Buy Century Enka!

1. Sunidhi Securities & Finance has come out with a research report on Century Enka (CEL). The research firm has recommended buy rating on the stock with a target of Rs 320, in its report dated December 18, 2009.

"CEL is likely to post an EPS of Rs 54.8 in FY10, which would go up to Rs 61.5 in FY11. At CMP of Rs 260, the share is trading at a P/E of 4.7x on FY10E and 4.2x on FY11E. Century Enka in its weekly chart can be seen in a clear uptrend since early-2009. The index is expected to reach its primary peak at Rs 275. The ability of the stock to sustain above Rs 275 should take it to Rs 320. We recommend buy with a target of Rs 320", says Sunidhi Securities & Finance.

2. Century Enka makes polyester yarn (47% of revenues), nylon yarn (24%) and nylon tyre-cord (27%). Its presence across multiple segments insulates it partly from business cycles. But these products are commodities and Century is vulnerable to volatility of petrochemicals-based raw material prices, derived from crude oil. Raw material costs account for nearly 67% of net sales. While the market demand for polyester is steady, given the large Indian market, nylon tyre-cord is a raw material for the tyre industry which was adversely affected last year. Huge inventory and cheap imports further aggravated the problem.

However, thanks to anti-dumping duty on imports and a recovery in demand from the auto sector, this segment is expected to perform well. Decrease in the raw material price has helped Century generate higher profits in the past two quarters. Operating profit jumped 150% and 68%, respectively, over the same quarters last year. Operating margin has improved to 21% in the September quarter compared to 12% in the year-ago period. Its market-cap to sales and operating profit are 0.32 and 1.48, respectively. Increasing raw material prices over the past few months have reduced the margins a bit but the stock remains reasonably valued even after the recent run-up.