MANAGEMENT DISCUSSION & ANALYSIS 

A. OVERVIEW

The scenario in the domestic branded clothing industry during the year was unsettled for a variety of reasons. The year commenced with healthy growth in domestic demand partly because of euphoria over an action-oriented and stable government having come into place. This, unfortunately, did not sustain, as the hard reality remained, i.e. the measures initiated by the new government are likely to impact the economy after passage of time and the consequential uplift in consumer sentiment and demand could show sustained improvement only thereafter. The good news on abatement of inflation and drop in oil prices and an improvement in the current account deficit position, have by themselves not been enough to generate significant growth in demand in 2014-15. The reforms/initiatives that have been initiated by the new Government need to be executed well and in time for the desired objective to be achieved.

The small quantum of domestic volume growth recorded in the year was disrupted by the large discounts extended by sellers round the year, on account of excessively high levels of inventory held by several players in our industry. The situation was further complicated by the gigantic strides that have been made by e-commerce. Although e-commerce does not directly impact the segment of clothing serviced by our company, it has resulted in capturing a large share of the wallet - that is, the total consumption expenditure budget - of our target audience, by inducing them to spend on other consumer goods categories like white goods and mobile phones, some of which offered at unbelievably low prices, often below cost.

Due to the feeble and erratic demand situation, the foot falls in malls were lower, and there is a major shake out in progress with a number of malls in the process of being closed down. This brsents an opportunity for companies such as ours to obtain quality retail space at somewhat reasonable prices.

Although the medium to longer term consumer story of the country remains intact, the growth in demand -contingent on higher GDP growth, a robust economy with across-the-board revival in investment, jobs and income opportunities - is vital before sizeable increase in consumer off-take sets in. The "Make in India" vision can be a major instrument for achieving these objectives, coupled with the steps taken for ease of doing business and simplification/rationalization of laws.

The roll out of the Goods & Services Tax (GST), although delayed, is very high on the agenda of the government after having announced that it would become effective from 1 April 2016. Hopefully the legislation will be approved by Parliament in the Monsoon Session. This, if executed well, could be a game changer. The rate of GST applicable to our industry will need to be appropriate to its structure, a one-size-fits-all approach to rate fixing would damage the industry irreparably.

The situation in the international market, is also highly unsettled. The European Union (EU), due to their economic problems, has had to resort to quantitative easing. The jury is out on whether quantitative easing will help the economy turn around. Meanwhile, there has been yet another crisis in Greece. Added to this, is the demographic profile of an aging population in the most prosperous EU member countries, where unemployment is rising substantially and specially for younger people in Italy, Spain and Portugal. The European market has consequently been at a very low ebb. As a consequence of this, suppliers to the EU have had to re-focus and launch a very strong thrust in those markets of the developed West where the demand situation is better, particularly, the UK, in Europe and in the USA, albeit only slightly. Resulting from this fierce competition from suppliers that are being squeezed in the continental countries of the EU, there has also been very strong price brssure in those markets where there is demand such as the UK and the USA; in the continental EU market the competition for a larger slice of a smaller pie has also become even more severe.

Clothing exports from India has grown, in the early part of the financial year, but has tapered off sharply in the latter part. Cotton clothing has grown by a meagre 3% growth, with Silk, Manmade Fibre and other Fibres (Vegetable fibres like Flax, Linen) growing more sharply, mostly in the Ladies clothing segment. However, this business has been done at considerable sacrifice in pricing and margins. The data on apparel imports into the US show that in 2014 quantity growth was 3.2% and 4.9% in the first four months of 2015. Of the top ten exporting countries to the US, India has fared relatively very well for textiles and apparel put together. Cotton apparel imports into the US has, however, shrunk in 2014 as well as in the first four months of 2015, while manmade, wool and other vegetable fibre based apparel have grown. With China going into an economic slowdown, the entire global market seems to be listless and the situation is likely to take time before a return to better times.

The business of import of clothing in the international markets is now being done on much shorter lead times to minimise inventory risk and carrying cost. The importer is able to negotiate much lower prices, demand a higher level of quality and better credit terms, which enables him/her to achieve higher margins on an almost flat turnover, at the cost of the exporter.

India's competitiveness in the export of clothing has been considerably eroded due to the Rupee having  become over-valued by 8% according to the RBI over 2013-14 and 22% with respect to 2004-05. Various steps to restore competitiveness need to be put in place, most important of which is the simplification of laws for the import of raw material, benchmarked with best practices in competing countries.

Reform of Labour Laws and Rules has commenced with Madhya Pradesh already permitting stores to function 24 x 7 / 365 days, and Maharashtra is considering adopting the same (this needs to be rolled out nationwide at the earliest), besides reduced onerous nature of labour law compliance, and encouragement of State Governments to take initiatives to modernise labour regulations. Initiatives like pushing States to align with international best practices for grant of clearances and ensuring compliance, an Advisory to Secretaries of the Government of India and Chief Secretaries of States to simplify and rationalise the regulatory environment, increase in validity period of Industrial Licences and simplification of application process, adoption of National Classification Code NIC 2008, which is globally recognised, integration of several more Central Services with more Ministries and entities like CBDT/RBI /PF/DGFT, etc, FDI liberalisation in several areas, work taken up on 5 smart cities in the Delhi-Mumbai corridor, several more industrial corridors on the planning board, Skill Development being pursued aggressively, reduction in the paperwork for Imports and Exports, circulation to states of 98 reform measures in "Ease of Doing Business" are some of the many reforms that have been initiated, ending the lull of years in the space.

These steps are certainly in the right direction, and hold out promise of further reform. Although all problems that have accumulated for so long cannot be set right in a year or two, it is important to have a long term view in challenging times, which is reflected in policy initiatives.

The EU seems keen to resume negotiations on the long-awaited FTA. One of the spokesmen for the EU, namely the EU Ambassador to India, has been reported in the Press as having indicated that the bilateral business between the EU and India would double to Euro 200 billion within four years of the Agreement being signed. When the Treaty is actually signed, it would restore India's competitiveness in the EU very substantially.

B. INDUSTRY STRUCTURE AND DEVELOPMENT

Bangladesh is recovering from the setbacks they faced during the brvious year vis-a-vis safety, fair wages and human rights.

China has made investment in low-cost countries like Bangladesh, Vietnam, Cambodia and Myanmar, to be able to address its need to grow consumption in China with its own production, notwithstanding its own problems stemming from demographics, the prospective limits to labour force growth and higher wages; China itself is graduating to higher levels in the value chain.

Turkey is trying to address the need for short lead time/ quick deliveries, with lower cost and lower transit time for transportation to the EU, helping EU retailers and brands looking to reduce their risk and investment in inventory. It is also buying selectively across the world for cheap inputs, including from India.

International retailers and brands are likely to continue to seek to protect their margins to meet their contribution needs on flat or lower throughput, by putting suppliers under even greater stress.

Our country could benefit substantially by unlocking our pool of human resources, using a combination of equipment and systems on the one hand, and greater skilling of the work force on the other, to drive up productivity and quality simultaneously. This, coupled with possible Trade Agreements with major importing countries, particularly the EU, could still result in a "win-win situation" for India to create its own niche and capture a bigger slice of the market.

Latin America, Africa, China and South-East Asia hold great promise as markets of the future for the Indian clothing industry.

The apparel industry continues to hold potential, not just for generating large gender sensitive employment, but also to create jobs for the large numbers expected to enter the workforce in the next decade. The industry associations have to be able to articulate that this industry can generate huge employment, to capture the focused attention of the Government.

C. OPPORTUNITIES AND THREATS

Arresting the export of India's taxes continues to be a major opportunity, because the industry is capable of competing with most competitor countries, given a like-for-like situation.

Towards this end, the recommended exemption from Service Tax for exporters of clothing addresses this need.

Cost of Funds for the exports markets should be available at international pricing in Rupees to be able to compete effectively, because a differential of 7% to 8% is difficult to absorb. This can brsent a major opportunity as well.

The quick resolution of the India-EU Free Trade Agreement, which has been lingering for more than 7 years is a major opportunity, because this would re­position India vis-a-vis not only Bangladesh, but also vis-a-vis several of our other competitor countries. Similar agreements with other major markets, especially the USA and Canada, would be most desirable.

The roll out of GST is a major opportunity for the industry, provided the rate is fixed with minute due diligence on the peculiarities of the industry, in the absence of which it could become destructive and a major threat.

Building Brand India, were it to be prioritised under the "Make In India" project, can be an opportunity, if executed well. We have the outstanding examples of Japan and Korea on how this was executed flawlessly and on a fast-track basis.

The existing Advance Licence/EODC System belongs to a different era (the like of which does not exist in any of our competitor countries), and is a major threat, because of the cumbersome procedure and the discharge of export obligation being as traumatic as it is.

If one is looking at a quantum jump in the export of clothing, global sourcing of fabric and accessories is vital to be able to widen the offering. A system which is in line with best practice in competitor countries is absolutely essential.

The existence of the C Form system used for availing lower tariff, is a barrier to entry of goods moving within our own country! As long as the C Form is required, and the process for obtaining it is as complex as it is, trade within the country carries an additional cost of 3% for the manufacturers, because a substantial portion of their turnover is such that the buyer does not furnish the C Forms despite regular follow-up, and the manufacturers end up having to pay the differential tax because of this default.

Relegating of Indian brands to the first/upper floors in malls is a threat because the ground floor is earmarked for foreign brands, several of which are fifth rate brands. In the eyes of the consumer, this is downgrading of brmium Indian brands which rightfully belong on the ground floor, apart from the fact that 60% of the consumers entering malls do not graduate beyond the ground floor. To build Brand India, it is vital to showcase Indian brands to maximum advantage.

As has been discussed, the malaise in consumer demand in the two major exports markets, of the EU and the USA, and particularly of Continental Europe, do not show significant signs of improving substantially in the near term.

There is some uncertainty over when consumer demand in India will bounce back, given the buying potential of the young population, who have not seen any increase in their income or who are unemployed, or are employed in jobs paying lower than their market value. That this will change, given the initiatives and the reforms rolled out, is a given - the question is, when that will happenRs.

D. SEGMENT WISE / PRODUCT WISE PERFORMANCE

Our Segments are reviewed in terms of the relevant Accounting Standards, with focus on the differential risks and returns of these segments, bearing in mind the organization structure.

The Geographical Segment is identified and given below: Year Ended 31st March 2015 

E. OUTLOOK

The Indian and Global environments have changed, with the future being more difficult to forecast. The global situation is particularly complex, as in the EU it seems very difficult to project when markets will revert to normalcy. The US market is confounding, because retail sales have continued to be subdued and often negative notwithstanding the broader sense that the US economy is recovering. With the possibility that the US Federal Reserve will move towards normalizing monetary policy and that this will necessarily involve increase in interest rates, one wonders what impact there will be on demand, not just in the US, but also in most markets in the world.

With the Indian policy framework being strengthened, one expects greater ease in doing business and a fillip to manufacturing under the "Make in India" vision. India's organised retail is increasing scale through M&A and is forecast to more-than-double in the next few years, subject to addressing the stumbling blocks. This can be only beneficial to the industry.

Decisive political leadership, empowered bureaucracy, accelerated GDP, CAD down 1.6%, subdued inflation, WPI inflation negative, greater brparedness to meet exogenous uncertainties have brought back India on the radar of Foreign Investors. We have built up a record level of foreign reserves in excess of USD 350 billion, a war chest which can help us combat various threats, including the impact of an increase in interest rates in the US.

The spend on advertising and brand building were enhanced by the company. The momentum of store openings was also stepped up due to increased availability of potentially viable locations. The Company has also made investments on productivity and quality enhancement equipment on a pilot basis. The initial results being most encouraging, this will be rolled out on a large scale.

F. RISKS & CONCERNS

The global economy's woes have hurt the performance of even IT companies. The limp demand in India has been a damper for some of the best companies, across industries, in the country. This is something which continues to cause concern.

The weakness of the EU economy and the somewhat uncertain recovery in the US , the volatility/debrciation faced by the Euro, and the overvaluation of the Indian rupee, continue to be a cause of concern, as also the impact of spending cuts in the EU and the prospective increase in US interest rates.

The unfair advantage that e-tailing enjoys over brick-and-mortar retailing is another cause of concern, necessitating a clearer decision on 51% FDI in retailing. The massive discounting/selling below cost by e-tailers has disrupted markets.

Total exports from India were negative in December 2014 and in January, February and March 2015 (also April and May 2015). How quickly we return to growth is also a matter of concern.

Clothing exports too have given up much of the growth recorded in the early part of the financial year. In fact, the dominant fibre for clothing exports, viz., cotton which is 70% of our exports (whereas 65% of global trade in clothing is in manmade fibres) has gown by a mere 3%. Furthermore, this 3% was also achieved at a great sacrifice of prices and margins. This is a matter of grave concern, because by next year India should overtake China to become the largest cotton-producing country in the world. Our global share in clothing is 12% - 14% in cotton clothing vs. 4% - 5% for clothing of all fibres. This shows the underlying potential for capturing further market share in cotton clothing. If we have to play to our strength, we have to capture a much greater share of global trade in men's clothing in cotton, in line with our position of being No. 1 producer in the world.

One of the risks common across industries and other countries, besides the impending increase in interest rates by the US Federal Reserve and the prospect of rising oil prices and its impact on the country's CAD.

G. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company's internal control systems, which are supplemented by an exhaustive process of internal audit (conducted by KPMG), which is regularly subjected to in-depth involvement of the management and monitored by the Audit Committee of the Board. Internal Audit covers the various functions, processes and other activities, including own retail operations of the company. Transactions are authorised, recorded and reported accurately and subjected to audit as well. The system of internal controls also ensures that all assets are safeguarded, insured and protected against loss.

H. COMPANY'S FINANCIAL PERFORMANCE

Operational Revenue & Profits:

The operational revenue was hit badly, largely due to the design-driven international business, where the quantity exported was lower, and the unit value realisation was lower in both USD and Rupee terms. Consequently, the PBT and PAT were lower, also impacted by higher prices paid for fabric (due to up-charge for smaller quantities bought per article) and lower Duty Drawback.

This was despite higher contribution from the branded business (subdued consumer demand and disruption of the market, notwithstanding), which also was eroded considerably due to sharp increases in Store Rentals (Rs. 7.43 crore), Personnel Cost (Rs. 2.29 crore), Advertising (Rs. 2.00 crore). The story would have been radically different, had the Indian market not turned sluggish after Q1.

During the year:

With the issue of 121,201 shares under ESOP, the paid-up capital of the company increased from Rs. 19,38,99,980/-to Rs. 19,51,11,990/-

The Company is in compliance with the Code of Conduct for Prevention of Insider Trading formulated in terms of the provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992, as amended from time to time. 

Dividends - Your Directors have recommended a final dividend of Rs. 2.50 per Equity Share of Rs. 10/- each on 19,511,199 Equity Shares The company had distributed an interim dividend of Rs. 0.60 each per equity share during the year. The total dividend for the year will be Rs. 3.10 (brvious year Rs. 4.50) per equity share. The total dividend amount (when approved by the shareholders) including dividend distribution tax would be Rs. 705 lakhs (brvious year Rs. 1,021 lakhs). Dividend (including dividend distribution tax) as a percentage of Profit after Tax is 74.28% on a Standalone basis and 80.66% on Consolidated Basis.

During the year 16 Stores were opened (1 store closed -a net addition of 15 stores) with 128 stores at the end of the year vs. 113 at the start.

ICRA (an associate of Moody's Investor Service) has reaffirmed the company's rating of A1+ for its short-term fund-based/non-fund based facilities at Rs. 8,000 lakhs. ICRA has also reaffirmed the company's rating of A!+ for Commercial Paper of Rs. 2,000 lakhs.

A1 is the highest credit quality rating assigned by ICRA to short term debt instruments, which carry the lowest credit risk in the short tern. Within this category, certain instruments are assigned the rating of A1+ to reflect their relatively stronger credit quality.

I HUMAN RESOURCES DEVELOPMENT / INDUSTRIAL RELATIONS:

The company recognises the need of continuous growth and development of its employees to meet the challenges posed by a rapidly growing consumer facing organization, besides fulfilling their own career path objectives. Consequently the role of Human Resources continues to remain vital and strategic to the company. Employee recruitment, training, and development are a key focus area, with policies, processes and extensive use of technology to attract, retain, and build on skills of high calibre employees. In keeping with its philosophy of a healthy and safe work environment, regular independent third party audits, certification, and training programs are carried out. Industrial relations have continued to be harmonious throughout the year.

J. CAUTIONARY STATEMENT

Statements in the report on Management Discussion & Analysis describing the company's objectives, expectations or brdictions may be forward looking statements within the meaning of applicable security laws or regulations. These statements are based on certain assumptions and expectations of future events. Actual results could, however, differ materially from those exbrss or implied. Important factors that could make a difference to the company's operation include global demand-supply conditions, finished goods prices, raw materials cost and availability, changes in Government regulations and tax structure, economic development within India and he countries with which the company has business contacts and other factors such as litigation and industrial relations in India, trade agreements, especially with the EU and the US.

The company assumes no responsibility in respect of forward looking statements herein, which may undergo changes in future on the basis of subsequent developments, information or events.