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

Ladies and gentlemen, good day, and welcome to the Sutlej Textiles and Industries Limited Q3 and 9 Month FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. This call may contain some of the forward-looking statements that are completely based upon our beliefs, opinions and expectations as of today. These statements are not a guarantee of future performance and involve unforeseen risks and uncertainties. The company also undertakes no obligation to update any forward-looking statement to reflect developments that occur after the statement is made. I now hand the conference over to Mr. Rajib, Whole-Time Director and CFO. And over to you, sir.

Thank you. Good afternoon, everyone, and welcome to the earnings and conference call of Sutlej Textiles and Industries Limited for the third quarter and 9 months ended December 31, 2024. I trust that you are all doing well. With me on the call today is Mr. S. K. Khandelia, Adviser to 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, after which Khandelia-ji will update you on the business highlights as well as the industry highlights. Our spinning capacity used in current 9 months was 97% against 91% in the corresponding period for 9 months FY '25. Our consolidated income came in at INR 2,012 crores. Gross profit improved by 15% to INR 865 crores. And EBITDA came in at INR 48 crores against a loss of INR 26 crores for the corresponding period last year, which is 9 months FY '24. We are continuing -- continuously working on the cost optimization and strengthening the balance sheet. We have consistently maintained our debt-equity ratio below 1 presently, which is at 0.85. Our efforts are continuing in the direction with long-term prospects, which is envisaged in our results and will be more visible in the upcoming quarters. For Q3 '25, our consolidated total income came in at INR 658 crores. Gross margin was at 42%, which was higher by 4% on a year-on-year basis. EBITDA is at INR 7 crores from minus INR 1 crores for the corresponding period. We are optimistic about the prospects. The Indian domestic market is expected to boost up on the benefits given in the budget, but the situation at present remains muted due to wait-and-watch approach regarding the geopolitical landscape post Trump administration's uncertainties and its implications for the trade. Positioning of key countries like Turkey has been worsening due to continuous increase in the interest rates and consequent negative impact on the demand of the dyed yarn. Further, the positioning of tariff may take some more time to stabilize. The fourth quarter will be of particular importance as it will be -- it will set the tone for the next financial year. We are cautiously optimistic that the positive cycle for the textile sector may start in the next financial year. Those were my opening remarks. I now request Khandelia-ji to please take it forward with the business and industry updates.

Thank you, Rajib, and thank you all for joining us on this conference call today. As we look at the global landscape, today, we find ourselves navigating through a period of significant uncertainties. Major economies worldwide are experiencing profound transitions, each bringing its own set of challenges. It will be interesting to see the strength of other countries that are important to us for the global textile trade. We are hopeful that after the dust settles, some of our major demand centers will have more clarity, and order flow should start improving. Coming to the domestic market, the recently announced budget has recognized the strategic importance of textile sector, which contributes nearly 2.5% to India's GDP. And the measures -- some of the measures which I mentioned here, announcement of technology mission, and that will boost production and improve quality of cotton, and cotton is a major raw material for textile industry. Another step taken by government is the imposition of custom duty of flat 20% or INR 115 per kg, whichever is higher, on imported knitted fabrics. This will restrict such imports from China and is a very positive step for domestic yarn manufacturing. Textiles is predominantly in MSME sector, and all schemes announced for their benefit will directly help textile manufacturing. Further, most important is higher spending spurred by lower taxes, and lower interest rates should be tailwinds for discretionary consumption like textiles going forward. Our strategic focus on fungible production capabilities, coupled with targeted cost optimization measures have already started yielding some benefit and are likely to continue going forward also. We also have our ears to the ground to the changes which are happening to the industry and are taking appropriate measures to deal with such changes, despite the overall subdued sentiment. We remain focused on optimizing our cost, product mix, production, et cetera, in line with emerging trends to stay ahead of the curve. With that, we can now take your questions.

[Operator Instructions] We have the first question from the line of Aditya Sen from Robo Capital.

Sir, my question is about EBITDA margins, which have been quite low since quite some time. So is there any strategic move that we are planning to get back to the previous margins? Or will the margins be only driven by the macro events?

Yes. As you know, as we have been explaining in our conference calls, and you might have seen the results of other yarn companies also, which are manufacturing yarn, that the EBITDA margin has been unfortunately coming lower since last 2 years because the textile has not been doing good worldwide, particularly the yarn industry. So the type of the margins which we have today will definitely appear to have to go up because these things cannot continue for the long. And I think people feel that now, as I mentioned that there has been positive steps for the domestic market. And once the dust settles in the export markets after all these policy designs and other things comes to the foray and the demand improves, it is the question of the demand and supply because demand is not emerging and supply pressure continues to be the same. And that is -- and we are operating at full capacity. So that is the reason that the EBITDA margin is low at present. And that is -- that should go -- keep on improving going forward. But the demand has to emerge and for which we are optimistic.

[Operator Instructions] We have the next question from the line of Kanishka Jain from AK Investment.

Am I audible?

Yes, yes.

So I wanted to know about the strategy, which you are planning or will be adopting to stabilize our margins going ahead. Any specific plan are you thinking of?

No. As I explained to you that there are 2, 3 things. First thing is that demand is not emerging, supply is more. That is the basic reason of EBITDA being lower. Second thing, whatever new things are coming, we are looking to the many things. You see we are looking any new product, new technology or any new thing, which we can do to improve our margin despite the subdued demand. But since the visibility is not there, we are not clear which products are to take forward, which technology to take forward further, and what should we do to improve our margins in the new products or anything. So once the visibility is there, then we can do many things. But of course, we are doing many things. Like as I mentioned, we are optimizing our cost further. We are reducing our cost. We are changing product mix to some extent. Like from apparel to non-apparel, we are increasing. We are going in value-added products, like lycra twisted yarn, lycra core spin yarn. Wherever there is demand of any specialty and by the specialty buyers, we are trying to cater to them, and then we are getting encouraging results. So once the demand emerges, we are fully geared to take benefit of that, and the EBITDA margin should improve.

Understood, understood. That was very well structured. Sir, and also wanted to know about some marketing spend on different services and other products.

Can you please repeat your question?

So I wanted to know marketing spend, sir.

You see, we have a big marketing team, and we have never test this type of -- whatever we are producing, we are able to sell. You must have seen the data. As our inventories are not increasing, our receivables are not increasing. We have different marketing centers and international markets. We are selling to 70 countries. And every corner of the country, we are selling. And we are selling for different applications, whether it is knitting, weaving, garmenting, grey, dye, apparel, non-apparel, technical textile. So we are present everywhere. So we have the huge marketing strength. The only thing is that the overall worldwide demand is low for the particular type of things at present. So once the demand improves, the things will improve.

Okay. Understood, sir. And also just wanted to know, aswe have volume up pretty, capacity utilization is pretty good. So how long does it take to revive completely? Any target or anything to that in your mind?

See, we hope you might have seen the Retailers Association of India, Garment Association of India that when the demand started coming down, they thought it is a temporary blip. But after 2 years, they also are not able to predict when the demand will reemerge. So you see the uncertainty is there. Geopolitical tensions, a lot of conflicts, Red Sea crisis, so many things have been happening worldwide. And whatever happens in the worldwide, that definitely impacts Indian market also because 20% of textile is being exported. And earlier, it used to be 1/3 of the total production. So that pressure is coming on domestic market also. So naturally, now we are seeing that the last year was a heavy election year. In the 20 of the major economies of the world, there were election in 20 countries. So that has created some sort of election mode and other things. And then a lot of geopolitical, as I mentioned. So it was the entire period of 2024, '24, '25 financial year has been struggling for the demand. And there's some -- of course, there has been certain shift towards certain products in which we are also adopting new type of products like recycled fiber and other things. So -- but you see, one can only hope that from the next year, all the dust will settle. Domestic demand should also improve because government has given income tax exemption. Now the rate of interest has also been cut. We are expecting the cut in the interest rate going forward in the U.S.A. as well as further interest rate cut in India. Inflation is also settling down. So that will improve the purchasing power with the masses. And once it improves, of course, it's because, after all, it cannot continue like this. So we hope that next year should be better than this year.

We have the next question from the line of Vikram Suryavanshi from PhillipCapital (India).

What was our production from the green fiber this quarter? And are we seeing the improvement in that business also? Or how is it?

So far production is concerned, we are running at 110% of our capacity. Production was good. Our capacity is 120 tonnes per day, whereas we have produced 130 tonnes per day. But the point here is that the business, basically this unit was set up for the captive consumption to have the better quality of yarn because, otherwise, when we used to purchase from outside, there used to be variation in the supply of the fiber. So that was basically meant for our own fiber. But having said so, there has been an increase in the PET bottle prices because many applications of that bottle has been increased like B2B. There has been requirements that even any plastic manufacturer has to use for the PET bottle manufacturer has to use recycled portion also with the virgin. So the demand of PET bottle has gone up. And because of the PET bottle prices has been going up. And in winter season, the supply also reduces. So because of that, there was mismatch between the fiber price and PET bottle price because the recycled fiber price is basically governed by the price of the fresh fiber, virgin fiber of the Reliance and other manufacturers. So there was pressure on the prices. Otherwise, plant is running well, and we had 110% of our total production in Q3 was 12,00 tonnes.

Okay. Good. And these PET bottle prices, if you compare last year to this year, what kind of increase could be there? Or if you can give broad number per kg basis, if it is possible.

You see, it is basically the delta between the PET bottle and the fiber price. So the last year, delta used to be higher by INR 3 to INR 4 per kg. And this year, in this quarter, particularly, delta has been lower by that much amount. So it is basically the delta which impacts. So I think that's maybe a temporary feature and other thing. Let's see how this works. And now the summer season will start and availability of bottles will increase, and demand for recycled fiber should also improve. So we are selling something in market also because we are buying from something market -- from market also and selling also. So I think going forward, it should improve.

Got it. And out of our total spindle, how much would be 100% cotton?

100% cotton is very -- total, we have about 40,000 spindles on which we run normally gray yarn, cotton gray yarn. And rest are all on dyed or melange or something like that. But because at times when the demand for the dyed or melange or other things is lower, we have to run more of the gray yarn. But in gray yarn, cotton yarn, it is not 100% absolutely. Sometimes, it is polyester cotton. Sometimes, it is 100% cotton. So maximum out of 413,000 spindles, we run normally about 60,000 sometimes. But normally, it is 40,000 only on cotton and cotton blended yarns gray.

Got it. And last, sir, our home textile business also seems to be impacting the profitability, but are we seeing -- not seeing some benefit of lower raw material cost in home textile? Or is there something else in the home textile business we need to improve?

You are right, you are very much right. What happened that since there were problems in the Middle East, our export to Middle East suffered very much. Secondly, we intentionally reduced our domestic sales, to some extent, particularly to the wholesalers because we find that the payment issue is coming there. So we have to remain -- we have tightened our credit to the domestic wholesalers, not for other things. While our exports are continuing at the same level and our main issues -- another issue since that we have the job processing also. And since the job processing was -- fabric not quite doing well, job processing in world traffic was low. So in the job processing, the turnover was down by INR 6 crores. And naturally, the standing charges is always there, and that impacted the results of this quarter.

The next question is from the line of Prerna Jhunjhunwala from Elara Capital.

So just wanted to understand what -- how much percentage of your yarn volumes would now be value-added yarn. And you had forayed into knitted fabrics as well. So is vertical integration helping you do much better than being solely in yarn? Or is it still very small?

So we have a very small capacity of knitting. We have only 18 knitting machines, and they were put out basically only to test the waters for the melange yarn. So unfortunately, since the market has been -- not been doing well, we could not expand that capacity. And we could not put the process house for knitting also. So that's a very small capacity. So knitting downstream, we are looking into. Once the visibility is clear, we may put more knitting with the processing. So that was the one part of it. So for value-added yarns are concerned, it depends from season to season, time to time and application to application. But the overall market has been down throughout each and every segment. So that is very difficult to say how much is the value-added at this point of time. Normally, we used to have about 20% of the value-added yarn, but it is fluctuating now. Because in such type of -- in such recession types of when the demand is low, people want the cheapest type of yarn. They don't need those type of yarn, except for specific application. So demand of those type of yarn is a little lower at this point of time. But we hope that as the things improve going forward, the demand will again come. Otherwise, we normally use 15%, 20% of value-added yarns. And what -- if you see -- if you compare with the gray cotton yarn, melange -- 100% melange is the value-added that way. So it's a relative term.

Okay. Understood. So sir, but if I look at your numbers 3 years, 4 years back and today, the profitability has taken a huge hit. Is it the market supply of blended yarn wherein more and more cotton players have started getting into blended yarn, impacting your profitability? Or is it largely more a demand concern, part one? And second, whether we can get into newer products or be more cotton intensive, because if I look at the numbers of other cotton yarn manufacturers, they have value addition as such, I understand. But their profitability as compared to last year has improved. So is your cotton capacity is also doing better versus blended yarn capacity? Could you help us give some color on that?

If you see -- let me take your question in 2, 3 parts. If you see the dyed yarn, synthetic yarn, everybody is in the same boat. There is no -- nobody is doing better than what we are doing. Rather, we may be doing something better as we have introduced certain different type of yarns. And for this, there has been good demand in the market. So we have been able to run our full capacity of synthetic dyed yarns. So that was the one part. We have the highest capacity of synthetic dyed yarns among all our peers. Now coming about the value addition in cotton and cotton blended gray yarn. If anybody has a downstream activity in cotton or say if there are different, say, if you talk of the fine count of the South mills, that's a different setup. So we have always been traditionally in dyed, melange and other things. Melange is doing well. We are doing better than our competitors in melange yarn. But since the overall demand, say, Bangladesh situation came to -- in between. So that affected the demand for melange yarn, which is one of the value-added yarn. So in gray yarn, nobody -- I don't think anybody, except new established mills, which have been established under the huge subsidy and have the new plant fully automatic, and they are meant for the gray production. Their expenses are for the automated plant. So they may be doing better, and they might have done better. And if you will see our results, we have done much better than the last year.

Yes. Okay. Understood, sir. And sir, in home textiles, we had acquired companies in the U.S. for marketing purpose. And how is our share of outsourcing versus brand and supplying to our units in U.S.? And how are we progressing over there?

No, we are supplying very little quantity there. Basically, that is a distribution company, and they are purchasing from worldwide. And that's a small company. And -- but since the U.S. market has been struggling, because you know the interest rate on the home, new home is about 7% there, which used to be 2% and 2.5%. So because of that, the home sales is less there. And due to that, there has been less demand for the type of home textile, which they have been distributing. So that company has been suffering. So from our -- from here, we are supplying to other retailers and other converters in the U.S. And our export to North America is very good. But from our -- to our company ASM, they are in different price bracket, much higher price bracket, and they are supplying to specific products and to specific customers.

[Operator Instructions] We have the next question from the line of Amit Aggarwal from Leeway Investments.

I raised the same question last year, I'm repeating the same thing. Last conference that our employee cost to turnover is still very high, 15%. All of the yarn companies have employee cost around 10% of the turnover. So last conference, you said that we have done something, taking steps to reduce it, but I don't see any change compared to the last quarter. Any comment on that part?

Yes, you are very much right. Unfortunately, what has happened that our efforts are going on, and we have reduced certain number of employees. And number of employees have reduced. Employee cost has reduced to that extent in absolute terms if you take the volume and other things. But what happened that the market has not been that good. So revenue has not increased in that line. So until unless revenue -- our efforts are going on there. Sales, which we have been always in dyed yarn, and dyed yarn our capacity in terms of number of spindle cities, it is okay we are using 100%. But in terms of quantity, we can produce much more. But there is no demand to that extent for the cost and pound and other things. On the same spindles, we have produced finer counts. The production will be very low. So the hours settled is for, say -- for number of average count, say 28, 27. And whereas the average count coming is higher. So because of that particular set of things, the employee cost is coming higher. And definitely, our employees cost, as I mentioned last time, and we are taking steps and we are rationalizing the workforce. And it has been the particular type of setup. So now we are going for some sort of wherever the automation is possible, wherever rationalization is possible. But you see, it is not a 1-day affair. It's a continuous. We have started the process, and you will see the result going forward. And it will be -- quarter after quarter, we'll hope to see some improvement.

And will there be significant change in next in these 2, 3 quarters or it will take 1 or 2 years?

If the revenue changes, it may immediately come down. You see, if the rates improve, if the cost -- demand comes throughout the entire capacity in terms of the quantity is also used, not only in terms of visible, which we are already using. The revenue will automatically increase. So earlier, we have able to achieve revenue of INR 3,000 crores. Now it is coming to about INR 2,600 crores, whereas the increase is always there, whether it is the wages, whether it is the staff, increments are always there. So -- but we are continuously rationalizing our workforce. And during last few months, we have rationalized the number of workforce. And you will continuously see the result. But it will not be that in last 2, 3 years, it will be 1-year affair, it will be 2-year affair. So -- but continuously, and once the revenue goes up, automatically, 2% to 2.5% can come down immediately if the revenue goes up.

Do we need to automize more and modernize machinery compared to the other competitors or we are as good as other competitors regarding the same?

No, no. You see there are 2 types of things. We are in dyed yarns. In dyed yarn, we have the -- we have been continuously modernizing our machinery. This year also, we have spent even INR 50 crores for different type of wherever the automation and other things can be possible and something like that. We always keep modernizing to the extent required. Others where anybody has the gray yarn, gray yarn also with them. In the gray yarn, the cost will be 5% even today. If anybody is manufacturing gray yarn, the employee's cost will be only 5%. If anybody has the, say, fabrics with them, the cost will be lower. So these type of things are there with the same type of cost we have been earning good EBITDA. But definitely, we are continuously working on that. We are sick of this problem, as I explained to you last time, that there are 2 parts. One side is that how we can improve our revenue. Another thing is how we can reduce our employee's cost. So on both fronts, we are working and quarter after quarter, but quarter may be even a shorter period. But if you will see the next year, say, '24, '25 compared to that in '25, '26, I am -- we are hopeful that the percentage will come down.

Okay. And my last question is regarding currency exchange. Sir, the dollar has increased compared to Indian rupee in the last 2, 3 months. So should that help in our margins or the cost will be adjusted as per the exchange rate?

So you see, depreciation of rupees that will definitely improve the margin. But in the products which we export to U.S.A., if you talk to other countries like South Korea or any other country, the depreciation in their currency has been much more than our currency. So there, we don't get benefit. So it is the competing countries currency, we say it's rupee versus dollar. So wherever it is, whatever we are exporting to U.S., we will get benefit there. Similarly, in some specialty products where we have the bargaining power, there, we will get benefit. But most of the things, we will not get benefit.

And I imagine that our biggest competitor country-wise is China. So is there any uptick in the Chinese market? Or is it struggling -- is it also struggling like Indian market?

No, no. We are not exporting to China, we are not exporting to China.

Competition is -- I think our competing country maximum is China only, or China and Pakistan.

It is appreciated much more than us. So suppose China is exporting to U.S.A., and we are exporting to U.S.A., we are in the same boat. And if China is exporting to some other country, we are also exporting to some country. We are almost in the same boat. So Indian market is concerned, it's a different story. Indian market, how the imports can do? Sir, recently, as I mentioned in my opening remarks, there has to be huge import of the knitted fabrics, which has spoiled our entire winter yarn garment market in the Ludhiana, Amritsar, NCR. But now the government has come out with the INR 115 minimum import duty. So that will stop that. So those type of -- in domestic market, China comes through different countries also. So Vietnam, they will sell through Vietnam. They will send through other countries. So our government is aware of that, and government is taking care that the imports will not be there. So in domestic market, it will not impact.

[Operator Instructions] We have the next question from the line of [ Rahul Shah ] from DD Associates.

Am I audible?

Yes, it is. Yes, very much.

So sir, I had one question regarding what is the volume growth in both yarn and home textile segment? And how do we see the contribution in volume from both the segments going ahead?

As I mentioned to you, if you compare Q2, Q3, since we have operated all the spindles in Q2 as well as in Q3, so there has not been any volume growth because until unless the demand pattern changes, volume growth can happen with the cost account, which has not been there. So that is -- more or less, it is the same. If you talk of the home textile, in exports, our volume growth has been the same. Volume was the same. And in domestic, of course, intentionally, we have reduced our volume there. And in processing, of course, Q3, as I mentioned to you, since the cloth business is not doing well, processing job was less. So there, some volume has decreased. Otherwise, in yarn, the volumes are almost same. As compared to last year, if you will talk last year, we cleared the inventories into FY '23, '24. There was huge stock in the beginning of '23. So we cleared those stocks. Sales will be more, but the production is more this year. As compared to last year 9 months, this year production is much more.

Okay, sir. Sir, going forward, sir, how do you expect the volume in the next -- after the macro conditions, if you consider?

As I mentioned to you that we hope that the consumer purchasing power has improved because of the change in the tax rate at the bottom. Secondly, Rabi and Kharif growth has been good. Third thing is the interest rate has also come down. So many EMIs should come down. And the inflation is also coming under control. Sir, last year, our GDP has gone down very much as compared to previous year. And this year, I hope that the CapEx and other things would happen by the government and others. So if the GDP improved and all these measures taken together, we are hopeful that the next year should be better than this year.

[Operator Instructions] Ladies and gentlemen, we have no further questions. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thank you. We are optimistic, but cautiously for the coming year. And we hope that the next year should be better than the current year. Thank you.

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