Mr.K Agarwal

Unlike many other domestic players that recorded steeper fall in profits, Suryalakshmi Cotton Mills restricted the fall in its profit to 15% at Rs 22.85 crore on 16% rise in net sales to Rs 483.49 crore in the nine months ended December 2011. This is partly due to the fact that the company is present in yarn and fabric (including denim) segments, with former recording fall in margins and latter witnessing improvement in margins. To know more about the industry dynamics and the company's initiatives, Capital Market's V.Kandaswamy conducted an email interview with Paritosh K Agarwal, Managing Director, Suryalakshmi Cotton Mills. Excerpts.

Kindly share your views on the Free trade agreement with Bangladesh, with specific insight on its impact on the Indian textile sector, in the short, medium and long term.

FTA has resulted in increase of import of garments from Bangladesh. In future garment manufacturing in India is expected to lose the business to Bangladesh due to low wages. There is possibility of flow of illegitimate goods of a third country entering India through this route. Bangladesh is also suffering from low demand from EU & US and it is bound to put pressure on Indian producers

China is witnessing rise in labor and power costs. Bangladesh is also hiking power costs significantly. On the other hand, India has opened up its textile sector to Bangladesh. In this regard, do you expect any improvement in the global competitiveness of the Indian textile sector? What are the other initiatives required at the government end to improve India's global competitiveness in general and in textile sector in particular.

Better infrastructure & government policies will help the Indian textile sector to take the advantage of higher manufacturing cost in china. India is fairly competitive, but to have an edge we need cheaper fuel and reliable power, lower interest rates and a superior infrastructure. We need to increase our share in value added products. Weaving & processing capacities should be encouraged.

What is the current total raw cotton stock of the company and how many months' requirement is it sufficient for. Also, what are the average costs thereof, and Var. (%) in the average cost of raw cotton held by the company, over the previous year.

Company is having 3-4 months stock and is in the process of procuring the same based on availability of quality stock at competitive prices. The average prices are ranging between Rs 32000 to Rs 34000 per candy and are less than last year.

What are the various units of the company and their production capacities? Of this, what were the expansions completed in FY 2010-11 and in the current fiscal sofar.

The company has a spinning division at Amanagallu, Mahabubnagar District, Andhra Pradesh with a capacity of 60864 spindles for manufacture of cotton as well as synthetic yarns and a denim division at Ramtek, Nagpur district, Maharashtra with a capacity of 40 million meters per annum for manufacture of denim fabrics. We have already completed the modernization of 56 looms. The benefits of which will be reflected from March, 2012 onwards.

The company's exports trebled in two years from Rs 45.46 crore in FY 2008-09 to Rs 139.63 crore by FY 2010-11. Do you expect the share of exports in total turnover to accelerate?

Yes this financial year there is a small growth and going forward we would expect better sales in export as we improve our products and services combined with forays in new markets. We are working hard to improve our share in US markets.

What are the share / value of exports in total sales of (a) yarn (b) denim in FY 2010-11 and in the nine months ended December 2011? What is the share of exports to (a) US (b) EU in your total exports, and whether your company is hopeful of increasing its textile exports in general, and to US and EU in particular? How?

Kindly share the dynamics of the global and domestic denim sector. How is the demand growth in the global and domestic markets? What were the estimated closures and capacity additions in denim in the global and domestic markets in 2010 and 2011? Do you believe that the worst is over for the Indian denim sector?

The worst is not over for Indian denim, there is the global recession and new capacities hurting in the domestic sector. A revival in global markets in a small way in the next half and stability and relaxing of banking norms in India would surely improve demand in India . We see the business getting better and denim coming out of the difficult times in the next quarter.

Do you visualize rise in denim prices, considering the rebound in raw cotton prices since January 2012?

There will be a marginal price movement either way as the prices have more or less stabilized, the raw material is expected to be not volatile.

The company has consistently recorded rise in PBIT margins of the denim sector to 13.9% in the nine months ended December 2011, from 10.6% in the nine months ended December 2010, 5.5% in the nine months ended December 2009 and mere 2.4% in the nine months ended December 2008.Do you expect further improvement in denim margins of the company?

Yes. We are pushing on value additions and all our efforts are to push up the margins. New buyers are added in exports.

What is your view on demand for, and margins of the cotton yarn segment? With improving cotton prices, do you expect the margins to be restored to normal levels? If so, how soon?

The Company is manufacturing and selling synthetic and blended yarns. Thus it will not have any impact. In fact the margins have improved.

Kindly update us on the performance, and plans for the company's garment subsidiary Suryakiran International.

The company has made a turnover of Rs 27.44 crores for the nine months period ended 31-12-2011 with a net profit of Rs 0.25 crores as against a turnover Rs 21.27 crores and a net profit of Rs 0.18 crores during the corresponding period in previous year. We are constantly finding out the new markets for improving prices and controlling the overheads to the extent possible to improve its margins.

What is the current status of plans to more than double the spindles capacity to 1.1 lakh, increase denim capacity by 4 million metres, and 25 MW thermal power plants? Kindly share the total project cost thereof and means of finance thereof, and when each of these capacities is likely to be commissioned.

We have already taken up the setting up of 25 MW thermal power plant with a total cost of Rs 128 crores and the same was funded by ECB/term loan of Rs 85 crores, promoters contribution of Rs 15.66 crores and internal accruals of Rs 27.34 crores and is expected to be commissioned in the first quarter of 2012-13. Other capex plans will be taken up at appropriate time on completion of this ongoing plan.

What was the effective reduction in export incentives for (a) yarn (b) fabrics other than denim (c) denim due to shift from DEPB (which expired in September 2011) and the revised duty drawback scheme?

There is no effect on yarn as the DBK is more than the DEPB even before the shift. Whereas the impact is nil in some cases and 1% of the FOB value in some cases depending on the country of export in the case of Denim Fabric as the Focus Marketing is made eligible for all the countries.

What is the total debt of the company as of December 2011 Out of this, what is the debt eligible for TUFS, and their average cost (net of TUFS benefit). What is the average interest on loans not eligible for TUFS? What are the company's plans to bring down its debt and interest costs?

The company has a total debt of Rs 140.69 crores as on 31-12-2011, which includes term loans of Rs 134.33 crores (95.48%) under TUFS scheme with an average cost of 7.7%. The average interest cost on not TUFS loans was 10.9%. Apart from this the company has a debt of Rs 58.56 crores as on 31-12-2011 relating to its upcoming power project.

What factors do you feel were responsible for sequential and y-o-y fall in profits in the quarter ended September 2011 and the quarter ended December 2011. What are the company's initiatives to improve its turnover and margins in general, and plans for enriching product (increasing share of denim / cloth), geographical (rising share of better margin exports to US / EU), cost control (savings on power and fuel, switch to low cost captive power etc)?

Increase in power cost and interest rates are the major factors responsible for fall in profits apart from fall in yarn prices as well as a denim fabric price with disproportionate fall in raw material prices. Turnover has improved to Rs 483.49 crores during the nine months period ended 31-12-2011 from Rs 416.48 crores in the corresponding period during last year with an increase of 16% over the previous year. We are working on radical new designs and products for value additions for EU and USA

What is the company's vision for its yarn, fabric (other than denim) and denim segments over the medium term.

After the recession for quite a long period the spinning has started improving from last month on wards and is expected to pick up further in the medium term. Regarding denim, demand is there in domestic market but new capacity addition is a concern. Regarding exports we expect the demand to pickup from April, 2012 onwards. The prices have started stabilizing and we hope the worst is over.

What is the estimated turnover and net profit for FY 2011-12 and FY 2012-13?