MANAGEMENT DISCUSSION AND ANALYSIS REPORT Economic Overview The formation of the stable government with a clear mandate in May 2014 had a major positive impact on overall sentiment in the country. The announcement of several reforms measures and policy initiatives taken during the year led to recovery in a number of macroeconomic indicators - economic growth improved, inflation moderated, current account deficit declined and interest rates came down. In addition, the launch of the 'Make in India' campaign has further boosted manufacturing sentiment. The new government changed the base year for calculation of economic growth from FY05 to FY12 and also introduced the concept of Gross Value Added at the aggregate and sector levels apart from revising industry groups. As per the Central Statistical Office (CSO), based on the new series, real GDP growth rate for FY 15 is 7.3% as against the revised FY 14 GDP growth of 6.9% (from 4.7% as per the old series). Inflation, measured by the Consumer Price Index (CPI), eased from 8.3% in March, 2014 to 5.2% in March, 2015. Fiscal consolidation efforts, well supported by lower commodity prices especially crude oil, have narrowed the fiscal deficit in India to 3.99% of GDP in FY 15. Going forward, this moderation in commodity prices could drive improved growth prospects and ease inflation brssures increasing disposable incomes for consumers and lower current account deficit, among others. However, during FY 15, exports remained weak. The rupee debrciated by 4.2% during the year from X 60.1 per US dollar as against Rs. 62.6 per US dollar towards the end of March 2015 as the US dollar strengthened against major currencies. Barring this, initiation of economic reforms, enhanced investments in key sectors and efforts to revive manufacturing growth augur well for the Indian economy. Driven by these positives, FY 2015 is expected to be at turnaround year for the Indian economy. The International Monetary Fund (IMF) projects India's economic growth to rise to 7.5% in the financial year 2015-16. It also forecasts that India will emerge as the fastest growing large economy in the world at the end of the same financial year. Leather Industry Overview The Indian leather industry has established itself as a prominent industry both in international as well as in the domestic market. With an annual production of 2 billion sq. feet of leather, accounting for 10% of the world leather requirements, India is the second largest producer of leather next to China. It also has the distinction of being the one of the oldest manufacturing industries catering to the global markets. From being a mere raw material supplier, the industry has undergone a positive metamorphosis to emerge as an established exporter of value-added and finished leather products, contributing significantly to export earnings. A dominant share of the manufacture of leather is controlled by the small and household units which account for almost 80% of total leather production. Large and medium units are either tanneries or shoe manufacturing companies. Playing a vital role in the national economy in terms of employment generation, employing nearly 2.5 million people with 30% being women, the industry offers tremendous potential for employment opportunities driven by the growth in global demand for leather products, especially in footwear, furniture, interior design and in the automotive industry, among others. Leather Exports The leather industry holds a significant place in the Indian economy because of its consistent contribution to the Indian exchequer. In fact, the industry is among the top ten foreign exchange earners for the country. In FY15, exports of leather and leather products touched US$ 6494.41 mn as against US$ 5937.97 mn in the corresponding period of last year, recording a positive growth of 9.37% and a CAGR of about 13.10% in the last five years. Major Markets: Countries in the European Union account for nearly 56% of India's total export of leather and leather products, Germany, UK, Italy and France being the prime markets. USA is the other major market for Indian leather exports Growth Drivers Abundant availability of raw materials: Endowed with 21% of the world cattle and buffalo and 11% of the world goat and sheep, abundant raw material availability is the key driver to the growth of the leather industry, enabling production of ~235 million pieces of hides and skins. The annual average rate of the growth of cattle is around 1.5% in India, helping it to maintain its leading position in leather production. Further, growth shown by the associated industries such as leather footwear, leather garments, etc. has spurred the growth of the Indian leather industry. Focus Sector: The Government is providing various incentives to the leather industry in Foreign Trade Policy and allowing concessional Duty for import of Machinery. Department of Industrial Policy and Promotion (DIPP) is implementing 'Indian Leather Development Programme (ILDP)' consisting of six sub-schemes viz. (Human Resource Development, Support to Artisan, Mega Leather Cluster, Integrated Development of Leather Sector, Leather Technology-Innovation and Environmental Issues and Establishment of Institutional Facilities) for the overall development of leather sector. Financial assistance is being provided to organize overseas marketing activities to promote exports from the country under Marketing Development Assistance (MDA) scheme and for enhancement of export through accessing new markets or through increasing the share in existing markets under Market Access Initiatives Scheme (MAIS). Recently, the leather industry has also been notified as a focus sector in the Make in India programme. It is expected that this renewed thrust will transpire in the form of increased allocation of funds to this sector and development of new and improved industry friendly policies with a view to augmenting tanning capacity, infrastructure modernization, skill development and exports. This will lead to enhanced production, quality products and market competitiveness. Besides this, the industry also benefits from availability of skilled labour, competencies to assimilate new technologies and handle large projects, and continued emphasis on product development and design capabilities. Challenges Bottle necks which are hindering the growth process of leather industry include product designs not aligned to international requirements, lack of warehousing support from the government, tanneries not confirming to environmental regulations resulting in closures, and fluctuation in international prices of leather. Unawareness of international standards, inability to mobilize funds at favourable rates, inadequate skill development of the workforce and low capacity utilization are issues especially affecting the growth of the small and unorganized sector. Footwear Industry Industry Structure & Development The Indian footwear industry, comprising of leather and non-leather segment, is pegged at X 25,000 Crores with a CAGR of 15%. India is the second largest global producer of footwear in the World, next only to China, producing more than 2.5 billion pairs of footwear per annum. This rebrsents 12% of the global production of approx.16 billion pairs of footwear every year. The Indian footwear market is dominated by men's segment which accounts for about 55 percent followed by ladies' and kids' segment which account for around 30 and 15 percent, respectively. Presently, unorganized players account for nearly 85% of the total footwear industry in India. However, in recent years the organized footwear industry is registering good growth driven by growing fashion consciousness together with increased disposable income among India's urban middle class, penetration of the organized players into Tier 3 and Tier 4 markets and tapping consumers' growing brference for branded footwear. The organized footwear segment is expected to increase by 27% per year. The huge market potential in India has attracted many International brands to commence operations in India while domestic manufacturers are now aggressively expanding their brsence Pan India. Growth Drivers As the footwear industry has strong linkages with the leather industry it stands to benefit from the strengths and capabilities of the latter. This includes abundant availability of raw material and large pool of skilled and unskilled labour. Further, the footwear manufacturing sector in India can generate 100% Foreign Direct Investment (FDI) through Automatic Route. The Indian Government is also providing incentives to the footwear industry by reducing excise duty on certain category of footwear and encouraging skill development. These steps in the right direction by the Government shall go a long way in creating an environment which is conducive for the expansion of the Indian footwear industry. BUSINESS OVERVIEW Mirza International is India's leading manufacturer and marketer of leather and leather footwear. The primary source of revenue accrues from the footwear business division through marketing of its own brands and by being the brferred supplier to international footwear brands. The in-house brands of the Company include Red Tape, Oaktrak and the recently acquired Yezdi brand. Red Tape and Oaktrak are well-established and successful brands having international brsence, including the prime markets of UK and USA. The Company's strong differentiators are its integrated manufacturing facilities which are equipped with a state-of-the-art tannery and supported by over 25 dedicated ancillary units, seamless supply chain and strong distribution network. Mirza International is also among the only manufacturers in India to design the products in-house through maintaining its own design and development team. Despite a muted market environment wherein discretionary spending was impacted, the Company continued its track record of growth. Total revenue for FY15 stood at Rs. 918.99 Crore as against Rs. 707.35 Crore in FY14, clocking a rise of 30%. Net profit for FY15 was at Rs. 51.16 Crore against Rs. 43.37 Crore for FY14. Segment Wise Performance The Company's business segments are primarily Footwear Division and Tannery Division. During the year under review, revenue from the Footwear Division increased to Rs. 796.47 Crore as against Rs. 623.78 Crore in the brvious year. The growth in revenue accrued chiefly due to greater market penetration in the existing international markets. Revenue from the Tannery Division stood at Rs. 261.75 Crore for the year as against Rs. 182.44 Crore in the brvious year. Overseas Revenue The Company continued to strengthen its position in the international markets. Revenue from overseas sales stood at Rs. 707.32 Crore as against Rs. 505.86 Crore in the brvious year, a growth of 40%. This stellar performance can be attributed to the Company's strong emphasis on high quality and well-designed products. The Company increased its revenue in both its main markets of UK and US. While revenue from UK operations increased from Rs. 303.12 Crore to Rs. 377.35 Crore in FY15, showing a growth of 24.5%, US operations have also increased manifold reflected in the revenue going up from Rs. 30.69 Crore in the brvious year to Rs. 74.82 Crore in the year under review. Domestic Sales During the year under review, domestic sales clocked Rs. 138.48 Crore, levels fairly similar to that clocked in the brvious year when domestic revenue stood at Rs. 139.91 Crore. Cautious consumer spends in the context of the economy still not attaining high growth level impacted sales volume. However, the Company believes that this was a momentary phase and discretionary spends will bounce back as the economy returns to a high growth trajectory. Further, leveraging the learning from its international operations, the Company is well-positioned to unlock the full value of its brands in the domestic market. Threats & Opportunities High competition from other Asian countries like China, Vietnam and Indonesia pose a risk to the growth prospects of the Indian leather industry. Further, these countries are meeting customer brferences by providing innovative leather products having great design and quality at lower prices. Notwithstanding these threats, the Indian leather industry has substantial potential for higher growth due to its inherent strengths and emerging market opportunities. Supported by Government incentives, leather exports are projected to grow at 24% per annum over the next five years. Among the European countries, UK (high capita consumption of footwear) and Germany (size of population) have shown very high rate of imports from developing countries. Mirza International which already has a strong brsence in these markets will be looking at exploiting this opportunity further. Opportunities exist plentiful in India too with the domestic market expected to double in the next five years. The key drivers to the rise in demand are increasing fashion consciousness, growing disposable income and population in India and the popularity of the e-commerce platform. Also, the per capita consumption of footwear in India is estimated to be 2 - 3 pairs per year, whereas such consumption in the Western Countries is much higher. Further, the footwear market is witnessing a steady shift from non-brands to brands. In the branded segment, the shift from low/mid value leather footwear to brmium/ aspirational leather footwear products is witnessing fastest growth. Mirza International with its strong brand positioning of Red tape as a brmium brand will be looking at leveraging this opportunity to the fullest. With strict laws and enforcements, small tanneries and unorganised shoe-making units face the danger of closure, benefitting larger and modernised units. Apart from its use in the footwear and garment industry, leather now serves as a vital constituent for many more end-uses. It is gaining in popularity as a medium of upholstery in home decor and automobile segment. This product diversification also offers exciting new growth prospects. Risk Review The Company recognizes that the manner in which potential business risks are analysed and time-critical responses are formulated could have considerable bearing on its performance. The Company believes that risks that are well-managed can create opportunities, whereas risks that are incorrectly managed could lead to financial and reputation loss. Appropriate steps are taken in consultations with all concerned to mitigate such risks. The following are some of the key risks as perceived by the Company: Economic Uncertainty: Slow economic growth in the international or national economies and uncertainties regarding future economic prospects, among other things, could affect consumer discretionary spending and therefore can impact business.Through brand strengthening and expanding brsence across the globe the Company endeavours to mitigate the impact of this risk as far as possible. Competition: The footwear industry is highly competitive and this competitive brssure may impact sales and profitability. To mitigate this risk, the Company is strengthening brand image through effective manufacturing, marketing and advertising. By providing footwear and other products with fashionable designs, high quality and which is good value for money the Company has built a favourable brand image for its products. Further, the Company concentrates on ensuring a fast manufacturing turnaround to ensure that the products reach the customers at the onset of demand cycle. The Company is also increasing its retail brsence in a systematic and carefully weighed manner. This reduces the threat of competition to a considerable extent. Constantly Changing Fashion Trends and Consumer Demands: Demand for the Company products may be adversely affected by changing consumer trends. In the footwear industry success depends upon the ability to anticipate and respond to changing consumer brferences in a timely manner. Misjudgements in understanding consumer demand and brferences may result in excess inventories for some products and missed opportunities as to others. To mitigate this risk the Company has a talented design and development teams located at UK and India to understand the pulse of consumers' demand. Through fast product development and lead time management the Company aims that the products are aligned to consumer brferences. Input Cost: Availability or change in the prices of raw materials could impact business and profitability. Leveraging its industry experience of almost four decades, the Company effectively supervises the availability of raw materials thus keeping the cost escalation risk to a minimum. Changes in Laws and Regulations: Compliance with current and future environmental laws and regulations could restrict ability to expand facilities or require acquisition of additional expensive equipment or modification of manufacturing processes. The Company has equipped its tannery with an Effluent Treatment Plant to ensure conformity to brsent environmental regulations. In fact as per a certified study, there is no environmental pollution caused by the Company's tannery. To shield itself from any such future risk, the Company has a strong regulatory mechanism in place which enables it to stay abreast of all government regulations relating to the industry and act suitably to meet norms. Exchange Rate: The operations are subject to risk arising from fluctuation in exchange rates with reference to currencies in which the Company operates. Labour Activism: Increased labour activism across the country may pose a challenge to the Company's operations. To mitigate this risk, the Company continually engages with the workforce to build their trust and strengthen the labour relations at its manufacturing facilities. Internal Control Systems The Company has an established internal control system commensurate with its size and the nature of operations. These have been designed to provide reasonable assurance with regards to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorized use or losses, executing transactions with proper authorization and ensuring compliance of corporate Policies. Through instituting Budgetary Control Mechanism, the management regularly reviews actual performance with reference to budget and forecasts. The Company also conducts regular internal audits to test the adequacy and efficacy of its internal control processes and bring out any deviation to internal control procedures. The same is reported to the management along with suggestions to strengthen the internal controls. Human Resources The Company makes substantive and sustained efforts towards building an eco-system which promotes the development and advancement of all its employees. All HR Policies and practices are aligned with the overall organisational strategy. In order to achieve operational excellence and maintain a competitive edge, the Company invests in building and nurturing a strong talented pool by instituting best practices with respect to its employees. During the year, industrial relations remained cordial at all the manufacturing units. The Company has strength of about 2791 employees as on March 31, 2015. Outlook The Company products are well-accepted by leading brands in overseas markets. The focus will be to expand geographic brsence to new countries and deeper penetration in existing markets through aggressive marketing and distribution. For their in-house brands, after entrenching its position in UK, the Company is now focused at replicating the UK success in US markets. The performance in the last few years in US for Red Tape has been very encouraging and the thrust now will be to drive higher sales by reaching out to more consumers through online and retail brsence. Apart from the US, the Company will also be looking at expanding its retail brsence in France and Germany. In the domestic markets, the Company is optimistic that the economy will recover and return to a higher growth trajectory sooner rather than later. This strong belief is founded on the recent initiatives pursued by the new government to revive economic growth. Expected changes in the macro environment would boost consumer sentiment and drive increased spending. Also, the expanding middle class segment offers tremendous growth prospects for the organized footwear industry. The Company is planning to leverage this exciting market opportunity by increasing its retail brsence through the setting up more exclusive showrooms and through multiple brand outlets. The Company will be also looking at tapping this demand potential through volume growth by entry in Tier 3 & 4 cities. Online platforms now offer a new growth engine for retail companies. Cognizant of this, the Company will be looking at engaging with more customers through a well-thought digital strategy. In conclusion, with the footwear industry being highly market driven there are sustained opportunities for driving growth. Leveraging its leadership position in manufacture and marketing of leather and leather goods, the focus shall be on creation of long-term value for all stakeholders. Cautionary Statement Statements in the Management Discussion and Analysis relating to projections, estimates, expectations or brdictions are based on certain assumptions. The Company cannot guarantee that these assumptions are accurate or will be realized. The actual results, performance or achievements of the Company could thus differ materially from those projected or estimated |