Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to the Rs.400 crore non-convertible debentures (NCDs) of Century Textiles and Industries Limited (Century). The ratings on the other debt instruments and bank facilities have been reaffirmed at ‘CRISIL AA/Stable/CRISIL A1+’.

 

Operating income grew by 31% on-year to Rs 2,422 crore in the first six months of fiscal 2023, with earnings before interest, tax, depreciation and amortisation (Ebitda) margin improving to 13.2% compared with 11.8% in the corresponding period of the previous fiscal. The improvement reflects demand recovery mainly in the paper segment with improved pass-through of raw material price increases to customers albeit with moderating export demand in the textile segment which was also impacted by high cotton prices. Earlier in fiscal 2022, operating income had grown by 58% on-year to Rs 4,132 crore, with Ebitda margin of 10.9%, compared to 8.7% during the pandemic impacted fiscal 2021.

 

Operating performance is expected to witness healthy improvement in fiscal 2023, driven mainly by opening up of educational institutions, offices and establishments with recovery in writing and printing (W&P) and tissue paper demand owing to improved utilisation and realisations. Performance of the commercial real estate segment is likely to remain steady, while textile demand will be supported by domestic demand albeit impacted by slowing exports. Operating income is expected to rise by 12-15% 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 September 30, 2022, company achieved cumulative sales value of Rs 1,766 crore or 53% of project value at Phase-1 of its newly launched flagship residential project on own land bank at Worli, Mumbai within 2 quarters of its launch; signifying the company’s strong brand name and ability to achieve sales booking. Further, as on September 30, 2022, with almost all of its phase 1 inventory being booked and launch of second phase in the Birla Vanya project at Kalyan, Mumbai, cumulative sales stood at Rs 549 crore or 48% of total project value. Also, in the Birla Alokya project in Whitefield, Bengaluru, Rs 332 crore or 84% of the project value was booked. The construction activities are continuing as per schedule. Further, Century continues to generate steady lease rental income from its commercial properties in Mumbai. In September-2022, the company has bought a 10-acre land parcel in South Bangalore which is expected to generate sales potential of Rs 840 crore over the next 5-6 years.  Company’s JDA projects too are doing well with healthy continuing booking. As of September 30, 2022, it has received Rs 383 crore or 60% of the total sales potential in its JDA project, Birla Tisya, in Magadi Road, Bengaluru, and Rs 1,766 crore or 53% of total sales in phase-1 of Birla Navya JDA project at Gurugram.

 

The investment required in residential real estate development is expected at Rs 400-500 crore per annum given the asset-light model adopted, with projects launched on owned land bank or with JDAs combined with opportunistic land acquisitions. The company follows a flexible approach towards investments into JDAs and will focus on executing ongoing projects. 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. 

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 0.34 time as on March 31, 2022, slightly highly than 0.28 time a year earlier, mainly on account of debt raising to meet the pre-launch needs of the new residential real estate project at Worli. The company’s debt stood at Rs 1,316 crore as on March 31, 2022, and is expected to remain below Rs 1,500 crore over the near-term despite the land purchase and investments JDA projects. Gearing is expected to remain below 0.6 time over the medium term despite expected increase in debt. Debt protection metrics has improved in fiscal 2022 with adjusted interest coverage ratio of 8.89 times driven by improved operating performance and is expected to remain at 5-6 times over the medium term. 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 this fiscal with better realisations and healthy demand pick-up from the e-commerce, fast-moving consumer goods and pharmaceutical sectors leading to improvement in capacity utilisation this fiscal. In the textile segment, healthy domestic demand is expected to provide support despite moderating export demand.

 

• 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 400-450 crore, which will be adequate to meet term debt obligation and expected refinancing of Rs 250 crore NCDs. 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. 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 about Rs 140 crore annually 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 prudent growth plan through the JDA route. 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 Birla Niyaara project on owned land in Worli, Bangaluru, in 4Q-FY22, Birla Alokya project also on owned land in Whitefield, Bengaluru, in October 2019 and the JDA project (Birla Tisya) in Bengaluru in December 2021 - achieving healthy sales booking. 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. Additionally, the company has plans to make investments in one or two JDAs every year.

 

The company has achieved healthy sales traction in the residential projects that have been planned and launched. However, majority of them still are at an early stage of development, thus exposing BEPL to demand and implementation risks. While the residential real estate environment has improved post the pandemic, new project launches and early stage of project development continue to 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 Niyaara, Vanya, Birla Alokya and Birla Tisya projects. 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 235 crore as on September 30, 2022, along with negligible utilisation of the bank limit over the six months through December 2022. Cash flow generation is expected to be strong with average net cash accrual, expected at Rs 400-500 crore per annum, will be adequate to meet term debt obligation of Rs 125 crore with expected refinancing of Rs 250 crore NCDs and capital expenditure (capex) of Rs 125-150 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.

 

ESG Profile

 

CRISIL Ratings believes that Century’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The paper, textiles and real estate sectors can have a significant impact on the environment owing to high water consumption, waste generation and greenhouse gas (GHG) emissions. The sector’s social impact is characterised by health hazards, leading to higher focus on employee safety and well-being and the impact on local community, given the nature of its operations. Century has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights:

• Century has released its detailed sustainability report in fiscal 2022 with detailed description (including quantitative details) as per GRI standards for key ESG parameters and has scored 90.2% in the Higg Facility Environmental Module-2021 (Higg FEM). Higg FEM measures and quantifies the sustainability impacts of a facility.
• Company has been consistently improving on its emission intensity with green-house gas related Scope 1 and 2 emissions of 9,58,908 tco2 in fiscal 2022
• It is continuously seeking to improve energy savings through process optimization and alternate energy. In fiscal 2022, about 41% of its energy needs was generated using renewable sources which has resulted in avoidance of 21,400 tonnes of GHG emissions.
• Its loss-time injury frequency rate (LTIFR) of 0.43 in fiscal 2022, is lower vis-à-vis peers, representing healthy employee safety and well-being standards. Gender diversity is an improvement area with only 4% of employees being women as of fiscal 2022, albeit, better than peers.
• The governance structure is characterised by 50% of the board comprising independent directors, split in chairman and CEO positions, and presence of an investor grievance redressal mechanism and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Century’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Outlook: Stable

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

Rating Sensitivity factors

Upward factors

• Material and sustained revenue growth combined with operating profitability margin over 20%
• Steady contribution from the residential real estate business
• Improvement in the capital structure, with sustained debt reduction
• Improvement in credit risk profile of AB Group

 

Downward factors

• Moderation in the business risk profile, with decline in revenue and operating profitability
• 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
• Deterioration in the credit risk profile of AB Group

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 115 crore on operating income of Rs 2,422 crore in the first six months of fiscal 2023 compared to net profit Rs 65 crore on operating income of Rs 1,855 crore during the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars	Unit	2022	2021
Operating income	Rs crore	4,132	2,618
Profit after tax (PAT)	Rs crore	162	-34
PAT margin	%	3.9	-1.3
Adjusted debt / adjusted networth	Times	0.34	0.29
Adjusted interest coverage	Times	8.89	3.78

 

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	04-Feb-20	7.95%	04-Feb-23	400	Complex	CRISIL AA/Stable
INE055A07104	Debentures	22-Feb-22	6.32%	21-Feb-25	250	Complex	CRISIL AA/Stable
NA	Debentures^	NA	NA	NA	400	Simple	CRISIL AA/Stable
NA	Commercial Paper	NA	NA	7-365 days	1000	Simple	CRISIL A1+
NA	Rupee Term Loan	NA	NA	Sep-23	143	NA	CRISIL AA/Stable
NA	Rupee Term Loan*	NA	NA	Dec-28	250	NA	CRISIL AA/Stable
NA	Rupee Term Loan*	NA	NA	Dec-28	250	NA	CRISIL AA/Stable
NA	Proposed Rupee Term Loan	NA	NA	NA	522	NA	CRISIL AA/Stable
NA	Cash Credit	NA	NA	NA	600	NA	CRISIL AA/Stable
NA	Overdraft Facility**	NA	NA	NA	125	NA	CRISIL AA/Stable
NA	Overdraft Facility	NA	NA	NA	125	NA	CRISIL AA/Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	460	NA	CRISIL A1+

^Yet to be issued

*includes Rs 50 crore LC/BG sub-facility

**Includes Rs 125 crore line of credit short term loan sub-facility

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Birla Estate Private Ltd	100%	Wholly owned subsidiary
Birla Century Exports Pvt Ltd	100%	Wholly owned subsidiary