SUTLEJTEX - SUTLEJ TEXTILES & INDUSTRIES LIMITED Share Price

In the earnings conference call for Q2 and H1 FY26, management expressed a cautiously optimistic outlook for Sutlej Textiles amid a challenging textile landscape characterized by fluctuating input costs and global trade uncertainties. Key takeaways from the management include:

1. Spinning Capacity Utilization: The spinning capacity utilization for Q2 FY26 was at 86%, slightly lower than the 91% reported in Q2 FY25.

2. Financial Performance: Stand-alone income was INR 642 crores, down 6% year-on-year. However, gross margin improved to 46%, an increase of 350 basis points compared to the previous year. The EBITDA for the quarter stood at INR 17.48 crores, resulting in a loss of INR 18 crores.

3. Segment Performance: The yarn segment operated optimally, with stable demand in the polyester viscose category, while the fiber division performed well due to cost management. The home textiles segment showed a strong turnaround driven by value-added products.

4. Strategic Focus: Management emphasized cost optimization and enhancing the share of sustainable products. They aim to strengthen their balance sheet with a comfortable debt-to-equity ratio of 0.97x and to invest in process enhancements and sustainability initiatives.

5. Market Diversification: There is a push towards diversifying customer bases and geographies, particularly in response to tariff issues in target markets like the U.S. Management highlighted optimism regarding upcoming free trade agreements with the U.K. and EU.

6. Product Innovation: There is a strategic shift towards value-added offerings, with a target to have 33% of the product mix comprising these higher-margin products, which typically have better net margins in double digits.

Looking ahead, management is focused on leveraging operational efficiencies to improve margins while navigating through internal and external challenges.

Q&A Section

Q1: I understand that the industry is going through a tough time, but I've seen that compared to all other industry peers, our EBITDA margins are always low for the last 5-6 years, especially in the yarn business. What could be the reason? Has our PET project been ineffective?

A1: We primarily operate in synthetics and cotton. Our focus has been on upskilling our product mix, which showed results in Q2. The headwinds in the first half have been considerable, but we are steadily progressing by enhancing our product portfolio to improve margins.

Q2: Do we agree that we have lost market share in the last 10 years? Has our INR 200 crore PET project been a failure?

A2: No, the recycled polyester project is seeing traction, and we're partnering with other firms to enhance margins. The project was impacted by volatile raw material prices, which have stabilized, providing a clearer forecast for our fiber business.

Q3: Can you guide on yarn prices compared to last year and how affected we are by U.S. tariffs?

A3: We see an 8% to 12% increase in synthetic yarn prices domestically, while cotton has dipped due to fiber pricing. The U.S. tariffs and route issues to Bangladesh impacted exports, but we're optimistic that clarity will help restore normal EBITDA levels.

Q4: You mentioned 86% capacity is optimal, but previously had over 90%. Why is this the case now?

A4: The 86% refers to installed spindles, while running spindles are at about 94%. There's a strategic decision to temporarily shut around 15,000 spindles to manage costs until market conditions improve.

Q5: Apart from raw material and selling prices, what cost optimization measures are being considered?

A5: The biggest lever will be diversifying our product portfolio towards more value-added yarns. We're also looking at rationalizing manpower costs and automating non-essential activities to improve overall efficiency.

Q6: What's the modernization capex for this year or next?

A6: We have committed about INR 58 crores in capex for this year. Depending on market conditions, we anticipate a similar amount for the coming year.

Q7: Can you discuss the recycling plant's raw material concerns?

A7: In recycled polyester, PET bottles are crucial, and we're maintaining 45-55 days of raw material inventory to stabilize pricing. Our costs average around INR 44 to INR 45 per kg for raw bottles.

Q8: How is the Kathua plant performing post-closure, and are there any cost inefficiencies?

A8: The Kathua plant is fully operational now, and while lost capacity cannot be recouped, we aim to optimize through efficiency and cost management in the next two quarters.

Q9: How have U.S. tariffs affected customer behavior, especially regarding order cancellations?

A9: We expect tariff resolutions soon. We're balancing our exports by catering to non-U.S. customers in Bangladesh and have expanded our marketing efforts to new markets like Egypt.

Q10: Are there plans to increase the number of retail stores?

A10: We've cut down on store openings and assess market response before establishing new outlets. We have internal benchmarks for average revenue from each store, which we monitor closely.