Analysis: Sutlej Textiles and Industries Limited

Modified: 11-Sep-20

This article provides in depth fundamental analysis of Sutlej Textiles and Industries Ltd, an Indian company focused on the production of Melange, Modal, Lyocell and Tencel yarns and home textiles segment.

In order to benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

 

Sutlej Textiles and Industries Ltd Research Report by Reader

 

Dear Sir,

Details of my analysis are as under:

 

Financial Analysis of Sutlej Textiles and Industries Ltd:

  • Sales Growth (CAGR of 10 years): 13.70% Good
  • Profitability i.e. NIM: 3.75% (not good)
  • Tax payout: 20.82% (Perhaps due to tax concessions)
  • Interest Coverage: 5.93 (required more than 3) good
  • Debt Equity Ratio: 1.13 (more than 0.5) Negative
  • Current Ratio:
  • Cash Flow: +ve
  • Cumulative PAT vs CFO 10 yrs.: CFO 1374.74 crores vs PAT of Rs.684.75 cr. (Good)

 

Valuation Analysis of Sutlej Textiles and Industries Ltd:

  • PE Ratio: 10.63 (Satisfactory)
  • PEG Ratio: 2.13 (Required within 1) Not Satisfactory
  • Earnings Yield: 9.89 (Good)
  • PB Ratio: 1.78
  • P/Sales Ratio: 0.62 (Good)
  • Dividend yield: 1.47

 

Business and Industry Analysis of Sutlej Textiles and Industries Ltd:

  • Comparison with Industry peers: 10 years sales growth:
    • Ambika Cotton: 14.89
    • Vardhman Textiles: 11.50
    • Sutlej Textile: 13.70
  • Increase in Production Capacity: Production capacity increased from 155,456 spindles in 2005 to 377,688 spindles in 2016 and 416,616 spindles in 2017.
    • Sales price remains almost constant from 200(2011-12) to Rs.206 in 2016.
    • Quantity sold 72,346 (2011-12) to 104,356 units in 2016
    • Sales increased from Rs.466 crores in 2006 to 2,271 crores in 2016.
  • Conversion of sales:
    • Sales increased from 467 crores in 2006 to Rs.2,271 crore in 2016
    • Net Profit increased from Rs.21 crore to Rs.143 crore in the same period.
    • NPM improved from 4.50 to 6% in 2016.
  • Conversion of profits into cash:
    • Cumulative PAT 10 years 649 crores, CFO Rs.1,375 crores
    • Dividend amount increased from Rs.5 crore to Rs.21 crore in 2016.
  • Creation of value for shareholders from profits retained:
    • Total retained profits of last 10 years 569 crore, the total increase in Market cap Rs.120 crore to Rs.1,449 crores i.e. increase of 1,329 crores.

 

Management Analysis of Sutlej Textiles and Industries Ltd:

  • Background check of promoters & Directors: CEO CS Nopany: no negatives found,
  • Management succession plans: Salary of CS Nopany in 2016 is 6.88 crores against NP of Rs.143 crores i.e. 4.81%.
  • Project execution skill is good.
  • Consistent growth in dividend payment is good.
  • Promoter shareholding: 63.90% Good

 

Other Business Parameters of Sutlej Textiles and Industries Ltd:

  • Product diversification: Pure play:
  • Govt influence: No govt influence.
  • Credit rating: A+ (very good)

I could not calculate the self-sustainable growth rate.

I want your analysis of the company for keeping the company in my portfolio for the long term. Also, advise whether it can be exchanged with any other company.

Thanks

Sanjay Jain

 

Dr Vijay Malik’s Response

Hi Sanjay,

Thanks for sharing the analysis of Sutlej Textiles and Industries Ltd with us!

Let us first try to analyse the past financial performance of Sutlej Textiles and Industries Ltd.

 

Financial Analysis of Sutlej Textiles:

Sutlej Textiles And Industries Ltd Financials

Looking at the financial performance of Sutlej Textiles and Industries Ltd for past 10 years (FY2008-17), an investor would notice that the company has been growing its sales at a moderate pace of 10-12% year on year. However, this sales growth has been associated with fluctuating profitability margins. The operating profit margin (OPM) of the company has been varying from 4% in FY2009 to 15% in FY2011 and has declined to 13% in FY2017. Similarly, the net profit margin (NPM) of the company has been varying from net losses in FY2009 to 7% in multiple years including FY2017.

The varying profit margins of the company over the years indicate that the company operates into a difficult and highly competitive business environment where at times, it finds it difficult to pass on the rising costs (including raw material costs and other inputs costs) to the end customers.

Different credit rating agencies have highlighted this aspect of the susceptibility of the profit margins of the company in their report over the years.

Credit rating report from CARE in July 2016:

Furthermore, the ratings also factor in the fluctuation in the prices of raw materials and forex movements imparting volatility to the profitability and intense competition in the sector.

Credit rating report from CARE in September 2017:

Furthermore, the rating strengths are also constrained by susceptibility to fluctuation in raw material prices and fluctuation in foreign exchange imparting volatility to profitability and cyclical & competitive nature of the Textile industry

India Ratings credit rating report of July 2015 (click here):

“Sutlej’s fluctuating operating margins are due to volatile raw material prices in the context of high operating leverage. As the key end-industry (fabrics) for the company is consumer discretionary, it faces high price elasticity of demand”

Further advised reading: 7 Important Reasons Why Every Stock Investor Should Read Credit Rating Reports

Apart from the changes in the raw material prices and other inputs costs, the changes in the govt policies and incentives also affect the profit margins. During FY2018, especially the Q3 (Oct-Dec 2017) quarter, the company witnessed a steep decline in its profit margin because of reduction in the export incentives provided by the govt.

Feb 2018 conference call, page 4:

In case of exports the strong rupee and reduction in export incentives from 11.5% to 2% from 1 st October 2017 were the spoil spots. Due to poor domestic demand mills tried to sell their products into exports creating supply pressure there also. On the other hand rates of polyester fiber which is one of our major raw materials was continuously increasing. Other input cost like power and coal also increased. This could not be passed on to market fully due to bad market conditions. Despite these challenges we have been able to fully utilize

The company has to use its manufacturing facilities for third-party contracts/job works at prices, which barely cover the variable costs.

Feb 2018 conference call, page 7:

S. K. Khandelia: So far is utilization is concerned utilization is full. We are running all our looms. But the problem is that 50% looms are for market and 50% are running on job work on which as I mentioned by me, we are able to cover only variable expenses. So once these job work looms are converted to market looms when the market stabilizes this will add to our earnings.

The management has also accepted the tough nature of business in the industry and it has at times, acknowledged that the industry conditions behave so tough that even reporting a positive profit is commendable.

Feb 2018 conference call, page 10:

S. K. Khandelia: You see, even in these challenging times when many of our competitors and others have not been able to reach to positive profit after tax, we have been able to generate profit after tax positive and even we could maintain about 12% margins on such huge sales.

While analysing the results for Q3-FY2018, an investor would note that the home textile division of the company has made losses in the quarter:

Sutlej Textiles And Industries Ltd Losses In Home Textiles Business

Further advised reading: Understanding Quarterly Results Filings of Companies

In different shareholders’ communications, the company has communicated that it has one of the highest margins in the sector it operates. E.g. FY2017 annual report, page 34:

Result: Sutlej reported one of the highest sectoral margins, validating its strategic direction.

Further advised reading: Understanding the Annual Report of a Company

However, when an investor compares the profit margin of Sutlej Textiles and Industries Ltd with its peers, then she notices that many of the peers of the company have significantly higher profit margins.

Sutlej Textiles And Industries Ltd Peer Comparison

Further advised reading: How to do Business & Industry Analysis of a Company

It indicates that overall, Sutlej has a lot to improve in terms of its competitiveness, product mix and branding in order to match the profit margins of some of the better performers in the industry.

Therefore, in light of the tough and competitive business environment and the changing policy situations faced by the company, it becomes essential that an investor keep a close watch on the profit margins of the company going ahead.

An investor would notice that the tax payout of the company has been consistently below the standard corporate tax rate prevalent in India. This is because the company has tax incentives available from the govt for its manufacturing units:

The FY2017 annual report, page 149:

Sutlej Textiles And Industries Ltd FY2017 Annual Report Tax Incentives

The company has communicated to the shareholders that because of the incentives, the tax rate of the company is expected to be at the level of MAT (minimum alternative tax).

Feb 2018 conference call, page 11:

Abhishek Salunke: And another question in on tax side, the annual tax rate for last two years was around at 17% and average tax rate for three quarters of FY18 is around at 32%. So in the fourth quarter should we expect MAT credit or deferred tax kind of thing to offset tax for fourth quarter which is what happened 4Q FY16 and 4Q FY17?

Bipeen Valame: Yes, so on tax rate you have to see we will remain in MAT.

Further advised reading: How to do Financial Analysis of Companies

 

Operating Efficiency Analysis of Sutlej Textiles:

While analysing the net fixed asset turnover (NFAT) of the company over the year, an investor would notice that the company witnessed an improving NFAT until FY2014 when it had the highest NFAT of 3.59. However, since FY2014, the NFAT of the company is on a decline. In FY2017, the company had the NFAT of 2.31. The decline in the NFAT in recent years is because of significant capital expenditure of about ₹900 cr done by the company during FY2014-17 to increase its manufacturing capacity in both the spindles as well as home textiles segment.

Feb 2018 investors’ presentation, page 28:

Sutlej Textiles And Industries Ltd Capacity Expansion In FY2014 17

An investor would notice that to maintain the NFAT alongside continuing capex, a company needs to spread out the capacity expansion in such a manner that it can keep on utilizing its newly added capacity quickly before it further expands the capacity. We saw an example of such a company, which could have increasing NFAT while it was doing capex as it could quickly utilize the newly added capacities at optimal levels in Skipper Ltd. Investors may read the analysis of Skipper Ltd and its performance on the front of NFAT in the following article:

Further advised reading: Analysis: Skipper Ltd

However, in case of Sutlej Textiles and Industries Ltd, the company is yet to utilize some of its capacities in the optimal manner, which as per the company is to use it for its own market products rather than for job work. As a result, the company is not able to get the true benefit from the added capacities leading to lower sales revenue and hence, the lower NFAT.

Feb 2018 conference call, page 11-12:

Bipeen Valame: So, if you see in case of home textile we still have, as Mr. Khandelia mentioned more than 75% utilization. And typically in home textile what we have seen is that capacity utilization goes up to 80% – 85%, it is not like yarn where we are able to go up to 95%. So we are seeing capacity utilization more than 75%, but major challenge what we saw is that the whole utilization remained at around 50%, rest of it remains on the job work.

An investor would notice that the receivables days and the inventory turnover level (ITR) of the company have been range bound over last decade (FY2008-17).

The receivables days have been in the range of 27-31 days. The receivables days in FY2017 have increased to 31 days, which is on the account of different accounting treatment needed for trade receivables because of new accounting standards (IndAS). Under IndAS, the company needs to show the receivables, which have been discounted from the banks in its balance sheet instead of contingent liabilities. These receivables, where the company has taken a loan from the banks under bill discounting and as a result, the receivables are to be received by the bank are now shown under trade receivables in the balance sheet whereas earlier such receivables were removed from the “trade receivables” and shown under contingent liabilities.

The company has disclosed this change in the treatment of trade receivables in its FY2017 annual report under section “Notes to first-time adoption”

The FY2017 annual report, page 181:

Trade receivables: Under previous GAAP, company had a policy to derecognise the trade receivables upon discounting on the same and the same were presented as contingent liability. Under Ind AS, the said trade receivables do not meet the derecognition conditions are defined under Ind AS 109, hence the company has re-recognised the trade receivables with the corresponding impact in short term borrowings. This has resulted in increase in trade receivables balance by ₹38.18 crores as at 31 March 2016 (1 April 2015 ₹55.75 crores) with corresponding increase in short term borrowings.

Further advised reading: Understanding the Annual Report of a Company

Over the years, Sutlej Textiles and Industries Ltd has had its inventory turnover ratio (ITR) within the range of 4.7 to 5.5 indicating that the company has been able to keep its inventory utilization efficiency in check.

Therefore, an investor would notice that the company has been able to control its inventory and receivables over the years and as a result has been able to prevent a significant amount of cash from being stuck in the working capital. Therefore, an investor would notice that the company has been able to convert its profits into cash flow from operations.

Further advised reading: How to Analyse Operating Performance of Companies

Over FY2008-17, the company reported a cumulative profit after tax (cPAT) of ₹770 cr whereas during the same period it reported cumulative cash flow from operations (cCFO) of ₹1,454 cr.

An investor may read the following article to understand the factors that influence the conversion of PAT into CFO. The article will illustrate the parameters that lead to a company reporting lower CFO than PAT and vice versa.

Further advised reading: Understanding Cash Flow from Operations (CFO)

 

Margin of Safety in the Business of Sutlej Textiles:

i) Self-Sustainable Growth Rate (SSGR):

Further advised reading: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it is able to convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company was attempting to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

An investor would notice that Sutlej Textiles and Industries Ltd has witnessed an SSGR of -7% to +7% whereas the company has been growing at a rate of 10-12% over the years. As a result, it seems that the company is attempting to grow at a pace, which is higher than what the internal business cash generation is able to sustain. As a result, the company has resorted to raising external funds to meet its growth requirements as the debt has increased from ₹738 cr in FY2008 to ₹1,033 cr in FY2017.

 

ii) Free Cash Flow Analysis:

While analysing the free cash flow (FCF) position of the company, an investor notices that over FY2008-17, Sutlej Textiles and Industries Ltd generated a total cash flow from operations (CFO) of ₹1,454 cr and it did a capex of ₹1,176 cr over the years to grow its sales from ₹791 cr in FY2008 to ₹2,250 cr in FY2017. However, as mentioned above, the company had a sustained high level of debt during the last decade and as a result, it had an interest expense of ₹531 cr over FY2008-17.

Therefore, post the capital expenditure and the interest payment, the company had a cash deficit of ₹253 cr (1454 – 1176 – 531). Moreover, the company has paid out dividends over these years and has also made investments including ₹50 cr invested in the preference shares of The Oudh Sugar Mills Ltd in FY2012.

The company has met the cash shortfall by raising debt from different lenders and as a result, the total debt of the company has increased from ₹738 cr in FY2008 to ₹1,033 cr in FY2017.

Free cash flow (FCF) and SSGR are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

 

Additional aspects & annual report analysis of Sutlej Textiles:

On analysing Sutlej Textiles and Industries Ltd, an investor comes across certain other aspects of the company, which are essential for making any final opinion about the company:

 

1) Management Succession:

Sutlej Textiles and Industries Ltd was a part of K.K Birla group, whereupon the division of family business interests Ms. Nandini Nopany the eldest daughter of Mr. Birla along with her son Mr. C.S. Nopany inherited the company along with two sugar mills: Upper Ganges Sugar & Industries Ltd and Oudh Sugar Mills Ltd. Investors may read the following article in Business Line as reference: Nopanys to ring-fence K.K. Birla legacy; to up stake in Upper Ganges, Oudh Sugar

It seems that recently these companies have witnessed one-step of management succession as a part division of family business of late Mr. K.K. Birla. Currently, Mr. C.S. Nopany who is about 51 years of age is the Executive Chairman.

Going ahead investors should focus on the future management succession-planning put in place by the company.

Further advised reading: Steps to Assess Management Quality before Buying Stocks (Part 3)

 

2) Project Execution:

The company has added to the existing manufacturing capacities in the past in both the business segments of the spindles and home textiles.

Feb 2018 investors’ presentation, page 28:

Sutlej Textiles And Industries Ltd Capacity Additions

The capacity additions have been a mix of inorganic measures (acquisition of Birla Textile Mill in Baddi) as well as organic measures (addition of capacity at existing plants).

Further advised reading: Steps to Assess Management Quality before Buying Stocks (Part 3)

 

3) High Promoter Remuneration:

The Executive Chairman of the company, Mr. C.S. Nopany has taken home remuneration of ₹9.96 cr. The FY2017 annual report, page 100:

Sutlej Textiles And Industries Ltd CS Nopany Remuneration FY2017

The company has not disclosed the absolute amount of ceiling applicable to the remuneration of directors. However, the remuneration seems higher than the statutory limit placed by the Companies Act 2013, which is highlighted by the auditor in its report. The FY2017 annual report, page 111:

According to the information and explanations given by the management, managerial remuneration has been paid /provided in accordance with the requisite approvals mandated by the provisions of section 197 read with schedule V to the Companies Act, 2013 except commission ₹7.20 crores payable to Chairman and other directors for which approval from shareholders are being taken in ensuing Annual General Meeting.

The company has been taking shareholders’ approval to pay a remuneration, which is higher than the ceiling put in the Act.

As per our own benchmark, which compares the promoters’ remuneration with the reported PAT, the FY2017 remuneration of the Executive Chairman ₹9.96 cr, which is 6.3% of the PAT (₹158 cr) for FY2017, is on the higher side.

Further advised reading: How to identify Promoters extracting Money via High Salaries

Investors should keep a close watch on the promoters’ remuneration going ahead.

 

4) Non-disclosure of promoter group entities under the list of related parties:

As mentioned in the new article published in the Business Line (Nopanys to ring-fence K.K. Birla legacy; to up stake in Upper Ganges, Oudh Sugar), the promoters of Sutlej Textiles and Industries Ltd have inherited two sugar mills: Upper Ganges Sugar & Industries Ltd and Oudh Sugar Mills Ltd as part of the division of business of late Mr. K.K. Birla.

Subsequently, the promoters merged Upper Ganges Sugar & Industries Ltd and Oudh Sugar Mills Ltd into a company named Avadh Sugar & Energy Ltd where the promoters Ms. Nandini Nopany and Mr. C.S. Nopany hold key positions (Chairperson and Co-chairperson respectively). (Source: http://www.birla-sugar.com/Our-Companies/About-Us-Avadh)

Sutlej Textiles And Industries Ltd Avadh Sugar About Us

Therefore, it seems that the promoters of Sutlej Textiles and Industries Ltd have significant influence over Upper Ganges Sugar & Industries Ltd, Oudh Sugar Mills Ltd (merged into Avadh Sugar & Energy Ltd). However, none of these names appears in the FY2017 annual report of Sutlej Textiles and Industries Ltd under the related party section as the enterprises over which promoters exercise significant control/influence.

FY2012 annual report, page 161:

Sutlej Textiles And Industries Ltd Sugar Companies Missing From KMP Influence

It might be that due to some legal business structuring/clauses these companies may not fall in the classification of related parties or it might be an omission on part of the company. Therefore, investors may seek clarification from the company about the same.

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

 

5) Supporting promoter group entities from the resources of Sutlej Textiles and Industries Ltd:

While analysing the annual reports of the company, an investor would note that Sutlej Textiles and Industries Ltd has been supporting promoter group companies Oudh Sugar Mills Ltd and Upper Ganges Sugar & Industries Ltd over the years.

The company invested ₹50 cr in Oudh Sugar Mills Ltd in FY2012 by way of Cumulative Redeemable Preference Shares (FY2012 annual report, page 63)

Sutlej Textiles And Industries Ltd FY2012 Oudh Investment

Further advised reading: Understanding the Annual Report of a Company

These investments we carried at their initial investment value of ₹50 cr until FY2016. However, in FY2017, two developments took place:

  • Oudh Sugar Mills Ltd was merged into Avadh Sugar & Energy Ltd. As a result, Avadh Sugar & Energy Ltd and M/s Palash Securities Ltd have issued preference shares to Sutlej Textiles and Industries Ltd in lieu of its investments in Oudh Sugar Mills Ltd.
  • As part of IndAS accounting, Sutlej Textiles and Industries Ltd has to disclose the fair value of the preference shares in the annual report of FY2017.

Sutlej Textiles And Industries Ltd Oudh To Avadh

Therefore, while analysing the FY2017 annual report, an investor notices that the value of the initial investment of ₹50 cr along with the due coupon for the interim period has declined in value significantly. The fair value of this investment in FY2015 was ₹22.49 cr, which has increased to ₹28.32 cr in FY2017.

The decision of Sutlej Textiles and Industries Ltd to invest in Oudh Sugar Mills Ltd might be akin to supporting promoter group entities using the resources of the company where the investment has turned into losses.

 

6) Supporting promoter group entities from the resources of Sutlej Textiles and Industries Ltd (Part 2):

While analysing the annual reports of the company, an investor would notice that Sutlej Textiles and Industries Ltd has given a loan of ₹40 cr to Upper Ganges Sugar & Industries Ltd in FY2016. (FY2016 annual report, page 131):

Sutlej Textiles And Industries Ltd Upper Ganges FY2016

The investor would note that Upper Ganges Sugar & Industries Ltd repaid the loan within the financial year; therefore, there was no loan outstanding at the end of FY2016.

However, in the FY2017, Sutlej Textiles and Industries Ltd again gave a loan of ₹40 cr to Upper Ganges Sugar & Industries Ltd, which was also repaid by it within the financial year; therefore, again there was no loan outstanding at the end of FY2017. (FY2017 annual report, page 182):

Sutlej Textiles And Industries Ltd Upper Ganges FY2017

Moreover, if an investor reads the summary balance sheet presented by Sutlej Textiles and Industries Ltd along with H1-FY2018 results, then she would notice that a loan of ₹40 cr is again outstanding in the books of the company at September 30, 2017.

Sutlej Textiles And Industries Ltd Upper Ganges FY2018

As the details of the counterparty to this ₹40 cr loan outstanding at September 30, 2017, is not disclosed in the Ltd information in the quarterly results, therefore, it cannot be said with certainty whether this loan is to Upper Ganges Sugar & Industries Ltd (or to Avadh Sugar & Energy Ltd in which it has been merged). Investors may seek clarification from Sutlej Textiles and Industries Ltd about this counterparty.

Therefore, it might be one of the scenarios that Sutlej Textiles and Industries Ltd has decided to continuously support Upper Ganges Sugar & Industries Ltd to the extent of ₹40 cr. As a result, it might advance the loan at the start of the financial year and take repayment before the end of the financial year. Therefore, the loan is not outstanding at the end of the financial year.

This can be one of the scenarios. Investors may seek clarification from the company about this loan as it may also tantamount to supporting promoter group entities using the resources of the company.

Further advised reading: How Promoters benefit themselves using Related Party Transactions

 

7) The statutory auditor did not do self-audit of two key manufacturing units:

In the FY2017 annual report, the statutory auditor of the company, M/s Singhi & Co has highlighted that they did not conduct the audit of two of the key units of the company at Kathua (J&K) and Baddi (Himachal Pradesh). Instead, a branch auditor has audited these units. (FY2017 annual report, page 110-111):

We did not audit the financial statements of Kathua and Baddi Units included in the financial statements of the Company whose financial statements reflect total assets of ₹1094.91 crores as at 31st March, 2017 and total revenues of ₹1612.71 crores for the year ended on that date, as considered in the financial statements. The financial statements of the Kathua and Baddi units have been audited by the branch auditor whose reports have been furnished to us, and our opinion in so far as it relates to the amounts and disclosures included in respect of the branches, is based solely on the report of branch auditor.

The statutory auditor, M/s Singhi & Co has acknowledged that it has not visited these branch auditors. (FY2017 annual report, page 111):

In our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books and proper returns adequate for the purposes of our audit have been received from branches not visited by us

Further advised reading: Understanding the Annual Report of a Company

Investors may seek details of the branch auditor from the company to do their own assessment of the branch auditor who has audited the key manufacturing units.

 

8) Issues related to compliance with guidelines:

Upon reading past annual reports, an investor notices that Sutlej Textiles and Industries Ltd has faced many issues related to compliance with regulations:

  • SEBI order on non-compliance of insider trading guidelines: The Company paid ₹5.39 lac as a settlement for the inquiry initiated by SEBI for the delay in disclosure of insider trades by the company.

The High Powered Advisory Committee (HPAC), considered the settlement terms proposed by the applicant in its meeting dated May 30, 2016 and recommended the case for settlement upon payment of ₹5,39,750/- (Rupees Five Lakh Thirty Nine Thousand Seven Hundred and Fifty only) by the applicant towards settlement terms for the aforementioned default.

  • Delay in appointment of women director: In FY2015 annual report, the company secretary has highlighted as part of its secretarial audit report, page 83 that the company did not appoint women director on its board in time as per the statutory requirements.

During the period under review the Company has complied with the provisions of the Act, Rules, Regulations, Guidelines, Standards, etc. mentioned above subject to the following observations:

1. No women director was appointed during the year 01.04.2014 to 31.03.2015

2. Company has not made expenses up to limit prescribed under CSR activity

  • Nonpayment of interest due to lenders on time: An investor would notice that every year at March 31, the company has an interest amount of about ₹3-4 cr, which is due for payment, but has not been paid by the company.

Sutlej Textiles And Industries Ltd Interest Accrued And Due

Further advised reading: Understanding the Annual Report of a Company

Looking at the financial position of the company as well as its credit rating of AA, it does not look like that the company would be facing any financial crunch to pay these interest payments on time when they became due. However, it is advised that investors should seek clarifications from the company as well as the credit rating agencies about these delays in interest payments.

In light of these issues, it does not come as a surprise to the investor when she reads the observation by the company secretary in its FY2017 secretarial audit report that the company should improve its compliance to regulations. The FY2017 annual report, page 106:

In respect of secretarial standards (SS-1) issued by ICSI, the Company has follow the same, however in my opinion there is scope for improvement.

Investors may seek clarifications from the company on the steps taken by the company in order to ensure that it complies with all the required regulations.

 

9) Pledging of promoters shareholding:

Investors would notice that one of the companies classified as promoters of the company, Uttar Pradesh Trading Co. Ltd has pledged 3,000,000 shares to lenders.

Sutlej Textiles And Industries Ltd Pledging

Further advised reading: How to know if Promoters are Losing Commitment to the Company

It might be that the promoter entity has raised funds from lenders by providing its shares in Sutlej Textiles and Industries Ltd as a security in order to support other promoter group entities/personal usage.

An investor should monitor the changes in the level of pledging of promoters shareholding going ahead.

 

Margin of Safety in the market price of Sutlej Textiles:

Currently (April 25, 2018), Sutlej Textiles and Industries Ltd is available at a price to earnings (P/E) ratio of about 11.5 based on trailing 12 months earnings, which offers a small margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.

However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

 

Analysis Summary

Overall, Sutlej Textiles and Industries Ltd seems to be a company, which has been growing at a moderate pace of 10-12% over the last decade in an industry, which is marked by high competition and pricing pressures. As a result, the company has been facing fluctuating profit margins, as it is not able to pass on the increases in the raw material and other inputs costs to its customers in time. The company is also impacted by govt policies and as a result, the recent reduction in export incentives by the govt has led to a reduction in its profitability.

The company has been able to increase its manufacturing capability consistently both by organic plant capacity creation as well as by inorganic acquisition where it acquired another Birla group textile company. However, recently, the company is not able to utilize entire capacity for its own market and has to run about half of the capacity as job work for third parties where it is not able to make any profits. As a result, in the recent most quarter (Oct-Dec 2017), the home textiles division of the company reported losses.

The company operates in a capital-intensive business, where it is not able to meet its funds requirement for capital expenditure from the cash generation from the business operations. As a result, the company has relied on debt to meet its growth requirements.

The company has been supporting different promoter group companies by way of loan and investments in preferred shares. Some of these investments have witnessed a decline in value indicating a loss to the shareholders of the company.

It seems that the promoters are taking home a remuneration, which is higher than the statutory limits and as a result, the company has to take approval of shareholders in the AGM to pay the higher remuneration to the promoters.

There are many aspects where investors may seek clarifications from the company like delays in interest payments to lenders, non-classification of promoters’ group companies as related parties, loan to one such promoter group company etc. An investor may seek clarification from the company about the opinion of secretarial auditor about the scope of improvement in the compliance to norms, pledging of promoters shareholding, details of branch auditors who have audited two key manufacturing units of the company etc.

Investors should monitor the profit margins of the company along with debt levels, promoters’ remuneration & pledge levels, compliance issues and investments/loans to promoters’ group companies.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views about Sutlej Textiles and Industries Ltd. However, investors should do their own analysis before taking any investment related decision about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

Hope it helps!

Regards,

Dr Vijay Malik

P.S:

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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