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 '24 Earnings Conference Call. From the management panel, we have the question today, Mr. S. K. Khandelia, Adviser to Executive Chairman, Sutlej Textiles and Industries Limited; and Mr. Rajib Mukherjee, Whole-time Director and CFO. [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. Good afternoon, everyone, and welcome to the earnings conference call for Sutlej Textiles and Industries Limited for the third quarter and 9 months of FY '24. I trust that you are all doing well. With me on the call today, Mr. S. K. Khandelia, Adviser to the Executive Chairman 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. Let me start the call by giving you the financial highlights of the quarter and 9 months gone by, after which, Khandelia Ji will fill you in with the business highlights as well as the industry highlights. For quarter Q3 FY '24, our consolidated total income came at INR 612 crores as against INR 670 crores in Q3 FY '23, mainly on the back of continued sluggish demand of the textile industry in both export and as well as domestic market. In Q3 FY '24, although volumes increased by 10% year-on-year realization dropped by 17% during the same period. On a Q-o-Q basis, total income decreased by 17%, mainly on record of lower volume. In the preceding quarter, total income was higher, mainly on account of the liquidation of inventory. EBITDA loss for the quarter is INR 1 crore as against INR 30 crores loss in the previous quarter and INR 21 crores profit corresponding the previous quarter last year, that is Q3 FY '23. For 9 months ended FY '24, our consolidated total income stood at INR 2,062 crores. Gross margin came at 36.6%. EBITDA stood at minus INR 26 crores. As we have been updating you, our efforts at strengthening our balance sheet continues. During the quarter, we have reduced our total debt by INR 68 crores to INR 724 crores as against INR 792 crores as on 30th of September 2023 on a stand-alone basis. Our current debt-to-equity ratio continues to stay below 1 and currently stands at 0.76. During 9 months, we reduced our working capital debt by INR 172 crores. And at the same period, working capital has reduced by INR 304 crores. Those were my opening remarks. I will now request Khandelia Ji to please take it forward with the business and industry updates. Sir?

Good afternoon, everyone. Thank you, Rajib, and thank you all for joining on this conference call. The year has been challenging for the entire textile industry in general and the spinning industry in particular due to ongoing geopolitical crisis, a reduction in discretionary spending on account of high inflation, et cetera. This resulted in supply outstripping demand and that has led to fall in realization rates and margins in exports as well as in domestic markets. Reduced exports of yarn and downstream products like garment, et cetera, put further pressure on domestic markets, dragging down the realization rates and margins. Rising imports from China of knitted and woven fabrics has been another challenge. In short, Q3 has been more challenging than Q2 and against general -- and this was against the general market expectations. I'm happy to say that despite increased challenges in Q3, we could improve our performance from Q2 by fine tuning our operations and product mix as per evolving market situation. So challenges are still persisting. The global economy after a tough couple of quarters, is now seeing moderating inflation and a speedy growth, which is likely to help consumption, as discretionary income should start increasing. With a greater than expected resilience in the United States and several large emerging markets and developing economies, we are seeing some green shoots of recovery. The Indian growth story continues to gather momentum, and we are likely to see some growth in the domestic market as well. With a strong foundation and agile organization, we remain focused on adapting to changing dynamics of markets and customer needs. We are hoping to deliver better performance in forthcoming quarters and we are cautiously optimistic. Thank you. Now you can please ask your questions.

[Operator Instructions] The first question is from the line of [ Mr. Amit Agarwal ] from [ Leeway Investments ].

My question is regarding -- we have a Red Sea problem. So is it difficult to export right now? And will it hurt our export margins? What is the situation in -- at present?

Exports in Q3 were down. And now we are seeing little improvements in January and some time a little bit on February. But in Q3, exports were down as compared to Q2 and realizations and margins were also very much low as -- in Q3 as compared to Q3 and as compared to corresponding period last year also. But now we are seeing a little improvement in export demand, but margins are still under pressure because Red Sea crises are there and other challenges are there.

And my second question is regarding debt reduction. So we have debt reduction, is it because we are holding less inventory or we have postponed our expansion plans?

So as far as the debt reduction concerned, it is actually directly proportional to 2 factors: one is the term loan reduction for the repayment. And the second factor is working capital reduction due to the reduction of the working capital level. So these are the 2 factors contributed to the reduction level.

Sir, have we reduced the total inventory position also?

Yes, of course. Of course, if you compare with March position, we have reduced almost by INR 300 crores. The working capital has reduced by INR 300 crores. If you compare with just last quarter ending position, then the reduction will be around INR 100 crores.

And the last question is regarding -- now we are moving domestic brand from wholesale to retail. So do we intend to spend more on marketing this year, in next 12 months?

You see, the retail -- marketing of the retail brand takes a little time. So it is -- month after month, it is a little bit progressing, and we are very hopeful that going forward, it will give good results, but it will take some time before it actually start delivering better results, but it is in the course.

So do we intend to spend more on marketing this year?

Sorry?

Like advertisement and -- advertisement and marketing of the new brand?

See, it is proportionate and it depends upon the requirement. Of course, we are continuously doing something on the brand building and the advertisement. We are doing continuously.

We'll move on to the next question, that is from the line of Prerna Jhunjhunwala from Elara Capital.

Sir, just wanted to understand the scenario in branded yarn business. We observed that most of the -- all the branded yarn companies are facing challenges and having a tough time creating profits over the last 3 to 4 quarters now. So could you highlight what are the key challenges? And what can be done to improve the same?

You see, so far, the branding of yarn is concerned, I think there are not any, except the company's name, there are no specific brands like that. But the sales to the brands, like Raymond, Siyaram, Donear, or international brands, all the garment manufactures who are the brands. So the problem has been the overall demand in the system has been low, so the sale of the garments, for example, by the international brands in the international markets. Similarly, sale of the fabrics by the, say, Siyaram, Raymond, and such type of things in Indian markets has been poor because the discretionary spending was at the back seat. So that was the reason since the demand of the garments and other things are not there, the demand of yarn is also impacted. Because ultimately it is the garments which drives the entire value chain. So since it was not there. But we hope because destocking was taking place. Secondly, everybody in the entire pipeline or say whether the yarn or whether the garments or fabrics, because the prices have been continuously coming down, everybody has lost money, degree may be different. So nobody wants to have the stocks because they lost heavily only in the matter of stocks. And now they feel that everything is readily available. So pipeline is practically empty, and everybody is buying to the extent they want. So until unless demand comes to the normal level and pipeline also, because the rates are still more or less continuously falling due to one reason or the other because raw material rates have also been falling and yarn rates falls ahead of their raw material rates, and they were falling disproportionately. But hopefully, I think this trend should reverse slowly and gradually going forward. And that should start to encourage the downstream players to buy again, and we hope that gradually, things should start improving. As we are seeing a little improvement in demand in export and export brands. And in case of other, there are different type of yarns which we manufacture, as you know, we are mainly in the dyed yarn business where we have all types of dyed yarn. So we are seeing some improvement in demand, particularly from the brands.

Okay. And sir, if you could help us in understanding if QCO implementation is a benefit to us or not because we understand that QCO has been applied on polyester yarn as well? I mean, I may be wrong, if you can correct me on that as well.

Yes. Yes. QCO is there in Polyester and polyester yarn. But actually, what was happening, it was not only the yarn, major was of the fabrics from China. And that is still happening and that is creating a big problem in Indian markets. You see Bhilwara, Ludhiana, these are the markets badly impacted, where a lot of Chinese fabrics are coming from directly or through other countries. So that is happening. So for polyester QCO was -- it was already there. It has happened, I think, a year or back so. So polyester imports are practically 0. And in case of yarn, of course, the yarn import was less, but the fabric which was there, it is still continuing and rather quantity has increased. Anybody who was increasing -- importing yarn little bit, they will now be taking fabrics. So that is the situation.

Okay. Understood, sir. So sir, how do we see, are we coming back to profit? How long it may it? Or it may take a lot of time? Just trying...

You see -- we are making required changes in the product mix, as I mentioned, that we keep on fine tuning our operations as well as our offerings, product offerings as per the evolving situation. So you see the challenges has been there, challenges will keep on coming, but we have to fine-tune our business model. But this time, it was a worldwide recession, particularly challenges, inflationary pressure. Like in U.S., you have never seen such level of high interest rate, high level of inflation, historically high in 40 years. So those were the things. Secondly, after the post pandemic, demand was very robust. So a lot of new capacities came in and that created excess capacity in India in all the sectors. So that are the challenges, but we know that how to handle these challenges. But of course, the improvement will be gradual and it will not be overnight. But we are looking and we are confident that gradually, we will see the challenges. And in the course of time, we will come back to original -- our original position once the market also come back to that level, even if there will be a little variation, we are sure that we will come back to our original level.

[Operator Instructions] The next question is from the line of Aditya Vora from Share India.

So just had a couple of questions. One is on the demand scenario. I'm assuming that the festive season wasn't great and it is reflected in the number. But any view about how the wedding season is because we still have January and February for the wedding season for this financial year? So how will the wedding season shaping out? Is it becoming better than what we anticipated?

You see, Q3, as is already over, as you said that in January, February, we are already sometime, today, in mid of January and only a little bit time is left with us. So basically, there has been improvement in order flow in the -- from the last week of December. And basically, it is an order which starts first and then the margins a little bit improved going forward. So Q4, we expect to be better than Q3. But exactly how better it will be, it is difficult to quantify because it's a very dynamic situation. Every day, raw material prices, yarn prices, demand prices, but the level the way in which order flow is happening, particularly in export, and particularly, say, in such we have different segments, cotton, Cotton Melange, synthetic dyed. So some segments have the started moving. So synthetic dyed is still not moving in domestic market. Of course, in export, there has been some improvement. So we hope that the Q4 will be better than Q3.

Okay, sure. And since you have had so much of experience, according to where you would be in the cycle? Are we kind of at the bottom of the cycle and we see our grades on ahead or where are we in the cycle? Just kind of -- if you can tell me qualitatively.

I personally feel and we hope that we are at the bottom of the cycle.

Right, right. So probably from FY '25...

But the recovery will be slow and gradual.

Right. Okay. Sir, one last question not much related to Sutlej Textiles, but just wanted your perspective is that when I was looking at this home textile companies, most of these companies are recording good volume growth. And that they have seen the entire restocking happening in the U.S. market. So is that kind of a precursor to companies like us who are spinning company?

Yes. You see, on textile after pandemic, people have been spending a lot of money in home textile because of work-from-home and other reasons. And earlier, you see, the home textile has gone down earlier, and they have come up earlier. You see the yarn business has gone down later after home textile. So this is a simple type of things which happens. And in case in our home textile, as you said, we are only in curtains and upholstery. And there, our exports has definitely improved. But in domestic market, we have slowed down because of the -- you see, we have changed our policy little bit regarding the payment system and others. We will sell in domestic to the extent of the receivables and other things keeping under control. And our cut service is also gradually improving. But naturally in retail business, the growth is slow initially and then take off. So this is the position in home textile, say, linen, rugs and all those types of things, growth has been very good. And, say, competition is also less because of China One Plus (sic) [ China Plus One ] policy also, and Pakistan, which used to be a big exporter, they are in little trouble. So all those benefits have been reaped by the companies, home textile players like Welspun, Indo Count and all those types. And they were already well established and integrated. So integrated players in home textile are doing well.

We'll move to the next question, that is from the line of Nish Shah from Stellar.

Sir, my first question is regarding capacity utilization. In Q3, our capacity utilization was 79%, which is 6% down Q-o-Q and 16% down as compared to Y-o-Y last year. So why it is so?

Yes, Nish, it was so because, as I mentioned in my opening remarks, that we have been fine-tuning our production and utilization as per the evolving demand and market situation. Say, when we found that some of the capacities which we were running, even we are not able to cover even variable expenses, so we decided that there is no fun in running those type of capacities where we are not able to cover even our variable expenses. And since as I mentioned, Q3 was more challenging than the Q2 because the geopolitical tensions increased, and say, impact of Israel-Hamas war was fully blown in Q3 initially and then gradually it tapered out. And demand was less in India also and demand-wise very less in export. You see our exports has gone down very much in Q3. So as per the market conditions, we reduced the spindles. But now the capacity utilization is better at this point of time.

Okay. Okay, sir. And sir, what levels can we expect for FY '25?

FY '25, I hope that we should be at the normal level.

Okay. And sir, next question is regarding Home Textile segment. Our revenue for Home Textile segment in -- as compared to Q2 is almost negligible growth. Like in Q2, we did INR 50 crores, and in Q3 also, we did almost INR 50.76 crores. So what is the reason behind this almost negligible growth? And what do we expect in the future for this segment?

Yes. As I mentioned in my previous question's replying, if you have heard that, that our revenue has gone down only in domestic segment and that is also not in cut service, but in the domestic wholesale sector. Because there we have intentionally reduced the volume at this point of time without because there were certain overdue payments. So were trying to collect those payments. And then again, we will start increasing our volume in domestic market. That was the reason, nothing else.

The next question is from the line of Sumeet Bhambri from Standard Chartered Bank.

Sir, 1 question on your debt levels. What is your target debt-to-equity level that you're working towards? You said you're at 0.79, correct?

Sir, if you tell me what is the target level? We are -- look, it will vary because the working capital position varies depending on the cotton procurement cycle. So it will be -- you cannot uniformize throughout the year for an ideal number. But the level whatever we are in, probably, it will be marginally up in the time of March ending because the cotton procurement will be higher than now. So ideal number giving for the -- throughout the year will not be right. But broad level, overall, I can say that 0.7 to 0.8, this should be the ideal number of the debit-to-equity you should maintain. That's the way we are targeting.

Okay. So that's your target number that you're working with, right, in that range?

We always try to keep it below 1. But normally, it vary from 0.7, 0.8, something like, even sometimes 0.65 also. But we always try to keep and we have been keeping it much below 1.

Okay. Okay. Because the reason I was asking the question was I'm seeing that consistent trend, right, year-on-year decrease. So is there a long-term plan to sort of continue to keep bringing it down, right, so that interest expense continues to come down and efficiency continues to improve?

Yes, you see. So if the profits are good, it will keep on getting down. So you see that there has been 2 barriers: one was the pandemic year and this year has been there. So whatever good thing which happened earlier, but our target is always, irrespective of anything, we have always to keep it below 1. So it will keep on going down from here in the next year, say, if everything goes well, next year it should go down.

Okay. Okay. Got it. And one more -- sorry?

Yes, please?

And I had 1 more question, right, on your -- on the -- you were talking about the home furnishing segment, right? So we are seeing real estate markets in quite a few sectors -- in quite a few regions is quite strong, right? So are you seeing that translating into higher sales?

Yes. It should. Hopefully, it should translate into good sales, better sales as compared to current sales in next year. This is what I also feel.

Okay. Okay. And finally, I know you were making a question -- you were making a point that -- to one of my colleagues' question was you do expect to get to original levels in 2025 FY. So what are the levels that you're targeting?

So that reply was in relation to the capacity utilization. You see, our capacity utilization with utilizing all the spindles, 100% capacity utilization, which we used to have always. So that was in relation to that. Because the profit and earnings, it all depends upon the market conditions and everything. So utilization level, I expect that next year, we'll be reaching to 100% as we used to. Only this year, our capacity utilization is has been lower.

The next question is from the line of Prerit Choudhary from Green Portfolio.

I have question related to the Home Textile segment. So what would be our current utilization levels for the segment?

You see, current utilization level is maybe about 70%, but that include some job work also, that includes some job work also. So you see this is the market -- overall market has been down, particularly domestic market for curtains and upholstery in some of the segments and in some of the markets. So that's why it was a little down. It was about 70%. And gradually, it should improve next year.

Okay. So I mean, in the presentation, you have mentioned that you are acquiring new customers. And currently, the domestic market being slow. So do we plan to do some expansion in this segment as well in coming years?

Sorry? I could not get you.

So we are acquiring new customers, that's what I'm seeing in the presentation. And with the domestic markets currently through and we are at 70%. So do we plan the CapEx in the medium -- small to medium term?

You see, what we are doing is, we are focusing more on exports. We are focusing more on exports and our exports are improving year-after-year. And so far domestic market is concerned, we have made our policy very clear that we will be selling to -- mainly we sell to the wholesaler. There are 3 segments in our Home Textile, I'll tell you, and another is the job work. First is the exports, second is the domestic market. And third is our cut service. So our exports are growing year-after-year. In domestic market, as I said, that we have intentionally reduced the volumes. And it is tied with the payment terms. If we get the payment in time, then only we are selling, and it is being sold to only wholesalers. Third is the cut service, that is our Nesterra brand. And that we have started 2 years -- 2.5 years back, something like that. And that is they doing well. We are satisfied by its performance. And hopefully, in future, it should be a good sector of our Home Textile business -- a good segment of our Home Textile business because it will be a cut service direct to the consumers through retailers. So we are working on that aggressively. And whatever CapEx will be required for that, that we we'll do, but we have still to work out. But at present, the CapEx requirement is not there.

The next question is from the line of Akshay Kothari from JHP Securities.

So what would be cotton as a percentage of our RMC?

Sorry?

Cotton as a percentage of our raw material cost?

It should be around 45%. I'll give you the exact number.

It should be around 40% to 45%. And exact number will be forwarded to you.

Okay. And sir, what is the export contribution? You were saying that in Q3, we did less of exports. So generally, what is the run rate we do and what was it in Q3?

You see, normally, our exports are about 40%. And our exports were down by 26% as compared to Q2. So now I think, hopefully, there's some better flow of order is there. And hopefully, in this quarter, the exports will be better as compared to Q3. Normally, we export about 35% to 40% of our total production.

In these geographies, do we export majorly?

We export to 70 countries of the world and to developed countries as well as the African countries, Middle East, everywhere -- Russia, Europe. Everywhere we export.

Okay. So we export yarn only?

We manufacture yarn. We -- so far, the home textile is concerned, that is also we are exporting, and that is to the developed countries, U.S. and Europe, U.K. Middle East also.

In one of the other textile company's call, they mentioned that Red Sea crisis did not impact them much because all the developed countries actually do not procure yarn from us. We export the yarn to the likes of only Bangladesh, Vietnam and China. And so Red Sea crisis actually did not impact much to the yarn players.

In our case, it is not like that. In our case, we are exporting because we are not exporting only apparel yarn. We are exporting various types of yarn for different types end use. So maybe home textile, may be for industrial application, maybe for medical application, various type of yarns which we export, and we export to U.S.A. Latin American countries, South African countries, East African countries. So everywhere we are exporting. Middle East, we are exporting. Say, Turkey, our big market for the export of synthetic died yarns. And that is also very much impacted because it also goes through Red Sea. So the impact on the yarn exports has been very severe initially. But now people have started taking the longer route yarn, and they have started paying for the extra cost also.

Okay. And sir, generally, what are the Incoterms in general? Is it FOB or CIF freight cost would impact us?

It depends upon country to country, customer to customer, product to product. We try FOB. But in many times, it is CIF. So 50-50, you can say.

Okay. And sir, lastly, what is our current capacity utilization?

As we mentioned, the current capacity utilization is about 90%.

[Operator Instructions] The next question is from the line of [ Vineet Jain ] from [ Wise Investments ].

Sir, I had a question on the revenue mix. You were focusing on the domestic part. So could you guide us like what could be the revenue mix for FY '25-'26? Is there any plan on the table?

You see, as you have seen in the past also and in the current year, quarter-to-quarter, it may vary. But our revenue mix is normally, say, as I mentioned, our exports are 35% to 40%, and domestic is 60% to 65%. This has been our normal revenue mix year after year; 2/3 domestic, 1/3 export, you can say that.

Yes. But if product mix if you can share a little bit.

Product -- every product we export. Normally, you see, in certain products it may be a little more, in certain products it may be little less, but we have majority, most of the products we are exporting, more or less same ratio.

Okay. One more question I had on the margins. Like when we are doing good, sizable business, why is that we are not able to increase our margins, irrespective of whatever dumping there is? Or what can be -- what can we do...

Margin is the product of the market condition. It depends upon demand and supply. It is not in our hand. You see, it's a competitive business. It's only domestically competitive, it is internationally competitive. So margins depend upon the demand and supply. This drives the market. And then it depends upon the product mix. So, so far product mix is concerned, we always keep on evolving new products as per the market requirements, fashion changes, et cetera. But basically, it is a function of the demand and supply. So at present, if you will see, each and every yarn company, depending upon which segment they are, whether synthetic, whether cotton, whether dyed, whether [ grade ], varies from segment to segment. But overall, the sentiment has been poor, margins have been poor. So basically, the reason has been the low demand and oversupply. Supply is overstripping demand. That is the main reason. So this is the connection of the demand and supply.

Yes, I agree with that. Yes, yes. I understand the point you made. But what I was trying to figure out was that since we are in this business since a long time, there would be some niche project where we would be having benefit of margin in our side. Is there any certain product?

Yes, yes. That is there. You see, for example, cotton and Cotton Melange Yarn, that's a specialty yarn. There are many, say, lycra type of special yarns. So that we keep on developing. But you see, every product has a cycle. So new products we keep on developing and all products keep on going down. So there's a cycle. But in the -- in such type of market, people prefer lowest quality material. They don't want to make experiments, don't want to take new developments and something like that. So this is the situation. So actually, it's an abnormal situation. But in normal course, you see, we have been developing and new products has been taken by the market. They are the new products, niche products, margins are better in other products, but the niche can be the limited. It cannot be 100%. You see, there will always be some percentage of the niche product which we always have in, which we will continue to have that.

So do we have any plan, like wherever we can sell those particular niche product to new customers, if you can identify new clients?

That we always keep on looking into different venues, different customers, different countries, and all those types of things, our marketing people keep on research. They keep on doing research and best on based on the customer feedback and other things, we have the full-fledged development centers for development of niche products. So that keeps on going on.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. S. K. Khandelia for his closing comments.

Thank you very much for your very insightful questions. So my closing remark is that we are cautiously optimistic about the coming quarter and the forthcoming all quarters. Thank you.

Thank you, members of the management team. Ladies and gentlemen, on behalf of Sutlej Textiles and Industries Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.