India Ratings and Research (Ind-Ra) has upgraded Sutlej Textiles & Industries (Sutlej) Long-Term Issuer Rating to ‘IND AA-’ from ‘IND A+’. The Outlook is Stable.
In a declining price and subdued economic scenario, Sutlej’s volumes declined only marginally, excluding contribution from new cotton melange capacity commercialised in November 2014. The increasing proportion of value-added products and better management of inventories have helped it mitigate the pressure on margins in FY15.
The company’s use of the working capital limits was 57% of the sanction limit and 64% of the drawing power on average in the 12 months ended May 2015. Also, its net working capital cycle improved to 95 days at end-FY15 from 114 days at end-FY14.
It has a broad ranged product portfolio in dyed polyester, cotton and blended yarn, with 30% of them being value-added products. In FY15, the contribution of value-added product revenue increased to about 32% from about 25% in FY13.
Increased exposure to cotton melange yarn will help Sutlej diversify its raw material price volatility risk to an extent. Sutlej has plans to incur capex of INR2.4bn for adding 31,104 spindles for the production of cotton melange yarn.
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.
