>BOMBAY DYEING (CLSA)

Three years after Bombay Dyeing began developing its historic mill land in Mumbai, completion of the first phase is near and launch of the next phase is imminent. Meanwhile, the polyester business continues to make losses. The company now is not averse to its restructuring. Textiles business is looking up with strength in domestic demand. 90% of its NAV accrues from the undeveloped prime land in Mumbai. The stock trades at 70% discount to NAV and hence offers deep value. Turnaround of the textile business in 2HFY10 will be a near-term trigger.

DEEP VALUE

■ Developing real estate in prime locations in Mumbai
With the first phase of 0.9m sf of property development at its two mill land sites in central Mumbai nearing completion; Bombay Dyeing is gearing up for the launch of its next phase of development. Company proposes to develop the 4.5m sf Spring mills site in 3 phases, starting from Mar’10. Building approvals have already been applied for the 1.5m sf residential phase and
commencement certificate is expected by Jan’10 end. The Worli site of c.3m sf will be developed in 2 phases from mid’11 onwards with a 0.7-0.8m sf of commercial development being planned.

■ Looking to cut losses in polyester & textile businesses
In FY09 Bombay Dyeing had Ebit losses of Rs660m on its textiles and Rs726m on its polyester business. While 1HFY10 losses for textile business were Rs223m, company has seen a revival in domestic demand in the segment in 3Q, which combined with cost cutting, is making company hopeful of an Ebitda break-even in 2HFY10. The polyester (PSF) business is still seeing weaker margins with Rs3.5-4/Kg of loss being recorded currently. While recent measure of conversion to gas as feedstock may help reduce costs, the company is not averse to restructuring of the business.

■ Counting on realty cashflows to improve balance sheet
Of the Rs18bn net debt on its balance sheet, Rs11bn of this is attributable to the capex incurred in textile and PSF business over the past 3 years. Assuming Rs2bn of annual losses from textile and PSF business and Rs1.6bn in interest payments; cash flows from real estate business of >Rs4bn are required to reduce balance sheet stress, which is likely from FY11 onwards.

■ Trading at an attractive 70% discount to NAV
Our NAV estimate of Rs1,385/share implies that the stock is trading at 70% discount to NAV. While the company remains essentially an asset play, its prime asset quality should attract a smaller NAV discount. Higher discount is attributable to the loss making PSF and textile business. Expected turnaround in textile business in 2HFY10 will be a near-term trigger and any efforts by the company to restructure PSF business will be a positive.

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