<b>Bombay Dyeing: Banking on realty </b>

Surf's up for Bombay Dyeing as its real estate projects and domestic textile demand take-off

The textile manufacturer is back in the news with two more Central Mumbai real-estate projects launched in December 2009. The renewed interest in the stock is based on analyst observations that the company is seriously considering restructuring its loss-making polyester business which has been a weak link so far. The textile segment is also poised for a turnaround, according to analysts, as domestic demand has picked up although exports are still soft.

The company which shifted its textile mills to Pune, has plans to systematically redevelop this vacated land bank and has almost 9 million square feet of undeveloped land in central Mumbai. It has nearly completed development of about 1 million square feet of land in central Mumbai and has lined up development of about 4.5 million square feet at its Spring Mills land in Dadar in its second phase from March 2010. Development of its Worli mill land is slated for mid-2011, as per analyst reports.

The company posted a net loss of about Rs 11 crore in the quarter ending September 2009. This is a recovery of sorts from a disastrous FY09 which saw the company posting a net loss of almost Rs 195 crore. The bottom line was boosted by healthy real estate profits of Rs 78 crore in Q2FY10. Operating margins also improved somewhat in the textile segment from a negative 21% in FY09 to a negative 17% in Q2 FY10. The polyester segment, however, saw operations erode in a tough demand environment and high cost base.

It had a debt to equity ratio of 5:1 at the end of March 2009 with net debt of about Rs 1,800 crore, 60% of which is on account of its capex in its textile and polyester businesses. The company plans on utilising cash flows from its real estate business to clean up its balance sheet. Analysts estimate that realty cash flows in excess of Rs 400 crore will be needed for this.

Bombay Dyeing has invested significantly in its home furnishings business and the sense is that the domestic demand scenario is improving. With some improvements in efficiency, a turnaround in its textiles business is expected in the second half of FY10.

While this turnaround and the company’s efforts to restructure the polyester segment are triggers for the stock, it all finally comes back to the realty arm which contributes about 90% to analysts' discounted cash flow valuations of the company. The real-estate environment is looking up and the company’s prime holdings in Mumbai have sent the counter spinning. The stock has appreciated over 23% in the last two trading days, which includes a sharp 19% surge on January 7, 2010.