Sanathan Textiles coming with an IPO to raise upto Rs 579 crore

Sanathan Textiles

• Sanathan Textiles is coming out with a 100% book building; initial public offering (IPO) of 1,80,32,786 shares of Rs 10 each in a price band Rs 305-321 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on December 19, 2024 and will close on December 23, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 30.50 times of its face value on the lower side and 32.10 times on the higher side.
• Book running lead managers to the issue are DAM Capital Advisors and ICICI Securities.
• Compliance Officer for the issue is Dsouza Jude Patrick.

Profile of the company

Sanathan Textiles is one of the few companies (amongst its peer group) in India with presence across the polyester, cotton and technical textile (which find application in multiple end-use segments including automotive, healthcare, construction, sports and outdoor, and protective clothing) sectors and based on its operating income, it had a market share of 1.7% in the overall Indian textile yarn industry as of Fiscal 2024. Currently, all the three yarn verticals are housed under a single corporate entity. This has facilitated its diversification into new segments which in turn has helped it in serving a large number of customers across various sectors. As on September 30, 2024, it has more than 3,200 active varieties of yarn products (i.e. yarn products manufactured by it during the period April 1, 2021 to September 30, 2024) and more than 45,000 stock keeping units (SKUs), and capability to manufacture a diversified product portfolio of more than 14,000 varieties of yarn products and more than 190,000 SKUs that are used in various forms and for varied end uses.

It also has a high share of value-added products such as dope dyed, superfine / micro, functional, industrial and technical yarn, cationic dyeable and specialty yarn which are produced after extensive in-house research. These value added products are tailor-made to customer requirements and have properties and characteristics which are distinctive from its other products. Its business is divided into three separate yarn business verticals, consisting of: (a) Polyester yarn products; (b) Cotton yarn products; and (c) Yarns for technical textiles and industrial uses.

The company’s products are manufactured at its facility at Silvassa. Over the years, the company has scaled up its production and as on June 30, 2024, its facility at Silvassa had a total installed capacity of 223,750 MTPA across the three yarn verticals. While it manufactures products across all verticals, polyester yarn products continue to be its largest item of production. It manufactures polyester chips using purified terephthalic acid (PTA) and mono ethylene glycol (MEG) and convert the chips into polyester yarn through various intermediate processing to impart specific properties to the yarn. 

Proceed is being used for:

• Repayment and/ or pre-payment, in full or part, of certain borrowings availed by the company
• Investment in its subsidiary viz. Sanathan Polycot Private Limited, for repayment and/ or pre-payment, in full or part, of certain borrowings availed by its subsidiary viz. Sanathan Polycot Private Limited
• General corporate purposes

Industry Overview

Global textile trade had grown at a CAGR of 1.0% between CY2018-CY2023 and was valued at $901 billion as of CY2023. On Y-o-Y basis, CY2020 witnessed a decline in global exports due to Covid-19 pandemic and it had negative implication on global supply chains and overall consumer sentiment. However, the trade rebounded in CY2021, registering a y-o-y increase of 15.8% to $931 billion. This resurgence can be attributed to release of pent-up demand due to gradual opening up of the economy. In CY2022, global trade again witnessed a y-o-y increase of 5.7%, however inflationary pressures along with weak consumer sentiment in major export markets like US and EU restricted further growth in CY2023, leading the industry to see a decline of 8.5%. As of CY2023, China, Bangladesh and Vietnam were the top three exporters of textiles with a share of 33%, 6% and 5% respectively; compared to CY2019, when China, Bangladesh and Germany were top three exporters. India’s share in overall global trade remained constant at 4% and stood at $35 billion in CY2023. Factors like comparatively high costs (raw material, labour, power) along with lack of free trade agreements have negatively impacted India’s textile export outlook on the global front.

Indian textile and apparel industry is projected to grow at a CAGR of 6.0-7.0% between fiscal 2024 and fiscal 2028, reaching a value of Rs 12,400-12,500 billion in fiscal 2028. During this period, exports are expected to grow at a CAGR of 4.5-5.5% while domestic industry is expected to grow at slightly higher pace of 7.0-8.0%. Between fiscals 2019 to fiscal 2024, the total Indian textile and apparel industry had grown at a CAGR of 4.5%. Within the total industry, the domestic Indian textile and apparel industry had grown at a higher pace of 5.8%, while exports have grown at a CAGR of 2.1%. The slower growth in exports is majorly due to decline in fiscal 2020 as a result of global slowdown which was further compounded by the Covid-19 pandemic leading to disruptions in supply chain and demand causing order cancellations. Also, high export tariffs levied on Indian exporters in countries like European Union (EU) when compared to zero import duty for other exporting countries such as Bangladesh have further dampened the export performance.

Meanwhile, Indian technical textile market is spread across all the 12 segments with Packtech, Indutech, Hometech and Mobiltech comprising major chunk of the market. The industry had shown compounded annual growth of 11.2% between fiscals 2019 and 2023 to reach Rs 1,930 billion from Rs 1,262 billion. Favourable factors such as availability of raw materials and labour, and growing economy drove the growth in the past. The market had grown strongly in fiscal 2024 as well, reaching Rs 2,140-2,180 billion, thereby registering a 11-12% CAGR between fiscals 2019 and 2024. However, the demand for technical textile products is still in its nascent stages with low penetration level of technical textiles at 5-10% as of fiscal 2023, against 30-70% in advanced countries. The government, in a response to capture the potential posed by technical textiles, developed a number of policies aimed to promote the development of the domestic technical textiles market.

Pros and strengths

It is one of the few companies in India with presence across the polyester, cotton and technical textile sectors: It is present across three yarn verticals, i.e. (a) Polyester yarn products; (b) Cotton yarn products; and (c) Yarns for technical textiles and industrial uses. All the three yarn verticals are, currently, housed under a single corporate entity. One of its business strengths lies in the diversity of its product range and the relatively higher share of value-added products. As of June 30, 2024, it manufactures more than 14,000 varieties of yarn products with more than 190,000 SKUs that are used in various forms and for varied end uses. It also has a high share of value-added products such as dope dyed, superfine / micro, functional, industrial and technical yarn, cationic dyeable and specialty yarn which are produced after extensive in-house research. These value added products are tailor-made to customer requirements and have properties and characteristics which are distinctive from its other products.

Focus on the product development of new products, through process innovation: It constantly seeks to innovate and design products that are unique in colour, property, characteristics to suit specific customer requirements. It has an in-house Product Innovation and Development team that is continually focusses on developing value added products and using its existing machines and infrastructure to prepare customized made to order products. Value added products and customisation of products is an integral element to ensuring longevity of customer relationships and repeat business. It offers a varied range of value added products which constitute a significant proportion of its revenues have higher margins since these are tailor-made to customer requirements and distinctive properties and characteristics.

Fully integrated Yarn manufacturing plant set up at a strategic location: The company’s products are manufactured at its facility at Silvassa which lies in western Gujarat (Operating Facility). The West Gujarat Cluster is amongst the major strategic locations for polyester yarn manufacturers in India due to availability of manufacturing facilities across supply chain of polyester segment. Presence of raw materials manufacturers, for MEG and PTA, such as Reliance industries, provides a logistical advantage for manufacturers in the location. Its facility has access to the textile markets of Gujarat and Maharashtra. The equipment in its facility has been designed and supplied by few of the domestic and globally renowned players in the yarn industry and has been designed to handle high number of SKUs so as to service made to order products as well as high value-added products.

Deep knowledge and understanding of optimal product assortment: The company has a diversified product portfolio for which it focuses on using its deep knowledge of the clusters and regions in which it operates to customise its product assortment keeping in mind local demands and preferences. It also continuously focuses on enhancing the products that it manufactures. Further, it has a wide network of suppliers across the country and internationally and it endeavours to source its products from regions where they are widely available or manufactured to minimise its procurement costs. The company’s facility has an inventory and receivable management system which has resulted in a healthy working capital cycle. It operates a standardized procurement system and procure most of its products on a purchase-order basis ensuring procurement flexibility at competitive prices. Its procurement team on an ongoing basis conduct research to locate the best product sources, in relation to both quality and price, in order to improve its supplier network and have efficient supply and sale cycle.

Risks and concerns

Dependent on distributors for maximum revenue: During quarter ended June 30, 2024, Fiscals 2024, 2023 and 2022, 96.55%%, 94.48%, 93.01% and 93.31%, respectively, of its total revenue from operations was attributable to its distributors. Its revenue from top 25 distributors during quarter ended June 30, 2024, Fiscals 2024, 2023 and 2022 was Rs 3,662.89 million, Rs 13,315.44 million, Rs 14,644.72 million and Rs 15,072.48 million representing 46.96%, 45.03%, 43.99% and 47.32%, respectively, of its total revenue from operations. It relies significantly on its distributors to sell its products and it expects that sales through such distributors will continue to account for a significant percentage of its revenues. If the company is unable to maintain successful relationships with its distributors, its business, results of operations and financial condition may be adversely affected.

High working capital requirement: The company’s business requires a significant amount of working capital for its day-to-day operations before payment is received from its customers. Any delay in processing its payments by its customers may increase its working capital requirement. Further, if a customer defaults in making payments for a product on which it has devoted significant resources, it could affect its profitability and liquidity and decrease the capital reserves that are otherwise available for other uses. As on June 30, 2024, the company had sanctioned working capital facilities aggregating to Rs 8,750.00 million and outstanding working capital facilities aggregating to Rs 4,489.93 million. If the company is unable to raise sufficient working capital the operations of the company will be adversely affected. 

Geographical constrain: During quarter ended June 30, 2024, Fiscals 2024, 2023 and 2022, the company derived 62.51%, 65.10%, 60.88% and 55.63% its revenue from operations from domestic sales from its customers in Gujarat, Maharashtra and Punjab. Due to a significant concentration of its revenues in these 3 states, it is highly impacted by risks specific to these geographies, such as civil unrest as well as other adverse social, economic and political events in these states, natural disasters, regional conflicts, and other unforeseen events and circumstances. If any of these risks materialise or if there is a significant downturn in these states, its results of operations and future profitability could be adversely impacted.

Business depends on its production facility in Silvassa: The company’s production facility located in Silvassa, is subject to operating risks such as the breakdown or failure of equipment, power supply or processes, performance below expected levels of output, raw material shortage or unsuitability, obsolescence, labour disputes, strikes, lock-outs, non-availability of services of its external contractors, earthquakes and other natural disasters, pandemic, social unrests, industrial accidents, its ability to respond to technological advances and emerging industry and safety standards and practices in the industries in which it operates and proposes to operate on a cost-effective and timely basis and any other factors which may or may not be within its control and also it needs to comply with the directives of relevant government authorities. The occurrence of any of these risks could significantly affect its operating results. Although it takes precautions to minimize the risk of any significant operational problems at its facilities, its business, financial condition, results of operations and the trading price of its Equity Shares may be adversely affected by any disruption of operations at its facilities, including due to any shutdown of its operations.

Outlook

Sanathan Textiles Limited is a polyester yarn manufacturer and a global supplier of Cotton Yarn. The company's business is divided into three separate yarn business verticals, consisting of: (a) Polyester yarn products; (b) Cotton yarn products; and (c) Yarns for technical textiles and industrial uses. The company is one of the few companies (amongst its peer group) in India with a presence across the polyester, cotton and technical textile sectors. It focuses on the product development of new products, through process innovation. On the concern side, the company’s relationship with its distributors is critical to its business. During quarter ended June 30, 2024, Fiscals 2024, 2023 and 2022, 96.55% 94.48%, 93.01% and 93.31%, respectively, of its total revenue from operations was attributable to its distributors. If it is unable to maintain successful relationships with its distributors, its business, results of operations and financial condition may be adversely affected.

The company is coming out with a maiden IPO of 1,80,32,786 equity shares of Rs 5 each. The issue has been offered in a price band of Rs 305-321 per equity share. The aggregate size of the offer is around Rs 550.00 crore to Rs 578.85 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations decreased by 11.17% from Rs 33,292.13 million in Fiscal 2023 to Rs 29,575.04 million in Fiscal 2024 primarily due to a decrease in the sale of products. Moreover, the company’s profit decreased by 12.37% from Rs 1,527.41 million in Fiscal 2023 to Rs 1,338.48 million in Fiscal 2024.

The company proposes to increase its scale of operations in all its three verticals to cater to such projected increase in demand. It is already in the advanced stage of commissioning a greenfield facility i.e. the Punjab Manufacturing Facility, Phase 1 of which is expected to be operational in Fiscal 2025. Further, in line with its vision of sustainable growth and keeping mind the environmental benefits of reusing waste plastic bottles to convert them into yarns for fabrics it started its sustainable textiles business in Fiscal 2022. The company’s sustainable textile business is marketed under the brand ‘Sanathan Rivero’. The company proposes to augment its sustainable textile business (i.e. recycled yarn business) under the polyester yarn product vertical. It plans to grow its recycled yarn business in the coming years at its Punjab Manufacturing Facility to a significant capacity and thereby expanding its polyester yarn business vertical.