Sutlej Textiles Initiating Coverage Research Report By Kotak Securities

We initiate BUY recommendation on Sutlej Textiles and Ind. Ltd (STIL)

Sutlej Textiles and Industries Ltd was incorporated on 22.06.2005 and was created out of a corporate restructuring exercise in which the textiles division of Sutlej Industries Ltd. (SIL) and Daman Ganga Processors Ltd were demerged w.e.f. July 1, 2005. A flagship unit of the multibusiness conglomerate promoted by Dr. K. K. Birla, Sutlej is among India’s leading textile producers with a value-chain extending from yarns and fabrics to home textiles. STIL is among India’s leading producers of dyed spun yarn and value added/speciality yarn. It also manufactures home textiles. It has a presence right from spinning (man-made & cotton yarns) to dyeing to weaving (processing of home textiles) and processing/finishing. It is amongst the few exclusive spinners in India for specialty yarns such as Modal, Lyocell and Tencel in the country. Its manufacturing facilities are located in Bhawanimandi (Rajasthan), Kathua (Jammu & Kashmir) and Daheli (Gujarat). The company also has its own captive power plants to ensure steady supply of electricity for uninterrupted production.

60% of its spindle age is less than a decade old. Along with steady capacity additions in Yarn segment, STIL is also aggressively scaling up its Home Textiles business. STIL has a competitive edge, given its leadership, diversified product offerings with increasing focus on value added yarns (like Cotton Melange Yarn, which is a specialized yarn requiring special set of manufacturing skills), strong clientele (domestic & global) and brand recall, steady capacity additions in yarn, aggressive expansion plans in high margin home textiles segment (with increasing focus on fast growing categories like Curtains and Upholstery fabrics) and strong credit ratings (upgrades from CARE in 2017, thus resulting in low credit risks). STIL is placed comfortably to leverage its strength and exploit the available opportunities in the Indian textile space. While yarn accounts for 95% of total turnover, home textiles contribute just 5%.

Profile: Quite Impressive

Sutlej has been a consistent dividend payer since its incorporation. The dividend amount has increased from Rs.4.4 crore in FY2006 to Rs.21.3 crore in FY2017. In % terms, the average dividend payouts over FY2012-17 stood at 12.7%, which is low, but still encouraging, considering aggressive expansion plans undertaken by the company during the same period. What we like about STIL is that it has paid dividends even during periods of slowdown.

STIL has a strong global footprint with presence spanning over 60 countries across Europe, North America, South-East Asia, etc. The company exports around 27% of its revenues to major developed and emerging economies like Australia, Argentina, Bangladesh, Bahrain, Belgium, Brazil, Canada, China, Chile, Cuba, Egypt, France, Germany, Hong Kong, Italy, Morocco, New Zealand, Peru, Philippines, Poland, Portugal, Russia, Saudi Arabia, Sri Lanka, Turkey, USA, UAE and UK, among others. The company is one of the largest exporters of value added synthetic and blended dyed spun yarn in the country.

The revenue share of exports has remained in the range of 25-26% over the years. While the long term target of exports share remains at 25%, the management could increase its share of exports in the near term due to slowdown in the domestic demand.