MANAGEMENT DISCUSSION & ANALYSIS ECONOMIC OVERVIEW Global Economy Global growth picked up marginally in 2014 to 2.6%, up from 2.5% in 2013, according to the World Bank. While U.S. and U.K. gathered positive momentum, recovery has been sputtering in the Euro Area and Japan as legacies of the financial crisis linger, intertwined with structural bottlenecks. Several major forces such as soft commodity prices, persistently low interest rates, increasingly divergent monetary policies across major economies, and weak world trade have been driving the global outlook. In particular, the sharp decline in oil prices since mid-2014 is expected to support global activity and help growth prospects in oil-importing developing economies. Overall, global growth is seen rising to rise to 3.0% in 2015, and average at about 3.3% through 2017. (Source: worldbank.org) Indian Economy From a turbulent and challenging environment in FY2013 when the Indian economy grew 5.1%, the pace of growth picked up in FY2014 at 6.9%. The economy stood up to the challenges of consumer inflation, weakening of the Indian rupee, widening twin deficits and an unstable global environment, and is now on a firm path of a revival. Current account and fiscal deficits are now within manageable levels. Post-elections, there is a wave of optimism. India is expected to clock 7.4% growth in FY2015, crossing the $2.1 trillion mark. The strong uptick in economic growth has been accompanied by receding inflation - at 5.1% in January 2015, considerably lower than double-digit figures in 2013. Current account and fiscal deficits are now within manageable levels Growth is expected to be strong in the coming years on the back of reforms, pick-up in investment, rebounding consumer demand and lower prices. The Asian Development Bank (ADB) foresees India's economy to grow by 7.8% in FY2016 and 8.2% in FY2017, making it one of the fastest growing emerging markets in the world, possibly outpacing China. A pro-investment attitude of the new Government, progress in implementing structural reforms and a pick-up in capital expenditure are some key triggers. With a high growth potential, India is seen as a bright spot in the global economic landscape. INDUSTRY OVERVIEW Global Denim Market The global denim fabric market is approx. $17 billion, growing at a modest rate of 3-5% a year. Asia accounts for about 70% of the global production of denim fabric capacities. World trade in denim fabric averaged 670,000 tonnes over the past one decade. In value terms, it fluctuated between $3 billion and $3.5 billion. While global growth in jeans is healthy enough, in North America and Western Europe jeans are facing a strong challenge from sportswear and the soft dressing trend. Europe rebrsents the largest market worldwide. Although developed regions such as the United States and Europe rebrsent mature markets, they are expected to hold a major share of the global market. Asia-Pacific is forecast to emerge as the fastest growing market with a CAGR of 9.4% over the analysis period. Growth in the region is led by rising disposable income, surging GDP rates, rising number of women in the workforce, rapid rates of urbanization, Westernization of lifestyles and rising fashion consciousness. Growth Forecast Global market for Denim Jeans is forecast to reach $64.1 billion by 2020, driven by increasing disposable income, westernisation of work culture and the ensuing rise in popularity of denim jeans as business causal wear. Denim jeans have brsently become a necessity and an essential wardrobe staple, as it provides comfort and has a longer life span, compared to other apparels. Currently, jeans are available in a variety of colours and styles to suit various consumer needs. Denim jeans have also demonstrated their capability to transcend beyond age and gender barriers. It rebrsents an evergreen fashion trend and is widely endorsed by a number of fashion models. Growth in the market is influenced by economic, social and demographic trends. Growing penetration of casual wear in the workplace as a result of the retirement of aging baby boomers, and a parallel rise in young professional workforce is benefitting growth in the market. India's Denim Market The Indian denim apparel market was valued at Rs. 13,500 crore in 2013, as per a report by management consulting firm Technopak, accounting for 5% of the total apparel market. It has been growing at a CAGR of 14% to 15%, outpacing the global denim apparel market, which is clocking a CAGR of 3% to 5%. The domestic denim market is projected to register a CAGR of 15% to Rs. 27,200 crore by 2018. In volume terms, the domestic denim apparel market has witnessed faster growth vis- a-vis exports during the five-year period FY2009-FY2013. India is the 2nd largest denim manufacturer in the world with 1,000 MMPA capacity, next only to China. The country is the 4th largest exporter of denim fabric in the world after China, Pakistan and Turkey. Asia accounts for about 70% of the global denim fabric production. The Indian denim jeans market is largely unorganised, with branded market accounting for only 30% share. According to a white paper by RNCOS, the ratio of organised and unorganised market will change significantly due to changing consumption patterns. Tier II, III cities and towns have emerged as significant demand drivers for the denim industry. Large players are exploring the unchartered waters through low range products, considering the affordability of consumers. The Denim Story The denim story started elsewhere in the world as work-wear, but for the youth of India it started as a fashion statement and reflected the style quotient and comfort wear. With more than 70% of Indian population under 30 years, there exists a huge potential for denim. India's denim market is skewed towards the men's segment which contributes almost 85% of total denim sales. Women's denim segment contributes 9%, while the remaining 6% is contributed by the kids segment. Currently, India has a capacity to produce 1 billion metres of denim fabric per annum. Metros and mini-metros, with about 7% of the total Indian population, contribute about 50% to the total market share in denim wear. Tier II and III cities, which constitute about 8% of the total population, contribute only 16% of the market share in denim wear, with tremendous scope for expansion. Demand for Indian denim India is the second-largest denim manufacturer in the world with capacity of 1,000 MMPA, second only to China with 3,497 MMPA capacity. The demand for Indian denim has witnessed a robust growth over the past four years, growing at a CAGR of 23.6% during this period. The per capita consumption of denim is the lowest in India - at 0.3 pairs per person, showcasing the vast growth opportunity. Technopak projects the denim market to register a CAGR of 14-15% in the next 5 years, significantly outpacing the global denim apparel market CAGR growth of 3-5%. Denim is of the most promising category in India's apparel market. Denim's Growing Popularity In India, most denim manufacturers focus on the domestic market, given the huge market potential on account of a high population base. In recent times, the industry has witnessed the entry of new fabric manufacturers which is making the market more "price competitive". Cotton remains the fibre of choice in denim apparel, while polyester is used as weft threads in blended denim fabrics. The demand for stretch denim is growing at a faster rate in India due to its comfort and fit characteristics. Denim fabric has seen a growing popularity as a casual and leisure wear in almost all the large cities in India. The popularity among youth makes the fashion fabric a daily wear for formal and informal occasions. People also use denim for semi-formal occasions. There is an increasing aspiration of the youth to engage with brmium denim brands Growth Prospects The global textile & apparels trade of $510 billion in 2009 is expected to touch $800 billion by 2015 and $1 trillion by 2020, growing at a CAGR of 6.3%. As per the Ministry of Textiles, annual production of textile goods in India is seen touching $220 billion by 2020, according to the Technopak Report, from the current $90 billion. China commands a 33% share of the global textile market, compared to India's share of 4.5%. With China diverting its focus to other sectors, there is a tremendous opportunity for India's textile industry to grow. According to the Technopak Report, India possesses the potential to boost its export share in world trade to 8% or $80 billion by 2020. Its annual denim production capacity of 600 million meters in 2010 has approximately increased to around 1,200 million meters in 2015. Growth in India's overall textile & apparel market will have a percolating down effect on the domestic denim market too. Demand for denim has been growing at a phenomenal pace in India in the recent years. The denim industry has witnessed a capacity increase of about 200-250 million meters in the past two years. Triggers for Growth Acceptance of denim as a fabric has registered perhaps the highest growth over the years in the Indian textile scenario. Currently, the metros and mini metros led the growth and contributed the largest in denim wear. Going forward, a large part of this growth will be through deeper and larger penetration in Tier II & III towns and cities due to an increasing acceptance of the fabric. Some key growth drivers of the domestic denim industry are: • Domestic denim manufacturing picking up pace, with emergence of large and improved units. • Fast-growing youth and urban population and more people wearing the fabric to the workplace. • The young generation, either gender, has accepted denim as "normal" wear rather than a "functional" wear. • Current domestic market is dominated by metro cities that account for almost two-third of consumption, while having got less than 10% of national population. • With ever-expanding retail network of distribution and higher per capita income at disposal in Tier II & III towns, the availability of denim will register a requisite improvement, leading to higher penetration. • The multiple price-point strategy of branded jeans is further fuelling growth. With affordable availability of better fabrics to 90% of the Indian population, the segment is bound to register phenomenal growth. • The rising number of working women, lifestyle changes and the evolving western culture has driven the demand for western wear, specifically jeans, amongst women in India. • Growing brand awareness and consciousness has given push to the organised denim market. Exports to aid Top-line Growth Of the total denim fabric produced in India, about 25% to 30% (200 MMPA) is exported. Encouraging Government textile policies and favourable exchange movement have made Indian denim fabric manufacturers highly competitive in the global market. In recent times, fabrics exported from China have become costlier than those from India owing to multiple reasons. Recent Chinese cotton policies and strengthening of Yuan have weakened the competitive edge of the Chinese denim fabric manufacturers, besides the ever-rising cost of power and manpower. Owing to the above factors, the denim fabric manufactured in China costs $2.6-$2.65/metre, higher than production cost of $2.5/ metre in India, as per the Technopak analysis. This has made India a more lucrative destination for international buyers to purchase denim fabric. The geopolitical instability of Pakistan, another major denim fabric exporter, has also worked in India's favour. Additionally, the emergence of Bangladesh, which imports bulk of denim fabric from India as a favoured destination for RMG manufacturing, has also boosted India's exports. Given these factors, India's share in the world trade of denim fabric is expected to improve, benefitting the domestic players. Favourable Indian textile policies and movement of exchange rates both Rupee viz-a-viz USD and Yuan viz-a-viz USD has the made Indian denim industry further competitive, as compared to China. Exports currently account for ~40-50% of the top-line of Indian denim manufacturers' domestic sales. Industry Outlook The Indian denim industry is showing continual growth trends over the years. With newer territories, technologies and trends, the market is only going to see some exciting moments ahead. Considering the demographics of India, the decade ahead offer better prospects for the Indian textile Industry as it is set for strong growth buoyed by rising domestic consumption as well as export demand. Abundant availability of raw materials and a skilled workforce, uncertainties and rising costs in competing neighbouring countries augur well for India becoming a global textile sourcing hub. Looking at this potential of development of the industry, the Government of India has extended the TUF Scheme for continuous growth and upgradation of the textile industry. The State Governments have also launched special schemes to promote investment in textiles. The Technopak report projects India's denim market to become a Rs. 27,200-crore market by 2018, primarily owing to youngsters' fondness for the cult fabric. The boom will be fuelled by not only an increasing demand from small cities and rural areas, but also acceptance of the denim fabric at workplaces, the study adds. In terms of volumes, the denim market is estimated to rise from the current 300 million pairs of jeans to 550-600 million by the end of 2015. COMPANY OVERVIEW Nandan Denim Limited (NDL) is the second-largest textile company in India. Located in Gujarat, the textile hub of India, the Company is engaged in the manufacture of denims, cotton fabrics and khakis through fully integrated facilities. With a projected denim manufacturing capacity of 110 MMPA, NDL is currently the 2nd largest manufacturing facility in India. It is a part of the Chiripal Group, a leading business conglomerate diversified across several businesses such as Textiles, Petrochemicals, Chemicals, Packaging, Infrastructure and Education. Our Competitive Strengths A Diversified Conglomerate NDL is a part of a leading conglomerate, Chiripal Group, with a total turnover in excess of Rs. 3,230 crore. Established in 1972, the Group is currently diversified across several businesses like Textiles, Petrochemicals, Chemicals, Packaging, Infrastructure and Education. The Chiripal Group is widely recognized as the textile house with manufacturing facilities for POY, Texturising, Cotton Spinning, Denim Weaving, Knitting and Processing, Home Furnishing. The Group's eco-system provides a distinct opportunity for Group companies to extend a large basket of solutions as per the customers' requirements. Locational Advantage Our plant is located in Ahmedabad, the financial capital of Gujarat. The state of Gujarat is the textile hub of India and houses the entire textile value chain. It is the largest producer of denim fabric (65-70%) and cotton in India. The Company enjoys close proximity to machinery vendors, fabric dealers and leading garment manufacturers, resulting in faster delivery and service and lower overheads and lower marketing and transportation overheads. The manufacturing locations are well connected for all sort of transportation of materials - inward and outward - by any mode - rail, road, air and sea - to facilitate a quicker response to the business requirement. Availability of skilled and unskilled workforce in abundance ensures business continuity under the most adverse circumstances. Improved Operational Flexibility NDL is in middle of expansion of its manufacturing capacity. It has installed a captive power plant to meet the captive requirement. Our expanded facility would enable us absorb the increasing market demand with faster delivery and timely execution, owing to limited dependency on external suppliers in the value chain. The integrated facility is set to benefit us by improving operational efficiencies. Also, with backward integration in place, our average cost of raw material is expected to further optimise. • Capacity expansion from 71 MMPA to 110 MMPA • Spinning capacity to be increased from 54 TPD to 124 TPD • Establishing a yarn dyed shirting capacity of 10 MMPA Government Beneits The Gujarat government provides a host of benefits to companies for setting up textile plants over and above the benefits applicable under the Central Government's Textile Upgradation Funds Scheme. The major benefits applicable to the Company are: Key Subsidies: • Interest Subsidy (in addition to Central Government subsidies) • Power tariff subsidy • VAT/Entry Tax reimbursement Four Pillars of our Strategic Growth Vision 1. Rising Demand for Denim Domestic demand for denim continues to be strong, backed by a majority of the young population 70% < 30 years, rising disposable incomes, fashion consciousness and increasing organised retail industry penetration in Tier II and Tier III cities. This, coupled with rising global denim apparel demand, will lead to improved capacity utilisation, asset turnover and return ratios at NDL. India is on its way to become a global production hub, driven by easy availability of cotton, competitive currency and low-cost labour. It is also set to benefit from China's decreasing competitiveness. 2. Increased Share of Value-added Products We are looking to increase our share of value-added products. Increasing our share of value-added products and adding more processing facilities coupled with innovative / Fashion First products will enable us to manufacture a wide range of denim fabric, fetching higher average realisations and profitability. The Company has set up an in-house creative design studio and product development cell. This Design Studio is managed by a team of designers and technocrats from India's brmier art and design, textiles and technology learning and research institutions. The cell's continual focus is on new market trends, fashion and product requirements meeting customers' needs to have a larger share in the sales pie. 3. Product Development The Company has set up an in-house creative design studio and product development cell. This Design Studio is managed by a team of designers and technocrats from India's brmier art and design, textiles and technology learning and research institutions. The cell's continual focus is on new market trends, fashion and product requirements meeting customers' needs to have a larger share in the sales pie. 4. Geographical Diversity The Company intends to geographically diversify in revenue sharing. The current share of export revenues is intended to be ramped up over the period of time. This is keeping in mind the growth in the global market and competitive advantages offered by the expansion project under progress. Optimisation of the market mix will bring forth customer mix changes that are expected to be remunerative in terms of product development and profitability. Management Outlook We have a vision of future growth in order to survive in a highly competitive market environment. The opportunity in the denim market augurs well for our Company. We are also well-positioned to capitalise on the soaring export demand. With our fully integrated manufacturing facility, our objective is to cater to the needs of customers by providing a variety of products under a single roof. We are hoping that the on-going expansion in denim fabric capacity and backward integration will better our operating margins and return ratios. Financial Overview Income from Operations Total Income from Operations increased by 22.7% from Rs. 8,938 million in FY2014 to Rs. 10,965 million in FY2015. The rise in revenues was driven by healthy increase in denim volumes and realisations on the back of an improving demand scenario and a favourable product mix. The Company successfully diversified into yarn dyed shirting business achieving revenue of < 1,160 million in FY2015, contributing ~11 % to FY2015 total revenues. The Company continued to increase its penetration of international markets to drive the exports business forward as revenues from exports grew 75% YoY to reach Rs. 1,363 million in FY2015 from Rs. 777 million in FY2014. Gross Proit Gross Profit increased by 26% from Rs. 2,689 million in FY2014 to Rs. 3,388 million in FY2015 as gross margins improved by 89 basis points to reach 30.9% for FY2015. Improvement in gross margins was driven by a healthy uptick in denim realisations and reduction in the trading business. Earnings before Interest Tax Debrciation and Amortisation (EBITDA) EBITDA grew by 24.7% from Rs. 1,327 million in FY2014 to Rs. 1,654 million in FY2015. EBITDA Margins for the year stood at 15.1 % as compared to 14.8% in FY2014, witnessing marginal improvement of 24 basis points. The improvement in EBITDA margins was largely achieved on the back of improved gross margins, partially offset by higher employee expenses and operating expenses on account of expansion in denim and shirting capacities and increase in power cost. Interest and Debrciation Interest Expense increased by 17.7% from Rs. 320 million in FY2014 to Rs. 377 million in FY2015. Debrciation & Amortisation expense increased 19.8% from Rs. 497 million in FY2014 to Rs. 596 million in FY2015 Proit after Tax Profit after Tax continued to grow at a robust pace, growing by 30.7% from Rs. 393 million in FY2014 to Rs. 514 million in FY2015. PAT Margins expanded by 29 basis points to 4.7% in FY2015 from 4.4% in FY2014. Leverage Total debt increased from Rs. 4,517 million in FY2014 to Rs. 4,709 million in FY2015 on account of the on-going capital expenditure. Debt to Equity ratio for the year stood at 1.8:1. Cash & Bank Balances Cash & Bank Balance for the year stood at Rs. 601 million, as compared to Rs. 261 million in FY2014 Risk Management At Nandan Denim Limited, the objective of risk management is to ensure that it is adequately estimated and controlled to enhance shareholder value. Risk is pertinent to virtually all the business activities, though in varying degrees and forms. It is the constant endeavour of NDL to identify, assess, prioritise and manage existing as well as emerging risks in a planned and cohesive manner. NDL's long-term financial security and success is built on a robust risk management system. Through a pro-active and improved risk management practices, the Company's risk management function continuously works towards achieving financial stability and enhancing shareholder value. Our Internal Risk Monitoring Teams strive to put in place specific policies, frameworks and systems for effectively managing various risks. The policies and procedures are reviewed and updated at regular intervals. The risk management function at NDL works in close co-ordination with various business operations to periodically review the individual relationships, identify early warning signs and access the overall health of the business. The Company has implemented a combrhensive risk policy and put in place a framework to identify, assess and monitor risks, and strengthen controls to mitigate the adverse impact, if any. Key Risks & Concerns The textile business, like other businesses, is susceptible to various risks. The primary risk factor is raw material prices, mainly cotton, the biggest component of cost. Since cotton is an agricultural produce, it suffers from climatic and seasonal volatility. Whereas such volatility in case of a product higher in the textile value chain is generally passed through an increase in value added products in the basket provides insulation against such volatilities. Significant Decline in the Denim Prices Denim could have some downslide in the demand from the consumer segments that could impact the profitability and business continuity of all denim manufacturers. However, Denim as a universal fabric could never fade out from the life style in the near future, and therefore, companies such as NDL with a widesbrad distribution channel will be impacted the least. Change in Chinese Policy China has the largest denim fabric capacity (3.5 times the Indian capacity) in the world. Chinese policy will significantly alter the dynamics of the business. However, China has to depend heavily upon the imported cotton stocks that reduces its cost competitiveness, notwithstanding the fact that the cost of power and manpower in China has increased substantially over the period of time to make them lose cost competitiveness that it enjoyed earlier. Unless Chinese players go for a severe dumping of material, the impact whereof could be countered through anti-dumping measures at the Government level, the impact on the overall market demand would be minimal. Non-availability, Quality and Price of Power An important issue is the availability, quality and price of power. With in-house power generation facilities, NDL is reasonably hedged against these issues. It also has back-up arrangements to source power from the State Grid as well as Open Market to make up for the quantity. Lack of Skilled Manpower The non-availability of skilled manpower along with high labour cost brvailing in the country is growing concern area for textile industry. NDL, as part of the group philosophy has always deployed the best automation technology to reduce its reliance on the quality and quantity of manpower required. Apart from the technologic leveraging, it has also initiated in-house training and development for the workers to ensure regular supply of quality manpower. the pollution in check as part of its corporate philosophy to ensure uninterrupted business operations without compromising environmental issues. Entry of New Manufacturers With the increase in penetration of denim in smaller towns as routine wear fabric, the Company expects lot of new manufacturers to join the band that may temporarily glut the market. However, in view of one of the largest integrated manufacturing facilities at its disposal and the brand and qualities established by the Company over the period of last one decade, it expects minimal adverse impact on its revenue and profitability. The domestic market is surging at 15-18% per annum that provides adequate space for new capacities being added in the segment by the existing or new players. In the near future, the Company doesn't expect significant consolidation in the industry. Natural Disasters The Company has established all its manufacturing facilities within a radius of 50 kilometers from each other and in the event of any natural calamity in the region, the operations of the Company may be hampered. Looking to the strategic advantage of being closer to the market, port and specific concessions extended by the State Government, it is a trade-off call for the continuing benefits to the organisation. The Company is not ruling out future expansions at geographically different locations to mitigate such risks. Currency Volatility Volatility in the foreign currencies could impact export earnings of the Company. However, as of now, a major part of the revenues is derived from domestic market with no significant imports of inputs. The Company follows prudent financial measures that are subjected to periodic reviews to hedge its revenues in foreign currency. Internal Controls The Company has an adequate internal audit system commensurate with its size and nature of operations. An independent firm of Chartered Accountants carries out regular Internal Audit processes and checks across the organisation. The management too is fully involved in reviewing the internal control systems and procedures to ensure efficient conduct of the business. These Internal Auditors periodically interact with the Audit Committee of Board of Directors to discuss various internal controls / internal audit issues. The business processes in the Company are regularly updated and automated to minimise the risks arising through human intervention. Human Resources Our organisational culture is fully geared to move into a space of growth, culture and strategy. We are encouraging our workforce to innovate and achieve the short-term and long-term objectives. Through our strategised HR processes, our aim is to achieve our business goals. On a ground-level basis, we are working towards a common platform to enable HR to be driven through online systems. In another initiative, we are building an HR ecosystem with department-wise Standard Operating Procedures and also all existing policies and procedures to ensure quality deliverable at each step. Moving forward, the core of our HR strategy is to implement the processes and brpare deliverables and guidelines, focussing on people management. With a key focus on employee development, we are nurturing our human capital and creating a talent pool to drive business goals. We are also inculcating a culture of high-performance business outcome within the organisation through effective internal communication with stakeholders and making them highly accountable. We are increasingly focusing on attracting corporate and qualified talent with cross-industry experience for creative execution and marketing of our scalable projects. With a scalable business, we are able to showcase the career path and progression to each of our employees. In an endeavour to make the organisation more vibrant, our rules and policies with regards to Human Resources are re-formulated, with the sole aim of enhanced employee satisfaction and to adhere to the best of industry practices Cautionary Statement Statement made in the Management Discussion & Analysis describing the Company's objectives, projections, estimates, expectations may be "Forward-looking statements" within the meaning of applicable securities laws & regulations. Actual results could difer from those exbrssed or implied. Important factors that could make a difference to the Company's operations include economic conditions affecting demand supply and price conditions in the domestic & overseas markets in which the Company operates, changes in the government regulations, tax laws & other statutes & other incidental factors |