MANAGEMENT DISCUSSION AND ANALYSIS REPORT 2015 Overview of the Economy During FY 2014-15 global economies has not grown as expected. However Indian economy has shown some signs of recovery and grew by 7.4% (as per new method of estimating GDP) as compared to 6.9% in FY 2013-14. Indian economy in the coming years is expected to grow at a rapid pace due to substantial reduction in crude oil prices, reduced inflation, strong investor sentiment and with the new stable Government at the centre which is committed to several reforms. The Government envisages GDP growth to accelerate to 8% in Financial Year 2015-16 driven by strengthening macroeconomics fundamentals and implementation of policy reforms recently announced. In the absence of supporting global demand, the domestic market will need to drive economic growth in the coming years. Industry Structure /Development (Textiles) The Indian textile and apparel industry (Textile Industry) has an overwhelming brsence in the Indian economy. It plays an important role through its contribution to industrial output, employment generation and the export earnings of the country and meets out the basic needs of the people at large popularly pronounced as Roti, Kapada aur Makan. After agriculture, the Textile Industry is the second largest employment provider in the country. It is also an established fact that in any country which is on the path of growth from developing to developed countries, growth of textile industry becomes a priority. The textile and apparel industry has always been an important sector for the Government. Thus for the development and to keep it competitive, the Government has been supporting the textile industry through various policies initiatives from time to time. Indian Government has taken various initiatives to give a further push to the textile industry which includes reducing India's dependence on US and EU markets. The Government, under the Focus Market Scheme, introduced duty credit scrip which the textile exporters can avail on export to 26 additional countries apart from existing destinations. 100% FDI is allowed in the Indian Textile Sector under the Automatic Route. In addition in 2013, the Indian Government signed MOUs with Governments of various countries such as Mauritius, Japan, Romania, Sri Lanka and Myanmar in order to provide boost to the Indian textile sector. The 'Make in India' campaign launched by the Government intends to provide a further boost to the Indian textile industry and enable it to achieve 20% growth in exports and sustain 12% growth rate in domestic market till 2024-25 as suggested by report of expert committee on Vision, Strategy and Action Plan for Indian Textiles and Apparel Sector. The campaign also focused on providing investment opportunities for foreign companies and entrebrneurs across the entire value chain. As per the plan for 2012-17, the Integrated Skill Development Scheme aims to train over 26,75,000 people up to 2017,covering all sub sectors of the textile segment. In Budget 2015, a sum of Rs. 5 bn was allocated for developing textile mega-cluster and also allocated Rs. 100 mn to set up a Trade Facilitation Centre and a Crafts Museum to develop and promote handloom products. These factors combined with entrebrneurial ability and capability to build infrastructure will be key success factors for India's rise in global trade. For the Textiles industry, the global focus is shifting from China to India on account of various factors i.e. increased labor cost, currency value and stability which is providing new place of opportunities as per the theory of "expected vacating places". The Government's positive steps are expected to help this shift and offer an excellent opportunity for increasing textile exports to the overseas markets. The developed countries including US, UK and Japan all are looking at India as suitable and reliable choice for their requirement of garments. This is a huge opportunity and it must be grabbed by the Indian Textile Industry so that it can increase its share in the global market. The initiatives taken by the Indian Government to further boost the textile industry coupled with the recent developments in the global market are expected to widen the export markets for the textile exporters and also help in driving textile growth in the domestic market. From the above it is evident that there are ample opportunities for the industry to increase its share in the domestic as well as global markets. Seeing the good prospects of growth of the Textile Industry, the Government of India through its National Textile Policy and National Textile vision document has set the target for Indian Textile and Apparel industry to $350 billion by 2025(domestic $200 billion and Export $150 billion). Management Perception of Risk/Concern/Threat Though the future of the Textile Industry appears to be bright but it is not free from normal business risk and threats. China the largest producer, consumer and exporter of cotton has recently changed its policy on sourcing cotton. Chinese Cotton Policy brought a sudden downfall in the New York price index and this in turn had a cascading effect on the entire world. Uncertainty brvails till stability comes in Chinese cotton production and consumption pattern. The export of both cotton and yarn to China from India has affected this year. India is the second largest producer of cotton, after China. India exports about 90-100 lakh bales (approx. 1/4th of production), mainly to neighboring countries China, Bangladesh and Pakistan. According to the CAB data, due to lack of demand from China, cotton export is also fall drastically. China reduced cotton buying from the global market leading to decline in international prices. Government policies in India will play a role in the outlook for cotton in the coming years. India's domestic use of cotton is projected to continue to grow, but not enough to reduce India's export potential. Record levels of cotton stocks, smaller imports by China, weakness in other commodity markets and a strengthening dollar have created a bearish climate for U.S. and world cotton prices. Input costs, including power and labor, are significant factors which make it difficult for the Company to face competition from neighboring countries. Increase in the power costs, higher transaction costs, high cost of labor and general increase in input costs are all hindering progress for which the industry has to concentrate on cost reduction exercises and improvement in efficiency. Further to give boost to the industrialization of the state, some Governments through their industrial policies have announced certain incentives for the New Industrial units in their state. Though it is advantageous to the new industrial units as they will have differential benefits in view of the different policies of the state nevertheless existing industrial units needs some compensatory benefits like freight equalization policy for having equilibrium for Textile Industry at large. This will enable them to become globally competitive and contribute towards the growth of the state as well as country. The high rate of interest and tight monetary policy are affecting the financial performance of the Textile Industry. Though RBI has taken some remedial measures in this regard but still a lot more is required as the Textile Industry is a capital intensive industry. Recently Turkey has allowed duty free imports of textile fabrics from Pakistan and hence, India will have to face tough competition in this market for textile products. The Indian Textile Industry is export-oriented, facing challenges which can be attributed to sluggish global demand as well as deteriorating global competitiveness of the domestic textile industry. Indian textile products suffer tariff disadvantage from the European Union. India is facing tough competition from neighboring countries like Pakistan, Bangladesh, Sri Lanka and Vietnam which have duty-free access are now grabbing the market share. Outlook There is scope for growth in the Textile Industry as India's share in the global trade in textiles is weak, compared to other countries. The free trade environment is a good opportunity for Indian textile industry to increase its share in the global market. In the mid-long term, the Indian textile industry is expected to grow very strongly with growth being balanced from both domestic consumption as well as exports demand. The prospects of long-term growth in India remain strong as it brings a rare set of strengths: stable democratic Governments, capable private sector, huge consumer base, coupled with the availability of raw material and skills, India's growing young population and rising income have been a key determinant of demand growth. All of the above will create a huge market opportunity for companies to take long-term opportunity. Your company has positioned itself as one of the leading integrated textile player to reap the benefits of economies of scale and become globally competitive in terms of cost and quality. The management of the company is making all efforts to meet the brvailing concern by focusing its efforts on improving operational parameters and effective raw material procurement and marketing strategies to reduce the cost brssure. The Company keeps reviewing its strategy in the light of changes. Industry Structure/Development (Sugar) The Indian sugar industry is characterized by the coexistence of private, co-operative and public sector. It is the second largest producer of Sugar in the World. It is the second largest agro based industry after textiles. The growth of sugar industry has powerful impact on the rural economy. The Indian sugar industry in the last few years has produced a surplus sugar over its domestic requirement. This is an outcome of a skewed cane pricing policy of the Government that has recklessly incentivized farmers to produce excess cane at prices far beyond what the industry can afford. The arbitrary fixing of cane prices by state Governments over and above the prices fixed by the Central Government (on the basis of recommendations made by Commission on Agricultural Costs and Prices) has virtually broken the back of sugar industry. The steep rise in sugar cane price year after year coupled with tumbling sugar prices has impacted the profitability of sugar Companies this year and are reflected in the financial performance of the Sugar Companies. Consequently, several sugar mills have been reeling under heavy losses; few have fallen sick and used their working capital facilities to fund these losses. We are no exception to the general phenomena now brvalent and faced by sugar industry. In the financial year 2014-15, the sugar segment of the Company has suffered cash loss of Rs. 22.90 crore which has affected the overall performance of the Company. Management Perception of Risk/Concern/Threat The Indian sugar industry is highly cyclical in nature and is sensitive to Government Policies and weather conditions. Sugarcane is the sole principal raw material, its availability; quality and cost are impacted by monsoon, less production or diversion of crop. Market sentiments move disproportionate to demand supply parity causing volatile change in product pricing. The farmers have shifted from other crops to cane due to huge disparity between cane prices compared to other crops. The shift in cropping pattern has been detrimental to both sugar industry and farmer. What was supposed to be the ultimate insurance to farmers, the guarantee of payment by sugar mills is virtually collapsing and making our farmer vulnerable. Export of sugar is not viable as sugar prices are also weak in the international market. The high cost of production (due to higher sugar cane cost) coupled with weak international prices also made exports unattractive. Outlook The Central Government upon the recommendation of Dr. C. Rangarajan Committee scraped the levy obligation and dismantled the release mechanism. The Rangarajan Committee recommendations for the sugar industry mandating sugarcane prices to be linked to the realization of sugar and its by-products still awaits full implementation by the sugar producing States. The sugar sector has an important role in ensuring food and energy security in the country. It has tremendous opportunities to meet food, fuel and power needs. For this to happen, supportive policy regime is required both at the Central and State Government levels. At these high uneconomical rates, it is virtually impossible for the sugar industry to buy cane, crush them and manage to survive. One hopes that the Government will decisively intervene. The cane farmer cannot survive unless the sugar industry survives and is economically viable. Uneconomical cane pricing has led the sugar industry to the verge of closure. Sugar prices have now been hovering far below the cost of production. As a result, sugar industry is under brssure. The sugar industry is virtually under brssure and it requires a supportive policy from the Government. Segment wise/Financial/Operational Performance The Company operates in two segments i.e. Textiles and Sugar. Please refer Director's Report on the performance review. Internal Control System and Their Adequacy The Company is having adequate internal control systems and procedures which commensurate with the size of the company. The company is having internal control systems which are properly followed by all concerned departments of the Company. The Company is also having an Internal Audit Department to test the adequacy and effectiveness of Internal Control Systems laid down by the management and to suggest improvement in the systems. Material Development in Human Resources/ Industrial Relation Front The Company is of firm belief that human resources are the driving force that propels a company towards progress and success and the company is committed to the development of its people. The total permanent employee's strength was 11,476 as on 31/03/2015. The Industrial relations were cordial and satisfactory. Cautionary Statement Though the statement and view exbrssed in the said report are on the basis of the best judgment but actual results might differ from whatever is stated in the report. For and on behalf of the Board of Directors Jawahar Lal Oswal Chairman Dated: 12.08.2015 Place: Ludhiana |