Stock Review: Century Enka

 

Century Enka's stronger financials and expansion plans make its stock an attractive buy. Investors with a one-year horizon can consider the stock

 

SMALL-sized textile company, Century Enka, is a part of BK Birla Group. Cheap valuation, timely expansion, low debt and good dividend-paying record make Century Enka's the stock an attractive buy. Investors with a one-year horizon can consider buying the stock.

BUSINESS:

Century Enka has three manufacturing units located in Pune and Mahad in Maharashtra and Rajashree Nagar in Gujarat. It is one of the leading manufacturers of Nylon Tyre Cord Fabrics (NTCF) in India. It also makes polyester and nylon filament yarn apart from nylon chips and tyre chords. During FY10, the company derived more than 35% of its total revenues from NTCF, followed by 32% and 21% from polyester and nylon filament yarn, respectively. Its chief product NTCF is used in tyres, conveyer belts and other forms of industrial belts.

GROWTH DRIVERS:

Recently the company increased its NTCF capacity by 35% to 29,500 tonne, which is expected to boost its FY12 revenues by 15%. The company's consistent operating and net profit margins around 13% and 6% over the past three years is expected to translate into a equivalent net profit growth, thanks to this expansion. It is also likely to undergo a change in management from BK Birla Group to the Aditya Birla Group in the near term. This could prove a big positive factor going forward. Aditya Birla Group now holds more than 14% stake in the company through its arm TGS Investment & Trade. The company's strong cash-flows and low debt compared with its peers are also key positives favouring its future growth.

FINANCIALS:

During the March 2011 quarter, the company's net profit rose 37% to 20 crore on a year-on-year basis while its net sales increased 18% to 358 crore. On a full year comparison, the company's net sales grew around 10% to 1,344 crore, while net profit fell 20% to 79 crore. This has resulted into an increase in its raw material costs by 23% on a year-on-year basis at 934 crore in FY11. The company's debt is around 0.68 times its equity, which is much better compared to its peers such as Garden Silk Mills and Filatex.

VALUATION:

Its stock price fell 22% in the past one year and is currently trading at a priceto-earnings multiple (P/E) of 5 times. Its immediate peers such as Garden Silk Mills and Filatex India are trading at a P/E of 4 times and 3.4 times, respectively. Century Enka also comes with a dividend yield of around 3.4%. Although the company's stock looks slightly expensive, its stronger financials and recent expansion of NTCF capacity gives visibility to its earnings. Add to it the 3.4% dividend yield and one can expect decent returns in near future. In addition to this, the possibility of transfer of management to Aditya Birla Group would be a strong reason to buy its stock.