TEXT-Fitch revises India's Sutlej Textiles' outlook to stable

(The following statement was released by the rating agency)

Nov 18 - Fitch Ratings has today revised the Outlook for
Sutlej Textiles and Industries Ltd (STIL) (SUTI.BO: Quote, Profile, Research) to Stable
from Negative, and affirmed its National Long-term rating of
'BB-(ind)'. The agency has simultaneously affirmed the ratings of
STIL's long-term bank loans aggregating INR7,297m and fund based
working capital limits (cash credit) of INR500m at 'BB-(ind)'.
Additionally, Fitch has affirmed STIL's fund-based limits
(including working capital demand loan and packing credit)
aggregating INR2,000m, gold card export credit limit of INR310m,
short-term loan of INR300m and STIL's non-fund based working
capital limits of INR330m at 'F4(ind)'.

The revision of STIL's Outlook is driven by the company's
improved operating and financial performance during the latest
two quarters ended September 2009. This demonstrated STIL's
ability to rebound after its profitability bottomed out and
leverage peaked in FY09, amid an industry downturn. The company
registered a sales growth of 20.3% yoy to INR5.3bn in the six
months ended 30 September 2009 (H1FY10). The improvement in
EBITDA margins to 11.5% during this period, as compared to 4.4%
in H1FY09 led to a dramatic recovery of financial leverage to
6.6x (on the basis of annualised EBITDA) in H1FY10 from 20.6x in
FY09. Interest coverage in H1FY10 has also improved to 2.7x from
1.4x in FY09.

Nevertheless, the high level of debt (INR8,176m as at 30
September 2009), and an expected INR271m drawdown will likely
sustain the company's high gearing ratio (Debt/Equity: 6.2x on 30
September 2009) in the medium-term. Furthermore,
lower-than-expected EBITDA margins can lead to a sharp
deterioration in STIL's credit profile, given its high level of
debt and significant annual debt maturities. Other risks include
an uptrend in the raw cotton prices (15% of the product mix),
volatility in the synthetic fiber prices (linked to crude oil
prices), price risk on inventories, and vulnerability to foreign
exchange movements (a quarter of its revenues are from exports).

In Q1FY10, STIL completed its capex programme to boost
production after a one year delay. However, the original
INR3,500m expansion plan was significantly scaled back (INR1,050m
worth of projects have been shelved) in light of the current
market conditions, as well as the company's debt position.

Fitch notes the promoters' vast experience in the textiles
business, the fact that three-quarters of its revenue comes from
the relatively stable domestic market, and that no debt
restructuring has been undertaken despite the sharp downturn,
which brought STIL's debt service coverage ratios down below 1x.
Fitch expects STIL to benefit from the likely rise in demand for
synthetic yarns due to softening prices, as compared to natural
fibers. Cotton prices have been rising again since August 2009,
which is likely to make synthetic yarn more popular, especially
in the mass clothing and home textiles segments.

The rating could be upgraded if the company is able to
achieve the projected revenues and operating margins for FY10,
leading to a sustainable improvement in the leverage and coverage
metrics. Negative rating drivers include a significant fall in
margins, led by a pressure on realisations or an inability to
pass on input cost hikes to the customers, which in turn
constrains the liquidity and debt protection measures.

STIL manufactures synthetic and cotton yarns, fabrics, home
textiles and garments, and has facilities in Rajasthan, Jammu,
Kashmir and Gujarat.

Contacts: Tanu Sharma, New Delhi, +91 11 4356 7243; Salil
Garg, New Delhi, +91 11 4356 7244

Media Relations: Shivani Sundralingam, Singapore, Tel: + 65
6796 7215, Email: shivani.sundralingam@fitchratings.com.

Additional Information is available at www.fitchratings.com.