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

Ladies and gentlemen, good day, and welcome to the Sutlej Textiles and Industries Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rajib Mukhopadhyay, Whole-Time Director and CFO. Thank you, and over to you, sir.

Thank you. Thank you very much. Good morning, everyone, and welcome to the Earnings Conference Call for Sutlej Textile & Industries for the first quarter ended 30th June 2022. I hope all of you and your families are in good health. Joining me on call today Mr. Updeep Singh, President and CEO of Sutlej Textiles and Industries Limited; and Stellar IR Advisors, our Investor Relations team. We have already uploaded the investor presentation, and I hope everyone had an opportunity to go through the same. Let me now get through the financial highlights. After which, I will refer to Mr. Updeep to run you through the industry and business highlights for the quarter ended 30th June 2022. As we all know that the Indian economy, like most countries in the world, was impacted by the geopolitical tension, high inflationary environment, increase in import costs. Despite all these challenges, at Sutlej, we saw a robust performance backed by healthy sales and profitability growth and reinforcing the strong fundamentals of the company. Now coming to the income statement. Our consolidated total income for the quarter was INR 853 crores, which is a jump of 44% as against INR 591 crores for the first quarter of last year, that is Q1 FY '22. The improvement in domestic and export demand that we have been witnessing before the [ quarterly ] pressure and with outputs signaling the geopolitical situation, it's the primary reason for our improvement in performance. We are hopeful with several measures being taken to cap the inflation and given the upcoming festive season, our performance in the forthcoming quarters should also be stable despite the current environment. For Q1 FY '23, our consolidated EBITDA stood at INR 138 crores, which is 16.14% EBITDA margin, which is 329 basis points higher than Q1 FY '22, where it was 12.85% or INR 76 crores and by 144 basis points higher than previous quarter, that is Q4 FY '22, where it was 14.7%. This growth of EBITDA are primarily driven by volumes, higher realization and benefit of operating leverage. On the profitability side, our consolidated PAT came in at INR 45 crores as against INR 20 crores in Q1 FY '22, which was higher by 123% year-on-year. The profitability would have been much higher than this, however, there was an exceptional loss on account of impairment loss of INR 23.66 crores since the company decided to discuss the captive coal generation power plant. On the balance sheet front, there has been a reduction in both long-term and short-term debt, resulting in an overall debt reduction of INR 45 crores to INR 900 crores compared to March '22, which stood at INR 945 crores. The debt equity ratio has been constantly below 1 for over 5 years. And currently, is it at 0.78x, which is also the lowest over the years. That's all from my side. I would now request Shri Updeep to share the business outlook and industry scenario. And then we can open the floor for the question and answer. Thank you.

Thank you, Rajib, and a very good morning to all of you, and I thank you very much for taking time off to join this call of Sutlej Textiles in spite of the fact that this would be going to be -- this is going to be a longer weekend, and wish you all a very happy independence day, 75th anniversary of our independence. At the outset, let me begin the call by reiterating our outlook on the industry. We continue to believe there are positive tailwinds for the textile sector, although they are temporary clouds as well on this. On the domestic front, with the aspects of an industry as well as government of India, as we move improving the coming environment in the country and various [ FPAs ] being signed in, coming up, which would be a great help to us. China Plus One strategy is adding benefits. Therefore, we believe that long-term growth prospects remain unchanged. The domestic demand on home textiles is expected to grow in India over a period of time. As you are aware, like most industries, our industry works best once there is a relative stability in demand and supply dynamics at both sales and [ quarterly ] cost. While global happenings have impacted, these sentiments on the demand side, on the input cost after year of reducing strong prices of cotton in the new season with the easing of supply chain issues and not in this season that we are witnessing a downward trend. This was what we were witnessing about 15 days ago. But now again, we see a little upward trend in the quarterly prices, where even the futures today range in the [ almost 104 ] for December. While we are confident about the opportunity in textile sector over the medium term, we are aware that there could be some challenges in the short term due to volatility in the raw materials because volatility really is something which is really not so good for the business, even if -- at the cost of the prices. So Sutlej being a trusted brand in yarn segment has been able to capitalize on the opportunities, which is evident from the results in the view of increasing demand of cotton-polyester brands across multiple categories of end use, there is a market potential or blended gray yarn as well. So in both in domestic and exports. And we see that also for the next few quarters, we are going to witness some sort of volatility in the prices as well. But I think we are confident that [ we are helpful ] should be able to sail through well in the upcoming quarters as well. So we believe that all these positives for us Sutlej is will well placed to continue its strong performance and add value to the stakeholders. I think with this, I can open the floor for questions, so that we can have better discussions when we are having this question-and-answer.

[Operator Instructions] The first question comes from the line of [ Rakesh Shah ], an individual investor.

So I just wanted to know this one thing that this many other companies compared to yours have not reported good numbers, whereas you all have reported excellent numbers. So why are we are seeing this traction -- like why are we seeing this sort of traction? And can this margin profile be continued in the coming quarters as well?

Thank you, Mr. Shah. This is a good [ add ]. And I would like to say a couple of things. Here, I think we being in the dyed segment, dyed yarn both for synthetics as well as on cotton, we have seen that in the first quarter of this fiscal year, there was some demand, which was rising from the last quarter as well, especially on the synthetics side. So on synthetics, we saw good profitability as well, whereas cotton trend has been a little slow because of the prices of the raw material. So being in dyed and being in synthetic as well along with, and having a good order book at the beginning of the quarter and during the quarter, I think this has resulted in a better performance on the one side of it. And on the other side, we could have better realization as well. Because of little smaller lots, if you look at the utilization in the first quarter, it has been a little below the last quarter of the last fiscal year. That is due to we have been making little smaller lots, which could affect us good realization as well. So these are some maybe that our results in this quarter have been better.

Okay. So apart from that, can you talk a little more about the CapEx plans just in case if I missed it?

See, we have a CapEx plan as it was announced in the last quarter as well. So we -- and we say to put a spinning and dying project in the state of, I mean, the UP of J&K, which was announced in last quarter, so we are still holding on to that. And because it is little longer gestation. So we really say that this would come up only in fiscal '25. So holding on to that -- I mean, holding on to it that we are going ahead with that. So we are just waiting for the land allotment and all that. As far as other CapEx is concerned, the normal CapEx, which is debottlenecking and all that, so whatever we have [ adequacy ] during this year, we'll do it, to the extent, of almost INR 100 crores, [ right? ] Or to the extent of INR 100 crores because now certain deliveries of machines have been eased out. So we -- and we say that whatever normal capital expenditure in terms of modernization or debottlenecking, we are going ahead with that.

Okay. So from apart from that I wanted to know a little bit more on the input cost. So how is the increase in input cost impact on your profitability? And how are you tackling it?

Yes. So see, it feels -- as we said during my [ talk ], it is not only the cost, but it is a volatility. So the major, I would say, skill we need to have within the organization is how do we manage the volatility of the raw material as well. If you look at, for example, I talk of cotton. If you look at cotton, if I compare cotton Q1 of last year to Q1 of this year, the cotton in term really has increased by almost -- one of the qualities has increased by almost 77.3% and the other one about 107%. So that is a jump in Q1 of last year to Q1 of this year. Whereas Q4 of last year to Q1 of this year, there is a jump of almost 29%, 30%. So there's the volatility. Then again, in the last 10 to 12 days or 15 days, we have seen that the cotton prices are again going up. Today, the New York Futures stands at almost 104, whereas the Indian prices are ranging in the range of almost -- for the Gujarat last quarter is almost close to INR 99,000 to INR 100,000 per candy. So these are -- this is again a shift in the quarter prices over the last 12 days. That is on the cotton side. On the polyester side, we have seen that the prices of polyester have been hovering in the range of say 110 -- sorry, 120 to almost 110 to 120 during these periods. So there is -- that is dependent mainly on the prices of Reliance, which again are somehow linked to somewhere on the CIF price of the imported fiber as well. Whereas in case of recycled polyester staple fiber, we have seen that from Q1 of last year to Q1 of this year, there has been a jump of almost 35%. Whereas if I compare Q4 and Q1, Q4 of last year and Q1 of this year, there's a jump of only about 3% to 4%. So this is the volatility on the polyester side as well. Viscose has remained almost stable during the period. There is an increase of almost, I would say, from the last year to this year is an increase of almost 17%. And whereas in case of quarter, last quarter to this quarter is about [ 6% ]. So the point is how do we tackle this? So in case of cotton, luckily, this year, our quarterly performance so far has been good. We are covered until the end of the season until such time that new crop comes. For example, in case of North cotton, we are covered till September end. And in case of Gujarat cotton, we are covered till October, middle of October, towards the end of October. So that has come handy to us that this year, we were able to on some of the raw materials as well. Polyester, I mean on the recycle side, we are having our own captive production as well. We have recycled polyester fiber. So that also helped us in terms of improving some of the runability of our spinning unit as well by holding on to the good quality and how do we make some changes while making that polyester fiber. So these are a few things that we were able to do during the year, which has helped us to, I mean, get to this performance level.

Okay, sir. So one last question. Can you give me some -- any outlook or guidance on the home textiles division, how it is looking?

Yes. see, if you compare the results of our home textiles division, there is improvement. I don't say that we have yet come out of the loss. There is improvement on the performance over the last year Y-o-Y quarter as well. And from the last quarter to this quarter as well, our quality of sales has improved. If you see -- even at a little lower turnover as compared to quarter 4, that to quarter 1, our profit has been better. So we have been able to get better realization by focusing on the markets like U.S., U.K. and other export markets and also a little bit on our Indian brand, which we launched for [ pet ] service. Nesterra, we are seeing good traction as we are launching some more SKUs on this. Today, we are at almost 335 stores across India, which we should be able to ramp up to more than 500 to -- I think 600 by end of this quarter. So this is what our plan is and that we should be able to do much better in the coming quarters on the home textiles front. So we should get positive in the next 1 or 2 quarters itself. So we see some good business for home textiles, and we are quite gung ho about it.

[Operator Instructions] Next question comes from the line of Ritesh from Girik Capital.

Sir, my question is on your new greenfield plant at Jammu. How much land is acquired, and what area this phase would be done?

Okay. Thank you, Mr. Ritesh. The land -- if I get your question right, you wanted to know how much is the land parcel we are looking at or we are acquiring?

Yes. Yes.

See, the government, I think it should be allotting to the extent of almost 63 [ lakh ].

Okay. And this phase will be covering all the 63? Or there would be surplus land [ remaining ]?

No there -- No, this project will be using almost, say, out of this, about 35 acres. There will be land available for expansion in that because that is a very basic which we need to have because we cannot have sort of space only for this project. So we will be having the extra space as well for the future expansion in this project as well.

Sure. Sir, my basic objective to ask this question was, if I see your CapEx amount, INR 900-odd crores for 90,000 spindles and dye house, so it looks quite aggressive CapEx plan. So is there any common utilities you are setting up for the future expansion, which is included in this amount?

Yes. Now I answer your question. Number one, the CapEx looks -- if you divide just by first spindle, it would look very high because one, part of this project is on the mélange yarn. So the cost of mélange yarn is a little higher because you have doubled the back process, I mean, for the ring frame or the ring spinning for the same production. That is one. Second, we are putting up a dye house. Now this dye house is a fiber dye house, which has -- which is included in this CapEx, which would cater to this project as well as some extra capacity to be given to others. So that is the dye house, we are initiating the project. And also, we have also said that this will be a 0 discharge project because nowadays everywhere governments are going in for our 0 discharge. So -- and we save that CapEx as well within it. So that is the reason it looks a little higher as compared to a normal spinning wheel.

Sir, what would be the capacity of dye house?

This dye house on cotton fiber would be to the extent of almost -- really this depends on the fiber types. So it will be to the extent of almost 20, 25 tons per day on quarter.

And this 90,000 spindles of mélange plus gray yarn, that would -- what would be the -- say, on optimum basis, what would be the output?

I mean the total output of this would be to the extent of 50 plus 20...

25 tons.

It will be 75 tons per day. And the dye house would be 25 tons per day, but you would be also, we would be doing some [ jobs ] for the initial time?

Yes. That could be a possibility.

Okay. And this plant would be commissioned by end of FY '25, right?

That is what being -- and we said. Yes.

Okay. So what would be the spend in this year FY '23 for this plant?

FY '23 in this plant, we envisage a spend of almost INR 100 crores including land.

INR 100 crores, including land. So FY '24 and '25 would be the big chunk of the investments.

This is a yes.

Sure. Is there any state incentive to set up in [ Jammu & Kashmir ]?

Yes, there is.

Can you...

Yes. As per the policy, 300% of the eligible plant and machinery amount, GSP in plant would be exempt for 10 years.

For 10 years, which will be leasing years.

Yes.

Okay. So in terms of incentives in amount, approximate amount, how much it would be?