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

Ladies and gentlemen, good day, and welcome to Sutlej Textiles and Industries Limited Q2 and H1 FY '23 Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rajib Mukhopadhyay, CFO and Whole Time Director. Thank you, and over to you, sir.

Thank you very much. Good afternoon, everyone, and welcome to the earnings conference call for Sutlej Textiles and Industries for the second quarter and half year ended 30th September 2020. I hope all of you and your families are in good health. Joining me on the call today is Mr. Updeep Singh, President and CEO of Sutlej Textiles and Industries Limited; and Stellar IR Advisors, our Investor Relationship team. We have already uploaded the investor presentation, and I hope everyone has had an opportunity to go through the same. I will take you through the financial highlights, after which I request Updeep to run you through the industry and business highlights for the quarter ended 30 September 2023. As we all know that the Indian economy like most countries in the world was impacted by the geopolitical tensions, high inflationary environment, key commodity prices, which had peaked up has started declining very recently. As a result, industry witnessed subdued demand during the quarter, despite all challenges, our performance has remained resilient due to our diversified portfolio, multimarket operations, strong relationships with our customers. Coming to the income statement. Our consolidated total income for the quarter was at INR 826 crores, which is a jump of 4% as against INR 798 crores for the corresponding quarter last year. That is Q2 FY'22. The increase in total income was on account of realization growth mainly. Our consolidated EBITDA stood at INR 94 crores, which was lower by 12% compared to the corresponding previous quarter. EBITDA margins were at 11.39%, which is 199 basis points lower than Q2 FY '22, where it was 13.38% or INR 107 crores. The margins were impacted due to increase in raw material prices during the quarter. On the profitability side, our consolidated PAT is INR 31 crores as against INR 42 crores in Q2 FY'22, which is lower by 25% year-on-year basis. I would like to highlight that despite being a challenging quarter, our capacity utilization, especially for the yarn business, which forms a majority of our sales have been at optimal levels at around 95% during Q2. As we had 94% in the corresponding previous quarter. On the balance sheet side, the total debt actually reduced by about INR 143 crores to INR 799 crores as of September 2022 as compared to March '22. Also, as you are aware, we have been consistently reducing our debt-to-equity ratio and currently, which is at 0.7x as of September 22 compared to 0.86x in March '22. That's all from my side. I now request Mr. Updeep to share the business outlook and industry scenario. And then we can open the floor for the question-and-answer session. Thank you.

Thank you, Rajib, and a very good afternoon, ladies and gentlemen, and thank you all for joining this call. At the outset, if I have to give you the industry scenario, the scenario seems to me a little bit the nature of the operating environment as it is reflected in the vulnerability of external shocks and unforeseen developments. As Rajib mentioned, that there is a declining trend on the raw material prices and the commodities. And as a result, there is a volatility in those. This leads to a little bit of headwinds in the textile sector, when -- at the consumer level, there is anxiety and the demand is less, which is impacting us and manufacturing sector as well. And there is general perception that in the quarter FY '23, the sales have been less and the Indian textile companies as the raw cotton and yarn prices remained higher and global retailers faced inventory constraints compelling them to cut orders, thereby putting pressure on the volume growth. Now at this stage, Indian cotton prices remaining still more expensive than its global peers, high-priced inventories of cotton fiber in the mill inability of textile players to pass on the higher cost to the customers across the value chain and above all, our muted export demand and the current global economic challenges have further confounded the situation. There has been impact on the utilization in the sector -- in the textile sector with -- which is putting pressure on the yarn, fabric, garment and home textile segments. However, going forward, as the cotton prices ease with increased new seasons arrival of cotton in the market yard, cost starting a downhill journey to appropriate levels, making Indian textile companies competitive in the world markets. Significant reduction in inventories of big retailers during the festive season or through various discounts, thereby boosting Indian demand and weathering of currency headwinds. The second half of financial year '23 may be a period of recovery. The government is also making all of efforts to strengthen the textile sector, engage with our stakeholders in a holistic manner to achieve the textile target -- textile exports target of USD 100 billion in the next 5 to 6 years, and scale at the total value of domestic and international trade up to almost USD 250 billion to USD 300 billion. At Sutlej, our performance of the quarter has been quite resilient as Rajib informed. And this is due to the agility in our business model and our flexibility to use various fiber. That is the cotton and interchangeability to cotton to manmade fiber. Our production capacity as a result are flexible to cater to various products and markets as for demand. Moreover, as you would be aware that we have a very diversified raw field base, as I said, for instance, this post quarter acrylic and our reliance on particular raw material is less. This helps us to be better equip to handle volatility in the prices and any particular raw material. I think any more commercial industry development and raw material and demand scenario, I can give you in the question-answer session. And I know leave it to -- the house open for question-answer session.

[Operator Instructions] We have a first question from the line of Riddhesh Gandhi from Discovery Capital.

Just to understand how the Indian profit now. Has it adjusted to the same level as international [ texty ] prices? Or is going to still take a few weeks for the crop to come?

In my opinion -- listen Mr. Riddhesh Gandhi. Thank you for asking this good question, Riddhesh. I mean, at the moment, if I look at with the arrivals coming in and the new crop estimates ranging anywhere between 351 to 365 depending on the agencies, who is giving this estimate. I think readjustment of prices and the base level is yet to come as the seasons picks up and more arrivals are there. I think this will come a little down, and it will be better adjusted from a certain level.

Right now, if we debate, my understanding is the price is about 65,000 actually it will be a timings on [indiscernible]?

Pardon me? Yes. At the moment, the prices are raising it 65,000 to 66,000, yes.

So -- and how much would be equivalent international prices.

International prices, if we convert to -- on today's New York, I think it is about 0.84. And if you convert this to, it comes to almost about 70,000-plus. So Indian prices -- sorry, about 56,000, 57,000. So Indian prices still remain at about 17% high.

And this year impact, what is the reason for the premium? Is this because the freight costs are high to the -- for imported product or is there some restriction on imports before I understand why are the prices are being -- equivalent when your matching?

Why the prices are not matching with the international?

Yes. I mean is there any restrictions which are there, is there some of the duty, which is there before I [indiscernible] that.

Yes, there is 11% duty as of now, is anything which is shipped today will attract 10% to 11% duty. So that is one of the reasons that Indian prices still are a little higher. And if you look at the crop last year, in the last season, the cost was much less. So today, what we are getting, we are getting the estimates.

So I said, input are...

Yes.

Right now, the alternatives, people are enforcing the yarn or the fabric between disparity prices?

I think so that fabric is being imported, but not too much on the cotton side.

Understood. Understood. So we need to hold on for this sort of normalization. So historically, the pricing of international and India, are you really -- are usually tariff, is it?

Yes. But I'm talking what happens -- hopefully happen either way, either it happens in India. Normally, it should be a clarity, but keeping in new various conditions internationally as well, if you look at last year, because of the drought situation in U.S., the international prices were -- did touch about 115-plus, which today are in the range of $0.83, $0.84 per pound. So I think something or others because of the weather conditions or the environmental condition of the nature, there is something which is happening. And so there is a disparity between the prices either sometimes Indian is higher and mostly now we have seen for the 2 years, Indian prices have been higher.

Understood. Got it. And on the MMF side of thing, how are -- how as far as looking debt, given what we're hearing is that there's a certain amount of import happening from China because of the slowdown there, how should we look in the MMF side?

See, on MMF, the total outlook is that it is stable to bearish. And it all would depend on the movement of crude, crude being volatile. And if crude go -- I mean, [indiscernible], we feel that the prices of polyester would remain mostly stable and stable to soft. We don't foresee anything today. I mean, of course, nobody can predict nowadays that these prices are going to rise from here.

But at the prices obviously depend on crude, but how upside looking right now?

Right now, I mean, if I have to summarize this on polyester side and MMF side, it is stable to soft.

And we expect that to continue, or we expect that into the reverse also, how should we resonate on that [indiscernible]?

See, I personally feel that this situation may continue for some time. How long? Even, I do not know.

Is there excess capacity? Or is it -- I mean that's the problem or it just the direct demand slow down as the [indiscernible]?

This is coupled with both the things. One subject to the crude and the melt cost and the other side is the demand. Now if we look at on the demand side, it is a very subdued demand today because of lesser foot fall, inventories, then also retailers also renegotiating the contract because of the dollar movement. So there are so many factors which are all combining together, and this leads to the impression that it is going to be a little softer.

Understood. So then if you were to look at your outlook for the next year per se, is it just too hard to talk about it now, given all the moving part? Or do you guys have an internal view that you are going to share on?

See, I don't see next year too bad because of the quarter, I would say, outlook because of the estimates, what we are getting today and unless some unprecedented weather conditions happen, the cotton drop at the present level of estimate seems to be good. And if -- actually just that happens, I think next year should be better than this year.

We have our next question from the line of Prerna Jhunjhunwala from Elara Capital.

Sir, my first question is on capacity utilization and outlook for near-term, do we see -- still see pressure in the yarn sales given the weak demand in the international market or yarn demand has started picking up?

See, thanks for the question. So I would say on the capacity utilization, as Rajib said that in the last quarter, the quarter on the question, which we are talking about, we have a capacity utilization of almost 95%, and we are entirely yarns. So there is a pressure on the demand as well, especially on the PV yarns and more so on the cotton mélange yarn. So there was a pressure and the pressure still on cotton mélange yarn still remains because retailers are still waiting for cotton to settle down at the fiber stage, and also, they are to replenish their inventories, once these are finished. And with the less foot fall at the stores and the anxiety amongst the consumer, there is a pressure on the demand side as well. And we do expect that going quarter would also see a pressure.

Okay. And what about domestic market? Have you started seeing improvement in the domestic market?

See, domestic market has been under pressure as well because of exports because whatever was exported earlier, that export was under pressure, and this capacity came to domestic market. So I think domestic market is doing better in the sense that it is also able to absorb some of the capacities of exports. So if that goes on for long, the domestic market is also going to come under pressure in the near-term.

Okay. Understood. And sir, if you could give some color on the Green Fibre plant, at what utilization is operating? And how is it helping in managing our costs today?

Very good. So on Green Fibre, I must say that Green Fibre has done well in the quarter. We have achieved good utilization. In fact, [ up 2% ] and in the coming in the last month we were in, we go to almost highest production on per day basis or manage consistently for our average on the monthly average. And our profitability also on the Green Fibre project has been very good. So Green Fibre has done good both in terms of -- if you see the numbers in terms of profitability as well as helping us in the yarn division. So we could -- because most of the fiber goes to our own yarn, and we could improve a little bit on the efficiency at the spinning stage as well and have better control over the raw material. So Green Fibre, I would say, last quarter sales were fairly well.

Okay. Sir, what is the utilization level today of Green Fibre? And how much is consumed internally?

We are making almost 3,700 tonnes per month and against a capacity of 3,600-plus. So -- and almost 95% of this is consumed internally, even a little more as well.

That's perfectly great. And sir, if -- just trying to understand how much ROE, ROCE this plant is adding to your profitability or to your numbers, if you were using virgin fiber against the recycled fiber, what is the delta that you're receiving in the margin, something to understand?

So if you look at this, I tell you, the difference between virgin and green fiber today in a range of INR 12 to INR 15. In certain cases, yes, 15-plus. So the delta and margin addition is one part. Second is the shades. So if we convert off and on, it becomes difficult to get the same shades, out of the virgin as well as recycled. Our die update of recycled is much more than the virgin fiber. So to match the shade, it's not so easy. So we have a threshold, I mean, which keeps on changing as to where we would like to switch from recycled to virgin. Of course, with the virgin fiber, we might be able to improve on the working of the spinning to some extent. However, this adds to some of the other issues on the shade matching. So if you compare on today's prices, I think there is -- in the PV yarn, this would be to the extent of almost INR 7 to INR 8 per kg, which is giving us advantage it is because of green fiber, our recycle fiber.

This is actually very good. Because INR 7 to INR 8 is a very good number to add to profit.

Plus this is a sustainability factor as well. So we, as a company, would like to stick to sustainability factor.

Okay. Understood. And sir, just wanted some clarity on the home textile business also. So you are at capacity of 8.4 million meters. And I wanted to get some color on what utilization they are at? And how is -- where do you see this business over the next 3 to 5 years?

See, the home textile business, as far as loom capacity is concerned, that is what sometimes I say there's a difference in this home textile, [indiscernible] in the living room as compared to bed and bath. Today, we are running at about 80% in terms of the loom capacity. So I would say that home textile business with the traction we are getting on cost service in the [indiscernible]. I do see that this business is going to grow in the next 3 to 5 years. I mean, to a large extent, I can't give you any fixed numbers or percentages, but I think this is a business which we can grow profitably in next 3 to 5 years.

[Operator Instructions] We have a next question from the line of Vikram Vilas Suryavanshi from PhillipCapital India Private Limited.

Congratulations for good performance in challenging times, while most of the players are really struggling to maintain profitability. I just don't -- I think some of the questions already answered, but just to take it forward on home textile, we have seen the recovery in sales, but still, I think profitability is not that much improvement. So what will be the road to profitability improvement in home textile?

Okay. First of all, thank you very much, Vikram, for your kind words. Yes, the team has done well under the circumstances, I would say. And regarding the home textile questions, I would say that -- you are absolutely right that the profitability has improved, but still it is [ impact ]. So in -- what we see as coming forward, or growing the profitability is our first on exports, especially in U.S. and U.K. market, and Middle East because U.S. and U.K. market are the markets, which would be really -- and which are really good on this and also on the cut service. And the good thing is that over the last one quarter where we had launched some more books on the cut service as well, we have seen a very good traction coming in, in cut service business, which is, of course, business is more margin. Of course, it takes time to grow that business. But I feel that we'll be able to take this positive in the next quarters, a few quarters more, we should be able to make it positive.

And what would be the share of export in the home textile for us? And if you can give even share up our Nesterra brand in overall sales broadly?

So I would say the overall, Nesterra today is a little less than 10% or 10%, and export is to the extent of almost 25%, which we intend to grow, so that is why it is a little less.

So export, can we reach to the similar number what we have in yarn like around 40%, 45%, almost half of this?

Yes, definitely, yes. That is a target.

And just to get more sense on the yarn side, typically, we have around 35% like mélange production earlier, but in the view that more demand is shifting to the Polyester Viscose and with the volatility in cotton price, what was the share for us in mélange in Q2? Or is there initial materials shipped in this mélange yarn production?

See, Q2, our production, I mean, mélange yarn was hovering to the extent of almost because one thing I would like to clarify before I see the share. Mélange, when you say mélange yarn, either you are referring to only cotton mélange, that share was much less whereas now we have developed some mélange yarn in polyester with the cotton mélange yarn as well. So if I combine all the mélange together, we still have at the range of sales say of around 40%, 45%.

And cotton mélange yarn is how much?

Cotton mélange was less.

Okay. Hello?

Yes, please?

What would be broadly cotton mélange, approximate number?

Cotton mélange, I would say, 100% cotton mélange was to the extent of almost 26%, 27%.

[Operator Instructions] We have our next question from the line of Aman Madrecha from Augmented Research Private Limited.

Sir, can you please highlight about how has been the polyester year spread in the cotton yarn spreads because what we are hearing from the industry is that at the cotton yarn spread level practically the [indiscernible] are at a breakeven. So can you just highlight in our case, what have been -- what are the spreads currently? And how are we foreseeing that because as the cotton levels -- new cotton levels are coming, and the prices are softening. So any color on that?

Yes. Thank you, Aman, for this question. And I would say that when you are referring to cotton spread and when you said that bills are at breakeven, you might be referring to the cotton gray yarns. So gray yarns, I would add to your statement that may not be at the breakeven at some point of time, the spread was negative. The cotton price was higher, the yarn price was lower at some point of time. Today, the delta -- the spread is almost in cotton yarn say for this cotton, the spread still remains to the stand of INR 40, INR 50, even less. So -- but in our case, being a mélange yarn, our spreads are a little different. So there is a pressure on that. The spread of mélange yarn has been to the extent of almost, I would say, 70, 75 for quite some time. That is why we had to get to some other msélanges in terms of polyester cotton. So that is the spread on the cotton side.

[Operator Instructions] We have a question from the line of Vikram Vilas Suryavanshi from PhillipCapital India Private Limited.

Yes, sir, can you update us on this expansion plan, which is in J&K. How is the progress in terms of land acquisition and orders?

Yes. So Vikram, the plan is like this, that the government of J&K has minuted the minutes of the Asset Committee meeting in which they have allotted the land parcel. We are yet to receive the letter of allotment from them. The minutes of the meeting have been uploaded, and they have -- I think they have asked for any objections, if any from the applicants who had made the DPR. So I think that should be -- we should be able to close it by end of this month later. And the land parcel will be allotted by that time, by end of the month. This is the expectation.

[Operator Instructions] We have our next question from the line of Vivek Mehta, an individual investor.

Sir, I have one question, and this is based on -- can you give you an outlook on demand in U.S. and Europe? And do things look to improve in H2?

See, I'm sorry, I couldn't get your name, please.

Vivek.

Vivek, I mean, I feel personally that in H2, see the part of H2 have already gone. So we are in third quarter. So I seel, if at all, the demand comes in, in a good way within this year, it would be only the latter half of the last quarter. This is what my personal opinion is because of less footfall today and also retailers sort of redouble hitting the contracts and also giving -- I mean, with replenishing their inventories later on and the cotton price is yet to stabilize, I think we'll have to wait for a few months before they get there. So H2 may not be very, very good. But I think there will be recovery in the last quarter. This is my personal opinion.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to Mr. Updeep Singh, President and CEO, for closing comments. Over to you, sir.

Ladies and gentlemen, thank you very much for attending this call, and we really feel encouraged by good questions being asked. And the situation being explained. We, as a team, are very resilient and we do see that we'll be able to -- I mean, tied over the situation what the textile industry is facing world-over under the uncertain circumstances. But it is something which is really doable. And we are quite confident that we'll be able to anti over and do well in the coming days. And with all this, I would like to, once again, thank you all, and thank my team across the units and the offices and our customers and all stakeholders for supporting us in doing, I mean, whatever best we could do and whatever best we'll be able to do in the coming quarters. Thank you very much.

Thank you. On behalf of Sutlej Textiles and Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.