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

Good day, ladies and gentlemen, and a very warm welcome to the Q2 FY '21 Earnings Conference Call of Sutlej Textiles and Industries Limited. [Operator Instructions] Please note that this conference is being recorded. I'm now glad to hand the conference over to Mr. Bipeen Valame, Whole Time Director and CFO of Sutlej Textiles and Industries Limited. Thank you, and over to you, sir.

Thank you, all, and good morning to everyone. I would like to wish all of you a very happy Diwali and prosperous and healthy New Year. I welcome you all to the earnings conference call of Sutlej Textiles and Industries Limited for quarter ended on 30th of September 2020. I have with me Shri S.K. Khandeliaji, President and CEO; Shri Updeep Singhji, Deputy CEO; and Stellar IR Advisors, our investor relationship team. The result presentation has been uploaded on the exchange, and I hope everyone had an opportunity to go over it. I will take you through the financial performance and some highlights, followed by industry insight by Shri Khandeliaji and Shri Updeep Singhji. As you're all aware, that it has been testing times for the global economy, including India, due to outbreak of COVID-19. However, I'm happy to inform you that despite such challenging times, we have done quite well to sell through such challenging times, which is reflected in our quarterly performance. Though it will take some time to get back to normal, but we think a large part of worst is behind us, and we should see quarter-on-quarter improvement going forward. We continued our focus on improving internal cost efficiencies and cost optimization. And the company has taken a lot of effective steps in this direction during the quarter. During the quarter ended September '20, the company reported consolidated total income of INR 473 crore against INR 644 crore in quarter 2 FY '20 and INR 197 crore in quarter 1 FY '21. The capacity utilization stood at around 68% to 70% -- 68%, on an average for our yarn business in Q2 FY '21 as against 43% in Q1 FY '21. As we speak, the capacity utilization rates have further gone up, and we expect to have a higher utilization going forward. EBITDA during the quarter was INR 25 crore as against INR 62 crore in Q2 FY '21, and EBITDA loss of INR 23 crore in Q1 '21. As far as borrowing is concerned, despite COVID-19 pandemic situation since March '20, we released the total debt by INR 65 crore in first half, H1 FY '21, with better working capital management, and we did not avail any of the moratorium or any other benefits given by RBI. Currently, total consolidated debt stands at around INR 806 crore. We also have sufficient liquidity with unutilized working capital limits since we have utilization in the range of 60% of our sanction loans or lower than that. I would like to take a minute and highlight our focus on debt reduction over the past 18 months. Our total debt has reduced by almost INR 114 crore from, INR 920 crore to INR 806 crore. This is mainly on our -- due to our focus on working capital optimization and better utilization. The debt-to-equity ratio has -- is very comfortable at 0.88, which is lowest in last 5 to 6 years. During this challenging time, we continue to monitor and ensure there is a sufficient liquidity, and we are able to meet all our obligations as we witnessed survival in demand. And just to highlight, before I hand it over to Shri Khandeliaji, that we started our 30 metric tonne line for Green Fiber project recently in the month of October. And we are working on commissioning -- and we started trial run production for 90 metric tonne going forward, and we expect to happen it in Q3 FY '21. That's all from my side. Now I would like to -- I would request Shri Khandeliaji to share business outlook and industry scenario. And then we can open the floor for a question-and-answer session. Thank you. And over to Shri Khandeliaji.

Thank you, Bipeen. Very good evening to everyone. I would like to extend my warmest greetings of Dipawali to everyone. I thank you, everyone, for joining us for this conference call. I would like to start with the statement of my Chairman, Shri C.S. Nopany, given in the press release that summarizes the position. "Gradual climbing back of economy out of depths to which it had plummeted is reflected on our quarterly performance also. A steady contraction of active COVID-19 cases and a low fatality rate instills measured optimist that worst is behind us. I repeat worst is behind us. While we are geared to scale back to pre-COVID levels on the back of our financial, operational, marketing strength, uncertainty continues until confidence is fully restored amongst the society and economy." [Technical Difficulty] where we are. Now I would like to tell something further. This pandemic has been a severe stress test for most of the industries and businesses across block. And more importantly, for textile and clothing industry, as it comes under discretionary purchases category. I'm happy to share with you that supply has been able to handle this stress at much ease due to its inherent strength in terms of financial, operational, marketing, organizational, quick adoption of new technologies and processes [Technical Difficulty], new normal ways of doing business like digitization, virtual meetings and marketing, [Audio Gap] to take benefit of emerging opportunities like China Plus One. Many businesses are shifting from China to other countries as they want second supplier also, and section is being noticed in western world. We believe that all those who will survive after this pandemic will have great opportunities going forward, and we believe that Sutlej will be among them. Now turning our performance in Q2, I'm happy to say that this turned out to be much better than what we expected earlier, and what I was expecting at the time of last conference call in August beginning. We are seeing continuous improvement in our capacity utilization, both in spinning and home textiles. In spinning, presently, we are able to utilize about 90% of our installed capacity, and we hope to achieve 100% capacity utilization before end of this year. And then home textiles also, capacity utilization is continuously going up, though it is a very, very -- we are in curtains and upholstery there and that is very, very discretionary segment. I'm also happy to share with you that despite not having any Chinese engineer on site, as against requirement of 25, 30 engineers for commissioning-related activities, we could start on our own 30 tonnes line in October end, which was supposed to be impossible by all those to whom we have been talking. This line is presently under stabilization and fine tuning. Another 90-tonne line to complete, 120-tonne project is also likely to be commissioned sometime in last week of November or in first week of December. This shows the agility of the organization to handle the severe challenges and crisis like this. We have also been able to continuously develop design and marketing synergies with our step-down subsidiary, that is American Silk Mills, and the benefit of which will be visible going forward. Now coming to the general business scenario. That looks quite positive at this point of time, though uncertainty continues. One of the major segments, which -- where we were also present, apart from many other sectors we are there in textile and the yarn or home textile. In the yarn, formal wear was one of our important category. That was not at all moving, whether it is formal wear, whether it is uniform, Bhilwara, Bombay, which used to be main market, and where we had foot present in -- particularly in these value-added dyed yarns. Now that has started moving since last 1 month. And we could get the old material delivered and have also started getting new booking. That is a very, very positive sign going forward. Another thing is that the people have learned to live with this COVID-19, though there is second wave somewhere in European countries and other. But they are well -- people are more geared and countries are well pledged to handle the crisis. And then there is, again, a good news about the vaccine that in one American company, perhaps Pfizer, if I remember correctly, has been successful. And we are seeing the euphoria worldwide that this vaccine news is the more bigger news than any other news these days. So these are the positive signs, and we are positive. And of course, the challenges are not going to finish in overnight. And we hope that '21/'22 should -- by the end of '21/'22 or sometime even before, say September '21/'22, we should be able to achieve pre-COVID level. So those are the very positive signs. We never expected that things are going to be at this stage so better. Actually, we were looking for that. We were prepared to handle 2021 as well '21/'22 heavy losses, and we were fully geared to handle that. So this is what the exactly the things are looking much better in marketing front also as so far in our case. So it is very easy to run the 100 capacity on grey commodity yarn, but we don't want to dilute our way of working and our image and our positioning in the market. We are in the niche dyed yarn segments, whether it is synthetic, whether it is cotton and cotton blended, whether it is Mélange or anything. So even having running those type of businesses, those type of market positioning, we have been able to sell only whatever we could produce, and we have not been producing any unsold goods since the lockdown start -- lockdown was lifted. And still we are not manufacturing any unsold goods, little bit here and there, that is something else. And we are seeing good repeat orders of our value-added yarn because we are not only in apparel, we are in various types of yarn, whether it is industrial application yarn, whether it be automotive yarn, whether it is home textile yarn, whether it is for some sort of medical applications, wherever they spin yarn, whether synthetic, blended or natural, whatever it is. So in all type of the specialty yarns, we are there. We are continuously doubling new type of yarn. As mentioned last time, we have already launched our sustainable products category in the yarn, 2 years back even. And now we are one of the leaders -- leading supplier from India of sustainable yarn, whether it is in organic cotton, whether it is recycled cotton, whether it is recycled polyester staple fiber, whatever it is. And we have a lot of certifications for that. So that is -- those are the things we have always been moving ahead of the competition, in grabbing the opportunity, and we are not following what we have been doing in the past. We always see the new way of doing businesses. And this is the new normal with the organization. This is the strength of the organization. So this is about the marketing. It is looking better now, but the situation continues to be uncertain. And nobody knows till the vaccine is -- of course, it is finally approved, produced and administered to the people. But since the people are moving around and everything, footfall is there in malls and retails, marketing is going on, so this is one front. On the raw material front, cotton is important raw material for us. And synthetic as well, that is more important for us because our major consumption is of synthetic type or various type of synthetic, indigenous and imported as well. And cotton is also important. So cotton prices are practically range bound because there is ample cotton in India, as well as in the world. So that's not a big issue right now for us. And in any case, since you are in the value-added yarn, we are able to pass on, if any increase or anything is there, to a large extent, depending upon the market situation. Of course, it was a very bad situation in the past, but the cotton yarn rates have been going up when the market rates little started up for the cotton. In case of synthetic, the synthetic rates were down, very much down earlier, but now that has started improving to a little bit because there is some activity started. So that is also not a big challenge. Temporarily, it takes little time to get adjusted because everybody wants to sell the material, and it takes a little time to get adjusted. So that is not the issue for us. So that way, the raw material front also, we are comfortable. We have been able to get the required quality -- quantity of labor with required people by our, say, more than 125 buses, which we used. And now we have labor, who are full working in our mills. And on their side, also, we don't have any problem. And on the demand side also, we also don't see any problem. So these are the main things which were impacting. But of course, since the retail and other things, the normal business of the consumer behavior has little changed, we are fully understanding that, we are monitoring that, and we are making required changes in our product mix to handle the new requirement of the customers. Say work from home is going to stay here, maybe in lesser degree, but it is going to stay. Things are going to change. So we are fully geared to sustainable products. We are getting everywhere, say, higher traction of sustainable product. Realizations will also be better. So we are continuously developing those type of products. So that is what I have to say about the business. And now I would request my colleague, Updeep Singhji, who is also the Deputy CEO of the company, to give a little more insight about our home textile and in fiber business. Updeep Singhji, please?

Yes. Thank you very much, Khandeliaji. So as Khandeliaji has said that during this quarter, quarter 2 of '21, the company has shown good performance over the first quarter, before the first quarter was bad. So in home textiles and in fiber, during this quarter, we could start our part of the fiber plant, which is [indiscernible] and which is under no stabilization, which normally takes a month about -- for stabilization, but I think we should be able to do it much faster than that. And compliment to the team that despite of the fact that where we could not get physical support from the manufacturing engineers that side for commissioning of a process plant, I mean we could have their guidance online, and we could start this plant. The balance of the 90 tonnes of this line, that is expected to start in the first week of December or end of November. I mean, which will take about a month's time to stabilize that. So that is underway, and we are hopeful to do it within the stipulated time. As regards the home textiles, home textiles has seen a better visibility in terms of the export orders. I mean we are seeing a better traction in export orders during this quarter, and it's almost double than the first quarter in case of exports, and especially in the countries like U.S. and the U.K. So we have seen good business in the U.S. and U.K. over the last -- over the first quarter, and we are able to strengthen our presence there and make our presence felt in those territories during this quarter. And going forward, I think this will be our main focus areas in terms of export. Domestic market in home textiles has been a little sluggish because of this uncertainty and the fear factor in terms of certain markets, which did not open fully, as -- for this sort of the category for cottons and upholstery. But going forward, in next 2 quarters, we do feel that there will be a lot of improvement over this quarter in this segment as well. This being a discretionary area of spend, I think this will take some time to come to pre-COVID levels, but I'm very hopeful that in next couple of quarters, we'll be able to, I mean, improve considerably on the domestic front as the life exports. In the meantime, we are preparing ourselves to go-to-market with -- on B2B brand, which we shall be launching in -- by end of December, so which will give us a more value addition in terms of our products in the market. So this is all we have done in the new products with the sustainable productions in the last 1 quarter, and this has given us good traction. The e-business of home textile has gone up from about, say, 40% to about 60% now. So once there is a complete business, I mean, there is a stability in the performance of home textile to this. Thank you.

So sir, shall we begin with the Q&A session or...

Sure.

[Operator Instructions] The first question is from the line of Kiran Naik from Mody Fincap.

Sir, my question is what is our market share in the segment which we deal into?

Say for, we are mainly, say, if we take dyed yarns, I think in dyed yarns, we should be having about 15% share in India and similar maybe in the outside India. In case of mélange yarns, in mélange yarns and cotton and cotton-blended dyed yarns, where we are in India, I think our share may be about 20% plus. And in abroad, of course, it's international. So our share may -- I may not be able to -- right now, able to tell you. But we have been increasing our share there also. So about total of production we are exporting in case of cotton and cotton blended mélange yarn, about 40% to 50% of our production is exported there. And overall, our exports are from 30% to 35% of all the materials, which we are provisioning.

Okay. So are we competing with Bangladesh?

No, no, no, we are not in garments. We are not in garments. Bangladesh is mainly in garments. Bangladesh doesn't produce any yarn. So far home textile is also concerned, we don't have competition with Bangladesh.

[Operator Instructions] The next question is from the line of Prerna Jhunjhunwala from B&K Securities.

Congratulations, sir, on continuous reduction in debt despite challenging times. Sir, just wanted to understand what is a different scenario that are being faced by you in blended yarn as well -- when compared to cotton? Because when we are talking to cotton yarn players, they are almost running at 100% utilization currently. And even in Q2, most of them ran at 90% plus kind of utilization. So what are the challenges we are facing and how are you overcoming the same?

Yes. Yes. As I myself mentioned in my opening remarks, it is easy to -- we could have also done that. But you see there is a specific setup of the plants like that. And in our mélange category, we could have run 100%, but that dilutes our image, and we don't want to compete with them. That is purely a commodity type of yarn. Grey cotton yarn is a pure commodity yarn, and anybody can do that. So we did not want to dilute our image. Secondly, our margins, if you will compare the margins, gross margins, you see then there are many expenses, so many things. If you compare the gross margin, that are much, much higher than the gray cotton yarn. We have some grey cotton yarn. We have some grey cotton yarn, but still we have always been trying to move to that portion also, to the dyed yarn. The margins are much better. For the temporary up and down, we can't change our business, and that is temporary. Secondly, the availability of workers, which were there because in grey cotton yarn, level of automization (sic) [ automation ] is much, much higher, in the grey cotton yarn, which is not possible in dyed yarn because you have to run hundreds of sets at a time. And then every order is different. So you cannot have that type of -- we have the full automization (sic) [ automation ], wherever it is possible across and best on the international levels. So we have international level automization (sic) [ automation ] so far dyed yarn is concerned, but it is much less as compared to grey cotton yarn. So that's why you require a lot of labor, lot of labor. So availability of labor was not that high. Say, in grey cotton yarn, you can run 50,000 spindles with the 50, 60 labor. Whereas if you have to run 50,000 on dyed yarn, you require 500 labor. So those types of challenges were there. So we did not want to move to that.

Okay. Okay. And sir, with respect to raw material scenario in the blended cotton, we are aware. But in terms of polyester and viscose, how are the prices moving? What is your expectation for these? Because they have been very volatile -- at least their prime commodity like crude oil has been very volatile over the last 6 months. So how are you dealing with it? And how is the pricing moving for you? And how it is going to impact your profitability going forward?

Prices of each and every commodity, though it has relation with the crude in synthetic [Audio Gap] price of that particular raw material, say, even if the raw material, say, if you talk the polyester, which is the most common synthetic raw material. So China is the biggest supplier in the world. The price has determined the demand and supply position of China, and that is they have the huge stocks. They have the huge stocks of the -- already, and they have the huge capacity, and still the worldwide capacities are underutilized. So prices are -- there may be a little plus and minus always depending though activity level has gone up recently, some increase has been there, but those type of increases and a little bit it is going to be range bound. There cannot be any major increase in the raw material. In case it happens, suppose, it takes a lot of time from transformation from crude oil to ultimate product. It's a very long chain. Say, polyester, raw material [Audio Gap] impact immediately. Of course, little bit sentimental effect may be there. And so that is -- and secondly, since we are in value-added products, the any increase or decrease, we are able to pass on to large extent, any increase. So comparative [Audio Gap] and to pass on that easily because competition is much higher, production is much higher, but in dye, that's why I say that we don't want to get into pure commodity products. We want to remain where we can have those type of leverages. So in case of synthetic, so far outlook is concerned, I think it is going to remain range bound, whether it is polyester or whether it is viscose, because China is the biggest factor.

Okay. Okay. And if we want to understand the pickup in the domestic segment that you mentioned, which categories are seeing good traction in the domestic market?

You see of -- let's say -- I say the suiting segment. When I say suiting, it may be for the trouser, if maybe for the readymade trouser, it may be for the readymade blazer, something like that, so -- that I'm talking about. That is being manufactured mainly [Audio Gap]

Sir, your voice cracked, I couldn't hear. Suiting segment is seeing good traction, and later?

We have the presence in Bhilwara. Say, Turkey is our big market. They have been supplying to Europe.

Sir, I'm so sorry, your voice was not audible in between. You...

Okay. Okay. Okay. I repeat it. When I take the particular segment, which was not moving earlier and which has started moving now, is the formalwear. And when I say formalwear [Audio Gap] and then, of course, some special shirting yarns, but mainly suiting yarns. So our clients are Siyaram, Donear, Raymond's, Gwalior's and then many clients -- large clients in Bhilwara. Similarly in export, we -- our major export for processed type of yarn is Turkey. So those types of products were not moving because everybody was working from home, and there was very little visibility of moving such type of yarns during that period. So we were -- since we have the flexibility to move to other yarns, we moved to the winter quality yarns. So now that segment has started moving. There has been good demand, operation of these companies have -- because retail sales have started, malls have opened, and so -- and in the international market, though it is not the pre-COVID level still, neither prices nor the demand. But since we have our internal marketing strength, whenever the demand comes, we get the first preference, whether it is international market or domestic market because of our established business, our product development, our competitive prices, timely delivery, dependability, because of all these things. When it started, we could book our orders and we are booked for this segment up to 15th December. So this is -- another segment, which is the uniforms, the school uniforms and other uniform, that is still not moving. So that is still to move because some schools have not yet opened anywhere, little bit somewhere in foreign countries and here and there, but that segment is still to start. So that is the sector, which I said that formalwear has started moving to some extent.

Okay. Okay. And sir, what would be the margin differential between mélange yarn and a blended yarn? Or is it similar for you?

No, no. Which mélange did you say? If I talk of the cotton and cotton blended mélange yarn and grey cotton yarn, if you talk that, that is the normal difference, which we normally take. So normally, the margins have been higher in cotton and cotton blended mélange yarn, ultimately after taking into account all the expenses and everything, but higher by normally by 5%, cotton and cotton blended mélange yarn, but as of now, because again it goes to the garments and value-added garments. Say now the demand of garments is of the pure, say, commodity type, most essential garments, so the demand of mélange has not been that good because that goes for the specialty garment, whether it is for the export lot of yarn to Bangladesh, Sri Lanka, Vietnam, also a new country where we are exporting; South Korea is a new country where we have started. So the demand of those type yarn is still not coming to the full level. And demand is for the grey cotton yarn, which is dyed, which is dyed as a piece dyed. So that is still to move fully. But in the normal course, from the grey to mélange yarn, dyed -- the margins are always better, normally by -- on an average by 5%.

Okay. Okay. And sir, Tiruppur market is one of the major markets for you.

Yes, yes. We are present there. [ Dev ] is our big client. Shahi is our big client. But you see they started operation much later because garment demand was not there, because that's our yarn, which -- we are selling most of our yarn even in domestic market to garment exporters, not for very ordinary -- it's all order based production. We have the huge development center. So it is -- all order is different. So they started very late because they got the very little orders from their overseas buyers. So that segment is still -- that has started moving. We have seen good traction, but still it is not that big because now the people are -- even if one has money, they are a little bit susceptible about spending it because uncertainty is still there, but a lot of improvement is taking place. And the improvement is better than what we expected.

Okay. Okay. And my last question is on green fiber and virginia -- virgin fiber difference. Because of lower crude oil price, what we heard from our channel checks is that there is no major difference right now. In fact, virgin fiber is cheaper than green fiber. So could you just help us understand what is the current scenario and going forward?

Yes. You see, earlier there used to be the green fiber, which you call -- actually it is not green fiber, the normal recycled polyester staple fiber. When you say the green fiber, it has to have certification. It has to have green processes. So that is actually the green fiber. And after this pandemic, there has been much higher enhanced realization in the world. Still it is to catch up in India. Across the world, people want sustainable products, that they are ready to pay higher price for that. Even the virgin fiber is cheaper. In international, blended green fiber is costlier. Green fiber garment made out of green fiber is much costlier than the virgin fiber because people are -- people want sustainability. So, so far earlier -- now here in India, because -- you see that because of pandemic and other things, bottle collections were less and temporarily the rates were increased. But still that is going on. More or less, it is same as of now, high tenacity, virgin fiber. High tenacity recycled green fiber is more or less same at this point of time, but still demand is there.

And profitability, sir?

Profitability, you see, we are not looking -- normally when the bottle collections and other things will start in India, the prices of this recycle will likely to go down again to the normal levels. And in exports, that will fetch premium. We are thinking to -- some, going forward, not immediately, but say, when the -- as the economy has started opening out, festival have started, people have started moving to market, bottle consumption -- so once the bottle peaking starts, the bottle prices will go down, recycled polyester staple fiber will -- rates will go down. And if there will be usual gap between virgin fiber and this fiber, may not be exactly the same, but it still will come down.

The next question is from the line of Sunil Jain from Nirmal Bang.

Sir, you said that you had already reached to 90% of your capacity utilization. No doubt that is very good. But in that, the product mix and all are similar to pre-COVID or still we are going for -- with commoditized product and may have some lower margin as compared to pre-COVID level?

No. You see margins are definitely much lower than the pre-COVID level. Simple reason is the traction of the realization is not that much. But the 90%, I said, we already started running now, 90%. And 100%, we will be achieving by December end. So the product mix had to be changed a little bit, but we were there already. Say in the formalwear, we were not moving, so we increased our production of the polyester count winter quality yarns, where we were already there. We could utilize some of the idle capacity of print finishing machines, which were idle, available there because you were not running all the ring spindles. When we say a 90% capacity utilization, it is of the ring frame only -- ring spindles only. But when the printing finishing comes, we could produce more of the polyester count yarns, and that's why we could run such huge capacity despite formalwear and other things were not moving. In commodity, of course, yes, to -- some things are still commodity. Say -- I say mélange. Say, the specialty mélange, which we used to make 100% specialty and polyester, cotton-dyed melange and such type of things, those traction is still -- full traction is still to come because the value-added garments are still not in that much in demand right now. Commodity garments are in demand. Essentials are only people buying. People are buying low-value -- whether it is India or internationally, major demand is of low-value commodity items, and those are being manufactured mainly out of the commodity yarns, whether it is mélange. So that traction is still to take place. Still, yes, but we still -- we don't take any order on losing basis.