Sutlej Textiles and Industries Ltd

The Sutlej of today is a broad-based well- rounded organization equipped to weather the downtrend in its sector

OVERVIEW

The global textile sector (in particular spinning) passed through its most challenging year in living memory during the year under review.

It would be pertinent to indicate to stakeholders that the sharpness of the decline was extended across 18 months, making it one of the most prolonged slowdowns in the textile industry, explaining the decline our performance, marked by an unprecedented net loss and decline in revenues.

SLOWDOWN REASONS

There were a number of reasons that contributed to the slowdown in the global textiles sector.

The principal reason for the slowdown can be traced to the period following the pandemic of 2020, marked by a sharp revival in demand for textile products the world over. Anticipating that this demand would extend, the entire textile chain the world over embarked on building large inventories - apparel makers issued orders for fabric, fabric makers issued corresponding orders for yarn and yarn makers issued orders for fibre. The result was that the entire textiles value chain built a larger inventory than routine or what could be considered normal. When demand consumed itself and plateaued, what was until then a positive sectorial momentum began to turn negative; what started as a technical correction in realizations soon translated into panic and extensive liquidation.

All players across the value chain that had built sizable inventory in anticipation of higher demand now began to liquidate their positions; realizations crashed; textile players were faced with marked-to-market losses; sectorial reinvestments were deferred.

The decline was also precipitated by the 'China plus one' phenomenon. During the pandemic, lockdowns across nations disrupted a stable global supply chain of material coming out of China. Since China was the largest supplier of a range of products, the disruption created a priority among large market-facing brands: the need to create alternative suppliers in other countries, moderating their excessive dependence on China and moving towards a broad-based supply chain. In their endeavour to build alternative suppliers across non-China, global buyers issued / large orders across countries. This, in turn, prompted manufacturers in those countries to increase their manufacturing capacities and build larger resource inventories. When the slowdown transpired, these players were not only stranded with larger stocks that needed to be liquidated but also with larger Balance Sheets that needed to be serviced, a twin challenge.

The outbreak of the Ukraine-Russia war aggravated an uneasy textile sector. The war increased the cost of fuel, affected purchasing power in large developed markets, and moderated their textile imports. As countries began to discontinue the support provided to their economies in the wake of the pandemic, there was an increase in interest rates. What was only a sectorial slowdown gradually transformed into an economic slowdown across countries that affected consumer savings and spending.

The emergence of disturbance around the Red Sea affected freight rates as ships were now required to negotiate the Cape of Good Hope as opposed to the Suez. The result was that shipments took longer to be delivered and there was an increase in fuel costs for most related companies. This translated into a higher cost of staying in business, affecting overall profitability.

There were peripheral reasons that aggravated the slowdown: a revival in travel the world over and the accelerated launch of new gadgets moderated the consumer surplus normally available to buy more garments. There was an increase in consumer preference towards ethnic wear, moderating the offtake of conventional products.

The most squeezed within this value chain was the spinning segment, which comprises companies like ours that are predominantly in the B2B space. As the industry recoiled from a decline in demand in the developed markets of US and Europe, garment exporting countries like Bangladesh suffered a decline in fresh orders; this prompted such countries to stagger yarn purchases from companies like ours. When China returned to the global markets following its lockdown, it sought to carve away market share through an enforced price cut. This was most visibly reflected in the import of woven and knitted garments as well as garments that impacted yarn demand, adversely impacting domestic demand and eroding prices.

COUNTER RESPONSES

At Sutlej, we believe that a crisis is best when not wasted.

We recognized that waiting patiently for market conditions to improve would not work; there was a priority to recognize realities, enhance responsiveness and readjust. I am pleased to communicate that the decline in our performance would have been sharper but for the timely changes in our go-to-market during the year under review.

We strategically segregated our portfolio and drew out customized responses to each with projected outcomes ranging from the short-term to the long-term.

This provided the Company with a phased clarity on projected investments and outcomes.

Sutlej broad-based its product mix across applications that extended from the apparel to the non-apparel (industrial and home textiles). This was done to moderate an excessive dependence on textile applications that would keep us vulnerable as long as the sectorial weakness lasted; more importantly, the broad-basing of applications would help build a progressively derisked Company relatively insulated from market meltdowns.

We accelerated the development of yarn products that consumed

CONCLUSION

I must end with a word about governance and our Company's commitment. During the last few years, we deepened our governance through deepening processes, practices, and systems; we invested in digitalization, and environment responsibility.

The result is that the Sutlej of today is a broad-based well-rounded organisation equipped to weather the downtrend in its sector with the a larger proportion of recycled fibre manufactured within.

This will open new markets for our products among large and responsible customers seeking to enhance the sustainability of their products. We believe that corresponding certifications will deepen our brand in this widening market segment.

We accelerated the research- led development of new and specialized yarn varieties that prioritized consumer comfort and elasticity (in blending applications). The focused development was directed at differentiating the Company from the herd, effective in countering the emergence of lower priced alternatives and strengthening its brand as a Company that takes customers ahead.

We opted for financial prudence and deferred sizable capital expenditure, including announcements made in the past, as market conditions transformed with speed and enhanced a priority for financial liquidity.

This recalibration of the capital expenditure helped protect the Balance Sheet, reduced our overall business risk, and enhanced the organizational focus on portfolio responsiveness.

Sutlej exercized its working capital discipline at a time when capacity to capitalize with vigour to any subsequent rebound.

We believe that this strategic shock absorber will enhance value for all our stakeholders as operating conditions revive across the foreseeable future.

I must take this opportunity to thank all those who have contributed to a deepening of this governance ethic - our Board of Directors who navigated the direction, our talent that actualized their blueprint, our suppliers who addressed our sectorial liquidity was threatened.

The management relooked every initiative; the result of this focus was that the finished goods inventory reduced by 50% during the space of just two quarters, making it possible to reduce the proportion of short-term debt within the employed capital. Following this right sizing, we are better positioned to resist the full impact of this slowdown without impairing our Balance Sheet.

Sutlej remained prudently rightsized in terms of its Balance Sheet during the last financial year. The debt-equity ratio was 0.84 as on 31^st March, 2024; the average cost of debt was 7.63% in FY 2023-24 and the Company repaid Rs. 203 crore in debt. I am pleased to state that despite the sectorial slowdown, your Company continued to protect its credit rating.

At Sutlej, we believe that we moved responsively during the last financial year in protecting ourselves from a full impact of the slowdown. These initiatives are expected to translate into bigger and better realities - portfolio mix, time to market, product quality, environment responsibility and the overall cost of staying in business - during the current financial year. needs in a timely manner and our customers who trusted us during the downtrend.

I am particularly grateful to our shareholders who kept faith in our pedigree and prospects during this challenging period. I can assure that when the worst is over, the improvement in our performance will more than compensate for your trust and patience.