Sutlej Textiles and Industries Limited (SUTLEJTEX.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '26 Earnings Conference Call for Sutlej Textiles and Industries Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sachin Karwa, Chief Financial Officer. Thank you, and over to you

Good morning, everyone, and welcome to the earnings conference call of Sutlej Textiles and Industries Limited for the quarter 2 and half year ended September 30, 2025. With me on the call today is our CEO and Whole-Time Director, Ashish Kumar Srivastava along with Mr. Ranjan Chaudhary, Chief Operating Officer; and Stellar IR Advisor, our Investor Relations team. We have already uploaded the investor presentation, and I hope everyone has had an opportunity to go through the same. Let me start the call by giving you the macro overview, followed by the financial highlights of the quarter. The textile sector continues to operate under a dynamic landscape, marked by fluctuations in input and cautious global trade sentiments. Despite these challenges, the domestic market has remained resilient, supported by gradual improvements in consumption and favorable policy measures from the government. The recent GST and import policy relaxations have also improved visibility, especially for synthetic and blended yarns. Talking about the financial performance, our spinning capacity utilization for Q2 FY '26 was at 86% against 91% in Q2 FY '25. The stand-alone income came at INR 642 crores, which was lower by 6% on a year-on-year basis. Gross margin improved by -- gross margin improved to 46%, which was higher by 350 basis points on a year-on-year basis. EBITDA for quarter stood at INR 17.48 crores with margins at 2.7%. Loss was reported at INR 18 crores. From a business perspective, Sutlej delivered a steady quarter with improvement across key divisions. The yarn segment operated at optimal capacity with stable demand, especially in polyester viscose segment category, reflecting the shift towards man-made fiber. The fiber division maintained healthy performance on the back of cost control and efficiency gains. The Home Textile segment stood out with a strong turnaround aided by value-added products and new geographies. Overall, our focus on operational discipline, product innovation and market diversification continues to support sustainable growth. Going forward, the management remains focused on cost optimization, capacity utilization and enhancing the share of sustainable product offering across the segment. We remain committed to strengthening our balance sheet and maintaining a comfortable debt-to-equity ratio of 0.97x. With that, I now request Ashish ji to take it forward with the business and industry updates.

Thank you, Sachin, and good morning, everyone, once again. Thank you for joining us today for the Q2 and the H1 FY '26 earnings call. As my colleague mentioned, the textile industry continues to navigate a mixed environment. While there is volatility in the raw material prices and the ongoing geopolitical uncertainties have surely impacted the global trade sentiment, the overall fiber cost landscape remained manageable during the quarter. Although domestic cotton prices stayed relatively elevated compared to international levels, recent policy measures, including changes in GST regulations and import relaxations have enhanced demand visibility, particularly in the synthetic and blended yarn segments. At Sutlej, Q2 marked a steady and positive quarter compared to the previous one. We observed improvements across our -- most of our divisions, both in turnover momentum and operating performance. Let me briefly review our business verticals. On our yarn business operated at optimal capacity with only minor disruptions from heavy rainfall in Jammu and Kashmir and Himachal Pradesh. The overall demand environment remained stable, though pricing pressure persists due to global competitive intensity and regional trade challenges. In exports, markets like Bangladesh faced temporary headwinds from shipping disruptions and tariff uncertainties in the U.S. However, we are actively diversifying our customer base and product mix with encouraging traction in new geographies, especially for our value-added and specialty yarns like the industrial yarns or the fire retardant yarns. Domestically, demand revival in the polyester viscose segment has been a positive development. The shift towards man-made fibers is evident, and our strategic positioning in this space has helped sustain volumes. With regards to our Fiber division, that has performed strongly during the quarter. The raw material buying prices remained under control, enabling healthy operating margins. Again, here, the emphasis on efficiency, process optimization and disciplined working capital management continues to deliver results. Home textiles emerged as the quarter's highlight, showing a clear turnaround. Despite challenges like tariff issues in the U.S. and cautious global retail sentiment, this segment delivered robust performance. We are well positioned in the value-added home textiles category, which demonstrates greater resilience than commodity segments. Additionally, we are expanding our geographic reach beyond the traditional markets. We remain optimistic about upcoming free trade agreements with U.K. and EU, which should provide a competitive edge for Indian exporters once they are fully operational. Operationally, our focus this quarter was on maintaining a lean working capital cycle and improving product value realization. Despite increased business activity, we adopted a prudent approach to inventory and receivables. We continue to invest in process enhancements, sustainability initiatives and product innovation to ascend the value chain and bolster long-term competitiveness. Looking ahead, we remain cautiously optimistic. Demand in domestic synthetics and value-added yarn is expected to stay firm, while international markets, particularly home textile should improve as trade normalizes and tariff uncertainties subside. Our strategic priorities are unchanged, enhancing our product mix with higher-margin value-added offerings, deepening customer engagement across geographies and driving operational efficiency. We anticipate this focus will yield steady progress in coming quarters. To summarize, Q2 was stable and constructive quarter for Surface Textiles, and we are confident in building on this foundation through the rest of FY '26. Thank you once again for your continued support and confidence in Sutlej Textiles. We can now open the floor for questions.

[Operator Instructions] The first question is from the line of Amit [ Agarwal ] from Leeway Investments.

I understand that the markets are -- industry is going through a tough time. But I've seen that compared to all other industry peers, we are -- our EBITDA margins are always low for the last 5, 6 years. So I'm talking about the yarn business especially. And what could be the reason behind it? Has our project which were supposed to increase our margins not been effective enough or that has been a drive for the last 4, 5 years? Because earlier and we are losing market share compared to all other listed yarn companies. I'd like to hear your comments regarding the same.

Sure. So thank you, Amit, for the question. I think what we had kind of earlier emphasized that we operate in the -- as far as the yarn is concerned, primarily in the synthetics and the cotton segment. What we have started our journey of upskilling our product mix, that is going to -- that has given some results in the quarter 2, and I think we'll build on that. So it's a question of what different product portfolio, which we can offer to the market, which is -- which can give us the higher contribution and as a result, our margins can improve. At this point of time, obviously, there are -- I mean, the current headwinds for this first half of this year has been reasonably high. So in this environment, we are slowly but steadily progressing up the ladder.

Do we agree that we have lost market share in the last 10 years because all other yarn companies have doubled their turnovers during this tough time also, and we are struggling to maintain the same turnover that we used to have 4 or 5 years back. And our project -- we were told that PE project will increase our margins. And I don't think we have got enough return after spending INR 200 crores on that project. Has that been a severe?

No. So I think on the -- as far as the recycled polyester fiber project is concerned, we have started seeing traction. And you will see that what we have now partnered with different, other companies where we can again move up from the basic polyester to value-added products. So even there, the margins are improving. In fact, the last quarter has seen a turnaround. It was largely dependent -- the PET bottle was -- project was largely dependent on the raw material pricing, which was reasonably volatile in the past few years. Now there is a bit of stability which has come in, which can give us a very clear forecast on how this business is going to move. That is as far as the fiber business is concerned. As far as the yarn business is concerned, while we do understand that our -- I mean, the companies -- the peer companies, they've also kind of moved ahead. They have just not remained purely in the yarn play. They have either moved ahead from the upstream to midstream like into fabric or other things, which has kind of helped them. What we have started -- we have now initiated that journey. And hopefully, the results are going to come in the subsequent quarters.

And can you guide me on the yarn prices compared to last year right now in the month of October, November, December? And how much are we affected by the U.S. tariffs? Has it affected our business? Or are we supposed to see some further slowdown in the demand of yarn prices as well as textile business being exported to U.S.A. because we have pretty good exports to U.S.A. right now?

So I'll take it -- I'll break this question into 2 parts. The first is on the domestic side and on the synthetic side, we have definitely see a better yarn pricing than the previous quarter. So we have kind of improved on the synthetics as far as domestic is concerned. As far as the exports is concerned, one of the major reasons -- one of the major markets for us was Bangladesh. And as you would be knowing that due to the recent changes in the land route -- I mean, the yarn not being shipped through the land route into Bangladesh has resulted in problems for almost all the yarn suppliers. What we were doing, we are not into the commodity cotton yarn, we are into the melange yarn. And there, the lead times make a lot of difference. So accordingly, our business, as far as the exports into Bangladesh is concerned, got affected, which was further compounded by the fact that the U.S. tariffs had come in and there was a little bit slowdown in the entire business in the domestic exporter segment. So both have kind of affected us. We are trying to navigate this entire environment. And I'm sure as the tariff settles or there is a clarity which is coming in, we will get back to our normal EBITDA levels, which is comparable to the peers.

Could you throw some light regarding the yarn prices compared to last year, October, November, December and 2025?

So on the synthetic side, there is definitely an increase, there's an increase of about 8% to 12%. On the cotton -- pure cotton side, I mean, there is actually a dip, but that is also coming because of the fiber pricing.

[Operator Instructions] The next question is from the line of Vikram Suryavanshi from PhillipCapital.

Firstly, you said that capacity of 86% is optimal capacity. But in the past, we used to have even a scenario where 90-plus percent utilization was possible. So that 86% remain optimal because of sales mix or any other reason?

So I'll explain this a little bit. We have the 86%, what it talks about is on the installed spin, okay? As far as the running spin users are concerned, we are still at about 94%. There is a deliberate -- looking at the market scenario, there is a deliberate attempt to kind of for now temporarily shut about 15,000 spindles, and that is where the difference is coming.

Okay. And that INR 15,000 for melange or synthetic?

So INR 15,000, we were running on the raw cotton, I mean, primarily. And in the raw cotton, we realized that we are not so competitive, and it was prudent to kind of temporarily close it till the time the markets or the pricing becomes a little more favorable to us.

Understood. And you also talked about cost optimization because if you look at our results, large part of margin is a function of raw material price and selling price of yarn and that has impacting our margin. But apart from that, the cost optimization front, what are the levers we are talking about, which can really help us to improve margin apart from the raw material's selling price?

I think the biggest is going to be the product portfolio. We are diversifying our product portfolio. We are looking at more value-added yarns. Earlier, we were purely into synthetics, I mean, the poly viscose and 100% polyesters, or the cotton melange. What we have added to our kitty is a couple of new offerings, which are in the form of industrial yarns, which go into different other applications or even the fire retardant yarns, which is -- which has very specific application in technical textile. And as we kind of move up this value chain, we think the overall contribution is going to be beneficial for the company.

But cost optimization side, particularly like employee cost or other maintenance costs or something, are we already optimized? Or is there any scope...

No, that's... Fair enough. So I think one was on the demand side. On the supply side, what we have done, we have or we are in the process because obviously, we realize the fact that our overall manpower cost is a little higher as compared to the industry. The journey to rationalize or, let's say, reallocate the right workload is already on. And possibly by quarter 4 of this year, you will see some results coming out there. We are also aggressively looking at what are the possibilities of -- so one is workload rationalization on the supply side. The other is also looking at identifying the non-value-added, nonessential activities and looking at automating them. So these are the 2 things which we are working on, on the supply side.

Okay. And is there any average number of spindles which are like quite old and we need modernization and which can help us in terms of productivity, or more or less most of the spindles are like modern one?

So I think -- see, it's a continuous. You have to understand that we have been operating in the environment and we can't take a large CapEx and modern. So there is a clear plan of what spindles to modernize at what time. More importantly, we are also trying to see the spindles which we have, they can be put to which particular product segment use, where they can be useful. So that's the reason why where we are looking at different kind of products, which can dovetail into what our current infrastructure is.

Understood. So if you can give what would be CapEx for modernization or annual CapEx guidance for this year or next year broadly?

So I can give you a rough idea while we have, I mean, kind of prepared a very clear plan. I can tell you what CapEx is we have already deployed in the current year. I mean we have committed -- we have a committed CapEx of close to about INR 58 crores as of now for this particular current year. And we are looking at based on how the markets are kind of ramping up. There is approval of the Board of a similar amount as we go forward for this current year.

Understood. And broadly, what would be the spread in synthetic and melange currently per kg basis?

So if you can define what the spread, I mean, typically, what is that mean by the spread?

Selling price minus raw material cost after adjusting the wage?

Okay. So I think on the -- if you look at the -- our overall contribution on the -- just one second, I'll give you the exact number. So our overall raw material cost is roughly about 55%.

Okay. And what would be the ideal scenario where we would like to have raw material cost as a percentage, which can give a decent margin?

So again, I think it all depends on -- more than the raw material cost because raw material cost is a function of the fibers which we use. And I mean, since we are kind of moving into more value-added products where the selling prices kind of play, this can change. But ideally, it should be around -- I mean, it could be anything between 50% to 53%. The important piece is the other cost, which is basically the power and fuel cost, which in our case is reasonably high, and we are attempting to correct that. Our power and fuel cost is roughly about 12.2%. And I think once we move -- fully operationalize our renewable plants, we can get -- I mean, we can shave off at least 2% out of this. And then obviously, in the overall employee cost, where, again, we think there is a margin to shave off a percentage or 2 percentage.

Understood. And last question, sir, from my side about our recycling or grain plant. We heard that there was concern about -- as an industry in terms of getting raw material as well as the cost of raw material, which partly highlighted. So for us, how much would be like concern for us getting raw material or pricing of raw material given the scenario we are?