I am pleased to present the performance of Sutlej Textiles and Industries Limited forthe Financial Year 2017-18. Although textiles is a cyclical business the challenges werefurther compounded due to structural interventions in the economy.
Despite these challenges I am pleased that Sutlej has been able to respond strongly.The Company reported a top line growth of 9.85% while margins were under pressure. I amconfident that Sutlej's response to this downtrend will translate into enhanced revenuesmargins and surpluses across the foreseeable future.
The Indian economy
India is the world's seventh-largest economy sitting between France and Italy andamongst the fastest growing large economies. After registering a GDP growth of more than7% for the third successive year in 2016-17 the Indian economy headed for slower growth(6.7%) in 2017-18 which was still the second-highest GDP growth rate among major emergingmarket economies.
The year under review was important from a reforms perspective. The Central Governmentannounced a sizable capital infusion into public sector banks. The Indian Governmentannounced a Rs. 6.9 lac crore investment outlay to construct 83677 kilometres of roadnetwork over five years. The impact of reforms related to business ease resulted in Indiabeing ranked 100th in the World Bank's Ease of Doing Business 2017 report an improvementof 30 places.
However the principal highlight of the Indian economy was the introduction of theGoods & Services Tax. This landmark reform sought to create a unified market widenthe tax net provide the formal sector a level playing field and accelerate goods movementpan-India through simplified regulation. Going ahead it is believed that thisformalisation signal could enhance business scale and ease strengthening the country'scompetitiveness.
Even as the introduction of GST represents a new way of conducting business in Indiaits introduction was impacted by short-term adjustment aberrations. Demand growth wasinterrupted across sectors affecting stocking and offtake. However once the adjustmentprocess is complete GST is expected to result in a new way of doing business in India.
Concurrently the Indian economy was marked by the emergence of cutting-edgemanufacturing technologies the growing role of online markets increased role ofartificial intelligence growing role of social media as an opinion-influencer and rapidlygrowing middle-income aspirations. In this dynamic environment there was a premium on theneed to innovate products processes and services. There was a growing need for companiesto improve the product delivery experience introduce products that offered a superiorvalue-for-money proposition and shrink the time to reach customers across geographies.
Global economic overview
The modest improvement in global activity that commenced in 2016 strengthened in thefirst half of 2017. Real global GDP growth improved 70 bps - from 3.1% in 2016 to 3.8% in2017. The US the world's largest economy entered its ninth straight year of growth in2017 (2.3% compared to 1.6% in 2016). In 2017 the Eurozone grew at an estimated 2.5% thefastest since 2007. China's growth of an estimated 6.8% was higher than its 26-year low of6.7% in 2016. Some large emerging market economies like Argentina Brazil and Russiaexited recessions. Emerging Asia delivered strong growth in the face of growingprotectionism concerns. The Gulf countries were affected by relatively weak oil prices(~60% since 2013) which resulted in macroeconomic instability. Growth in emerging marketand developing economies accelerated to 4.3% in 2017. Oil prices averaged $53 per barrelin 2017 up by 24% compared to 2016. (Source: IMF World Bank MOMR)
Sutlej's challenges and spirited response
During the year under review your Company reported a higher turnover but lower profitsdue to various sectorial challenges. The Company was affected by demand slowdown declinein realisations and increased costs. Besides there was a growing need to stabilize plantoperations (RTM and DGHT) of expanded capacities during the first year of commissioning.The Company suffered an increase in costs due to enhancement of tariffs by the statediscom in Rajasthan. An increase in cross subsidy surcharge made the cost of open accessof power prohibitive.
Despite declining margins the Company continued to reinvest in its core business withthe objective to be among the first off the blocks when the consumer sentiment revives andthe textiles sector starts performing better.
Your Company is attractively positioned to outperform the sectoral growth average. Itcomprises a basket of 300+ active products (nascent and mature) enjoys a visible presencein diverse downstream spaces (knitting weaving home applications industrial andmiscellaneous) across around 65 countries. Instead of deferring all business-buildinginitiatives Sutlej continued to introduce market value-added products as a againstdeclining margins. Even as competition turned price-based and dealers de-stocked theirinventories your Company reinforced its engagements with longstanding institutionalclients generating steady product offtake.
Your Company exerted stronger control over factors within. It focused on sweatingassets with the objective to cover fixed costs more efficiently. It examined every costincurred and practice undertaken. It continued to research yarn varieties that enhancedvalue. It continued to modernise facilities to enhance operating efficiencies moderatecosts and achieve qualitative consistency. I am confident that Sutlej is well-placed tocapitalise on an impending sectoral rebound with a larger capacity lower costs and widerproduct mix.
India is one of the most attractive textile markets with a growing preference forvalue-accretive fashionable products. India is a young market its rural areas arerelatively under-penetrated and there is a large national consumption headroom.
Your Company is India's largest spun-dyed yarn manufacturer (including cotton cottonblended dyed and melange yarns). It (total spinning capacity 418680 spindles) enjoyseconomies of scale. It produces niche yarns in a wide range of counts blends and shades.Its value-added product mix (cotton and man-made fibres) can absorb cost increases throughblend alterations. Its fibre-dyed products provide ready-to-use convenience forprocessors. Its discerning customers enjoy growing consumption appetites. Its costleadership has translated into superior financials across market cycles. It enjoys arobust new products pipeline. It pursues a pre-sold manufacturing model that enhancesrevenue visibility. Its strong credit rating validates its robustness. Its capacityexpansions were funded by a judicious mix of internal accruals and low-cost debt.
Your Company intends to implement its green polyester fibre project during the currentfinancial year expected to go on stream in 2019-20. This project when implemented willmake it possible for the Company to generate a significant part of its PSF requirementfrom within strengthening business integration.
Your Company's presence in the home textiles business in India and abroad will enableit to capitalise on the growing demand for quality contemporary fabric for curtainupholstery and niche interior applications. This business will become a major focus areaby virtue of robust domestic demand and the national home furnishing market which isexpected to grow at a CAGR of over 8% across the next few years catalysed by growth inits residential and commercial real estate segments growing traction for custom-designedfurniture and increasing adoption of eco-friendly products.
It is expected that the ongoing slowdown will restrict the entry of new players anddefer brownfield capacity expansions. When the country's pent-up textiles demand revivesthe carry-over inventories would disappear strengthening realisations of yarns and hometextiles benefiting competitive players like Sutlej. I am cautious in my optimism relatedto the sectoral rebound and the Company's performance in 2018-19 but foresee attractiveprospects across the medium-term.
I would like to end by expressing my heartfelt thanks to all our stakeholders for theircontinued support.
C. S. Nopany