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

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Earnings Conference Call of Sutlej Textiles and Industries hosted by Stellar Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Bipeen Valame, CFO and Whole Time Director, Sutlej Textiles. Thank you, and over to you, sir.

Thank you, and good afternoon, everyone. I welcome you all with earnings conference call of Sutlej Textiles and Industries for the quarter ended on December 2020. I have with me Shri S.K. Khandeliaji, President and CEO; Shri Updeep Singhji, Deputy CEO of Sutlej Textiles; and Stellar IR Advisors, our investor relationship team. The result presentation has been uploaded on the exchanges, and I hope everyone had an opportunity to look at the presentation. I will take you through financial performance highlights, followed by industry insight by Shri S.K. Khandeliaji, and then we will open the floor for question and answers. Our operations are now operating at optimum levels, and we are well equipped to capitalize on revival in demand being witnessed in the textile sector. During the quarter ended December 31, 2020, the company reported a consolidated total income of INR 557 crores against 680 -- INR 586 crores in Q3 FY '20 and INR 473 crores in Q2 FY '21. The effective capacity utilization stood at 85% on an average for our yarn business in Q3 FY '21 against 68% in Q2 FY '21. EBITDA during the quarter was INR 52 crores as against INR 62 crores in Q3 FY '20 and INR 25 crores in Q2 FY '21. Net profit during the quarter was INR 12 crore as against INR 17 crores in Q3 FY '20 and a loss of INR 5 crores in Q2 FY '21. As far as leverage is concerned, despite COVID-19 pandemic situation since March '20, we reduced our total debt by INR 10 crores in 9 months ended December 20 with better working capital utilization and without availing any government [ help from the year ]. Currently, the total consolidated debt stood at INR 862 crore, and the debt-to-equity ratio has remained below unity since nearly 2 years now. We also have sufficient liquidity with unutilized working capital lines of over [ 60% ] of our sanction limits. We continue to monitor and ensure there is a sufficient liquidity and we are able to make all our obligation as witness -- we are witnessing revival in demand. That is all from my side. Now I would now request Shri Khandeliaji to share the business outlook and industry scenario, and then we can open the floor for question-and-answer session. Thank you, and over to Shri Khandeliaji.

Thank you, Bipeen. A very good afternoon to everyone. And I thank you all very much for joining us on this conference call. And it is a matter of pleasure for all of us that year 2021 has started on a very promising note, so that's a good thing for all of us. As mentioned by Bipeen, now we are running our full installed capacity of estimates. And capacity utilization in home textile division is also continuously improving. We have recently started such service sales to retailers from our home textile division under our Nesterra brand, which is yet to be formally launched. We have also started our 120 TPD Green Fiber plant, and the same is currently under trial run, and commercial production is expected to start sometime next month. The terms of these developments will be shared with you by our Deputy CEO, Shri Updeep Singhji, once I finished. Overall business environment and consumer sentiment improved much faster than what was expected earlier. The statement of my Chairman in press release after Q3 FY '21 results summarizes the position, and I would like to read it out. "The decline in COVID cases and the gradual lifting of restrictions in India has witnessed a revival of consumer consumption. Prices have recovered lost ground, leading to an improvement in margins. Capacity utilization has finally reached optimum levels with the return of the workers. There is a renewed sense of confidence with the rollout of the aggressive vaccination program throughout the globe. While some portion of the current revival could be attributed to a pent-up demand, the growth-oriented budget of the government gives me optimism for sustained improvement in the performance of textile sector." Initially, when the demand came after and during Diwali festival season for dyed yarns particularly, and that is for formal wear, we all had a preemption that whether it is festival-demand only, whether it is likely to continue or not, however, to our great pleasure, it is continuing even after festival season. And now going forward, there are many seasons from April. The schools are also likely to open where we had the very large consumption of dyed polyester/viscose yarn. We are the one of the majors suppliers of that. And similarly, there are Eid festival and so many other seasons, other things are going to be there. For such consumption, yarn is normally taken from 15th February onwards. So that has already started happening. We are already having orders for the full February. So that's a good sign. So demand situation looks bright in coming months also. Exports are also doing well. Of course, on raw material front, though rates of all raw materials have increased, but we should pass on those to market in view of improved demand. In case of dyed yarns, there is always a time lag a little bit because in dyed unit, to have advanced orders to decide about the various search and other search, so dyed yarns are always better than the gray yarns. But in this period of time, gray yarns have performed better than dyed yarns. But historically, dyed yarns always perform better and will continue to do so going forward. But half of that will be visible because the orders of [ high yarns and energy ], which we have taken, will be visible more in the coming quarters. During this pandemic time of nearly 1 year, we have worked very hard to optimize our cost and improve efficiencies. And that process is still going on and should further add to our agility. On the back of our [ very high ] and value-added product mix for different end use, including non-apparel and for different downstream consumption like in knitting, weaving or any other purposes, our continuous product innovation, base market penetration and our presence across geographies, we are fully geared to capitalize in any opportunity which unfolds going forward. Now I request Updeep Singhji to add what I have said and Bipeen has said. Thank you. We'll give you over to Updeepji.

Thank you very much, and good afternoon, ladies and gentlemen. We have, as Shri Khandeliaji has said, we have started this year on a good note. And coming on the trial run of our backward integration of Green Fiber, so we have been under this process of trial run, and we are successfully underway. And the unit has got the consent to operate from the provisions of the Board as well. So all of the formalities are complete. So we should be commissioning the plant within Q4 of financial year. So the plant has come up well. I mean the quality and the first grade, what we could make during this process of free trial is going on well. And we are very hopeful that we'll be very soon able to commission the plant. And the team has done a wonderful job in the absence of physical presence of Chinese engineers. And this has been done online, and this is one of the standing plants, first of its kind, which has been done online and which will be commissioned online without the presence of a team of supplier engineers. Coming on the home textile front. This year -- I mean, in this quarter, the home textile has also done better than previous quarters. And we have seen a lot of traction from the countries like U.S., U.K. and even Middle East. In addition to that, we launched our cut service. We have sent our books on the cut service to 56 retailers in 15 cities so far, and we have got good response from them. So these are basically 3 collections as of date. But coming in the next quarter, we'll be launching another [ 13 ]. So home textile as well has seen a good response amongst our customers across both India and abroad. And in the -- in this journey, we have added a few more ranges on the products, including sustainable products in home textiles. So we have a very diversified product portfolio within the category of upholstery and drapery and adjacent categories along this. So we see a lot of traction now going forward in this business. In addition to this, we have been able to synergize over this quarter -- over the last quarter with our subsidiary, American Silk Mills in the U.S., wherein we have shifted some of our manufacturing, which was earlier being done in U.S. or sourced from U.S., now through Sutlej. So this sort of synergy will give us a lot of benefit, and the very purpose of acquisition is being served now. So this is what we have done so far in home textiles. We have taken in a big way, as I said in my last call, digital initiatives, which have given us a lot of impetus in increasing our sales. We have developed digital look books, digital sample library and also used 3D visualization tools and sales assist apps, which have helped us to stay connected with the customers even during this year of pandemic. In addition, we have [ built ] innovative products exclusively developed by our in-house yarn. So that is a big advantage when customers look at a vertically integrated company, entry from fiber to fabric or even buildups, and we are able to develop such products in our home textile division. So -- and some of the collections, like Global Traveller, as you can see in the presentation as well, we have got good transaction brands, what you call impetus from the customers. Then we have made, in that process, we have made inroads across the globe. We have got approval from companies like IKEA, Ethan Allen, Kravet, Voyage, as you can see in our presentation. So these are the key initiatives which are -- which have helped us to do better in the last quarter. And going forward, we expect to have better results in the division as well. Thank you very much.

[Operator Instructions] The next question is from the line of [ Rishab Makiza ], an individual investor.

So in our earlier con calls in Q4 of FY '20 and FY -- Q1 of FY '21, we have expected some consolidation up to 30%. So have you seen any movement on that? And just, yes, so when can we see the demand situation improving due to the effect of the consolidation?

So far consolidation is concerned, of course, it has happened in retail and in the garment sector to some extent. But since the market improved much better than what was expected on the basis of which we had given that about consolidation, but that has not yet exactly happened to that extent. And see, the textile industry has been doing well now since last few months. And I think that once the moratorium and all these is over, and let us see, in the next year, will it make any -- the process forward because the real test of the financial strength of consolidation will be not only next year when the present -- when the entire working and everything comes forward. But then definitely, it is likely to be much less than what we expected earlier.

Understood, sir. My next question is about our BPM plant expansion, which was delayed earlier. Do we have any plans to restart that expansion now that the situation is improving? And let's say, quarterly, the CapEx there because originally around INR 215 crores is planned?

No, no, I think you are -- which expansion you are taking about? We have not declared any expansion earlier. And the expansion perhaps you will be talking is about our Green Fiber project. For that, I have already mentioned that we have already started trial run, and that is likely to be commercially commencing in the next -- sometime next month. So that...

No, sir, I -- yes, I know. No, no, I was talking about that specialized yarn expansion, which we had planned in FY '17, which was delayed in Q4 of FY '18, the 28,000 spindles. We had said that you will look at it after the Green Fiber plant expansion is over.

Maybe. But at the moment, there is nothing on the cards. We are examining different possibilities. So -- but at the moment, there is nothing on the cards. Whatever was there, we have already one expansion of 31,000 was completed in March '17.

Yes, sir. Yes, sir.

That was completed in March '17. And after that, we have taken up this recycled fiber project only. We were exploring many other opportunities. But since you know that there has been pandemic, there has been the -- and the consumer behavior and presence have changed, so we are having a real look on entire thing and we'll do so in the due course of time. But as of now, there is nothing on the cards.

Okay. Understood. And my last question for now is, what would be the expected CapEx for this year in addition to the normal maintenance CapEx, which you know every [ 16 months ]?

Can you reply to this, Bipeen?

Sir, the typical normal CapEx, what we assume is around INR 50 crores.

Yes, sir.

Maintenance CapEx.

Correct, sir. I'm just...

I heard here INR 41 crores. I think we have already spent it up to Q3.

Yes, we have already done it.

Yes, we have already done that. And that is for the regular modernization, debottlenecking, little adjustment here and there. Our project CapEx is on a separate writing, Bipeen, I am correct?

Yes, sir.

Yes. And next year, definitely, it is likely to be a little more with all the things that have improved. So we'd never stop normal CapEx, which is required for keeping the plant healthy and up to date. So that will continue. So about INR 56 crores normally we do every year.

The next question is from the line of [ Nitin Agarwal ] from [ SEI Advisor ].

Congratulations on the good numbers.

Thank you so much.

Sir, first, I would like to know your views on this whole textile industry, man-made fiber, the policies of the government and with regard to how this China Plus One is going to affect India and the company.

Yes. Well, any questions, I will try to reply every one in short time. So far, textile industry is concerned, entire textile industry overall, it is doing much better than what was expected. Of course, in case of garments, we have still not produced to the pre-COVID level in the exports, particularly, domestic garments have also improved. Otherwise, yarn is doing well. Fabric is, of course, there is some challenges in fabric because most of the fabric was for formal wear and other things. But home textile is doing well. Yarn is doing well. And overall, if we take the entire picture of the textile industry, it's doing much better than what it was expected to do. And then if you talk the China sector, definitely, it has started improving and it has started improving production in India. The call -- every foreign buyer, whether it is brand or whether it is big retailer or whether it's anyone else, they want to have China Plus One supply definitely. And India definitely ranks higher than them. Of course, in case of garments, we have little challenges of little smaller capacities and other things. But the people in the government to whom we have been discussing all ways in the government level also, there are some sort of collaborative approach. And many garmentors may come together and then take the bigger orders and something like that. So those type of things are happening. Then there are regional cooperations. So far, in spinning, we are concerned. We hope that we are going to get good benefit out of that China Plus One policy because Bangladesh is a big garment supplier to the world. And there, they used to get the fabrics and other things from the China. So now the Chinese -- so this Bangladesh fabric industry has improved considerably, whatever they have. So the demand of yarn there has improved. And going forward, we are going to have regional cooperation, regional cooperation with Bangladesh. That means since we don't have retail agreements with any of the importing countries, but there, so we will take the benefit of that to Bangladesh. We will be supplying yarn to Bangladesh in more quantities. They will be converting it to garments, and we'll be exporting to the countries like European Union or others where they have a free trade agreement. So that is how China Plus One policy is going to benefit us. Then another issue when it will come to cotton, I will tell you that the Xinjiang province cotton, which U.S. has done. So it is not only that anything led in China, Xinjiang province cotton is not -- cannot be exported to China. But anywhere, any product made out of that cotton, whether, say, if it is yarn made out in China but exported -- garment is exported by Vietnam, that is not also allowed technically. But how strong implementation is there, but it is definitely interesting. And that is one of the major reasons that the demand of yarn from China, cotton yarn particularly I'm talking about and cotton blended yarn have been very strong. And that is how the gray cotton yarn, reaction has gone up very high, and that is also similarly other things. So the China Plus policy is definitely going to benefit India. In case of home textiles, we are already seeing the traction. Some of the Chinese orders have already moved through to India. And going forward, this momentum will continue. So far man-made fiber is concerned, government in the budget, also as announced, we have been working closely with the government from our various associations and the inverted duty structure, which is one of the biggest problem for MMF sector. Is it going to be removed? But the call has to be taken by GST Council, where it is already pending. Finance Minister as the Chief of GST Council is already supporting that. But because of this pandemic and state and center, the evolution of GST funds was the primary issues which were taken so far. Now with the GST collection improving and reaching to all-time high, I think now this issue will be taken shortly by the GST Council and will be resolved. The government as a policy has decided that there will not be any inverted duty structure, and that will be most prudent in the textile industry, particularly MMF-based. Second thing, there is increased realization among the exporters of garmentors -- garments that, so far, they are basically cotton dominated, and therefore, their factories are not able to work for the full year. And we're working full year. They need to run this MMF-based garments also, which are basically winter wear garments. And for that, government is providing all sorts of help. For example, government has removed antidumping duty on PTAs. Government has removed antidumping duty on acrylic fiber. So the government is now fully convinced that if we have to achieve a target of USD 320 billion or USD 350 billion by 2025 from USD 160 billion, then definitely, it is the only MMF-based industry. So government is interested in creating employment, and that is possible only by the textile industry. So that realization has been very much up to the PM level, up to the financing ministry, in the commerce ministry, in the textile industry. So now they are pushing MMF in all the possible ways. So recently, you must have seen the -- you must have gone through, we call, production incentive scheme. In that scheme, 40 top-traded global item -- global-traded items of MMF best garments are there, and 10 items are of textiles. Similarly, the mega-textile our government has already announced, in 3 years, we are going to set up 7 parks, and that will be for the big investments where joint venture can come, FDI can come. Those type of focus, government is putting on the textile industry. And it is one of the selected sectors for the growth. Out of the 13 which the finance minister mentioned in his speech also, textile is one of them. So the government focus is there. So I think I have explained to you about the textile industry, MMF-based and China. Have I missed any question?

No, sir. I'm very thankful. You have given me a detailed answer, sir. I have a few small questions, not as big as this one, sir. Now this Green Fiber plant that is going to go in production in somewhere in March, sir, what is the kind of margins like this kind of product can enjoy?

No, you see, apart from the margin, of course, it is going to add to our margin because we are purchasing recycled polyester staple fiber, green fiber from the market. So naturally, there are variations in each and every supply because whereas once we will have our own fiber in-house, once our -- regularity of quality will further improve, though we'll take all possible precautions that is there. But having our own fiber will add to our quality, our productivity because our fiber can be engineered exactly as per our spinning requirement and downstream requirement. So that is going to give a big advantage in productivity and efficiency, number one. Second thing, you all know that this is a time of sustainable products and sustainable manufacturing facilities. And again, there is the cushion of backward integration and traceability. So since we have our own fiber plant, we have the better traceability of the yarn, including the raw material. So we will be -- our supplies will be prepared in domestic and international market where such yarn commands premium. Of course, the agenda demand for such yard is increasing. But at present, it may be a little bit low. But going forward, there is going to be use demand, and it will be only sustainable products. And of course, in organized sector, perhaps we are among only a few people in India who are having such type of world-class recycled polyester staple fiber manufacturing plant. So it may add 1%, 2%, it is a rough calculation. But I personally feel that it is going to be a big game-changer in the years to come for the Sutlej. Thank you.

Sir, right, we agree with you. Sir, do we have any plan to set up a large production capacity in the production-linked incentive scheme or in the textile part?

We are in yarning, we are open to all -- we have the resources. You see, our -- you have seen our financial position are so strong. Our debt-to-equity ratio is constantly going down. So we have ample scope to take all these opportunities. We are examining that. Government has yet to announce the details, the jet details that has -- that was announced, the ship framework, about INR 11,000 crores is allocated to -- for this. But the jet details has yet to come, but we are definitely examining all the possibilities and all the opportunities, we keep on examining. And hopefully, let us see how does it work out.

Sir, do you foresee, with the revival in demand in exports and in domestic, there will be a margin expansion for the next 2, 3 quarters?

I think that there should be, you see? But you -- in textile, there are so many variables, as you know, whether it is the raw material, whether it is the exchange rate, whether it is so many other things. Like at present, ocean [ 30 ] is a big issue. Container shortage is a big issue in exports. So many things keep on coming. But overall, I personally feel that the margins are definitely going to be better going forward.

Sir, how big will be your home textiles in our overall scheme of business? Let's say...