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

Good afternoon, everyone. I welcome you all to earnings conference call of Sutlej Textile and Industries Limited for quarter ended on December 31, 2021, and half year ended on -- and the 9 months ended on 31st December 2021. I hope all of you and your families continue to remain safe. I have with me Mr. Updeep Singhji, President and CEO of Sutlej Textiles and Industries Limited; and Stellar Advisors, our investment relationship 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 Mr. Updeep Singhji. After seeing the more than a year, full cash challenges, we have started to witness revival in the economy., when the third wave of COVID-19 pandemic hit us. As you are aware, the textile industry had already started witnessing sharp recovery, and we saw that the impact of third wave of COVID-19 was much less than anticipated on the sector and Sutlej in particular. We witnessed good traction in domestic as well as export markets, both in terms of realization and volume growth during the quarter. Yarn business exports during the quarter contributed around 42% to sales compared to 32% in Q3 FY '21. The capacity utilization level continued to be at around 94% in the yarn business, which have reached to pre-COVID levels and around 69% in Home Textile business. During the quarter ended December 2021 the company reported consolidated total income of INR 823 crores against INR 557 crores in Q3 FY '21, witnessing a strong growth of 48% year-on-year basis and growth of 3% sequentially. We believe that sequential growth was somehow muted due to some impact of third wave of COVID-19, which we believe that we should get over in next quarter. For 9-month FY '22, the consolidated total income stood at INR 2,211 crores against INR 1,227 crores in 9 months FY '21, showing a growth of 80% year-on-year basis. The consolidated EBITDA during the quarter was INR 99 crores as against INR 52 crores in Q3 FY '21, a growth of 93%. And we saw some marginal decline compared to Q2 FY '22. The EBITDA margin stood at 12.45% in Q3 FY '22 compared to 9.25% in Q3 FY '21 and 13.38% in Q2 FY '22. The consolidated EBITDA during Q3 FY '22 was lower compared to Q2 FY '22 by around INR 7.5 crores in spite of increase in total revenue, mainly on account of some onetime changes. First, RoDTEP benefit of INR 6.71 crores pertains to Jan to June '21, recognized as a income from operation in Q2 FY '22. There was a discount going on in RoDTEP E-scrips so the company has taken the discounting provision of INR 2.74 crores on E-scrip recognized in Q3 FY '22. And we saw a onetime benefit of PPP loan waiver in our U.S. subsidiary, which is around INR 3.83 crores recognized in Q2 FY '22, which is not there in Q3 FY '22. The above impact is also visible on PBT and PAT for Q3 FY '22. Reported consolidated PAT for the quarter stood at INR 37 crores as against a loss of INR 12 crores in Q3 FY '21 and INR 42 crores in Q2 FY '22. During 9 months FY '22 PAT stood at INR 99 crores against a loss of INR 31 crores in 9 months FY '21. I would also like to highlight that on the balance sheet side, we have been consistently been trying to contain the overall debt and maintain the overall gearing below 1. There has been marginal increase in total debt of around INR 35 crores to INR 942 crores during 9 months ended December '21. This is mainly on account of debottlenecking and maintenance CapEx up to 9 months and increase in working capital, which is mainly due to increase in number of days cotton inventory and also significant increase in cotton prices during this period. We are closely monitoring the inventory levels, and we are confident that we will be able to bring it to the normalcy by end of this fiscal. Lastly, we would like to highlight that presently around 30% plus of working capital remains unutilized, thereby giving -- providing the company adequate liquidity. That is all from my side. Now I would like -- I would request Mr. Updeep Singhji to share business outlook and industry scenario. And then we can open the floor for question and answer. Thank you, and over to Updeep Singh.

Thank you very much, Bipeenji, and good afternoon to you, ladies and gentlemen. I thank you very much for taking time off to attend this investor conference call for our company. I would like to introduce a couple of my colleagues who are with me. One is Mr. Oscar Reig-Plaza, who is the business head for our Home Textile division; and Mr. Jatinder Kumar, who's the Vice President for raw materials that is fiber, all type of fibers man-made as well as cotton. So I got them in because these are 2 important areas for any textile group like us to be there. So they are here. And since Oscar is here in India, so I thought -- him to join as well. The COVID pandemic has altered the global textile and apparel supply chain with several apparel brands preferring more than one sourcing destination. Further, the U.S. cotton trade war and the subsequent imposition of additional duties on Chinese textile and apparel imports have led to importers in U.S. scouting for other destinations such as India. It is observed that made up sale in India has been a huge beneficiary of this trend and has witnessed robust off takes over the past 18 months. Bangladesh, Vietnam have been benefited in ready-made garments based on account of importers looking for alternative sources beyond China. Additional optimism is emerging with Government of India becoming benevolent towards textile sector. Several incentives such as RoSCTL, MITRA and PLI for manmade fiber segment have been announced over the past 8 to 12 months and the further the stance of government on free trade agreements is also welcome policy change for T&A players. We see government being more open to FDAs with textile ministry confirming that several of them are under negotiation and could be signed in the financial year '22. Even at the risk of subsequent pandemic wave remains, it is expected that domestic spinners and textile industry will sustain healthy volumes in the financial year '23 as well amidst a shift in preference away from Xinjiang quarter. Improved capacity utilization, greater financial flexibility have led to pick up even in CapEx activity in spinning segment, particularly in recent months. This follows muted CapEx activity in recent years. Several spinners, particularly in mid-scale and large-scale, have already announced some of their CapEx plans for this. In addition to this, capacity enhancements, plans include CapEx towards debottlenecking modernization as well as margin assertive or efficiency moving projects such as machinery upgradation and renewable power capacity additions. The current scenario in the market, as you are aware, that spinning is doing good. So even in Home Textile domestic market segment is improving since there were low travel restrictions, the major wholesalers are looking to make new product introductions this year after 2 years of almost nil. During the festive season, domestic market experienced a spike in orders at the retail, which reinforces Indian consumers quick to bounce back mindset. The third wave of COVID was feared to affect deeply the third and fourth quarter. However, we see some positivity with COVID restrictions being revoked completely by U.K. and Germany and other European countries expected to follow the trend. We continue to see growth in U.K. And the third wave of COVID may have some impact on local or export sales essentially in retail. Trade shows such as [ GS ] in India, Heimtextil Germany have been deferred to a later part of the year. These trade shows are integral part of this trade -- Home Textile trade as you are aware of, and we hope to see this happen to give boost to new sales. Europe declaration of nonseriousness of this type of COVID will assist to boost market segment. Markets in Southeast Asia are projected to open up in coming months. North America continues to be wide open for businesses and the new and the reorders are on a steady rise. Home textile trends indicate a preference for sustainability. And now coming to outlook for the raw material. The fresh polyester prices have remained volatile and higher on back of the robust demand, steep increase in prices of cotton as the natural fiber and crude oil, which recently touched a decade high and expected to touch, I would say, about 100 a barrel, higher international prices, ocean freights and volatile currencies. The prices are likely to remain firm in future. The prices of recycled polyester fiber will keep following the price trend of fresh fiber with increased volatility and higher price of PET bottles, the fiber prices are expected to remain stable to higher. Indian cotton prices for the current season '21-'22 have registered significant gains as a result of lower areas sown under cotton by about almost 7.2%. It was 12.07 million hectares, crop damage due to erratic weather, extended monsoons, unseasonal rains and insect/pest attack with current trade estimates pegging the crop at about 348 -- 340 to 348 lakh bales as projected by CAI, tighter cotton balance sheet. So I think this robust demand as well of the large raw cotton from India and mills during the '21-'22 held off opening stock of cotton due to the season '21-'22 significantly lower. So what we see that cotton prices, we feel that will remain a little firm, although they may not -- these may not grow. I mean, beyond this point, we'll come to that later. So we strongly believe that strong yarn business and upstream Home Textile business will lead Sutlej to deliver a robust performance and continue to add value to the stakeholders. Thank you very much. Now I open the floor for question-and-answer session.

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

Sir, this quarter, we have seen a good jump in the realization margin wide basis. Sir, what is the value-added mix in this quarter sales?

When we say value added, I would say that in our yarn business, we have almost 25% to 30% of the value addition. I mean, both for -- in export as well as domestic.

So at the COVID times, there was a period where gray yarn was going more than the colored and value-added yarns. So is the mix now optimal or still there is a room for improvement to go for the value-added year?

I think there is still room for improvement because you see it is the value -- when I say value-added yarn, this could also be dyed and the gray both put together. It is a blend of various fibers also which add value. So I still feel that there is a scope for value-added yarns in dyed segment as well, going forward.

Secondly, if we see now our volume is coming in the range of 25,000 to 28,000 tonnes and your utilization is also 94%. I guess last you have put up the capacity in terms of standards was in 2017. Is there any now plans to increase the capacity? Or would you like to remain at the same levels?

See, this point is that, yes, we may think of but then at the moment we don't have any plan to do this immediately because if you look at even the deliveries of spinning machines are ranging between, say, 2 years to 3 years. So which we expect that would come down in about 6 months time. Because once -- I mean, this settles down, so there is deliveries. I mean, they'll be -- start quoting in the range of 2 years by the next 6 to 8 months. I think at that point of time, we would think of that if we can, I mean, look at the capacity increase. However, I mean we need to improve our own efficiencies; we would like to get better there. So we'll improve our margins until such time. Yes. Just to add here Ritesh, what has happened is that once you are considering the capacity and the tonnage, what we are -- what you are seeing as a number. But what majorly happening is that the product mix changes what we have done internally. As you asked the first question, shifting on a more on -- more of a value-added spindlage shifting on more value-added going coarser, going finer. So that is also add a significant value to the customer. And to -- so keeping -- what my point is that keeping the production level same still one can have a room to go for a better EBITDA margin and also better growth in terms of sales.

Coming back to again, value-added, sir, if any quantitative information is given it would be much better to analyze -- even on the index level, say, last year, it was 100 this year, it's 100 plus or -- and then we can go, say, in a year down the line?

So currently, if you really see this, we are having almost 35% to 40% of our spindlage on melange. I would say the entire melange, which is on value-added in almost a significant portion of it. Now part of it even on a synthetic side also is also on a value-added. Since what happens in our case, as you know, that we are actually made to sell company. We generally do not create the inventories. So what happens, we do a lot of sampling. So giving you a fixed number becomes very hard for us because we are having a lot of SKUs and a lot of dyeing capacity with variety. So when we typically say that in black, we may have 100 varieties of black. So what I'm trying to say is that we are having a significant value added position, but giving a specific number in terms of spindlage or something is very difficult. Yes, you are absolutely -- it's not only in terms of spindlage. In terms of what we have made new products in this time -- I mean, in this quarter or in this year over the last what you asked, during COVID. I think we have got our sales more almost by 20% in terms of value added. That is all, I mean, we can share at this point of time. And just to add here that if you see the even export side, that what we are seeing is that as we say the value-added means that the export also has increased significantly in terms of the value and in terms of the volume also and with new territories also. So the customer world over as the markets are opening, we saw a good amount of traction in export, which also is, I would say, largely a value-added business.

And in terms of Home Textile, definitely, there are a lot of developments. When do we see the breakeven actually?

I think we expect that FY '23 should go very well for us. And we not only see breakeven, but we see good traction in the year '23.

Sir, if I have a hard right, this quarter utilization was 69 in Home Textile?

Yes.

How much would be job work in your own sales?

Yes. So I'm giving you a number of 69, which is our -- so job work is very, very small in that maybe because we did not do much of a weaving job work. Our processing unit is having job work but that we are not considering because processing is having a different capacity calculation. So I'm giving you purely 69%, you can consider almost a 90% plus is our own out of that 69%.

So say, in a couple of years, can we assume your realization can be 2x in the Home Textile?

Yes. But I mean that is what we plan to do.

The next question is from the line of [ Monika Arora from Sharegiant Wealth Advisors ].

Congratulations on a good set of numbers. So I wanted to ask that when do you think that the Home Textile business will be EBIT positive.

Thank you, [ Monikaji ], and good question. Yes, we expect that FY '23 would be a year of Home Textile for us, where we'll be coming to positive in the year.

I also wanted to ask that, why do you think that the EBIT loss has widened in Home Textile?

[ Monika ], there are a couple of points, which I would like to highlight here. The loss has widened is -- if you see my opening remarks, as I mentioned, that this Home Textile business is both a domestic that is Indian business and American Silk Mills. So first of all, if you remember, I mentioned that INR 3.93 crore onetime PPP loan waiver has resulted into other income. So you are seeing a number which is 676 loss to 11.86. So 676 to be adjusted with 393, point #1. Point #2, in American Silk Mills, we were having the order book of almost like maybe 1.2 million to 1.4 million. But there were major constraints in the United States in terms of U.S. logistic issue, and Oscar is with me here. So U.S. logistic issue has actually hampered the delivery. So the way we were expecting this quarter to improve, that is the December quarter. That could not happen because, as you know, most of these containers are floating on the US sea and even the drivers there is a shortage. So what is happening is that the material which we are getting from India, China or Italy that is getting delayed so that has impacted on the sales. That is point #1. On Home Textile front, as you know that we launched Nesterra as a new brand. Last quarter, that is we were expecting more books and things to get launched probably -- and I would say probably there is a delay of maybe 1 or 2 months. So now the books are with the stores, and we are now very positive that in this quarter, we should see a traction from February, March, and it should continue to the next financial year. But to answer your question, yes, this is not exactly apples to apples so slightly, it has increased because of fixed costs remain fixed but sales did not take off the way it was expected in this quarter. So there is a lag.

Okay. And any marketing strategies planned for the Home Textile business?

Yes. We do have marketing strategy. And I mean plans for Home Textile business for the next 2 to 3 years, short term and long term. And we have recently appointed a new business head for this division, who comes from this industry and front-end -- mainly front end from U.S. and Europe. So that is one. Second, we have now consolidated the total Home Textile division to be managed by one team, including ASM and Indian Home Textile division. So that is Sutlej Textile's Home Textile division. Then third, by the launching of this brand and also by putting up more SKUs in the market and appointing more distributors, as of -- as we talk today, we have already -- we are on the retail points at about 160 retail stores and which we will increase to 250 in the next 6 months. So for each, I would say, category in Home Textile division, we have a separate plan as a marketing plan to do that to achieve these numbers.

So have you got the orders like...

Yes, I'll just explain. Like, for example, in case of brand, like we launched Nesterra, which is necessarily a cut service. So where we are servicing our retailer retail points through cut service. So that is one initiative which we have taken in this year '21, sorry, '22, and which is going to fructify, we see, in '23. So that has a separate strategy for this cut service.

Any order pipeline we have in the segment?

Yes. See you are talking of Nesterra?

Yes.

So in Nesterra, it is, see, on a daily basis, we have reached an average of almost 300 meters, which we intend to increase to almost 1,000 meters per day.

[Operator Instructions] The next question is from the line of [ Niral ], an individual Investor.

Congratulations on a great set of numbers. Sir, in terms of the budget, I believe there was, I think, expectation from the industry on the import duty. So given that there is no reduction in the import duty and cotton prices are rising, what is your outlook on cotton prices in general? And how do you think that is going to impact the company going forward?

Thank you, [ Niral ], for asking this question. And first, I'll answer your second question. The import duty on cotton see basically what is imported in India is a long - extra long staple ELS quarter. So first of all, we, in India, I mean, we in Sutlej, we are not importing any cotton which is ELS cotton or I mean, any imports of cotton because our all product mix is based on Indian cotton. However, having said so, the impact of import duty on cotton and the cotton prices. Today, we see cotton prices in the range of, say, INR 78,500 per candy. I'm talking of Shankar 6. So we -- yes, so we don't expect these prices to go up very sharply beyond this. And maybe that we see that this -- there will be some sort of reduction in this. And I don't say that when it is reduced, it will come to the old levels. We see that there can be a reduction of 5%, 7% going forward. So I hope this answers your question or you need.

And do you plan to make any follow-on requests in the government in terms of the duty or…

Yes. See, the associations are doing it. We are part of CITI. So as an association, yes, definitely, I mean, various associations are engaged with government agencies for this.

The next question is from the line of Prerna Jhunjhunwala from B&K Securities.

Congratulations, sir, on a good set of numbers. Just wanted to understand this raw material scenario across polyester VSF as well as cotton PU. How it is moving and how you are able to pass on the increase in prices to the customers? Like what is the acceptability today?

Yes. So if we look at polyester and viscose prices, polyester prices have shown -- jumped over a period of time and so has viscose. So what we are able to pass on part of it. See today, we cannot -- I mean, we were not able to pass on the full increase in terms of, I would say, the price increase based on polyester and viscose, we could do it to the extent of 75% to 80% as an average based on the product mix. Because see, these prices are directly linked to fiber as well as when we are value added. So value-added, there we can get a little more increase than the normal counts. So I would say that we were able to pass on 75% to 80% of these prices, based on fiber. And we see that polyester trend is going to be a little strong based on the raw material prices and also prices of crude oil. So in the short term, we see that polyester should remain firm to range bound.

And sir, how is the demand shaping up? Because cotton prices have increased, so meaningfully in the last 1 year. So do you think that the demand for polyester and viscose based products will increase in the -- in meanwhile period till the cotton actually settles down, as you said to a previous participant?

Yes Prerna, you're absolutely right. What is going to happen is that I would say that the blend would increase, where today, we are using, say, 100% cotton, there could be something which is blended with viscose or polyester so that would increase in a little higher segment. Lower segment, yes, there will be some shift from cotton to polyester and viscose. But I would say if my industry experience says that, that shift could not be -- I mean it will be in the range of, say, 8% to 10%. And it will be mostly in the blend.

Which means, sir, the demand for our segment will actually improve meaningfully, going forward, at least in the near to medium term till the [indiscernible] raw material prices are going to remain high. Just wanted to understand how you are going to capitalize when you -- on this, when you're running almost full capacity in the yarn business?

Yes. So see, there are a couple of things which will happen in this. One, this blend mainly in the gray segment, when I said blend between cotton, viscose and other could be on the gray segment. Second, to answer your question, it is the change -- it's a shift in the product mix in terms of count. We might get a little coarser and increase the production. Yes. So that is one way we can do that.

Sir, but how should we look at Sutlej from next 3 to 5 years perspective, what will be the growth drivers for the company?

See, the gold drivers for the company would be one, the value reason. That we would like to add value in our business, both in spinning as well as in Home Textiles. And the second would be that our control on our raw material in -- by having this green fiber plant. See today, we have this capacity of almost 3,600 metric tons per month, which is almost equal to our consumption. And there, we would like to add value addition. In terms of, I would say, [indiscernible] there's so many things where we can add this and we'll have control over our raw material. So the growth driver for us going forward is value-addition in yarn our Home Textile and green fiber business.

And sir, are you seeing a better profitability in the green fiber business today.

Yes.

Given that the entire world is like looking at climate impact of using these natural resources or wastage created by the sector?

No, I agree with you, Prerna. We see this traction, and we see this traction more as the concept of sustainability is growing, we have got the certification as well. So in green fiber as well as in our yarn units. So this concept of ESG and all these certifications, we are now having it. So now we have to market it. So I think we'll grow on this proposition of value addition in the group.

[Operator Instructions] The next question is from the line of [ Aditi Rathi from Medici ].

My question is on the budget side. So there has been a decrease in the import duty on yarn fabrics and other accessories in textile. So what is your take on it? How do you see the current scenario in that terms?

We see that this reduction in import duty on certain category of yarn. So it is in certain category of yarn. So we see that in terms of gray man-made fiber yarns, I think [Technical Difficulty] within India. And what benefit really comes out of this needs to be seen. I think it will take at least 1 quarter to figure out what is the exact impact of this?

So currently, as such, it is not affecting you directly because maybe that particular segment is not related directly to your business?

You are absolutely right, [ Aditi ].

So like maybe in future, that might like, as you said, after 1 quarter, you'll be correctly able to figure out how is it affecting you?

No, I would say -- I was saying affecting the industry. I mean -- in case of dyed yarns, this impact comes -- there is a lag -- I mean lag in this. So for example, if the gray yarn sells more within India, there can be more demand for dyed subsequently. So we have to wait and watch, at least for a quarter.

So I have one more question. Like, can you tell me like how much percentage of yarn is currently being imported on the side of cotton versus man made?

How much yarn is?

Being imported, currently being imported.

No, by Sutlej. No, we don't.

Okay. So no, generally for India, if I see the domestic market?

Domestic market, I won't have the exact figures, but I figure out that it is more of the man-made yarns which is imported. And also filament yarn. Cotton yarn imports are -- I don't think there's too much of cotton yarn import in India.

And your company doesn't have any import related data for this, right?

No. A company may have data on import related -- I don't remember it off hand, the figure you said, yes.

Correct. I mean, you don't import any yarn?

No, we don't import any yarn.

[Operator Instructions] The next question is from the line of [ Renuka Yadav ] from -- an individual investor.

So my question is on the CapEx front. So what is your CapEx outlay for FY '23 and FY '24?

Thank you, [ Renukaji ], for asking this question being here. Our CapEx outlook for '23, '24 is under probation. So we will have to -- we know, we won't have too much of CapEx. It is the debottlenecking, which comes up, and we are underway to prepare it and go to the Board in the next Board meeting.

I would also want to know like going forward by the end of FY '25, what can be the revenue mix between yarn and Home Textile?

See, the revenue mix, what we expect -- I mean, these are just off-hand figures what we have a plan. I mean -- so I would say Home Textile would go to almost more than 10%. Because the category we are in today, for example, if we expand the category in a couple of years or 3 years, then it would -- it might change in Home Textile. But the categories that we are in, in upholstery and drapery, we expect this percentage of the revenue.

[Operator Instructions] There are no further questions from the participants. I now hand the conference over to Mr. Updeep Singh for closing comments.

Ladies and gentlemen, thank you very much once more for attending this conference call. And I would like to conclude this with a statement, which you might have read also from our Chairman Mr. Nopany, "The textile industry continued to witness strong demand and volume growth on back of ebbing fear of COVID-19 and government of India's successful mass vaccination campaign. While there was some uncertainty about impact of third wave of COVID during the quarter, the Indian textile industry is experiencing high surge in demand with structural changes in textile supply chain driven by China plus 1 strategy and tailwind with various government initiatives for the industry. Cotton prices rose sharply and continue to stay high, part of which was offset by improved realization and higher efficiencies. We are fully geared up to meet growing domestic as well as export demand going forward with our well-diversified product portfolio." So thank you very much, and I would wish all of you to stay safe.

Thank you on behalf of Sutlej Textiles.