Sutlej Textiles and Industries Limited has informed the Exchange regarding 'Transcript of quarter and year ended 31st March, 2019 earnings conference call held on 10th May, 2019'.
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and industries limited
CHENAB TEXTILE MILLS Lotus Corporate Park, 'E' Wing, 5th/6th Floor, 185/A, Graham Firth Compound, Near Jay Coach, Goregaon (East), Mumbai - 400 063. Phone : (022) 4219 8800/6122 8989 Fax : (022) 4219 8830 E-mail : info@rtmyarmcom Website : www.sutlejtextiles.com CIN No. : L17124RJ2005PLCO20927
22nd May, 2019
BSE Limited Phiroze Jeejeebhoy Towers, Dalai Street, Fort, Mumbai 400 001. Scrip Code: 532782
Dear Sir / Madam,
National Stock Exchange of India Ltd. Exchange Plaza, 5th Floor, Plot No.C/1, G-Block, Bandra-Kurla Complex, Bandra(E), Mumbai 400 051. Scrip Code : SUTLEJTEX
Subject: Transcript of quarter and year ended 31st March, 2019 earnings conference call held
on 10th May, 2019
Pursuant to Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, kindly find enclosed a transcript of the earnings conference call for the quarter and year ended 31st March, 2019 which was held on Friday, 10th May, 2019. The same is also available on the website of the Company i.e., www.sutlejtextiles.com.
The conference call held on 10th May, 2019, as per the enclosed Transcript incorporates mainly the highlights of financial results upto 31st March, 2019, and other related information which is already in public domain and/or made available / uploaded on the Company's website.
Please take the same on record.
Thanking you
Yours faithfully For Sutlej Textiles and Industries Limited
Manoj Contractor Company Secretary and Compliance Officer
Registered Office : Bhawanimandi - 326 502 (Rajasthan)• Mills : Kathua - 184 102 (J&K)
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textiles and industries limited
“Sutlej Textiles and Industries Limited Q4 FY19 Earnings Conference Call”
May 10, 2019
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MANAGEMENT: MR. S.K. KHANDELIA – PRESIDENT AND CEO
MR. BIPEEN VALAME – WHOLE-TIME DIRECTOR & CFO
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Moderator:
Ladies and gentlemen, good day. And welcome to the Sutlej Textiles and Industries Limited Q4
FY19 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only
mode. And there will be an opportunity for you to ask questions after the presentation concludes.
Should you need assistance during the conference call, please signal the operator by pressing ‘*’
then ‘0’ on your touchtone telephone. Please note that this conference is being recorded. I now
hand the conference over to Mr. Bipeen Valame – Whole-time Director and CFO. Thank you,
and over to you, sir.
Bipeen Valame:
Thanks and good afternoon everyone. I welcome you all to Earning Conference Call of Sutlej
Textile and Industries for Q4 and Financial Year 2019. I have with me Shree. S.K. Khandelia Ji
– President and CEO of the Company and Stellar IR, our Investors Advisor Firm.
The Investor Presentation has been uploaded on the Exchanges and I hope every one of you had
unfortunately to go through it. Financially Year 2019 was a challenging year for the company
with headwinds arising on account of subdued demand and changing in market dynamics because
of structural changes in government policies. We believe our efficient operating capabilities help
us to consolidate during the year. Initiatives towards backward integration into green fiber yarn
to further enhance company’s operational performance will benefit in future.
Commenting on the performance during the quarter:
EBITDA margin improved by 70 bps year-on-year during the quarter-ended on March 2019, on
account of efficient use of power units and higher localization of solar. Cotton and polyester
prices continued to be at elevated levels.
During Quarter 4 FY19 the company reported total income of Rs. 617 crores as compared to Rs.
610 crores in Quarter 4 2018. For the financial year ended on 2019, consolidated total income
stood at Rs. 2,642 crores, 5% year-on-year growth against Rs. 2,510 crores in FY18, supported
by increase in realization in yarn segment.
Sales volume for the yarn during FY19 was 108,138 metric ton compared to 106,159 metric ton
in FY18. Home textile production was 6 million meters in FY19 as compared to 7.8 million
meters in FY17. Export sale for the year stood at Rs. 930 crores as compared to Rs. 782 crores
in FY18, portraying a growth of 19% year-on-year basis. Export as a percentage of overall sales
stood at 36% for FY19 as compared to 32% for FY18. Export growth was mainly led by higher
realization in our effort to diversify our portfolio in different geographies.
EBITDA for the quarter ended March 2019 was at Rs. 57 crores, with EBITDA margin of 9.3%
compared to Rs. 53 crores, and EBITDA margin of 8.6% in Quarter 4 FY18. For FY19
consolidated EBITDA stood at Rs. 240 crores compared to Rs. 281 crores in FY18. The company
reported a net profit of Rs. 15 crores for Quarter 4 FY19 as compared to Rs. 10 crores in Quarter
4 FY18.
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Lower finance cost on improved operational efficiencies helped the growth during the quarter.
During FY19, Sutlej recorded a consolidated net profit of Rs. 58 crores as against Rs. 113 crores,
including exceptional gain of Rs. 42 crores last year in corresponding previous year.
I would now request Shree. Khandelia Ji to share the business outlook and industry scenario. And
then we can open the floor for question-and-answers. Thank you and over to Shree. Khandelia ji.
S.K. Khandelia:
Thank you, Bipeen. Good afternoon, everyone. And thank you very much for joining us once
again on this Conference Call. I will start by reiterating what my Chairman has stated in his press
release. And I quote that, “the challenging business environment for the textile industry continued
during the due to subdued demand. The situation was further aggravated by unprecedented
fluctuations and raw material prices and exchange rates that created even more uncertainty and
further dampened market sentiments. This resulted in intense competition, subdued product
prices, and lower margins. We could counter the challenges to a large extent because of our
varied product mix and value-added yarns. Sutlej will continue to focus on consolidating its
operations and improving efficiencies all around during this phase of prolonged recession.”
Now, I would like to elaborate a little on the various items which he had mentioned:
There has been a severe demand supply mismatch. After demonetization, followed by GST
rollout and frequent changes in the policies of GST and inverted duty structure for synthetic yarn
and fabrics and fibers, and no provision for refund for accumulation on GST accumulation by
fabric manufacturers, and such other things disturbed the business, particularly of the textile
industry. The cost in synthetic on fiber, initially the fiber the duty is 18%, on yarn also initially
it was 18%, subsequently reduced to 12%, and on fabrics it was 5%. And with the provision not
to claim refund for the accumulation.
Essentially, only this year from August Government has allowed the refund due to inverted duty
structure to fabrics. This means whatever you have accumulated up to 31st July can’t be utilized,
except for clearance of the stocks. And then there are various issues still going on relating to
inverted duty related refunds in case of fabrics. So, all these things have been disturbing the
demand. So, this created a serious demand-supply mismatch. While their production by
everybody continued unabated, demand was subdued. And this resulted in intense competition
and due to that it was not at all possible to pass on the increase in input costs and other costs to
the consumers and this impacted the margins.
So, this situation has been going on since last about two years. And gradually there has been
some improvement, but the improvements have been very slow. Now when we were expecting
improvement, the general elections code of conduct and so many other things, everybody is busy
with the elections, so again for the time being it is again disturbing the business.
Now, I talk to the widespread and unprecedented fluctuations in different aspects which had taken
place during the year:
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First, I take the raw materials – in case of cotton government increased the support price by 28%.
And because of that, the new cotton arrivals started at a very high rate and continued at the high
rate throughout the year and have further increased during the year because of the production
figures which was 365 lakh bales last year latest have been brought down to 321 lakhs by Cotton
Association of India. Unfortunately, in India we are not able to get the reliable information about
the cotton crop size. While Textile Commissioner has a different figure, trade industry has a
different figure and Cotton Association of India is different figure. But in a nutshell, there is
definitely less production this year because of less rains in Maharashtra and Gujarat, and that had
impacted the yields and total production.
On the other hand, since the yarn productions is continuing as it is, the demand has remained as
it is. So, ultimately it is expected that at the end of the year the carryover stock will be lower than
the last year and this is impacting the prices. But on the other hand, China and U.S. trade war is
impacting the international cotton prices because USA is one of the major producers of cotton
where there is no consumption so he depends on exports. And China was the big importer which
has imposed 25% duty on import of the USA cotton. That has rattled the international markets.
So, those type of things and fluctuations which has taken place in cotton.
In case of polyester, we have seen the fluctuations in the price of crude oil. Polyester is a
derivative of the crude oil. So, the price which was up was Rs. 96, the basic price of polyester
fiber which was Rs. 96 per kg in the beginning of FY18-19, which was ruling around Rs. 102
sometime in August. Thereafter, it has started increasing and on 4th October, in short time of two
months it increased to Rs. 119 that is an increase of 17%. It stayed there for about a month, and
then in one month it came down to Rs. 100, a fall of 19%. Market doesn’t like such type of
fluctuations and in textile industry so when the prices were going up people were buying, but
were not ready to pay higher prices because of the subdued demand. So, the industry could not
pass on the increased cost of the polyester staple fiber, which is one of our major productions.
But when the prices started coming down, the customers stopped purchases even at the cost of
stopping down their loans. This resulted in accumulation of lot of inventory in October and
November. And when the polyester prices come down to Rs. 100 then the sale started. But during
that period the mills that used costlier polyester fiber, which resulted in heavy stock losses, this
was unprecedented.
Similarly, in case of cotton, since the demand was subdued, even demand-supply mismatch was
there even for the value-added yarns, because in throughout the world, the global economy is
under stress, it is known to everybody. And on the other hand, the supply is increasing there also.
And then during the course of the year duty drawback which was reduced on rollout of GST was
not restored. And then it started getting restored in bits and pieces. And recently government has
also increased, but still there is a gap of 2% to 3% as against which was there before GST rollout.
But at least there has been some improvement and that is reflecting in Q4 Results of that particular
segment. And going forward, it will definitely. If you see the garment exports which was seeing
continuous negative growth month-after-month has shown the positive growth in last three, four
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months. So, that is a plus sign. And since the government drives the upward value chain, so the
positive growth in garments in last three, four months will be a positive thing for the industry.
So, these types of fluctuations were there and the cost has been increasing which the industry
could not pass on due to subdued demand, and this is the reason and this position has been
continuing since last two and a half years which started from the demonetization. But these things
are coming to an end or the impact of all these things are getting reduced. So, I feel that once
these elections are over, and again stability returns, because the pipeline is more or less to a large
extent, at least in retailer front, or particularly in winter-related yarns, in winter-related yarns
there is no accumulation anywhere, either with spinning industry or with the manufacturers or
with the retailers. That’s a good sign for this year and that should help us because we manufacture
lot of winter quality yarns.
As you have seen from our results and other things that our exports have grown substantially
during the year. As the domestic market was not doing well, of course, export was also not doing
well in most of the items because export prices are also fixed based on the domestic prices and
exchange rate on that particular day, this in case of textiles, particularly yarn, particularly yarn
because we have a majority production of yarn still. So, those prices are based on the domestic
prices. So, because of that, but we had been diverting towards value-added yarns where the
competition is comparatively less, we are developing different end use. So, because of those
value-added yarns and consolidation of our all the operations, cutting costs and improving
efficiencies has helped us to face the challenges posed by these difficult conditions.
So, you see, all these things are behind us. I am hopeful that going forward we have the strength
we have consolidated and this will definitely improve the business. You must have seen that in
Damanganga Home Textiles, our home textile business, we have suffered heavy loss this year.
And unfortunately, what happened, I will explain to you, our home textile segment’s capacity
increased, coincided with the demonetization and then rollout of GST. So, we increased our
capacity many folds from 2 lakh meters a month to 8 lakh meters a month that is about 2 million
meters a year to about 8 million meters – 9 million meters a year. So, this increased capacity
could not be absorbed. On the other hand, interest, depreciation, fixed expenses, which were
organized this year for, for example, the cost of the staff say designing, development and other
staff which was not to full extent, but to a large extent were organized to take care of this
enhanced capacity, those expenses were there. Because it is a temporary phase, its not a
permanent phase. So, those staffs are there, those cost is there. And then depreciation cost is
there, finance cost is there, those are the fixed charges. So, that is the reason that unit could not
do well. There has been gross underutilization of the capacity.
But to face this challenge there are two, three things. One, that the market is not likely to remain
like the same. Second thing, we have further strengthened our designing and marketing team to
take on and to produce much value-added items where the competition may be less. So, that we
have done. Another thing, we are increasing our product offerings, and for that we are in the
process of ordering, installation or other things for various machines like printing, digital
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printing, embroidery, fancy yarn, curtains and upholstery, and wide-width fabrics and printing
dying, these machines are going to be added in due course of time, for which we already have
the sanction from the Board. And hopefully, within this year all this will be in place, because
some of the orders have already been finalized and some are in the process of negotiation and
other things. So, once all these things are established and installed, our product offering will
increase considerably and that will help us to utilize our capacity to a large extent. And as soon
as we start utilizing our capacity to a better level, these losses will not be there.
And now I come to the ASM, another which you might have seen that in consolidated results.
American Silk Mill has resulted in loss this year. You see, in any cross-border acquisition the
initial phase is always difficult because there is cultural gap, there are many things which are to
be lined up. And because of bad market conditions in India, and of course, in abroad also the
things are not so good, we could not leverage the synergy of ASM which we thought initially.
And on which we have been continuously working. But it takes some time. So, now we have, as
I mentioned perhaps in the last Conference Call, that we have appointed new CEO, who is a very
experienced and very talented person, Mr. David as a CEO of ASM, and he has drawn a strategy.
In India, our Deputy CEO – Shree. Updeep Singh ji is himself focusing on our Damanganga
Home Textiles business as well as driving synergy between ASM business and Damanganga
Home Textiles business. And this is going to definitely deliver good results going forward.
So, these are the things, these were the challenges which we faced in Damanganga Home
Textiles. And these things I think in due course of time, all this will be over, and the company
will be definitely should be able to perform much better once the demand normalizes and we are
able to utilize our full capacity in Damanganga Home Textiles. This is what I had to explain to
you.
Regarding green fiber that is manufactured out of recycling of PET bottles. We have already
started installation of this project and the work is already on, construction work is going on. And
it will be commenced as per schedule in Q1 2021. So, the work is going on as per schedule, all
main machines and even most of the supporting machines, orders for those have been finalized,
small, small things are being done and the team is there. So, that will add value so now we are
depending upon many suppliers for such type of recycled fiber and quality issues are there, and
those are not branded and other things also. So, once we have our in-house, we will be able to
control the quality. And of course, it will reduce our raw material cost to some extent. But the
main thing is the quality, so we will be able to add value to that. And other things which we are
planning that we will be branding this the green fiber, and the product manufactured out of green
fiber, we already have the license in all our spinning units for manufacturing of green yarn,
sustainable yarn. And once we have our in-house, we will have the control and quality, once it
also has the certification, we will be able to sell much quantity of this recyclable green yarn which
has a really good demand, and increasing demand in the world. And the premium is there. And
we are also thinking to brand it. So, this is going to add much value going forward.
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And I think I have covered most of the things. Thank you very much. Now, the floor is open for
question and answer.
Moderator:
Thank you. Ladies and gentlemen, we will now begin the question and answer session. The first
question is from the line of Awanish Chandra from Monarch Network. Please go ahead.
Awanish Chandra:
Thank you very much, Khandelia sir and Bipeen ji for giving this opportunity. Sir, you have
explained the whole demand environment, what went wrong during the year. So, I will come to
that. But before that, our margin this time has 70 basis point expense which looks pretty good
and we have given the explanation in the present as well. So, will it be one-time kind of thing
and we will again go back to the same margin contracts and or we will maintain at least this level
what we had in FY19, both on consolidated and a standalone level?
S.K. Khandelia:
I think as of now, actually I am looking for the improvement in this margin. If I take the 2019-
2020 as a whole year, the first quarter may be a little challenging because elections are going on
and there is a labor shortage. But more or less in first squatter also the margins should be in the
same lines. But for the whole year 2019-2020 margins what we have calculated and what we
have even conservatively what we feel is that the margins are going to improve in 2019-2020
overall.
Awanish Chandra:
Okay, sir. At least two, three factors like this efficient use of power unit and rooftop solar at
RTM, these things will contribute or anything you feel that from the RM side, be it cotton or your
raw material for manufacturing-made yarn, these things will help? So, were you expecting any
expense in the margin, two factors?
S.K. Khandelia:
Yes. So, far raw material cost is covered so far cotton is concerned, we have covered the cotton
at lower prices. And at present the cotton is ruling at much higher rates at which we have covered
it. Though in last few days it is coming down because of, again, the tweet by, Twitter handle of
Trump on Sunday; so again, due to the international cotton price have seen, and in India also it
has come down to some extent, say by Rs. 500 to Rs. 1,000 a candy. But that does not impact us,
we have the cotton covered at a much lower rate as compared to these rates. So, so far cotton is
concerned we are okay with that. In case of polyester fiber, these types of fluctuations are more
or less controlled now. I don’t think in crude oil prices there can be that type of fluctuation which
we have seen last year. Then there will be a fluctuation, fluctuation is happening, as you see $70,
$65, in worst case it can even go to $80. So, those type fluctuations will continue, but the Iran
sanctions and other factors have already been taken care of. And it is more or less, continuing
more or less stable. Similarly, polyester prices are more or less stable after these came down to
the normal level in December So, in December it was Rs. 100, the basic price, now it is Rs. 105.
So, Rs. (+/-2) to Rs. (+/-3) every now and then. Now the whole thing is demand and supply,
demand is bound to increase. You see, after all there will be pent up demand going forward, how
long one can afford not to purchase or anything, something like that. So, when the elections
started and before that, the demand started improving, we were seeing improved demand. And
the realizations also started improving, but because of these elections, because these days
everybody wants to go to his hometown and vote, so in there is labor shortage. So, these things
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will be over and from Q2 continuous improvement should be visible, that is what I feel. And
overall 2019-2020 margins… And overall 2019-2020 definitely in my opinion should be better
than 2019-2019, overall margin will be better, and margins which we have seen in Q4 should
actually improve, except Q1, Q1 maybe more or less like that.
Awanish Chandra:
Okay. And sir my last question, you have already given a very really detailed explanation on
demand environment in FY19. And first quarter you are anyway not expecting much. But as far
as hope is concerned for FY20 or FY21, one thing you have talked about the pent up demand,
which is still kind of hope thing, if one need to at least look at two, three factors which will really
change, because whatever reports we are getting, most of the sectors are witnessing slowdown
and even FY20 there will be still a slowdown in those sectors, and even it is now going to the
consumer related things. So, apart from pent up demand, can you pinpoint two, three factors
where you think there will be really change in FY20?
S.K. Khandelia:
I have already mentioned, you see the garments are the growth engine from India. Earlier we
used to export 45% to 50% production of the entire textile value chain, if you will see the figures
of five, seven years back. This figure is languishing about total export from India of textile and
textile related articles are languishing about US$ 36 billion. Government is very much concerned
about that and efficiently taken many steps, as I mentioned, that they have improved export
incentives. And because of that the garment exports have already started improving. So, that is a
one of the biggest factors, once the garment exports increase, that is one of the biggest factors.
Another thing is that all these things with the so much fluctuation and other things, because the
market never liked so much fluctuation in the raw material prices, but once the stability is there
the demand is bound to increase, this is the stability part, the another factor which due to which
we feel that the demand will be there.
Third thing, say winter government yarns are mostly manufactured, used in hosiery or in
Ludhiana and North India markets, the entire pipeline is empty, entire pipeline is empty, because
this year there has been extended winter. So, there is no material at all, and we are seeing good
deliveries even now because people will be preparing for the winter garment, and for that yarn is
sold up to November. And we whatever we are seeing that there should be pent up demand and
there will be -- when I say that, I am definitely feeling like that. It is based on market research
and other things, in other countries and also, as I said, we have developed many new varieties of
the yarn, we have developed new end applications other than apparel. So, those things are
definitely going to help us going forward.
Moderator:
Thank you. The next question is from the line of Resham Jain from DSP Mutual Fund. Please go
ahead.
Resham Jain:
Sir, just wanted to understand that in last three, four months, since January we have seen cotton
prices moving from Rs. 42,000 per candy to now close to Rs. 46,000, has gone up to Rs. 47,000
as well. So, with this increase in cotton prices by close to around 15% odd, how much yarn prices
have moved up during this last three, four months?
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S.K. Khandelia:
See, there are two types of things which includes one is the pure cotton grey yarn, number one.
In which it all depends upon the exports of grey cotton yarn, movement of the prices. So, for
example, when the cotton prices touched to say Rs. 47,000 the rates increased for a particular
variety, that is come at Rs. 130 a kg. But with a little power in the cotton prices it has come down
much more than that. So, it all depends upon demand and supply. Cotton yarn position had
improved in part of the year, but most of most of the time it was under pressure. But in our case
we manufacture very little quantity of grey cotton yarn, ours is mostly value-added yarns like
mélange yarn and cotton and cotton dyed yarns. We of course, we do manufacture some quantity
of grey yarn when there is some problem of the orders of the value-added yarns due to one reason
or the other. So, in one of our units only some of these spindles, which we have the flexibility,
others have been continuously working on these value-added products. In case of value-added
products, such type of fluctuations is much less and depends actually on exports of the garments.
So, in our case if the export of garments is improving the yarn rates have of course not increased
to that level, which used to be, the gap between the raw material price in yarn used to be there
two years back because of the demand was less from the exporters. But once that picks up that
difference will again come to the debt level and earnings will improve. So, ours is a different
type of yarn, where we have seen that entire, not entire cost increase but majority of that has been
passed on. And we have the cotton of the season rates, say maybe about Rs. 40,000 on an average
of Rs. 42,500 something, so we have the benefit.
Resham Jain:
So, what you are saying is that whatever increases has happened in cotton prices, that munch
amount has been passed on in the yarn cost also for your Milan yarn for example, that increase
has already happened?
S.K. Khandelia:
Not fully, I am saying now fully. Suppose if today if I get my rates on today’s rates of the cotton,
it has not been passed on fully. Because the garment exports have started increasing, but since I
have the cotton I have the other way around, I have the benefit. Given whatever rate has increased
I have the benefit.
Resham Jain:
And sir going into like in the next four, five months when we will get into the new season and
before the end of the current season, do you see any further increase in prices? Because you said
that this year, we have like 321 lakh bales, which is lowest in the last eight, nine years. So, what
kind of demand supply situation you see we will get into in the next four, five months? Or you
see that import of cotton will more or less fill this gap?
S.K. Khandelia:
Yes, you are right that for the next season it is very difficult to predict for anybody, and there are
no predictions available. And even whatever predictions are available those keep on changing
because it depends to a large extent on monsoon, how the monsoon behaves, particularly in
Maharashtra, Gujarat, which are the major, and similarly in South India, which are the major
cotton growing areas. Of course, in North India say Punjab, Haryana and these areas, Rajasthan,
these areas the irrigation facility is there. So, there the fluctuation may be less, the prices have
been good to the farmers, farmers could get good prices because of the increase in support prices.
So, that part will be okay. But this part will depend upon how the monsoon behaves. But in any
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case, we feel that this year was abnormal, because particularly the monsoon was deficient in these
two states, Maharashtra and Gujarat, the Cotton Belt. So, there if the rains are widespread the
production is bound to improve.
Second thing, as you mentioned imports, definitely since South India mill particularly where near
to the port, near to the port, they have their advantage of getting the imported cotton, because in
their case there is other way around. Say, if they get the cotton from Gujarat and Maharashtra,
the bread cost is very high. Whereas if they take it from the imports, because the Indian cotton
prices have been higher this year as compared to international prices to some extent, time to time
depends upon that because the exchange rate has been fluctuating so much, when it was Rs. 75
it was good to export the quarter. But now when it does come down to Rs. 70 is becoming a
challenge to export quarter, Indian cotton at these rates. So, the exports have actually coming
down this year and imports are increasing. So, we expect import of about 30 lakhs bales at least,
this is the prediction, to a large extent. And exports are less, this will fill up the gap to some
extent. But since there is a gap of 50 lakhs in last year’s production and this year’s production,
and this operating itself was about 28 lakh bales only, so the initial was less. So, there will be a
pressure on the prices, but it all depends upon international prices, everybody knows these
factors, even after the reduction in crop sizes the prices have come down to some extent in recent
months. So, but more or less it will be range bound what I feel, say if it is 46,500 - 46,000 today
for popular varieties and classics which is the brand, you can say that most the consuming variety
in India, or Maharashtra cotton, those are more or less which is likely to be range bound till the
new cotton starts and the potion becomes clear. Suppose if the rain is deficient, as of now the
monsoon production is of the normal monsoon. So, the rate is likely to be range bound. There
cannot be any major increase or decrease.
Resham Jain:
Okay. And sir one final question is on the overall spinning capacity additions. So, we have seen
the central cap has been removed on spinning since last three, four years. And lot of state has
also reduced the subsidy which they used to give for spinning. So, the spinning expansion if you
look at overall, I think last 1 – 1.5 years almost it has come down significantly. So, do you see
supply situation also coming into play, let’s say next two years’ time?
S.K. Khandelia:
Yes, you are right. The addition in spinning capacity, the spinning capacity has definitely has
come to a standstill, more or less. But many state governments are still giving incentives say for
Andhra, Telangana, Karnataka, these are still giving incentives even on a spinning. Though, in
some of these states this stuff is out, business many states are still giving. Despite that actual
addition is not taking place because people have seen the fluctuations and mostly the additions
which take place is for grey cotton yarn or PC grey cotton yarn, those are pure commodity, it is
not easy for everyone to get into the value-added yarns. So, the capacity addition is less and
excess capacity, you see if the export to China pickup even the present capacity will be fully
utilized. But if the export to China doesn’t increase, then it will take two to three years’ time, as
you read, but I expect in two to three years’ time this capacity is going to get up absorbed, because
domestic consumption is also bound to improve, how long we can continue to be at this level of
consumption of domestic, we have 130 crores people in India. So, I am very bullish that this, of
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course in grey cotton yarn there may be some challenge for next two, three years. But in other
things, I think this one, two, three years is not required at all.
Resham Jain:
One thing which you mentioned just now is on Chinese demand of cotton yarn. Any color on
that? Have you seen some improvement, because typically after Chinese New Year we see
some…..
S.K. Khandelia:
See, in case of China no one can have any prediction, even our export promotion policies is
finding it difficult to give any prediction or something. Because Chinese when they start buying,
they start buying, when they stop they stop totally. So, in China the things are, and as I said, in
India present international prices of cotton are higher as compared to international prices. So, this
is another challenge. And in Vietnam Chinese have put up a lot of spinning capacity. There they
can import American cotton, there is no 25% extra duty there. So, that is getting cheaper to them.
And that’s why exports from India has taken a little back seat this time. So, in India itself the
consumption has to grow for getting this capacity absorbed.
Moderator:
Thank you. Our next question is from the line of Prerna Jhunjhunwala from B&K Securities.
Please go ahead.
Prerna Jhunjhunwala:
Thank you for the opportunity. Sir, in light of the discussion earlier in the call, how are the
spinning margins now, because if Indian cotton prices are higher than international court prices,
it is bound to impact our spinning margins. So, how are that?
S.K. Khandelia:
See, I have already explained that, we are not in commodity type of yarns. We are in the value-
added cotton yarns where fluctuation is not like that of grew cotton yarn. Secondly, we are
already covered in case of cotton and a much lower rate as compared to current prices. So, that
is another thing which will help us. Third, garment export as you started improving, as I
mentioned to you, there is a positive growth in garment exports and that will help us. So, so far
we are concerned we have no challenge in this grey cotton yarns and other things.
Prerna Jhunjhunwala:
And sir, the next question is on mélange yarn, what is the kind of growth we have seen in it in
total mix of sales that we have done this year?
S.K. Khandelia:
This year as I mentioned to you, there has been a negative growth in garments. So, we have not
seen any growth, whatever we could produce we have been able to sell. Of course, the margins
were little less as compared to earlier, which I had already mentioned. Because there is supply,
the supply – see, there at present no new capacity as come, but whatever it was there due to less
demand supply pressure was little bit there, everybody wanted to have the order, though it is
development-based orders. So, it is not easy to cut each other. But of course, we have been able
to sell whatever we could produce and we have dried our full mélange capacity.
Prerna Jhunjhunwala:
So, we are not even full capacity today in all our…?
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S.K. Khandelia:
Yes, we have not changed any spindle on grey as of now. Earlier in some part of the year, last
year perhaps or maybe in the beginning of this year, some of these spindles will have to be run
on grey cotton yarn, because at that time when this duty drawback and other things, export
incentives, were grossly reduced from the earliest levels, at that time some challenges was there.
So, we had to, about 13,000 or 20,000 the spindle out of about 135,000 or 140,000 spindles, we
had to take on grey cotton yarn. But those were very fast, we could take them back on the mélange
yarn and all are mélange yarn. Mélange or any cotton blended value-added yarn, PC-Dyed or
something like that okay.
Prerna Jhunjhunwala:
Okay. So, could you please expand on your growth strategy days, in your presentation you have
mentioned growth strategy 2.0. So, what is the strategy and how much growth can we expect in
light of this strategy going successful?
S.K. Khandelia:
See, number one which we have mentioned is the green fiber, green fiber next year will be a big
booster, not necessarily we will use the entire fiber in-house, we may brand it, we may sell it
overseas where they fetch good price, because outside the sustainability is a big issue. Another
thing, we are very bullish on home textile division, there might be losses, so perhaps people may
not be able to appreciate our bullishness at this point of time, but we are very bullish on this
business as it is a different type of business. And we are investing in this business. As I mentioned
to you that we are adding many digital printings, embroidery and so many other things. So, it
will be a big growth factor for us. So, these are the things and we keep on developing the
opportunities as it comes to our way, keeping in mind the demand, supply other things. So,
growth is bound to be there because we have been generating cash surplus year after year. So,
growth will be there and at present, as I mentioned to you, green fiber is under implementation
and home textile we are increasing the product offerings, that will be another thing. These are
the two things which we are doing this year. And going forward, there can be many more
opportunities which we keep on evaluating.
Prerna Jhunjhunwala:
So, you have been growing at around 8% to 9% in difficult years also in the last two years. So,
what is the goal that we can we can look at it in FY20 or 21 in light of these two strategies?
S.K. Khandelia:
See, there are two parts, one is the revenue growth, one is the bottom-line growth. We are more
focused on bottom-line growth.
Prerna Jhunjhunwala:
Okay. So, should we look at margin expansion of at least 100 bps going forward in FY20 and
another 100 bps in FY21?
S.K. Khandelia:
This entire situation, and particularly in textile industry we have been tracking, it has always been
our question-and-answer session, we have been tracking it very well. So, you are aware that the
type of fluctuation which takes place, it becomes very difficult. We have been expecting
improvement this year itself, but it did not materialize. So, world-wide if anything happens that
does affect the textile margins. This trade war between China and America, that is impacting
everything, everywhere, throughout the world, all commodity prices are under stress. So, you
never know, but definitely the strength which the company has, as you have seen even in this
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difficult year our revenues have grown. And in fourth quarter our margins have grown. So, that
shows our strength. And keeping that strength in mind and little optimistic picture, not much
optimistic but even in optimistic picture, that’s what we… earlier we used to have 13%, 14%
EBITDA level at this point of time. So, say even reaching 12% or something like that, I think
this would be possible. So, you are talking 150, 200, I am trying for 300, 400.
Prerna Jhunjhunwala:
Okay. Sir I was just trying to dissect your margins. So, if we are looking at 300 to 400 bps margin
improvement, which other segments apart from these two things that can add on to your normal
margins? So, that if margins come back to normal in next two to three quarters as you are
expecting, so where will be the…
S.K. Khandelia:
No, let me be clear. I am not expecting bit change this year, 2019/2020, I am expecting
improvement of as compared to 2018-2019, but I am not expecting improvement of 150, 200
overall immediately, say first quarter is under challenge, then there are three quarters, overall
there will be improvement as compared to last year. But I cannot say that it can 150, 200 points
this year itself. But going forward, definitely, I feel that, it should not be much difficult.
Bipeen Valame:
And Prerna, just to add to what Khandelia ji said, what we are expecting is that once the green
fiber project starts that should give us some, definitely some benefit in terms of raw material
pricing, and the quality and the consistency. So, that could help us to see the improvement on
EBITDA side. And we are also seriously exploring the possibilities of having what we have
installed right now a solar, because there are a couple of possibilities that said government is
considering whether they can reduce the power cost, in Rajasthan particularly, which is pretty
high. In our business we have seen two major challenges which Khandelia ji rightly mentioned,
one is raw material side and another also is power cost. So, we are also evaluating other options,
because in Rajasthan we could put rooftop solar, but in other plants also we are seriously
evaluating how we can get some better power cost which directly adds to reducing the cost and
better EBITDA cost, including our plant in Gujarat.
Prerna Jhunjhunwala:
Okay. So, Sir with respect to this green fiber plant, there have been lot of many plans that are
coming in in green fiber, existing players are expanding their capacity, you are entering into this
business. So, your raw material sourcing strategy like PET bottles and all, how do you plan to
bring that into place?
S.K. Khandelia:
In earlier call also, I have explained that we are in the organized sector, we have much better
capabilities to procure the PET bottles as compared to others, much better timely payment and
other things, and dependable working. So, I don’t think we are going to face this challenge.
Maybe initially for two months, one of the things get to stabilize and other things, we are not
going to face any challenge in my opinion. If others can get it should be definitely possible for
us to get it, number one. Second thing, another option is the flex, sometimes imported flex come
cheaper as compared to PET bottle process. So, that option is also available. But getting PET
bottles because the consumption of PET bottle is not going to reduce because the size of various,
even plastic and other things, that is for different things not for these things.
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Bipeen Valame:
And what have done is that we have also extensively done, I would say, a decent amount of
research on how we can create a hub-and-spoke model so that we can collect at different location
and bring it at one location at efficient cost pricing. This plant is coming up in Baddi, so if you
see the road transportation is pretty good in Baddi. The significant amount of portion will get
consumed in Baddi plant number one, because this we call it as unit number two, and large
quantity can also get shifted on the road transport in city, that Kathua unit So, we feel that we
will have the ability to consolidate the PET bottle as a raw material.
Prerna Jhunjhunwala:
Okay. So, we don’t foresee any shortage in this raw material because of the expansion?
S.K. Khandelia:
See, there are challenges in businesses, but we feel that if anybody else can get why we will not
be able to get, we are putting the required infrastructure and required manpower in place, required
as you mentioned we will be getting aggregators in different place, we will be having our people
at different places they will be buying it. And if anybody else can get it why will we not able to
get it, simple.
Prerna Jhunjhunwala:
Okay. And sir my last question will be on ASM, what is the annual volume of ASM? And how
much can we supply to ASM as synergy at current level of operations? Of course, ASM can grow
and stuff like that, its a different story. But current level of operations of ASM and how much
can we supply there?
Bipeen Valame:
See, what we have been seeing on the calls in the past also, in case of ASM, ASM doesn’t have
his own manufacturing capacities, and that is not we have purchased. It is basically, the way we
are looking at it is, it is a front-end business model with asset light model. So, right now ASM is
able to source within USA and weaving mills for the woven product, but they also have a product
portfolio in terms of other things, something like the Sensuede which is the outdoor fabrics. Then
there are other things like what they are having as velvet, silk material. So, what is ASM, ASM
is having lot of flexibility. In terms of synergistic benefit, we definitely did some business from
Damanganga to ASM, going forward we are expecting as the volume increase in ASM we will
be able to provide the woven product to them at much competitive pricing, so which will add to
the top-line as well as the bottom-line on a consolidated basis. But at this point in time we are
having the strategy which is separate for Damanganga to grow their business and American Silk
Mill as their standalone separate business, for which we have hired the CEO and the entire team,
including design and sales team, as Khandelia ji mentioned.
Prerna Jhunjhunwala:
Okay. So, that right now the volume is not very high, insignificant maybe?
Bipeen Valame:
Yes, compared to, like if you look at the size of Sutlej, yes, the yarn business the size of ASL
only fabric portion is small. Even our Damanganga facility 9.6 million meters is a pretty, pretty
large mill what we have.
Moderator:
Thank you. The next question is from the line Harish Shiyad, an individual investor. Please go
ahead.
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Harish Shiyad:
Can you give broadly the break up between your cotton yarn and the polyester yarn, your product
mix?
S.K. Khandelia:
Roughly the number of spindles is about, you can say about we have about 40,000 spindles on
cotton and…
Harish Shiyad:
No, in terms of production compared to last year.
Bipeen Valame:
We can send those numbers separately, broadly I can give you a break up. We are having around
420,000 spindles; I am giving a broad number. Out of the 35% to 40% spindles are on cotton,
cotton mélange; rest of the spindle is on polyester. Of course, we keep a lot of flexibility in terms
of (Multiple Speakers)
S.K. Khandelia:
We are not in grey yarn business, because it is completely different.
Bipeen Valame:
So, we have dying facility in all three locations.
Harish Shiyad:
Now, based on that yesterday there was a tweet by U.S. Trump that they imposed the import duty
on the Indian polyester yarn. So, how that will affect us?
S.K. Khandelia:
No, that is different, that is filament yarn, not cotton yarn.
Harish Shiyad:
Okay. One more industry specific question and impact on us. This, Alok Industry was under
NCLT process and it is likely to be taken by Reliance, some process is pending. But once the
Reliance takes over the Alok Industry definitely, if I understand, their production utilization will
go up. So, how that will affect us and the market dynamism, because Reliance is supposed to be
very aggressive in this field?
S.K. Khandelia:
Their business is different; our business is different. Actually, if their business grows we will
have the benefit of selling yarn to them, which we used to sell earlier.
Harish Shiyad:
But they also sell the yarns, right, if I understand it correctly?
S.K. Khandelia:
See, that is a captive consumption basically for their other utilization, specialty yarns we have
been supplying to them as payment, we are supplying on credit. But if that again picks up, we
will have the opportunity to sell to them.
Moderator:
Thank you. The next question is from the line Nimesh Shah from Shah Investments. Please go
ahead.
Nimesh Shah:
I wanted to know that on the absolute number terms what is the impact on our EBITDA margin
because of home textile?
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Bipeen Valame:
Percentage term, if you see our segment reports, EBITDA margin impact to can compute,
because in yarn segment, the yarn segment overall the profitability has remained almost more or
less at same level. So, the impact on consolidated basis you can take it Rs. 38 crores.
S.K. Khandelia:
Roughly 1.5% you can say.
Nimesh Shah:
Okay. Sir, there has been a heavy loss since…
S.K. Khandelia:
Overall impact if you see, our turnover is about Rs. 2,500 crores and this segment has a gross of
Rs. 35 crores. So, I think it will be about 1.5% overall, if you say the yarn segment, yarn segment
will be higher by 1.5% roughly than the overall.
Nimesh Shah:
Sir, what is the plan for turnaround strategy for home textile in next two to three years so that it
becomes EBITDA positive?
Bipeen Valame:
Okay. As I have already explained in my explanation, you see we have not been able to utilize
our capacity fully. And that is the reason of the losses, otherwise we were in profit if you go
through the four- or five-years accounts earlier, before this expansion we were in profits. So, as
I mentioned with this expansion, our expansion coincided with the demonetization, then the
rollout of GST, then withdrawal of the export incentive, then inverted duty structure. All these
things have taken a big toll on the business, expanded capacity could not be fully utilized,
whereas there has been much increased depreciation, finance cost, and the fixed expenses
because we have hired a part of the staff and other things to run those plants and to market those
things. So, there is a reason there is a loss. Now you see the turnaround, once the capacity… You
see, these things are not going to remain forever, these things are going to be behind us in due
course of time. This is one thing. So, once the capacity utilization improves there will be
automatic improvement without doing anything else.
Second thing, we are increasing our product basket. As I mentioned, we are going to install digital
printing, embroidery, wide width stent, wide width dying, there are so many things which we are
going to do. So, to be able to supply a complete package, suppose if a customer wants so many
things we should be able to supply the complete package. And that will improve the utilization
of the plant, and that will also increase the sales of our existing products. So, that was another
thing. So, because of that our capacity utilization will improve, our margins will improve, value
addition will be there. So, this is the second thing. Third thing, the synergy between ASM and
Damanganga Home Textiles will be there because initially the glitches were there now a core
team has been formed between these two companies to leverage the benefit of each other. We
will be selling here the ASM products, we will be supplying to ASM our Damanganga products.
And another thing, we are in the process of developing a brand also, but it will take some time,
because brand development is not, it takes years. So, we have decided to develop our brand over
a period of year. So, once all this product offering is there, then the work on this branding will
start. So, these are the things which are bound to turn around this.
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Moderator:
Thank you. As there are no further questions, may I now hand the conference over to Mr. S.K.
Khandelia for his closing comments.
S.K. Khandelia:
Thank you very much, once again, for participating in conference call and raising very interesting
questions which has helped us to give the insight of our type of business, which is little different
than the normally spinning mill business, and we could explain you the reasons of our
Damanganga Home Textile losses which are not going to stay much longer.
So, in a nutshell I would say, these two and a half years if you see has been pretty difficult, though
the difficulties were getting over to some extent. And in fourth quarter, after the government
restored these duty drawback benefit to some extent, we are seeing improvements. And after
these elections are over, new government is in place things get stabilized, we are hopeful that
whatever consolidation you see in the efficiencies, and the inbuilt strength which we have, will
help us to deliver better performance going forward. Thank you very much.
Moderator:
Thank you. Ladies & gentlemen, on behalf of Sutlej Textiles and Industries Limited, that
concludes today’s conference. Thank you for joining us. And you may now disconnect your lines. Thank you.
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