MANAGEMENT DISCUSSION AND ANALYSIS Economic Review Global Economy: Global economy was pegged back in the year 2015 with a lower GDP growth of 3.1% as compared to 3.4 % in 2014, as reported by IMF's World Economic Outlook update in January 2016.The global economic activity was majorly impacted by the decline in growth of emerging economies and the modest recovery in growth of advanced economies was not enough to compensate for it. One of the major factors that constrained economic activity in 2014 continued to have an influence resulting in this slowdown, i.e. China's rebalancing leading to declining trade, which has in turn majorly impacted prices for energy and other commodities. This bearish trend majorly impacted the leading energy and commodities exporting economies of Middle East, Brazil, Russia and others. Another major contributor was the change in United States monetary policy, with the Quantitative Easing program finally ending in October 2014 in the context of a resilient U.S. recovery and expectations of hike in interest rates from zero (increased to a range of 0.25% to 0.5% in December 2015) by the Federal Reserve, leading to tighter financial conditions. Weakness in global trade was thus a logical result of these developments and rise in protectionism. The estimated growth in world trade volumes was down to 2.6% in 2015 vs. 3.4% in 2014. On the currency front, all the major currencies have debrciated against USD, with some debrciating much more than Chinese Yuan, which was devalued in phased manner by the People's Bank of China. Going forward, however, the Global GDP is projected to grow by 3.4% in 2016 and 3.6% in 2017. This will be on the back of continuing gradual recovery in advanced economies (2.1% in 2016 and 2.1% in 2017) and also a rebound in emerging economies (4.3% and 4.7% respectively). However, these expectations may be derailed by any new economic or political shocks. Competitive currency devaluation and negative rates monetary policies being followed by central banks have created a world never seen before, where the only thing that's expected to remain constant is high volatility. Key Market Economies: As per the IMF report, while the estimated overall GDP growth for advanced economies was marginally higher at 1.9% in 2015 from 1.8% in brvious year, individual economies showed a mixed picture with G7 economies of United States, Japan, France and Italy growing faster than 2014 and the other 3, i.e. Germany, United Kingdom and Canada slowing down. Overall the Euro zone's GDP growth is expected to jump from 0.9% in 2014 to 1.5% in 2015. Similarly, Australia's GDP growth also rebounded from 2.7% to 3%. Among the major emerging economies, while India showed an improvement in GDP growth rates and China is estimated to slow down, GDP of Russia and Brazil are however expected to decline in 2015.Some of these countries are among the major markets of the Company for its exports. United States United States economy had seen a steady recovery in economic growth in the last few years. However, in 2015 there was a small dip of 10 basis points in the GDP growth from 2.5% in 2014 on account of dismal Q4 (1.4% growth). While the job market has remained robust, consumer spending was sluggish and rising energy prices impacted the economic sentiments. Atlanta Federal Reserve's estimates released at the end of March for GDP growth in Q1 of 2016 showed an annualized pace of only 0.6%. This has led to renewed concerns on the country's economic outlook with the University of Michigan's consumer sentiment index down to 91 in March 2016 as against 93 at the end of March 2015. With the renewed concerns on the economy front, the national Federal Reserve is likely to adopt a more cautious approach to raising interest rates. IMF's projections in January 2016 for the United States economy were 2.6% growth in 2016 and 2017. Canada With the impact of crude oil price shock and commodity downturn, Canadian economy performed worse in 2015 than brviously projected. Actual growth is estimated to be 1.2% growth vs. early estimates of 2.2%. However, debrciation of Canadian Dollar had supported the recovery in the second half of the year by advancing manufacturing and non-energy exports. Hence, the economic growth is expected to rise to 1.7% in 2016 and 2.1% in 2017. Euro Region Growth in the Euro region was back on track in 2015 on the back of recovery in economic growth in major non-German economies of France, Italy and Spain. Collectively, the effects of monetary easing by the European Central Bank, stronger private consumption and decline in oil prices overcame the weakening of net exports. Going forward some of the major challenges facing the regional economy are political in nature, viz. tide of refugees challenging the labor markets' (and society's) absorption capacity and the threat of terrorism. Latin America and Caribbean Economic prospects for the Latin American and Caribbean region were expected to be grim by IMF with the GDP decline continuing in 2016 at the same pace of 0.3% as in 2015. However, the situation when looked at country level throws up an interesting contrast of many countries continuing to grow modestly, but countries with high dependence on oil and commodity exports, poor policy frameworks and weaker domestic fundamentals experiencing major de-growth in GDP. The situation is expected to improve in 2017 with recovery in global GDP growth. However, risks to economic growth of the United States will also impact the Central American economies. Indian Economy India became the fastest growing large economy overtaking China in 2015. The GDP growth in 2014-15 was 7.2% (based on revised base to 2011-12) and in 2015-16 it was 7.6% by the Central Statistics Office. In addition to this, the overall macro-economic health of the economy showed marked improvement with fiscal and current account deficits curtailed due to central government initiatives and helped by oil price decline. While the current account deficit has been curtailed, it was largely because imports declined more than exports, which have been on a consistent declining trend from December 2014. Inspite of debrciating Rupee, decline in interest rates and policy support announced by the Government, the declining trend in exports is expected to be arrested only from first quarter of FY 2016-17. This is because currencies of most other emerging economies competing with India for merchandise exports have declined more than the Rupee and most central banks are biased towards monetary policy easing. The imports have declined largely on account of lower oil prices, commodity prices and gold imports. Inflation has also been trending lower with the Wholesale Price Index in deflation territory for many months and Consumer Price Inflation under the target published by the Reserve Bank of India (RBI). While this has led to lack of buoyancy in demand in the domestic market, profitability margins of most commodity dependent manufacturing sectors have been helped by this scenario. The tamed inflation also leaves policy room for RBI to follow through with further rate cuts in April 2016. This would be after announcing two rate cuts of 0.25% and 0.5% in June 2015 and September 2015 respectively leaving the repo rate at 6.75%. In addition to this, further reforms and policy initiatives of the Government are likely to ensure uptick in growth for the Indian Economy. One of the most important initiatives would be the 'Make in India' mission being promoted aggressively by the Indian government. Textile and Garments sectors is one of the key sectors focused on by the Indian government due to country's comparative advantages in this sector. In addition to this, the government policies such as set-up of Integrated Textile Parks, Centers of Excellence focused on testing and evaluation, resource centers and training facilities set up, etc. and supportive policies for FDI (100% FDI under automatic route) and export are encouraging major investment from domestic and foreign players. Industry Overview India's Textile Scenario: Indian textile industry is one of the key sector of the economy in terms of contribution to the economic activity, employment generation, external trade and foreign exchange earnings. In 2015, size of this sector was US$ 108 billion and it was expected to grow 5 fold in the next decade. In value terms, the industry constitutes about 14 per cent of the manufacturing sector, 5 percent of the GDP and 12 per cent of India's total export earnings. It generated direct and indirect employment for 105 million people, 2nd largest after agriculture. Globally, India is the 2nd largest producer of textiles and garments with the leading position occupied by China. It is likely to overtake China in terms of size by 2022-23. Unlike China, India has a brdominantly cotton based textile industry. The MMF textiles and clothing exports accounted for 80 per cent and cotton textiles for 20 per cent in China, while in case of India, cotton textile and garments contributed a much higher percentage. Globally, India is the 2nd largest producer of textiles and garments with the leading position occupied by China. It is likely to overtake China in terms of size by 2022-23. Unlike China, India has a brdominantly cotton based textile industry. The MMF textiles and clothing exports accounted for 80 per cent and cotton textiles for 20 per cent in China, while in case of India cotton textile and garments contributed a much higher percentage. Country’s major competitive advantages are: •Abundant availability of raw materials such as cotton (1st in world), wool (6th largest clean wool and 9th largest greasy wool producer), silk (2nd largest) and jute (1st in world). Even in man-made fibres, India is the 4th largest producer. • Skilled workforce have made the country a sourcing hub. • Installed capacity for yarn production. • Rich cultural heritage, tradition and diversity reflected in textiles. • Production linked cost structure. However, some of the disadvantages faced by the sector from a global competitiveness perspective are : • Higher cost of capital. • Internal duty structure making raw material costlier for man -made fibres. • Unfavourable tariff structure for Indian textile products vs. other countries in many key markets such as Europe, Canada etc. In FY 2015-16, in line with the overall decline in exports from India, exports from the sector are expected to decline to about US$ 40 billion as compared to US$ 41.4 billion in FY 2014-15. However, government has taken some measures in FY 2015-16 to improve the competitiveness of Indian textile exports such as: • Launched a 3 percent Interest Equalization Scheme in November 2015 on br-shipment and post-shipment of garments, for five years, with retrospective effect from April 1, 2015. • Approved an Amended Technology Upgradation Fund Scheme (A-TUFS) in place of the existing Revised Restructured TUFS for technology upgradation of the textiles industry supporting CAPEX spends. • Extension of duty drawback scheme to synthetic textiles with less than 85% cotton and not for retail sale. • Focus on setting up of integrated textile parks and 'Make In India' mission. • Completion of review of National Textile Policy 2000 and expected announcement of new National Textile Policy in 2016. The new National Textile Policy will aim to achieve exports of US$ 300 billion by 2024-25 and create additional 35 million jobs in the sector. Free Trade Agreements (FTAs) between India and major markets such as Europe, US, China, Australia, Canada, etc. or relevant sectoral agreements can be a major growth driver for the industry by granting favorable duty structure for Indian textile products. Similarly, bilateral/multilateral trade agreements between groups of countries, for e.g. Trans-Pacific Partnership (TPP), could potentially harm the Indian textile exports in some segments. As per the recent data from OTEXA, total textile and apparel imports to USA have grown at a rate of 7.0% in volume terms in 2015 vs. 2014, whereas imports from India have grown by 7.2% for the same period. In the same period, imports of 'Made Ups/ Misc' to US increased at a higher rate of 8.3% with India's contribution going up from 22.6% to 23.8%, with growth of 12.3%. China, which is the largest exporter to US for Textiles & Apparels, in the same period grew its exports of 'Made Ups/ Misc' by 2.6% only. The global home textiles industry, of which bed linen is around 21% of the total volume, is expected to sustain a growth rate of 5% through to 2017 reaching a size of US$ 96 billion from US$ 86 billion in 2015. Indian Home Textile segment has carved a niche in the global market for the Indian textile industry in the last decade with its value added products which are now known for their high quality, luxury and designs. India has acquired considerable strengths in many product segments within this sector, such as towels, sheet sets and other madeups. There has been significant additions and investments in large vertically-integrated capacities in recent years in this segment by Indian textile companies buoyed by the high growth in exports and growing domestic demand. Cotton Scenario: All major cotton producing countries were expected to show a Y-o-Y decline in production in Marketing Year ("MY") 201516 due to inclement weather, especially in Pakistan, India and United States. In China, withdrawal of government support and major reduction in price realizations, led to a 22.7% decline in area under cultivation. Whereas in India, decline in land area under cotton cultivation was 7.1%. Hence, production in India has been estimated to decline by 9.2% to 26.8 million bales, however all other top 5 producers except Brazil would see a decline of more than 15% in MY 2015-16. With the world cotton consumption expected to be around 109.2 million bales (down by 1%) in MY 2015-16, the year-end closing stock would be down to 103.3 million bales. World's Cotton Balance Sheet Trend In India, the year-ending stock for MY 2015-16 is expected to be 11.2 million bales, lower by 2.3 million with total consumption of 24.5 million bales. Trade in cotton was estimated to be lower at 34.9 million bales in the same year, a decline of 1.3%, majorly on account of decline in imports to China. Cotton exports from India are expected to grow by 31% on account of demand from Pakistan, Vietnam and Bangladesh. Globally, cotton prices have been in a negative trend due to historic highs in carryover stocks, especially in China which is now trying to reduce the levels by controlling imports and reducing price support. However, the drop in cotton prices in India are much lower than the international prices as a result of the spurt in exports, especially to Pakistan. In MY 2016-17, USDA's projections for the world-wide output of cotton have been 4% higher than brvious year to 105.5 million bales on account of recovery in yields, which were affected in the brvious year due to adverse weather and pest problems. Consumption has been projected to rise modestly by 0.8% to 110.5 million bales with the world economy under stress and relatively steeper decline in prices for competing products. Indian production of cotton in MY 2016-17 is expected to rise by 1.2 million bales. However, domestic consumption is expected to remain flat. Exports to Pakistan are expected to come down since their domestic production is expected to recover on the back of normal weather. Global pricing scenario in MY 2016-17 is expected to be bearish on account of liquidation of reserve stocks by China, marginal increase in consumption and higher production. Cotton yarn sector is currently beset with problem of overcapacity in a challenging demand scenario in both domestic and export market. Exports of cotton yarn continued the declining trend in the period Jan - Oct 2015. Vietnam, which was nowhere in the basic textiles trade scenario at the start of the century, has risen to the 4th position in the list of countries exporting cotton yarn on the back of an imbrssive growth run in the last few years. This has been on account of Chinese investments in spindle capacity in Vietnam and the Trans Pacific Partnership. This trend is likely to continue for a few more years. Operational Review The Company is a leading player in the Global Home Textiles segment of the Textiles & Apparel industry focusing on bedding products. It is the 2nd highest manufacturer and exporter of bed sheets, bed linen, quilts from India and among Top 3 bed sheet suppliers to the United States. The Company has turned in another year of high sales growth with its sustainable business model focused on catering to the changing mindset of consumers and more importantly, by helping to shape their desires and demands. In FY 2015-16, it has continued the focus on strengthening its brsence in higher value added product segments in the bedding products market. Capacity Expansion: The Company has put in place a two-phase expansion plan to cater to the expected strong demand for home textile products. Phase 1 of Rs. 175 Crores is towards increasing Processing capacity from current 68 million meters to 90 million meters, setting up a water effluent treatment plant, Automation of cut and sew and warehousing and Phase 2 of Rs. 300 Crores is towards upgrading the existing Spinning Facilities, Investments in additional Weaving (with specialized looms) and value added equipment for the delivery of fashion and utility bedding.. New Markets: With its strengths in the brmium category, i.e. mid to high, of bedding products, the Company is now set to target the domestic market in India and has earmarked an outlay of 25 crores over three years for this purpose. The gradual change in Indian consumers mindset towards comfort and luxury, increasing nuclearization of households and higher allocation of spends towards home decoration while purchasing new homes, are factors which make the domestic market attractive. The Company also continued its global expansion with entry into new geographies by planning a foray in Europe and Middle East. Product Mix & Product Line: In the brvious financial year, the Company had entered into 3 new categories fashion bedding, utility bedding and institutional bedding. It now has the complete Bed Linen product basket, which is marked by product sophistication, value-addition and quality. On the fashion bedding side, by appointing designers in US and UK it has developed its own collections, which were well received when brsented in various trade fairs. The company has made all the necessary arrangements at the factory for delivering quality products in this segment. For the utility bedding segment, it has launched entire collection on the mattress pads and other utility bedding products. It has also been successful in getting onboard a few large customers in the institutional bedding segment. With this success and progress, it has been able to grow contribution of these new segments in the overall volumes to 10% and is on track to increase it to 30% in the next 3-4 years. Marketing: Targeting Niche Consumer Segments In march, 2016, the Company launched three lifestyle brands - Boutique Living, Revival and The Pure Collection in the US market, which will be launched next year in other markets. The three brands are designed keeping different target consumers in mind. Boutique Living is targeted at successful professionals who travel frequently. Revival is targeted at professionals who look for classic detailing with a modern outlook. The Pure Collection is for the health and environment conscious consumer. The Company intends to increase its market penetration by launching brands catering to such consumer segments with specific needs. Financial Review The Company's overall financial performancein all parameters were in line with business plan and had substantial growth over the brvious financial year. Brief summary is highlighted below:- Segment Review Textiles: Home textiles sold in FY2015-16 was 54 million meters, resulting in a volume growth of 28 %. Revenue growth for the year in home textile segment was 31 % resulting in the overall revenue growth of 24%. Spinning revenue declined by 9% as compared to brvious year on account of challenging export market situation and greater in-house consumption. Risk Factors & Mitigation (a) Economy Risk: Economic growth influences new home purchases and overall consumer spending, which in turn impacts purchases of home textiles for new homes and repeat/replacement purchases for existing homes. The Company is currently brdominantly dependent upon exports to developed countries such as US, EU, Canada, etc. Slowdown or cuts in consumer spending in these countries on account of the economic situation would impact it directly. Risk Mitigation The Company has over the years diversified its market and product portfolio to sbrad its risks from economic downturn. In addition to the export market, it is now poised to address the domestic markets as well and is expanding its brsence in large emerging markets to widen its brsence. It is also expanding its product portfolio and customer base to mitigate impact of economic risks and customer concentration. (b) Currency Risk: Currently nearly entire income of the Company is from exports and hence, in foreign currency. The Company also imports a small portion of its raw materials and a significant part of its capital equipment, hence it only has a partial natural hedge. Any volatility in the currency markets, would therefore impact the company. Risk Mitigation Since the Company is in made-to-order business, the exchange rates at which orders are secured is known to it and the Company follows the policy of entering into foreign currency forward contracts of 6 months to 12 months tenure on receiving firm orders from clients. This approach allows the Company to manage the currency risk in a more brdictable manner. (c) Raw material Price Risk: Cotton being the base raw material for the Company's bedding products, any increase in cotton prices will impact its margins directly. Another factor related to cotton prices is the movement in cotton to polyester price ratio, which when higher may lead to a dip in demand for Company's cotton based products. Risk Mitigation Current situation in the industry, with high cotton production and excess yarn capacity in India, is highly amenable to a stable price scenario for the Company's raw material base. Irrespective, the Company follows a procurement strategy of partnering with its raw material suppliers by extending better credit facility and buying the latter's production capacity. With its made-to-order approach to manufacturing, the Company is able to incorporate variations in raw material prices in its pricing decisions so as to protect its manufacturing margins. This approach helps facilitate lower inventories, shorter working capital cycle and capability - based competitiveness. Company's brsence across the bed linen product basket in the mid to high segment insulates it to an extent from changes in highly price sensitive customer demand that is linked to the movement of cotton to polyester price ratio. SWOT Analysis Strengths: The Company is an integrated Yarn to Made Ups player with greater investment in downstream value-added products with world class manufacturing facility built with latest technologies from across the world. This commitment to the best standards is reflected in its recognition as a quality product manufacturer by its global customers. It has mastered the production strategy of 'Made-to-Order' by developing long term customer relationships, including quasi-annuity institutional relationships, which help get reasonably good visibility into market demands and revenue brdictability. This not only leads to lower inventories and shorter working capital cycles for the Company, but also de-risks its capital investments from demand volatility leading to a sustainable business model and consistently superior financial performance. Additional factors that plays into this strength of the Company are its balanced in-sourcing and out-sourcing approach, modern assets less than 10 years old and operating leverage from increasing capacity utilization. The Company has been able to establish itself in the demanding and attractive mid-to-high range product niche in many large global markets by focusing on intangibles like brands, investments in patented technologies/products, captivating team and establishing direct consumer connect through its showroom and studios in its major export markets. From a product perspective, the Company's strength is its one-stop shop ability for everything about Bed Linen from Bed Sheets to Fashion Bedding, Utility Bedding and Institutional Bedding- the complete Bed Linen product basket. Weaknesses: The Company's brsence in only the bed linen market in the value added product segment (Made Ups) would restrict its balance sheet's ability to absorb any major external shocks in this market. Also, limited visibility and awareness in India, its home market, is likely to hamper its expansion and growth in this value conscious market. Opportunities: In addition to growth in its existing markets such as United States, Canada, Europe, UK, Australia, etc., the Company has a lot of scope for growth in the emerging markets such as the BRICS countries. Finalization and implementation of Free Trade Agreements with Europe and Canada by the Indian government could provide a huge spurt in market access. With the changing lifestyles and greater consumer apbrciation of benefits of better quality bed linen, demand for the Company's products is likely to increase. There is also enough untapped market potential that can be exploited by the Company by launching its own proprietary patented designs targeted at niche uses and consumer segments. Its entry in 2014 into the Fashion Bedding, Utility Bedding and Institutional Bedding segments, gave the Company a complete product range in the Bed Linen market. With the brand strategy of launching home textile brands catering to niche segments, the Company has increased the addressable market. Threats: Any adverse measures in terms of tariff and non-tariff barriers, even in a comparative sense with respect to competing countries, effected by the Company's target markets, are likely to affect the business. The Trans-Pacific Partnership (TPP) is expected to send ripples throughout global textile trade and Vietnam's textile industry is likely to emerge as the biggest beneficiary of it. However, with regards to the Company's main product segment TPP and Vietnam are not immediate threats because of following reasons: • Duty applicable on bed linen products from India in the United States is only 6.7%. This is not a huge advantage. • Vietnam is dependent on cotton imports and yarn imports, which not only add to the cost structure, but also fall a foul of TPP's'yarn-forward' Rules Of Origin requirements. • Another factor which go against Vietnam is its lack of capacity for spinning the counts required for bed linen market. Any withdrawal of the export promotion facilities, such as Interest Equalization Scheme or Technology Upgradation Fund Scheme or Duty Drawback Scheme, etc., currently offered to the sector by the Indian government will impact the Company's profitability. Outlook With the world economy projected to be on a recovery path, notwithstanding the lackluster fourth quarter of 2015 and initial months of 2016, consumer spending numbers and new home sales are also expected to pick-up. The advanced economies as a whole are expected to grow at a faster pace in 2016 and 2017 as compared to 2015. This will drive greater demand for the Company's products in the textile segment in its key export markets. Encouraging economic growth prospects for many of the significant emerging economies bode well for the Company's sales in its existing markets and expansion plans into newer markets, such as its home market of India.Given the expectations for stable cotton supply and price scenario, in addition to the ample availability of spinning and weaving capacity, the Company does not expect any major threats to its profitability. The Company has consistently delivered strong financial performance over the last four years while transforming its product portfolio. It has been successful in forging deep relationships with its customers such that majority of the company's revenues were derived from customers with relationships that were five years or longer. The past record of Company's successful transition from a yarn and textile supplier to a value added bed linen marketer to some of the most demanding consumers is a clear testimony to its capabilities and a harbinger of its continued success in leveraging positive demand environment in the coming years. Internal Control Systems The Company has internal control procedures commensurate with its size and nature of the business. These business procedures ensure optimum use and protection of the resources and compliance with the policies, procedures and statutes. The internal control systems provide for well-defined policies, guidelines and authorizations and approval procedures. The operation and monitoring of the system of internal control is entrusted to employees who possess the necessary skills, technical knowledge, understanding of the Company, industries and markets in which it operates. An Independent Audit Committee, on quarterly basis, reviews adequacy and effectiveness of internal controls and provides observations/ recommendations. The discussions are also made with Internal Auditors and the Internal Audit Report is also reviewed by the committee. The Company has invested not only the latest production systems, but also high tech waste treatment plants for sustainable manufacturing and IT Systems for business process optimization. The Company is also the 1st Textile Company in India which has implemen ted SAP HANA version with SAP EHP7. After implementation, our systems performance has increased multifold. Developments in HR As a brand-led business, people are the most critical resource to maintain Company's quality edge in the market. The Company believes that people are its most valued resource and their efficiency plays a key role in achieving set goals and building a competitive work environment. A productive and innovative workplace has been and will continue to remain a key requirement for successful business performance in the Company's perspective. We strive to provide great place to work to our people through challenging and learning environment. Talent Management, Leadership Development are some of the focus areas for Company's Human Resources Team. HR Department of the Company conducts training programmes to upgrade skills of its employees. The Company is also committed to increase gender diversity at the workplace. To bring uniformity and accuracy in the HR processes, automation of certain HR activities of employee life cycle is being done. Cautionary Statement Statements in this document/discussion relating to future status, events, or circumstances, including but not limited to statements describing the Company's objectives, projections, estimates and expectations maybe 'forward looking statements' within the meaning of applicable laws and regulations. Such statements are subject to numerous risks and uncertainties and are not necessarily brdictive of future results. Actual results may differ materially from those anticipated in the forward-looking statements. |