Sutlej Textiles Low on Valuations, not on Returns
Ensuring consistent supply of key inputs and cutting its debt has put co firmly on the growth path
Sutlej Textiles has turned into a consistent performer that is low on valuations but high on returns, a turnaround that became possible after the company ensured consistent supply of three key inputs of cotton, power and labour while reducing its debt levels. This strategy has helped the company make a strong comeback after facing sharp volatility in earnings between 2007-08 and 2011-12.
Part of the KK Birla group, Sutlej Textiles is India’s leading manufacturer of dyed yarn, with a capacity of 2.6 lakh spindles in three units spread across Jammu & Kashmir, Rajasthan and Gujarat. The company is also India’s largest manufacturer of value-added cotton melange yarn, which is used for high-value clothing. All leading fabric and clothing manufacturers such as Siyarams, Raymond, Digjam, Donear are among the customers of the company which gets one-fourth of its revenues from exports.
“Raw materials, uninterrupted power supply and labour are the three critical inputs for our industry. The company invested in building quarters at manufacturing units to reduce labour shortages that had plagued our performance in the past,” said Dilip Ghorawat, Sutlej Textiles’ whole-time director and chief financial officer.
The company carries 4-5 months of cotton inventory while maintaining excellent relationship with domestic producers of polyester and viscose. It has built a 12mw captive power plant at its Rajasthan unit and a 3mw plant at its Gujarat unit. “Consistent 24x7 power supply from the state grid in Gujarat resulted in the captive power plant remaining idle for the last three years. As a result, we decided to impair that asset in FY14,” Ghorawat said.
The company also slowed its capex plans over the past four years in a bid to bring down its debt-to-equity ratio. “In the last four years put together, we spent only Rs 125-130 crore, when other industry players were spending hundreds of crore. We compromised on growth, but now the debt-equity ratio stands at 0.6 as against 3.5 in FY10,” said Ghorawat. The company is currently in the process of adding around 13% spindle capacity to its value-added cotton melange segment, which is expected to be commissioned by October. This can add Rs 200-250 crore on annualised basis at full utilisation levels. Deleveraged balance sheet and a 30acre land parcel at Kota in Rajasthan give the company comfort to start planning for growth in future. “We have organic and inorganic growth plans,” Ghorawat said without disclosing details. “We have three benchmarks when considering these opportunities — return on capital employed should be above 20%, debt-equity ratio shouldn’t exceed 1.2 and the project’s payback period should be maximum 4.5 years.” In this entire process, the company has gained in vitality. Its return-on-equity stood at 28% for 2013-14, which Ghorawat said was the highest in the entire textiles industry. The company has maintained a consistent dividend paying record since inception and declared Rs 8 per share dividend for the fiscal. The company is currently valued at 3.7 times its net profit for 2013-14 and 1.1 times its book value. It has emerged as a strong contender for future growth.