Sutlej Textiles and Industries Limited (STIL) was incorporated in the year 2005. The company is a part of K. K Birla Group having interest in diverse fields like Fertilizers, Engineering, Textiles, Sugar, Tea, Coffee, Food Products, Media, Information Technology, Biotechnology and Shipping.

The company manufactures synthetic/blended/cotton yarns, fabrics, home textiles and garments. STIL has an installed capacity of 2,53,000 spindles and 60 looms as of March 31,2010. However STIL is predominantly a yarn manufacturer with sales of cotton yarn contributing around 27% and that of synthetic yarn contributing around 67% to its total revenue in FY10.

Key Highlights

Backward Integration: It has commercialized a 12-MW thermal power plant at Bhawanimandi unit. This investment will ensure a steady supply of quality power in this energy-intensive industry.

Increase in volumes on account of Expansion: STIL made an expansion of 31104 spindles at Kathua unit to manufacture cotton melange and cotton blended dyed yarn. This was completed and the commercial production commenced from May 1, 2009. Future Outlook

At Current market price of Rs255, the stock is available at P/E of 6.21x of its FY11E earnings, and 5.05x of its FY12E earnings. We recommend BUY with target price of Rs 369, given that company’s future shows potential.

Sutlej Texxtiles and Inddustries is an integrated textile compnpanyengaged in spinninng, weaving home fg,furnishing and garments.

It’s spinning and weavving division manufactures cotton ynyarn,yarn, woven fabrics and other speciialty yarns ssuchblended yas modal, lycocell an tencel. Its home furn,ndnishing divissionproduct offering inccludes curttain fabrics, seat covvers,covers, bed spreads and kitchen line Its garmeden.entsmattress cdivision mmanufactures 1.6 million trousers asnannually and isdalso plannning to start the production of suits a blazers.

It caters to the majo players in th industry like Raymonds, HorheeHarry’s Collectiion, Digjam, MMarks & Spencer, JC Penney Next, B.H.S.y,.,ASDA, Carrefour, Grasim, Donear, Siyaram, Arrow Sears, Kohls Arvind and J,w,s,John Miller.

During the quarter ended June’10, Sutlej Textiles Ltd.’s net sales grew 40.6% (y-o-y basis) to Rs 348.67 cr from Rs 247.99 cr during the corresponding period last year. The operating profit of the company witnessed a growth of 78.44% to Rs55.28 cr as against Rs30.98 cr last year.

The Operating profit margin of the company surged 336 bps to 15.85% as against 12.49% during the same quarter last year. The bottom line of the company grew by a massive 256.42% for the quarter ended 30th June, 2010 to Rs 15.54 cr as against Rs 4.36 cr during the corresponding period last year.

However, on q-o-q basis, the company’s topline grew 9.46% but bottom line grew marginally by 6.95% for the quarter ending June’10.

Superior domestic demand and a boost in rural economy has affected the textile industry of the country positively and helped the firm to register a better performance in Q1.

During FY10, the company achieved capacity utilization close to 94% in the yarn division as against 90% in the previous year. Despite intense competition, it achieved highest ever sales and exports. Its sales increased 35% from Rs. 851 crores to Rs. 1147 crores and exports increased 62% from Rs. 204 crores to Rs. 332 crores. The Company forayed into new geographies and increased its volumes in the existing markets.

This spectacular performance could be achieved due to initiatives taken towards capacity expansion, modernization; better quality control, judicious product mix and continuous modernization with several cost reduction measures and sustained emphasis on product quality.

Company’s robust earnings are due to spindleage expansion along with superior yarn realisations in this fiscal. Two other developments catalyzed the record performance: firstly, there was an immediate cost pass through from cotton to yarn; secondly, the combination of record yarn prices, additional 43,776 spindles and value addition (dedicated to mélange and other value-added yarns during a full year’s working).

The company has a moderate dividend yield in the past four years. In FY10, they increased the dividend payout from 10% to 25%.

Textile Sector Contribution:

According to the Annual Report 2009-10 of the Ministry of Textiles, the Indian textile industry contributes about 14 percent to industrial production, 4 per cent to the country's gross domestic product (GDP) and 17 per cent to the country’sexport earnings. It provides direct employment to over 35 million people and is the second largest provider of employment after agriculture.

According to the Ministry of Textiles, the cumulative production of cloth during April’09-March’10 increased by 8.3 per cent as compared to the corresponding period of the previous year.

Total textile exports increased to US$ 18.6 billion during April’09-January’10, from US$ 17.7 billion during the corresponding period of the previous year, registering an increase of 4.95 per cent in rupee terms. Further, the share of textile exports in total exports has increased to 12.36 per cent during April’09-January’10, according to the Ministry of Textiles.

As per the Index of Industrial Production (IIP) data released by the Central Statistical Organisation (CSO), cotton textiles have registered a growth of 5.5 per cent during April-March 2009-10, wool, silk and man-made fibre textiles have registered a growth of 8.2 per cent and textile products including wearing apparel have registered a growth of 8.5 per cent.

 Technical Textile Segment:

According to the Ministry of Textiles, technical textiles are an important part of the textile industry. The Working Group for the Eleventh Five Year Plan has estimated the market size of technical textiles to increase from US$ 5.29 billion in 2006-07 to US$ 10.6 billion in 2011-12, without any regulatory framework and to US$ 15.16 billion with regulatory framework.

The Scheme for Growth and Development of Technical Textiles aims to promote indigenous manufacture of technical textile to leverage global opportunities and cater to the domestic demand.

Government Initiative for Textile Industry:

According to the Ministry of Textiles, investment under the Technology Upgradation Fund Schemes (TUFS) has been increasing steadily. During the year 2009-10, 1896 applications have been sanctioned at a project cost of US$ 5.23 billion. The cumulative progress as on December 31, 2009, includes 27,477 applications sanctioned, which have triggered an investment of US$ 45.5 billion and amount sanctioned under TUFS is US$ 18.9 billion of which US$ 16.4 billion has been disbursed so far till the end of April, 2010.

Future Prospects: In May 2010, the Ministry of Textiles informed a parliamentary panel that it proposes to allocate US$ 785.2 million for the modernisation of the textile industry.

The Scheme for Integrated Textile Park (SITP) was approved in July 2005 to facilitate setting up of textiles parks with world class infrastructure facilities. 40 textiles park projects have been sanctioned under the SITP. According to the Minister of State for Textiles, Panabaaka Lakshmi, under the SITP, a cumulative expenditure of US$ 204.3 million has been incurred against allocation of US$ 220.7 million in the last three years.

The government’s interest subsidy under TUF will modernize the industry, counter market challenges and enable it to stay competitive in quality and price. The Indian home furnishing industry is influenced by traditional designs, fused with some international styling (use of lace, minimalism, etc). Such designs appeal to customers attracted by fused concepts.

The home textile market witnessed an increase in the use of organic fabrics, textures and weaves that focus on natural fibres. After a brief lull in 2009, the home furnishing market is expected to recover, propelled by middle-class income growth and an expansion in home-specific organized retailing chains.

The hospitality industry is expected to strengthen the home furnishing market by 25 percent. In a space hitherto dominated by indigenous players, international players are entering.

The Company emerged as an integrated player in the textiles industry with a value chain extending from yarn and fabrics to garments and home textiles, enabling it to make its presence in every segment.

Sutlej is the biggest producer and one of the largest exporters of value added Synthetic and blended dyed spun yarn in the country. It is also one of the prominent manufacturers of Cotton and Cotton Blended Dyed and Melange yarn in the country.

Sutlej is well poised to capitalize on the unfolding opportunities in textiles and clothing both in the international as well as in the domestic space since it has manufacturing facilities with State-of-the-art plant and equipments sourced from across the globe, strong R&D Cell in each unit, wide marketing network and a large pool of technical and managerial talent.

The company is on the verge of improving its product mix by enhancing the proportion of value added premium products. It is producing lycra-based fabrics which enjoy high demand in the Gulf and has also initiated yarn trading to broaden the product basket. It would further invest around Rs 54 cr during 2010-11 and 2011-12 for plant modernization and up gradation.

It is expected that the company will fetch high realisations by liquidating low-cost cotton stocks accumulated over 2009-10 and will maximize production across all their manufacturing facilities (yarns, fabrics, garments and home textiles), corresponding to 90–95 percent capacity utilization.

Company has positioned itself well into overseas markets, hence the prospect of cotton exports seem good as there are expectations that Govt. of India would ease curbs on exports of cotton from Oct 2010.

The Technology Up gradation Fund is expiring in 2012, so low-cost funds will be difficult to acquire which would slow down fresh capacity creation. Thus, the ensuing demand-supply mismatch is expected to strengthen yarns and apparel prices. This can boost the profitability of the company in future.

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