Potential Value Unlocking To Create Wealth For Investors

Established in 1879, Bombay Dyeing & Manufacturing Company Ltd is the flagship company of the Wadia Group. We present here an exclusive analysis of Bombay Dyeing, which is one of the oldest producers of textiles in India. 

COMPANY OVERVIEW
Bombay Dyeing & Manufacturing Company Ltd (BDML) operates in three segments, namely, textiles, polyester and real estate. 

TEXTILE BUSINESS
The company's textile product portfolio ranges from towels and bed covers to clothing for men, women and children as well as manufacturing polyester staple fibre and PET chips in a separate division of the company. The company distributes its products with a chain of exclusive 350-plus Bombay Dyeing retail and 2000-plus ,multi-brand stores. The company plans to invest more than RS.100 crore to increase its franchise stores and multi-brand outlets to 500 and 10,000, respectively. The company also looks to widen its product availability. The company will be investing aggressively in technology to improve customer experience on their e-commerce portal and retail stores. This would extensively increase this segment's revenue in the coming years. 

Recently, the company sold off its textiles processing unit at Ranjangaon, Pune, for a cash consideration of RS.230 crore, which enabled them to reduce their debt significantly. In FY2016-17, this segment generated RS.303 crore or 17.73 per cent of the total revenues. 

POLYESTER BUSINESS
Bombay Dyeing is one of the six producers of polyester staple fibre (PSF) in the country and has a market share of around 15 per cent. This division recorded a sales volume growth of 2% during the year. In FY17, the overall polyester industry's capacity utilisation remained under 80%, whereas Bombay Dyeing's capacity utilisation increased from 91 to 93 per cent. In FY 2016-17, this segment generated RS.1110 crore or 64.91 per cent of the total revenues. 

REAL ESTATE BUSINESS
Bombay Dyeing set up its real estate division in 2004-05. The realty business faced adverse conditions in the recent past due to changing policy framework, demonetisation effect, delay in the receipt of regulatory approvals and general economic slowdown. Hence, the revenues from real estate activity for FY2016-17 decreased to RS.297 crore as compared to RS.470 crore in FY2015 16. Currently, the company is developing two multi-storey residential towers at Island City Centre (ICC), Dadar. Their combined sales value is estimated to be around RS.4,000 crore on completion. Bombay Dyeing has entered into an agreement with L&T for completion of construction and to hand over the apartments by the last quarter of 2018. In FY2016-17, this segment contributed 17.36 per cent to the total revenues. 

INDUSTRY OVERVIEW
Retail-textile sector is expected to grow upwards of 8 per cent over the next 10 years. The sector is influenced by swinging commodity prices and constant inflow of cheaper alternatives from China and the unorganised sector. However, GST implementation will help the organised retailers by reducing influx of cheap alternatives from China and domestic unorganised industry. The lacklustre consumer demand in both urban and rural markets, coupled with the intense competition from the existing players and new players will provide a major challenge for BDML in this segment. 

Polyester staple fibre (PSF) industry saw a volume growth of 3 per cent in FY17. Polyester accounts for 65 per cent of per capita fibre consumption globally as compared to only 45 per cent in India. Hence, there is growth potential in India. Prices of raw materials as well as energy costs are the two major input costs for PSF division, both of which are crude oil price dependent. Changes in oil prices could impact the margins and profitability. With the main input costs based in US dollars, fluctuations in the Indian rupee/ USD exchange rate impacts the business and the margin. Also, the supply and the price of cotton crop in India and globally could have an impact on the demand of PSF. Increased competition from new capacities added by other players in the country may result in pressure on margins due to price undercutting by new entrants. Recycled polyester has been gaining market share due to preferential excise duty treatment in India. China continues to have a dominant influence on polyester, fibre intermediaries and downstream textile industries. Any significant development in the Chinese polyester chain impacts PSF business dynamics in India. 

The real estate sector is undergoing transformation. The industry is moving from being highly opaque to more transparent and organised. There is an increasing inclination of buyers to lean towards established companies with high degree of corporate governance and structured delivery mechanism. Hence, established companies will secure a distinct advantage over the relatively unorganised and smaller players. The introduction of Real Estate (Regulation and Development) Act, 2016 (RERA), is expected to be positive for the organised real estate sector and may result in pickup in sales. 

The housing shortage has encouraged government to introduce interest subsidy to the tune of 6.5 per cent under Pradhanmantri Awas Yojana (PMAY) for low and medium income households. The current shortage of nearly 20 million houses is the key driver which will have a huge effect on luxury real estate as well. 

HEALTHY LAND BANK
BDML owns two large contiguous land parcels with clear titles, making them one of the largest land owners in Mumbai, thus giving a significant advantage over other real estate players. The company directly own close to 55 acres of land in the posh and expensive South Mumbai (Dadar & Worli) area, which they had acquired way back in late 1800s and early 1900s at approximately 4 annas/ guntha. Their plan is to develop these sites as mixed-use developments, comprising of residences, offices and luxury retail, with well-planned amenities and large open spaces. With large development potential, excellent pricing power and the opportunity for unlocking of value, it is a win-win for all the stakeholders. The ICC towers is just the beginning of large scale development of 55 acres of land bank available with BDML, which makes it one of the exciting real estate stories in India going forward. 

Further, the company also has access to close to 10,000 acres of historically acquired across land India at rock-bottom prices providing long term development opportunity for many years to come. In real estate business, the cost of the land is nearly 70 per cent of the project cost and the rest is cost of development of land and profits to the developer. However, in case of BDML, land carries almost zero cost and hence the profit margins are likely to be unusually high.

On the financial front, Bombay Dyeing recorded a 30.79 per cent increase in its revenue to RS.622.86 crore in Q1FY18 as against RS.476.22 crore in the first quarter of FY17. The company's PBIDT rose by 8.50 per cent to RS.66.98 crore in the first quarter of FY18, as against RS.61.73 crore in the first quarter of FY17. The company's net loss narrowed from RS.43.58 crore in first quarter of FY17 to a net loss of RS.32.71 crore in Q1FY18, depicting a substantial improvement in the financial performance on a year-on-year basis. 

On an annual basis, the company posted a 7.57 per cent decrease in its revenue to RS.1668.14 crore in FY17 from RS.1,804.72 crore in FY16. However, the PBDT of the company increased tremendously, rising by 300.55 per cent to RS.102.94 crore in FY17, as against a negative PBDT of RS.51.33 crore in FY16. The profit after tax of the company also showed a substantial improvement, rising by 148.93 per cent to RS.41.71 crore in FY17 as compared to a loss of RS.85.24 crore in FY16
On the valuation front, the company maintained a PE ratio of 46.41x, as against its peers Raymond (142.89x) and Siyaram Silk Mills (22.8x). The PE of textile industry stood at 27.49x. The company's ROE and ROCE stood at 0.89 per cent and 1.80 per cent, respectively, in FY17. 

RECOMMENDATION 
Through investments in e-commerce, new franchise model, brand, new products and information technology, the company is expected to grow ahead of the industry in retail-textile business. We believe Bombay Dyeing will create substantial wealth from the development of two large land parcels in the heart of Mumbai which will show improved performance in FY17-18 and robust performance in FY18-19. We anticipate huge value unlocking and strong profitability in the time horizon of next 1-2 years. We recommend HOLD on the stock for our reader-investors.