MANAGEMENT DISCUSSION AND ANALYSIS ECONOMIC OUTLOOK The global economy has been steadily growing at about 3.5% in the last couple of years. in 2015, a minor correction is expected in global economic growth. There is confidence of a revival in global the economic outlook in the coming years though this view is not brsently supported by economic fundamentals. driven by higher economic growth in the advance economies and constrained by moderate growth in emerging markets especially china, the global economic environment can, at best, be termed as stable. usa is projected to grow by 2.5% in 2015 and 3% in 2016. europe is projected to grow by 1.5% in 2015 and 1.7% in 2016. The negative consequence of the serious greece crisis in terms of its ‘contagion effect’ on the rest of eu and world has not been found, though uncertainty on this account in the near future cannot be fully discounted. japan’s gdp may also grow by about 1% in 2015. in emerging economies, moderated gdp growth in china at about 7% is expected in 2015. Policy induced restructuring of economic growth towards the domestic market and consumption demand are citied as the main reasons of a slowing chinese economy. This, in turn, has affected global commodity prices adversely. lower commodity prices, especially oil and other energy items, have helped developing countries like india in terms of lower domestic inflation and a manageable trade deficit. Indian economic outlook The indian economy is projected to grow 7.5% in 2015 and 2016 as per the new method of estimating gdp growth. in the absence of supporting global demand, the domestic market will need to drive economic growth in the next couple of years. as domestic consumption demand is also linked with domestic industrial growth outlook, large investment in public and private sector for augmenting capital formation will be the key driver. This, in turn, depends upon structural reforms, which will set the tone for the growth of the indian economy across the coming years. The new government has to continue making substantive efforts to catalyse industry growth and other sectors through rational fiscal and monetary policies. Textile industry India is the second largest global producer of textiles and garments. The abundant availability of raw materials (cotton, wool, silk and jute) and a skilled workforce have graduated india into a global sourcing hub, employment driver and net foreign exchange earner. The most significant change in the Indian textiles industry has been the advent of man-made fibres (mmf). india has successfully found a place for its innovative range of mmf textiles in almost all countries. despite this, cotton textiles continue to form the base of the industry. The indian textile industry is export-oriented, facing many challenges, which can be primarily attributed to sluggish global demand as well as deteriorating global competitiveness of the domestic textile industry. having no trade pact with any of the leading consuming markets of usa and eu is affecting india’s textile and clothing export prospects. with japan, india has a free trade agreement but japan has large investments in asean countries like vietnam, myanmar, etc. due to their geographical proximity to china, these countries are dependent upon the chinese textile industry for the supply of textile materials like yarns and fabrics for their garment industry. besides, rigid labour laws, high conversion cost due to diverse incidence of taxes, surcharges being not fully refunded to the industry and lower scale of production, especially in garment manufacturing, are some of the daunting challenges confronting the indian textile industry. nevertheless, there are growth opportunities for the indian textile industry, especially in yarns and fabrics by integrating with leading readymade garment-exporting countries like bangladesh and vietnam. made-ups is another promising sector. in addition, the rising cost of textile manufacturing in china offers attractive opportunities provided suitable policy actions are taken in time Change in China’s cotton policy following global volatility in cotton prices in 2010-11, the chinese government announced in march 2011 that it intended to buy domestic cotton at a eserve price basis almost 35-40% higher than the international price. China purchased local cotton that was later sold at a discounted price. simultaneously, it built significant inventory (almost 60% of the global inventory as on 31st july, 2015). during the current year, the chinese government did not buy directly from farmers but provided direct subsidies equal to the difference between market and target prices. In xinjiang, the target price was fixed at 19,800 rmb per tonne against a market price of 14,000 rmb per tonne, the chinese government paying the difference. in the rest of the provinces, the government paid 2,000 rmb less per tonne. for 2015-16, the price for calculating direct subsidy was reduced to 19,100 rmb per tonne for the xinjiang region. demand drivers india’s growing population has been a key driver of textile consumption. imf expects india’s population to touch 1.34 billion by end- 2019 against 1.24 billion in 2013. india’s young population is influenced by evolving brferences and a growing incidence of women workers. india’s rising incomes have been a key determinant of demand growth, catalysed by rural incomes as well. Global cotton scenario cotton season 2014-15: at the beginning of the year, the world was sitting on an opening cotton stock of about 20 million tonnes, a result of inventory addition across the brvious four years. during the current year, cotton production was estimated at about 26.17 million tonnes while consumption is expected to be approximately 24.4 million tonnes. The world could add about 1.8 million tonnes in stock by the end of this year. however, a majority of the stock addition could transpire across the world except china. china reduced cotton purchases from the global market (in brview of no major revival in consumption) leading to a decline in international prices from historic highs. cotton season 2015-16: a decline in global cotton production (by ~8.7%) and a steady increase in consumption (by ~2.3%) will result in cotton consumption exceeding production in cy2015- 16 – a first in the last five years. This will result in a decline in the global cotton stock levels, with carryover stocks at about 20.76 million tonnes, equivalent to a stock-to-consumption ratio of ~83% compared to ~89% expected at the end of cy2014-15 cotton production is expected to decline across all the major cotton producing countries led by china and usa due to decline in acreage as farmers shift to alternative crops. low domestic cotton prices have stabilised cotton consumption in china at 7.7 million tonnes in 2014-15 after falling for four consecutive seasons. in 2015-16, consumption is expected to remain stable at 7.7 million tonnes as domestic yarn competes with imports. major growth in consumption is coming from east and south asian countries like vietnam, Thailand, indonesia, bangladesh and india. Indian cotton scenario cotton season 2014-15: during 2014-15, although the area under cultivation in the country increased by about 6% to 12.3 million hectares, due to variations in the weather and water availability, there was a subsequent decline in yield. india commenced 2014- 15 with an opening stock of 0.54 million tonnes, estimated to produce about 6.46 million tonnes, consume about 5.44 million tonnes and export about 1.1 million tonnes. it implies that the country will have a carry forward stock of 0.63 million tonnes cotton season 2015-16: india will consolidate its position as the world’s largest cotton producer in cy2015-16 due to relatively lower decline in the cotton production compared to china, which was the world’s largest cotton producer till cy2013-14. cotton production in india in cy2015-16 is expected to remain the same or increase. although there has been a decline in the projected area by about 3%, good rainfall and weather may result in increased productivity and production. The stock-toconsumption is expected to decrease further in cy2015- 16 from the brsent 11.5%. lower production numbers resulted in a similar carry forward stock from cy 2014-15, which was expected to be much higher due to a decline in exports during 2014-15, lower demand from china and the expectation of limited cotton exports in cy 2015- 16 as well. india will remain the world’s largest cotton producer for 2015-16. cotton consumption is expected to increase by about 3-4% in cy 2015-16 on account of low cotton prices, which resulted in a significant decline in the sbrad between cotton and polyester stable fiber. further, the expected improvement in the global economy may result in improved demand for textile products. for 2015-16, the indian government increased the minimum support price by Rs.50/Qtl, which converts to Rs.32,500/candy of the minimum level and for prices below this level; the government can intervene in the market like it did in 2014-15. Vardhman group has 22 manufacturing facilities across india, employing more than 25,000 people. The company enjoys global alliances with leading textile companies such as american & efird global llc (usa), marubeni corporation (japan) and nisshinbo Textile, inc. (japan). spinning section: vardhman (along with its subsidiaries) is one of the largest yarn manufacturers in india, manufacturing and dyeing fibres from 12 different manufacturing facilities located across punjab, himachal pradesh and madhya pradesh. vardhman is the leading manufacturer and exporter of cotton yarn as well as a leading manufacturer of piece-dyed fabric. The company is also the second largest producer of sewing threads and market leader in the area of hand-knitted yarns. The company’s yarn product basket is divided into three categories – commodity, compact and specialised yarn – and delivers the widest range of specialised greige and dyed yarns (cotton, polyester, acrylic and other blends). The company’s yarn business is the largest revenue generator, accounting for nearly 60% of its topline. The company’s yarn consumption is divided equally between domestic, international and captive fabric consumption. The company is one of the largest cotton yarn exporters to quality-conscious markets (eu, us and the far east). approximately 70% of the yarn revenues are relationship-based, providing long-term revenue visibility. fabrics: This value-added component of vardhman’s business makes a significant contribution to profitability. The company’s 1,316 looms and 114 million metres of fabric processing infrastructure are sbrad across five facilities in two locations. The company’s product basket comprised fabrics for tops (shirting) and bottoms (trousers/pants), specialised fabrics like yarn-dyed, special white and also finished fabrics with effects like liquid ammonia, teflon/ nanocare (an oil and waterrepellent). it is the leading manufacturer of lycra-based products in india. The company’s customers include prominent apparel makers (esprit, gap, banana republic, old navy, h&m and benetton, among others). exports comprised about 35% of the company’s fabric output in 2014-15. 2014-15, a perspective The fiscal 2014-15 was marked by cotton price volatility due to changes in the chinese cotton policy. The company built a considerable high cost cotton inventory; yarn prices moved in tandem with cotton prices. The margins from the yarn business declined, compensated by an uptick in fabric business profitability, validating the company’s operational integration. result: the overall business generated an ebidTa margin of around 18% in 2014-15 compared with 23.05% in the brvious year. Yarn sales volumes (including internal transfers) increased 19.97% from 1,68,758 tonnes in 2013-14 to 2,02,467 tonnes in 2014-15 domestic: 8 customers were added; 15 products were introduced exports: 27 customers were added; 16 products were introduced business volumes with key corporate customers were added an output of 50 Tpd (output 1 lac spindles) was generated through de-bottlenecking and line-balancing at the yarn manufacturing facilities. 14,000 spindles were added, enhancing capacity to a million-plus spindles; 7300 spindles were commissioned at the satlapur#5 unit. fabrics The company increased sales volumes (including internal transfers) 12.35% from 1,514 lac metres in 2013-14 to 1,701 lac metres in 2014-15 for grey fabric. The company increased sales volumes 4.60% from 1,065 lac metres in 2013- 14 to 1,114 lac metres in 2014-15 for processed fabric. The company launched fabrics usable in highstretch bottom weights, which was well-received by leading textile brands. in 2014-15, seven customers were added; 30% of the sales rebrsent products introduced in last two years. launched modal and tensile fabric ranges used in women’s garments Vardhman, a dominant hand-knit yarn player Market leader in the handknit yarn category pan-India brsence; 1,800 retail outlets across 650 cities and towns 45 sub-brands in various packaging categories under the umbrella brand of vardhman knitting yarn products marketed to around six million domestic consumers accounts for 40% share of india’s organised sector and 30% of the total market |