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

Ladies and gentlemen, good day, and welcome to Sutlej Textiles and Industries Limited Q3 and 9M 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 , Chief Financial Officer and whole-time Director. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and welcome to the earnings conference call for Sutlej Textiles and Industries for the third quarter and 9 months ended 31st December 2022. I hope all of you and your families are in good health. Joining me on the call today is Mr. Updeep Singh Chatrath, President and CEO of Sutlej Textile Industries Limited and Stellar Advisor of our Investor Relationship team. We have already uploaded the investor presentation and hope everyone has had an opportunity to go through the same. Now let me take you through the financial highlights. After which, I'll request to Updeepji to run you through the industry and business highlights for the quarter ended 31st December 2022. As I said, let me state that the operating environment for our sector like many others, continues to remain challenging, weakening sentiment in the large economies on the back of inflationary pressure is causing bars for textiles and creating temporary imbalance in the value chain. In the face of these challenges, at Sutlej our expanding product portfolio, multi-market operations, fungible manufacturing and long-standing customers have ensured that we continue to put encouraging results. I would like to highlight that last couple of years have been quite ironic for the textile sector. While FY '22 was a phenomenal year for the sector with companies reporting robust results. FY '22 has been a far challenging year with volatility in input costs made the demand and the comparison with corresponding previous year looks more magnified due to higher base effect. Now coming to the income statement. Our consolidated proclaimed [indiscernible] FY '23 came in at [ INR 670 crores ] down by 19% on a year-on-year basis. The drop in sales was witnessed in both domestic and export market. For the 9 months ended 31st December 2022, the consolidated sales were up by 6% to INR 2,349 crores, led by realization and growth in both domestic and export markets. Gross profit for the quarter was down by 21% at INR 305 crores on a year-on-year basis. [indiscernible] the 9 months ended December 2022; the gross margins witnessed improvement of 6% on a year-on-year basis at INR 1,147 crores. For Q3 FY '23, our EBITDA stood at INR 21 crores, that translated into an EBITDA margin of 3.12% as compared to INR 99 crores in Q3 FY '22. At the net profit level, the company reported a loss of INR 16 crores for Q3 FY '23 as against profit of INR 37 crores responding previous quarter. On the balance sheet side, we have been consistently trying to maintain our debt-to-equity ratio. Currently, our debt-to-equity ratio is 0.72. During the 9 months, our consolidated date has reduced by INR 125 crores to INR 818 crores. Total term loan repayment for '23 are around INR 125 crores, of which we have already repaid around INR 103 crores till December 2022. The balance will be paid in Q4 FY '23. That's all from my side. I would now request to Updeepji to share the business outlook and industry scenario. And then we can open the floor for the question-and-answer session.

Thank you, Rajibji, and good afternoon to ladies and gentlemen, and thanks a lot for us on this earnings call today for Sutlej Textiles Industries Limited. Between this call and the last call, much change in business environment in general and the textile industry factor in particular. After the wind first 2 quarters, textile industry faced headwinds riding on uncertain political situation, which resulted in volatility in raw material prices. On demand side, there had been pressure and it still is on, especially from high consumption market of U.S.A. and Europe due to recessionary trends. We now live in an environment of inflation giving recession. Consequent to all this, as I mentioned about that is efficient recessionary trends in U.S.A. and Europe and unprecedented volatile raw material prices, uncertainties have resulted in. This triggered low consumer confidence and a wait-and-watch approach by the buyers who in turn kept and extend account at a lower test in 22 -- calendar year '22, especially in the second half. China, owing to its highly factoring geopolitical ships and productions for diversification and supply sources by leading brand retailers, cited its shares to... [Technical Difficulty]

Ladies and gentlemen, please stay connected while I try to reconnect the management. The management line has been disconnected. Ladies and gentlemen, thank you for your patience management has been connected. Over to you, sir.

So in India, textile and the exports declined in the second half and likely to be about 8% to 10% lower in '22 calendar as compared to '21, with revenue and margins for -- I mean, started declining in Q2 of '23. And I think they are coming -- they came further down in Q3. The macro headwinds of inflationary and cost pressures high and uncompetitive prices and volatility in the raw material prices and resistance from the downstream companies, the recessionary concerned in the key markets have resulted in the contraction of almost about 11% to 11.5% in India's total T&A exports during the period April to December '22. Share of textiles and apparel for the total merchandise exports from India declined to 7.93% during April to December '22 from 9.78% in the previous year. Prices of cotton yarn have contracted and the peak levels -- from the peak levels of May '22. They continue to be around 15% to 20% higher -- still higher than the past 5-year average and likely to keep moderating in the coming months. The overall impact is likely to be moderation of profitability and revenues of spinners as happened in Q3 and may continue forwarding the quarter. In terms of outlook, we still remain positive with these temporary disruptions and should -- as these temporary disruptions should get resolved. The comment is also anything happened in terms of -- which is going to the long term in helping us to, I mean, reduce export risk. And one of the steps this is in signing of FDA... [Technical Difficulty]

I'm sorry. So we are not able to hear you. Ladies and gentlemen, please. Ladies and gentlemen, thank you for your patience. The management line has been connected. Over to you, sir.

Thank you. And I'm sorry, there was some line disturbance. So coming to Sutlej, as a multi-market diversified product company, our capacity utilization was not much impacted as the overall industry in spinning. While our inventory positions are currently higher than planned, we are constantly in touch with our distribution channels and customers and are confident to pick up sales and rationalization of inventory in the coming quarters. For our home textile division, we continue to focus on bringing in fresh orders. Our biggest strength continues to be our fungible manufacturing facilities that are not only able to cater to domestic and export markets but are also able to process and offer interchangeability between the cotton and manmade fiber. This diverse set of raw materials, we believe helps us to derisk our raw material costs as well. We believe that all these positives going for us, Sutlej is well placed to continue its strong performance and add value to stakeholders. I now open the house for question and answers, which we'll be very pleased to answer. Thank you so much.

[Operator Instructions] We have the first question from the line of Amit Agarwal.

Sir, I have 2 questions. Sir, one question is regarding yarn prices. Since China is opening up after COVID for the last 15 days, so do we think it will affect yarn prices around the world? And my second question is resulting to a debt level. Since the issues expansion coming up from the next 2, 3 years. But our earnings per annum are not -- they're there that they can fund the whole project. So do you think debt levels will increase from here in the next 2, 3 years, since the market around the world [indiscernible] because of the high [indiscernible] sales. What is your opinion on both the cases.

To answer your first question because your first question was very, very clear to me. That is regarding, you say that the opening up of China the pricing of yarn, how this would go? See, Mr. Amit Agarwal, thank you very much for this question. See, with the opening up of China, we do see that the prices of fiber -- today if you look at the prices of fiber, the delta between the raw material to the fiber is very low. And with the opening up of Chinese market after the holidays, we feel that this might helped to increase the demand as well. So as such, we see that the yarn prices, which are at present in the international market may not be too much impacted. There's a small impact but not that much. So we don't see much facts from that.

Okay. Sir, my other question is regarding since we've a [indiscernible] expansion coming up in the next 2, 3 years. That is around INR 900 crores projects coming up but per annum earnings are not that much. So I think our debt levels will increase in the next 2, 3 years from the present level?

So what I understood from the question is that you want to know that whether that debt level is going to increase in the next 2 to 3 years, right?

Yes. Because we have expression around about INR 900 crore project coming up.

So yes, the project is going to come up. Obviously, for that particular project that countdown will come into the books. But overall, operational working capital will be still because this project will also to come to a commercialization, it will take 2 years. So the working capital level will be similar until that point of time. Yes, terms will come into the books. That's for sure.

So the total debt that will be increased from the current level, right? That means.

Yes. Total term loan will increase from the current level.

[Operator Instructions] We have the next question from the line of Rahil Shah, an individual investor.

Just wanted your outlook in terms of percentage wise, how do you see the revenue growth happening for the next quarter as well as for the next year and even your EBITDA margins, which are -- which had gone quite low. So if you could provide a certain number you are in mind, which you will be able to achieve?

You see -- since the market is very, very volatile in terms of the raw material as well, and there's some pressure on demand. We still feel that in the coming quarter, we should be able to better the top line as well. And so is -- the -- what do you say, the profitability. But it's very difficult to predict any number today. We all know the volatility in all raw materials and uncertainty on the geopolitical situation. To commit any number or to predict a number, it will be very, very difficult for us, even for the next 1 or 2 quarters, what we talk of a year. But we feel that this is a cycle, and it will take some time to stabilize. I think 23% towards the second half should be good. That is my personal assessment.

[Operator Instructions] We have the next question from the line of Akshitha Anchan, an individual investor.

So I have a couple of questions. My first question is on the cotton production. It is lower than it was expected for this floor. So will this have any impact on the cotton prices? Or will it sustain from these levels?

And your second question?

So my second question is the current situation that is in Pakistan. So will that help India in any means? Is India able of delivering it to that extent from export point of view?

Yes. So thanks, Akshitha, for the questions. First, coming on the cotton production. We see that the cotton production when we started the season, it was estimated by various agencies to the extent of almost 350 to 355 lakh bales, which now one of the agencies has estimated a production of almost 330.5 lakh bales. With this and some other trade quarters are still expecting a crop of 350 lakh bales. With this production level, I think the cotton prices should be stabilizing somewhere in the range -- they could be range bound as these are today. We cannot expect the cotton prices to go to a level what these were, say, in the year '21. But we feel that they should be fairly -- they should be fairly stable in the 16s in -- so in terms with these cotton production, what we have today. Because internationally also, we see that in the U.S. also, the cotton production is going to be almost 14 million bales instead of 17 million bales. So internationally also, there is a pressure on the cotton prices. A pressure in sense that they should be a little higher and the problem is not the higher or lower, the problem is the volatility in the cotton prices. And with the uncertainty in demand and macroeconomic sectors, the ICE cotton futures have remained rain-bound with increased volatility. The cotton futures if you recall, declined sharply from the highs of [indiscernible] 155.93 on 4th of May '22 to the lowest of [indiscernible] 72 on 1st of November 2, but recovered. And today, we stay at almost $85.61 per pound, basis March '23 as a month. So I feel that these prices would remain rain bound to firm. Now the second question was on about Pakistan. You see with the situation in Pakistan -- I mean, Pakistan is now also importing a lot of cotton because their crops were destroyed as well. And what the situation is, I think from India, we can take some advantage in terms of some of the home textiles and also the cotton coarser count because Pakistan has been producing -- building on the coarser counts. So I think India should stand to gain some out of this and let us hope for the best.

We have the next question from the line of Vivek Mehta, an individual investor. .

So my first question is with the freight rates in our --, will it have an impact on demand division?

See, with our freight rates coming down, for example, in U.S. market also, for example, that's one of the biggest consumption centers. The freight rates coming down, the overall prices, yes, would come down. But at the same time, the specialty trends. I mean the overall demand being less I think there will be some sort of rationalization, but at the same time, they would trade off. So the freight rate coming down may not impact that much because of the reducing demand or the pressure on the demand side. But definitely, it has a little positive effect.

Okay, sir. Sir, my second question is, as the China opening up, how we'll shape up for economic on external prospective?

I think Mr. Vivek Mehta, with the China opening up, we feel that, I mean there would be a better prospect in terms of -- mainly the velvet fiber prices, if they can -- I mean, a little bit sustained and they increase the prices. I think overall, this would have a little positive impact in the overall scheme of things for the textile industry as well.

[Operator Instructions] The next question is from the line of Riddhesh Gandhi from Discovery Capital.

If you could just outline over the last 2, 3 quarters and including now, how have spread been both on the cotton side and the MMF side?

Spread on the cotton side and the...

And the MMF side.

So I would say, over the last one quarter, we have seen a lot of pressure on both the spreads. On the bottom side also, the spread has -- I mean, today, we see in our segment because we are not into the gray yarn, we are into dyed mélange yarn. The spread has been to the extent of almost, I would say, in the region of -- in the vicinity of 190. And in case of synthetic, it had been in the vicinity of 70 to 75.

Okay. And how much -- so if you can let us know, for example, in Q2, how the spread was, in Q3 how the spread was, and [indiscernible]

Q2, the spread was in the vicinity of -- in case of quarter in vicinity of 120, 125, and in synthetic I think it was in the range of 95 to -- 90 to 95.

Got it. And in Q3 -- how would we to look it in the Q3, what was the range size?

Q3, this was down to almost 85, 90, and 55, 60, respectively, in that range because there is a wide range of products so...

Yes. Right now, how much would it be in the...

We are almost the same, a little bit higher, a little bit of higher.

Got it. And so effectively, from what I understand on the -- so some amount of that cotton spread squeeze was effectively because of the Indian prices being higher than international, that has been repaid. But the rest of it and the reason is it continuing is because the demand is lower.

The majority of the reason is the demand in our sector, in our type of products. It is basically the demand at our stores or I would say, the consumer demand. There is a recessionary trend and U.S. and Europe are the major markets. So it is basically the -- I mean, I would say the consumer demand, which has impacted the spread and also because of the falling prices of the raw material and the volatile prices are there. This has impacted the overall spread across over the quarter.

Got it. And then if we were to look at, let's say -- I mean, look, at the end of the day, this is up to an extent commodity given how spreads have been volatile. But if we were to look at, let's say, a normalized spread, what is it like normalize is [indiscernible] that we should be looking out.

I would say that normalized spread for cotton for our size of product should be in the range of 140 to 130 around that. And in case of synthetic in our product category could be in the range of about 90 to 95, something like that.

Got it. So you're saying effectively -- so if you would look at it in a larger delta in terms of the MMF, in terms of like right now, we're at 65, but you're saying it should have normalized by 95, so you said...

I am depending on, of course, the product categories, for example, in some season we get the coarser count, in some season we can finer count. So yes, you are right. I mean averagely that.

So you have pressure right now on MMF as opposed to actually cotton, is it? .

No, cotton, there is no demand. So we have converted some spindle to MMF.

Okay. Then cotton is demand issue and MMF demand is an issue, spread [indiscernible].

But that is as on today. So tomorrow could be different.

Got it. Got it. But how -- is this the volatility like I mean, almost sort of actually weekly that we are seeing huge differences or is reasonably steady right now. .

For example, say, one way the crude price is such, this impacts your synthetic all the more. So that [indiscernible]

You have some inventory hits also in Q3, right, given the fact has come off [indiscernible]

Inventory hit in Q3.

Inventory hit. Yes.

So can you quantify what the extent of the inventory hit is?

I think our CFO can take it offline. I don't have the exact figure right now with me.

Okay, sure. Sure, sure. And so just to get your own perspective where you will effectively think we will see this normalize when the orders for, let's say, the governments and home textile players, et cetera, started normalizing, that when is demand will come back effectively the way you're looking at it.

That is what I feel so, but when it would be, I'm not in a position to comment on that because it will be very difficult. But I foresee that at least a quarter or so would take it depending on the geopolitical situation. .

And because of all of the pressure per se, is there -- are there other mills closing or not really?

We saw in last quarter or so, I mean, certain percentage of spindle being closed. But I -- luckily, we did not need to -- I mean, we never did that. So we have been utilizing our capacity to almost 94% or so as being done in the dyed yarns.

[Operator Instructions] The next question is from the line of Niraj Mansingka from White Pine Investment Management Private Ltd.

A few questions. One, what is the normalized EBITDA or your normalized EBITDA margins for $0.90, $0.95 per synthetic, how much EBITDA and this growth can you do because of that?

Normalized EBITDA margin for [indiscernible]