NA	600	NA	CRISIL AA/Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	460	NA	CRISIL A1+

*To be issued