LL Soni, Vice President, Finance, Sangam India Ltd. He is a chartered accountant with over 15 years of work experience in the field of Finance and Banking. He has been with the Sangam group since 1995.
Sangam India Ltd. is the largest single location dyed yarn producer in the country. It controls a market share of 25% in the polyester-viscose segment. It has recently completed its Rs6.5bn expansion plan in the recent years. Owing to its state-of-the-art plants and consistent yarn quality, it has emerged as preferred supplies and commands a premium for its product. The company recently announced its plans to double its denim production from 8.00 million meters to 16 million meters by setting up additional line. In FY09, the company added 1.29 lakh spindles, 130 weaving machines, besides setting up of 21MW power plant and modernising of process house.
Speaking to Hemant P. Maradia of IIFL, Mr. Soni says: "Margins could improve to all-time high levels of 17-18% in coming quarters."
How is Sangam (India) positioned in the Indian textile industry?
We are one of the largest manufacturers of polyester dyed yarn in the country. Presently, we have 16,2,720 spindles of polyester-viscose dyed yarn and 31,200 spindles for cotton yarn installed in Bhilwara along with 257 weaving machines and a 31 MW thermal power plant. We also have strong presence in the Indian synthetic blended fabric segment with brands like Anmol and Sangam. Further, we have an established client base, like Reliance, Reid & Taylor, Siyaram and Grasim. Our fabric is marketed through a network of 100 dealers and 1000 retailers.
Can you update us on your expansion plans?
As a part of our strategy, we now plans manufacture various value-added denim products. The Rs 350mn expansion plan will be financed through internal accruals. In FY09, we completed its Rs6.5bn major expansion plan by adding 1.29 lakh spindles, 130 weaving machines, setting up of 21MW power plant and modernising of process house.
However, we curtailed our capex from Rs7.07bn to Rs6.5bn. We didn’t set up a new process house and modernised our existing process house. We also saved some money in the spinning division. We added 130,000 spindles of PV capacity, including 31,200 of cotton spindles. Out of that, the cotton wastage is around 25% as the productivity of raw cotton is around 72-75%. We earlier used to sell it in the open market, but now we are using it as raw material in rotors.
We also added 140 weaving looms and increased power plant capacity by 21 MW. We also added 1768 rotors for cotton yarn.
What is the rationale for doubling the denim capacity?
Out of the 140 looms that we added, we used 40 looms for increasing our denim capacity. We put a new denim line. We found that demand for denim is picking up. And we are planning to go in to specialty denim fabrics by mixing different blend in cotton. We are now doubling our denim capacity from 8mn meters per annum to 16mn meters with a small capex of Rs350mn. We will fund the capex in denim from internal accruals since our cash profit has been good in the current financial year.
How have you coped with the downturn and what is the outlook?
Last year was pretty bad for all textile players in India. We had a net loss of around Rs150mn though we had a cash profit of Rs400mn last year. Operating margin shot up for the fiscal year 2009-10 (first nine months), from 8.6% to 14.5%. Operating margin in the January-March quarter of FY10 is likely to be even better. Margins could improve to all-time high levels of 17-18% in coming quarters.
Have realisations improved?
Realisations have improved in the entire textile sector. In the PV dyed yarn, realisation has improved by 30% in the last 12 months. Of course, raw material prices have also increased, but demand is very robust.
Has interest cost increased substantially?
In 2007, our interest cost was Rs150mn. This has gone up to Rs500mn now due to a change in interest rate scenario. But, we get interest subsidy under TUFs. So, our total cost of long-term fund was close to 1% prior to the global financial crisis. This has now gone up to 3.5%. Since our performance this year has improved, we can start fighting with the bankers to reduce the rates.
Have denim prices also increased?
The prices of denim have improved. Cotton yarn prices are up 40-45%. Growth is very strong in both domestic as well as international markets. Last year’s surplus capacity has been absorbed by the domestic demand. There is not enough capacity to meet the export demand, particularly in spinning. Such good is the condition that for the first time in 2-3 years, we are able to bargain for prices with the customers.
There has been a complete lag in capacity addition in the last two years. In 2007, every body was expanding capacity. In the next two years there was no capacity addition due to the global financial crisis and the subsequent downturn. Even if anybody plans to add capacity in spinning today it will take at least 12-18 months to do that. Technically, you can say there is a shortage of capacity and therefore, the demand is outstripping the supply.
What’s the trend in polyester prices?
Polyester prices have risen by around 25% in the last 12 months. In viscose, prices have increased by around 30% in the past one year. However, we have been able to raise yarn prices by 30-35%. Overall, we have been able to improve our realisations as pricing power has come back.
What kind of capex are you planning?
There will be no major capex in the next one year. There may be some minor investments, like in processing.
What is the share of exports in total turnover?
In FY10, out of around Rs8.45 billion of turnover, exports are close to Rs1.8bn. Exports have revived only in recent months. In the last two years, exports have been virtually stagnant. Between 2003 and 2008, CAGR in exports was 69%. We started exports in 2003 with a base of Rs90mn. It reached Rs1.66bn in FY07. We are aiming to increase the share of exports in the topline to 30% in FY11, or around Rs2.5bn in value terms.
What are you hearing from your overseas clients?
Demand has increased in Europe. We are not targeting the US market. We basically export poly-viscose yarn and poly-viscose fabric. These products are used mainly in Eastern Europe and continental Europe.
Why are you betting big on PV?
We have seen some change in the consumption pattern of poly-viscose in the last couple of years. One is in uniform; the second is in ladies bottom and the third is in knitted fabrics and summer suit has given growth wagon to demand of PV sector. We have also seen increased use of PV in suits. While the overall textile market has seen 5-6% growth in the past five to six years, the same in PV has been at around 8-9%. All the four major players in the country - Sangam, Rajasthan Spinning, Sutlej Textiles and Banswara Syntex - control close to 85% of the PV market.
All the four players have increased their capacity by 50-70%. In Sangam, we have tripled our capacity, from 64,000 spindles to ~193,000 spindles, between 2007 and 2009. About 90% of our revenue in yarn business comes from PV while the balance comes from Denim and Cotton yarn. Overall, 70-72% of the company’s total turnover comes from the yarn business. The balance comes from fabrics. 20% of fabrics topline comes from PV fabrics; 3-4% from home furnishing and 6-7% from denim.
The prospects for the yarn business are looking bright for the next 5-6 quarters. In PV yarn our market share is close to 25%. We are the largest PV dyed yarn producer in India.
What about cotton?
In cotton yarn, our market share is negligible. We have a very small capacity in cotton yarn though it accounts for nearly 70% of the total textile market in India. Cotton is not our focus area.
Any plan to enter the garments segment?
We are planning to foray into the readymade garments. We are doing our internal assessment right now. Nothing has been finalised as yet.
What is the mix in fabrics?
We are not selling any gray fabric. Our total fabric capacity is 30mn meters per annum. Out of that, PV finish fabric accounts for 20mn meters; 3-4mn meters is home furnishing and 6-7mn meters is denim.
What is your USP?
Our strength lies in our location - Bhilwara. Around 50% of our capacity is sold in the vicinity of 5 kms. So, our sales cost comes down as does our costs on freight and insurance. We can also control our debtors in a much better manner as our inventory is pretty low. We maintain finished goods inventory of only 3-4 days while our raw material inventory is for one month. Therefore, our working capital is only around Rs1.8bn out of the topline of Rs8.5bn. Normally, working capital of a textile company is 30-40% of the topline. Our inventory cycle and debtor cycle are the lowest in the industry. We control the pricing power in polyester viscose yarn, as our market share in 2/15 and 2/18 count yarn is close to 65%. That is why our operating margin is the highest in the industry. There is a gap of 3-7% in our operating margin and that of the rivals’.
Banswara Syntex has come close to our margins due to value-addition in garments.
How is India placed vis-à-vis other markets?
At the gray fabric level, our quality is at par with international players. Where we lack is in finished fabrics. Therefore, we need to make more investments in the processing segment. We are not talking about Sangam alone, but the entire industry needs to make more investments on the processing side. The global PV market is mainly controlled by India, Turkey and Brazil. Around 70% of the world’s PV market is controlled by India while the balance is accounted by Turkey and Brazil. Globally, the share of PV in textiles is less than 1%. In India, it is less than 7-8%. It is a very small and niche segment.
Will your share in PV rise in future?
Yes, the share of PV should go up. The domestic demand itself is enough to drive our growth. A PV fabric gives the same level of comfort as a cotton fabric. Cotton contains around 6% moisture. In viscose, the moisture is around 13-14%. We mix viscose with polyester so that it gives the same comfort as cotton. PV gives better results in designer clothes. Its shine is better than cotton; its durability is better than cotton. And, in pricing it is cheaper than cotton.
What is the debt-equity ratio?
Right now, the debt-equity ratio is 1: 3.50, but we plan to reduce the same to less then 1:2 by March 2012. We are repaying close to Rs700mn every year. We want to make the company debt-free in the next five -six years. Out of total term loans of Rs4.5bn, we plan to repay Rs1.5bn. My present networth is Rs1.8bn, which will be increased by Rs 500-600mn in the next two years.
How do you plan to improve margins?
Value addition, better product mix and improvement in capacity utilisation will lead to an increase in our margins going forward. Right now our capacity utilisation is around 85-86%. We can take it up to over 92-93%.
Tell us about the group’s infrastructure foray?
Infrastructure is controlled by a promoter group company called Sangam Infratech though Sangam has a small investment of Rs60mn in one of the road projects. Sangam Infratech has completed one road project and toll revenue has started. Sangam has a stake of 26% in the project called KT Sangam. Another project is under development on the Thane-Bhiwandi highway. Sangam Infratech has also bagged a toll project. The group is also foraying into the steel sector. Sangam Infratech is a closely held company by the promoters.
What is your message to the shareholders?
FY11 and FY12 will be good for the Indian textile sector. Investors should be able to get good returns from textiles. They should stay invested in textile stocks for at least 12 months.