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

Good day, and welcome to the Sutlej Textiles and Industries Limited Q1 FY '22 Earnings Conference Call hosted by Stellar IR Advisors Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Bipeen Valame, Whole Time Director and CFO, Sutlej Textiles. Thank you, and over to you, sir.

Thank you, and good afternoon, everyone. I welcome you all to the earnings conference call of Sutlej Textiles and Industries Limited for the quarter ended on 30th of June 2021. I hope that all of you, your families continue to remain safe. I have with me Mr. Updeep Singh Chatrath, President and CEO of Sutlej Textiles and Industries Limited; and Stellar IR Advisors, our Investor Relations chief team. The result presentation has been uploaded on the exchanges, and I hope everyone had an opportunity to look at it. I will take you through financial performance highlights, followed by industry and business insight by Shri Updeep Singhji. The Indian textile industry has faced various challenges for the past more than 1 year on account of COVID-19 pandemic. However, with the opening up of economies, the sector witnessed a sharp recovery and rebound in the second half of fiscal 2021, which continued in Q1 FY '22, with increased demand in both domestic and export markets with some impact due to second wave of COVID-19 in April and May '21. During the quarter ended June 2021, the company reported consolidated total income of INR 591 crores against INR 197 crores in Q1 FY '21 and INR 688 crores in Q4 FY '21. The capacity utilization stood at around 90% on average for our yarn business in Q1 FY '22 as against 93% in Q4 FY '21, registering a marginal impact on account of second wave of COVID-19. We expect the momentum to continue. However, with emergence of second wave of COVID-19, reduced demand and delay in lifting of material in April and May, we saw some drop in overall sales by around 14% in Q1 FY '22. In spite of drop in sales during the quarter compared to Q4 FY '21, we witnessed improvement in EBITDA margin to 12.85% in Q1 FY '22 as against 11.89% in Q4 FY '21 on a consolidated basis and 13.55% in Q1 FY '22 as against 12.41% in Q4 FY '21 on a stand-alone basis with better realization in yarn business. The EBITDA during the quarter was INR 76 crore as against profit of INR 82 crore in Q4 FY '21 and loss of INR 23 crore in Q1 FY '21. The net profit during the quarter was INR 20 crore as against a loss of INR 38 crore in Q1 FY '21 and a profit of INR 28 crore in Q4 FY '21 on a consolidated basis. We focus more on export, and export was 39% of sales in Q1 FY '22 compared to 36% in Q4 FY '21. In Home Textile being consumer-facing business, we saw some pressure on sales volume due to COVID-19-related restrictions in domestic market. In export market, we saw 8% to 9% improvement in realization per meter, and domestic market realization remained steady as compared to Q4 FY '21. Capacity utilization was low due to COVID-19 impact on discretionary spending. However, the growth for recovering in H1 FY '22 with governments removing restrictions and economies are gradually opening up. In terms of leverage, notwithstanding the constraint posed by COVID-19, we continue to remain -- continue to maintain debt equity level below 1. The total consolidated debt as on 30 June 2021 stood at INR 937 crore as against INR 907 crore on March 31, 2021. The long-term debt decreased by INR 24 crore, while short-term debt increased by INR 53 crore, primarily on account of lower OpEx during the quarter due to second wave of COVID-19. There was a marginal increase in overall finance cost on account of Sutlej Green Fibre that is recycle polyester -- PSF working as a normal production unit and has been commissioned in March '21. But overall, we benefited with better working capital management and interest rate reduction. So the impact on finance costs remain marginal during the quarter, around 2%. Similarly, we saw some impact on depreciation costs with Sutlej Green Fibre going for normal production for the entire quarter. Lastly, we would like to highlight presently more than 35% of our working capital remains unutilized thereby providing the company with adequate liquidity to meet all obligations as demand revives. That's all from my side. Now I would like -- request Shri Updeep Singhji to share the business outlook and industry scenario, and then we can open the floor for question and answer. Thank you, and over to Shri Updeep Singhji.

Hello. Am I audible?

Yes, sir. You are perfectly audible.

Okay. Thank you very much, Bipeen, and thank you all, investors and analysts, for joining this call of Sutlej Textiles. The Indian textile and apparel industry, as you all know, showed robust signs of recovery in domestic as well as export sentiment -- segments, especially in H2 of financial year 2021 as compared to lows of 2020. However, the second wave of COVID-19, starting from the second half of April this year and affecting especially Tier 2 and Tier 3 cities and rural areas as well, unlike the first wave, which was restricted to Tier 1 cities only, impacted growth prospects of Indian textile industry in Q1 of 2021-'22. See, the irregular lockdowns in April effected demand sentiment for the -- especially synthetic yarn and blended yarns and fabric in domestic market, leading to [Technical Difficulty]

Hello?

Yes. Can you hear me?

Sir, we lost you in between.

Okay. I don't know where did you lose me, but...

We lost you after you said about the Tier 1 cities lockdown impacted.

Okay. Okay.

That's it. Yes.

Okay. So I'll just say that after that, and the irregular lockdowns in April affected the demand sentiments for yarn and fabric in domestic market, leading to demand supply mismatch in yarn fabric market. And especially it was for synthetic and blended yarns in the domestic market because the formal segment was not up. So that was one of the reasons. And with the strong export market and approaching festive season in India, we envisage a strong demand ahead. And of course, the caveat is that unprecedented impact of COVID-19, I mean, what we call the third wave, so that is one caveat, which we have to look at. The recent onset -- what happened for second wave in India and some key export markets, lingering uncertainty is likely to prolong and delay in full recovery for apparel players to the extent delaying the same towards the end of the year '22 or early '23. And the restrictive measures, though, temporary, like store closures, restricted shopping and mass movement and limited spending on account of second wave contraction is expected to bring down the revenue growth of organized apparel sector to 15%, 20%, this is as per one of the rating agencies. As far as the home textile business is concerned, this continues to be affected by lag in demand, whereas the pent-up demand during the festive season and gradual opening of export market should gradually lead to pick up in this segment in which we are in. The government has continuously supported the textile sector being one of the largest employers in the country. With the announcement of PLI schemes and other incentives, I think the new policies which the government has given, should thrust up this sector. And being one of the leaders in yarn industry, we believe that we can capitalize on these opportunities. As far as the raw material is concerned, we saw -- in case of cotton, we saw surge from last quarter, I mean, the Q4 of '21. We saw a surge in price by about 28%. And we envisage that cotton is going to be stable to low going forward with the new season. And if you look at the crop, we envisage that the area under cultivation as of now, the sowing is about 7% to 7.7% low as compared to last season. But I think we should end up doing almost the same, if not more, because of the monsoons which we are getting now. And overall, if you look at the cotton estimates and the balance sheet, we feel that the closing stock as per the government, what figures have come out, should be in the range of, say, 118, but some other estimates also show this to as about 50 lakh bills and the consumption is being backed at almost 340,000 to 347,000 bills. So I think that cotton crop is going to be good, and the prices definitely would like to be -- I mean would be stable to low. As regards to polyester, I think the polyester prices have been firming up over the last quarter, and there has been a considerable increase of polyester prices by almost 10% to 11% over the last quarter, I mean, the Q4 of '21 to Q1 of '22. Now as regard the recycled polyester fiber, which is -- which we also have our own manufacturing facility for the fiber, there we have seen a very big surge in the raw material of bottle. The PET bottle have shown an increase of almost 31% from the last quarter of '21 to the first quarter of -- say, as on 30th of June, we have seen an increase of almost 31% in the bottle prices. Whereas the fiber prices -- recycled fiber prices have come down from INR 78 per se to INR 73, say, minus 6%. So there has been a pressure on the recycled polyester fiber. Luckily, we could run our capacity to almost 80%, 89% in case of a fiber plant and because we are consuming this fiber ourselves. As regard viscose, with the recent announcement of government -- on this, what you call, antidumping duty, withdrawal of antidumping duty on viscose, its impact is yet to be seen, although we envisage that there should be a price movement downward for the viscose fiber in domestic market, but the real impact would be clear in next about a week to 10 days' time. So overall, we see that the raw material prices in this quarter should be a little bit firm if not too low. And as a result, we envisage that the yarn realization -- I mean, the yarn prices should also behave in a similar manner. So at Sutlej, we continue to focus on our well-diversified value-added product portfolio and the balance sheet of the company will aid us to capitalize on the opportunities going ahead. In the end, I must say that our strong roots have led us to withstand the storm in the recent past, which will help us to grow stronger in the coming future. Thank you very much, and I can now open the floor for question-and-answer session.

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

Sir, congratulations on a good set of number in restricted environment of operations. I would like to understand a few of macro environment that is going on in the textile industry. First of it, you mentioned that antidumping duty, the impact of viscose is not -- will be clear in a week's time. Could you just help us understand what happened when the antidumping duty on PTA was removed by the government? It could just help us understand the impact on the sector, which polyester industry has witnessed, and eventually, we can understand viscose as well much better.

See, when antidumping duty on PTA was removed, I mean, immediately, there was some reaction in terms of the pressure on the polyester prices. But I think polyester prices over a period of time have rebound. I'm talking about the fiber prices. So we didn't see too much impact for the polyester prices going -- I mean, going forward from the removal of antidumping duty from PTA. Today, I mean, the prices are at almost the same level in case of Reliance.

No. And in terms of global competitiveness as compared to what we were pre-antidumping duty in polyester and post-antidumping duty removal on polyester, export prospects? I'm just trying to understand from that perspective as well.

See, export definitely, I mean, the companies in India who are manufacturing polyester fiber, they have really gone -- I mean, they should have gone up in the exports as well because they are more competitive now getting the raw materials from outside and also having a sort of a situation where there is an alternative supplier of raw material of PTA. So definitely, their exports should have gone up. This is my estimate.

Okay. And how has it changed for blended yarn players, the scenario, whether PC cotton, PC yarn and all, they have seen better demand and better competitiveness from -- in the export market post removal of antidumping duty?

Yes. The PC yarns over a period of time -- I wouldn't say that it is only related to antidumping duty. But yes, the blended yarn with the polyester blends have done well over the last quarters. So -- even in export as well as in Indian market. So that is one area. I mean that is mainly due to the thrust of the people on MMF and also the support of government on MMF. So I think the PC has done well over the last 1 quarter in India as well as in exports. And now people have better assessed to a polyester fiber from other companies as well because they are also competitive, importing some raw materials from outside India.

Okay. Okay. And sir, how is the demand with respect to MMF, basically blended yarn? We understand cotton has seen a sharp improvement in demand due to China Plus One alternative sourcing that is playing out due to ban on Indian cotton. But how is the same for PC, PV yarn that you are witnessing from the global markets and from Indian fabric manufacturers who might be exporting or using in domestic markets?

Yes. See the PC and PV, these are 2 different segments and 2 different, I would say, categories. So in case of PV, I mean, the demand was a little bit skewed in case of, I mean, India because there were lockdowns and the formal weave was not, I mean, being produced. So as such, we saw a skew in this demand and -- especially on the PV yarn. As far as export is concerned, another major player in export, I mean, for the PV market is Turkey. So we saw that in export also, there was a little pressure on PV during this period because of the formal -- everywhere because of the lockdowns. Whereas in case of PC, we see that there has been a considerable better demand than PV because it also goes for knitting and all. So PC has witnessed a better demand over the last quarter as compared to the PV yarns.

Okay. And will -- the profitability will also differ materially between PC, PV and cotton yarn? And has the demand for -- and has the margins for dyed yarns started improving as compared to 3 to 6 months back?

Yes. See, we see some improvement in margins of dyed yarns, but of course, cotton yarn still remains the most profitable over the quarter. And then comes the PC and then the last was the PV because of the formal segment not being, I mean, in place for the demand. So cotton has been the driver, I think, for the spinning companies over the last one quarter.

Okay. And sir, what will be your cotton inventory at the end of March as well as at the end of June?

You are talking in terms of number of days? We are covered till end of...

Number of days, yes.

Yes. We are covered till the end of the season.

Covered till end of the season. And you covered it in the month of March only?

No. As a policy, we do that, I mean, gradually, and we did cover that towards the end of June.

Okay. Okay. And sir, last question from my side would be now that we're seeing heightened demand in the textile sector, would there be any expansion plans that you have figured out where there could be a great opportunity for growth for Sutlej Textiles?

Yes, definitely. I mean, there are many things on the drawing broad and with -- backed by the government policies and the government thrust on the textile sector, I think we are also envisaging that we can increase on certain areas, we can enter certain areas. So we are always open to that.

Any color you can give where the demand is very high and you could see some opportunities?

See, it is always on the value addition, I would say that, that we can always go for the value addition from the yarns.

[Operator Instructions] The next question is from the line of Ritesh Poladia from Girik Capital.

Sir, as you said on the green fiber -- the delta on the green fiber actually reversed. So that would have a negative impact on the current financials?

I think we -- I mean, see, this is something we have to look at in terms of the operational efficiencies. We are at almost at the peak of the operational efficiencies, so definitely, yes, I mean, it is based on the delta between the raw material and the fiber prices. I think as these lockdowns open up and the fiber prices and the availability of bottle, both -- I mean availability of bottle increases, the demand for fiber is also increasing. So I think we should be able to do much better in this quarter.

Okay. And the quality -- means, has the plant stabilized to your satisfaction or still the work is going on?

See, as far as the stabilization is concerned, the plant is stabilized, but we can never be -- there is always a scope for improvement. So I would say, generally, the plant is stabilized, but we need to aim at the world-class manufacturing for this plant.

Okay. Second, the volume was down 24% sequentially, definitely because of the lockdown. You think July would have covered your peak utilization?

Yes. As far as the utilization is concerned, we are covering July. And whereas uptake is concerned, I think in this quarter, we'll cover up the entire deficit.

Okay. So Q4, we did about 28,700 tonnes that would surpass in Q2?

Pardon me?

The last quarter, Q4 FY '21, company did about 28,700 tonnes of yarn.

Yes.

Q2 will surpass that or it would be still lower than the Q4 number?

See, as far as sitting today, we are concerned with 1 month having passed in the quarter, I think we should be able to do almost the same.

Okay. That's wonderful. And sir, final question, any updates on the home textile? What are the things going on there?

Yes. So on home textile, as my colleague, Bipeen said that because of this lockdown and all that, and it's being a discretionary spend and mainly being sold at the retail stores, so we had selling during this quarter after April. In fact, we were at set to go out, I mean, by mid of April, but then because of this lockdown, the entire retail chain -- I mean, that was closed, However, still, we managed to do good sales outside India. So we had good market -- I mean, we did well in U.S. and UAE. And since this is a little long-drawn process from your sampling to get -- actually getting the order, still I feel that on export front, we did better. And I think with the opening up of malls and all retails in India now, gradually, I think we should be able to do better in this quarter and going forward in the next quarters.

And how about domestic retail opportunity with brand Nesterra?

We saw a real good traction in the beginning when we launched this. Only in the month of April, there was -- sorry, in the month of May, June, there was a dip because of the closure of the retails. And now again, we are sort of augmenting the launch. So that means we are adding more goods. So we feel that in Q2 towards the end and Q3, Q4, we should do better traction in Nesterra. Because it's brand building, it takes some time. And I think we should be able to do good in this year.

[Operator Instructions] The next question is from the line of [ Shruti Shah ] from [ Shah Investment ].

Sir, just a follow-up on the previous question on the Home Textile business, we're witnessing losses this quarter as well. So sir, if you could just -- when do you think that this business will be a bit on positive side?

Thank you, [ Shruti ] for asking this question. Yes, I feel that we should be getting to positive on the operational side -- on the operational profit and cash profits, I think, towards the fourth quarter of this year.

Okay. Okay. Also, sir, just 1 question on the yarn segment. As all these bigger brands like H&M, Zara are focusing on recycling yarn. Are we looking an opportunity in this segment?

Yes. We already have that. And in fact, we are going to increase that because we are already certified as GRS in our -- both the plants, fiber as well as we can give yarn certification as well and other required certifications. So I think we are now focusing more on this, and that is an opportunity for us as well.

Okay. And sir, how is the demand progressing in the quarter 2 of FY '22?

As far as the yarn is concerned, yes. With the opening up of the market and also opening up of the, what you call, formal apparel, I think we will have better demand in this quarter as compared to the last one. And we are seeing some traction already in the month of July.