Sanathan Textiles (STL) is engaged in manufacturer of polyester yarn and 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. These technical textiles are used in various sectors such as automotive, healthcare, construction, sports and outdoor activities, and protective clothing.

As on September 30, 2024, STL had more than 3,200 active varieties of yarn products 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.

STL also has a high share of value-added products such as dope dyed, superfine / micro, functional, industrialand 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 characteristicswhich are distinctive from its other products.

The company’s plant is situated in Surangi village, Silvassa, and has its corporate office in Mumbai. The total installed capacity as on September 30, 2024,stood at 2,23,750 tonnesper annum (mtpa) across polyester yarn, cotton yarn and technical textiles. The same is expected to increase to 581,990 mtpa once the company’s Punjabmanufacturing facility and the additional unit 3 and unit 4 at Silvassa are completed, and the facility is fully commissioned and operational.

The company plans to commission Punjab facility in 2 phases, with phase I to be completed in FY2025 and phase II in FY2027. Further, the company has recently commenced cotton yarn operations at unit 3 of its Silvassa facility through its subsidiary, viz., Sanathan Polycot Private Limited with an installed capacity of 540 mtpa and it anticipates that it will commence cotton yarn operations at unit 4 of its Silvassa facility in FY 2026 which is expected to have an installed capacity of 10,950 mtpa.

As on June 30, 2024, STL had more than 925 distributors in 7 countries comprising 916 distributors inIndia, 2 distributors each in Argentina, Canada and Singapore, and 1 distributor each in Germany, Greeceand Israel.

The company‘s clients comprise several multinational, regional and local companies such as Welspun India, Valson Industries, GM Fabrics Private Limited, Premco Global, Creative Garments Textile Mills Private Limited, Banswara Syntex, AYM Syntex, Techno Sportswear Private Limited, Haren Textiles Private Limited, Khosla Profil Private Limited and Tulip Elastics Private Limited.

In FY2024, STL earned 95.6% of its revenues from the domestic market and the balance 4.4% of its revenues from exports.

Object of the offer

The IPO consists of a fresh issue of Rs 400 crore and an offer-for-sale of Rs 150 crore by promoter and promoter group.

Out of the proceeds from the fresh issue, Rs 160crore will be used for repayment or prepayment of certain borrowings, Rs 140 crore towards investment in subsidiary Sanathan Polycot Private Limited for repayment or prepayment of certain borrowings and the balance towards general corporate purposes.

Strengths

STL is among the leading players engaged in polyester yarn manufacturing in India, with an annual installed capacity of around 2,00,750 mtpa as on June 30, 2024. It is also engaged in manufacturing of cotton yarn and technical textiles with annual capacity of 14,000 mtpa and 9,000 mtpa as on June 30, 2024, respectively.

STL constantly seek to innovate and design products that are unique in colour, property, characteristics to suit specific customer requirements. STL has an in-house product innovation and development team that continually focuses on developing value added products and using its existing machines and infrastructure to prepare customized made to order products.

The manufacturing facility of STL is located at Silvassa, Western Gujarat. It is among the major strategic locations for polyester yarn manufacturers in India due to availability of manufacturing facilities across the supply chain in the polyester segment. Besides, proximity to manufacturers of key raw materials, i.e., purified terephthalic acid (PTA) and mono-ethylene glycol (MEG) leads to freight cost savings for the yarn manufacturers in Western Gujarat.

STL has long standing association with leading consumer brands with a low customer concentration. The Top 10 customers accounted for around 23.2% of revenue in FY2024 and 24.8% in 3M FY2025.

STL has deep knowledge and understanding of optimal product assortment and strong supplier network enabling procurement at predicable and competitive pricing, leading to an overall efficient cycle.

The company is led by Managing Director Paresh VrajlalDattani, who has over 44 years ofexperience in textiles industry and has been responsible in augmenting relationships with various stakeholderswho has helped the company expand by increasing its product portfolio on a continuous basis. In addition, the company has a committed and large senior management team, which has an extensive experience in the textile industry.

Weaknesses

The major raw materials consumed are PTA and MEG, both of which are derivatives of crude oil, and are continuously affected by the movement in crude oil prices. Also, a part of the raw material requirement is imported, which necessitates higher inventory holding for that material.

The success of the company’s business depends upon its ability to anticipate and forecast customer demand and trends. Any error in the company’s forecast could result in either surplus stock, which the company may be unable to sell in atimely manner, or at all, or under-stocking, which will affect the company’s ability to meet customer demand.

STL earns more than 90% of its revenues through distributors and if the company is not able to maintain successful relationship with the distributors than the company’s business might be impacted.

Operations of the company are highly working capital intensive in nature and if the company is unable to raise sufficientworking capital the operations of the company will be adversely affected.

Delays in commissioning of plants in Punjab might have an impact on the future growth of the company as the company is operating at 100% of the current capacity.

STL has incurred significant indebtedness which exposes it to various risks which may have anadverse effect on the financial condition of the company. As of September 30, 2024, STL’s total sanctioned and outstanding indebtedness was Rs 2721.6 crore and Rs 1393.0 crore respectively.

STL import a large portion of its raw materials from international suppliers and any adverse foreignexchange fluctuation could increase the cost of operations and affect the company’s profitability. Further, anyrestriction or embargo on the sourcing of raw materials from certain countries could adversely affect the operations of the company.

Contingent liabilities as on June 30,2024 stood at Rs 64.5 crore.

Valuation

For the 3 months ended June 30,2024, the company earned net profit of Rs 50.07 crore on revenues of Rs 781.13 crore.

For FY 2024, consolidated sales were down by 11.17% to Rs 2957.50 crore. Decline in revenues was primarily on account of reduction in the averageselling price of polyester yarn from approximately Rs 120 per kg during Fiscal 2023 to Rs 112 per kgduring Fiscal 2024 and reduction in the average selling price of cotton yarn from approximately Rs 322 per kg during Fiscal 2023 to Rs 266 per kg Fiscal 2024. However, the capacity utilization remained over 100% in FY2024. The OPM declined 14 bps to 7.66%, which led to a 12.7% decrease in operating profit to Rs 226.58 crore. Other income increased 41.09% to Rs 22.3 crore, while interest cost increased2.97% to Rs 23.08 crore and depreciation increased 2.08% to Rs 44.39 crore. Eventually, net profit decreased by 12.4% to Rs 133.85 crore.

FY2024 EPS on post-issue equity works out to Rs 18.6. At the upper price band of Rs 321, P/E FY2024 works out to 17.3 times.

Listed industry peers of the company are KPR Mill, Vardhman Textile, Indo Count Industries and Filatex India. In comparison, KPR Mill is trading at P/TTM EPS of 46.4 times, Vardhman Textile is trading at P/TTM EPS20.3 times, Indo Count Industries is trading at P/TTM EPS 26.3 times and Filatex India is trading at a P/TTM EPS of 26.3 times.