MANAGEMENT DISCUSSION AND ANALYSIS ECONOMIC OVERVIEW GLOBAL ECONOMY The global economy is still struggling to gain momentum as many high-income countries continue to struggle with legacies of the global financial crisis and emerging economies being rendered less dynamic than they were in the past. The global economy growth in 2014 was lower than initially expected, continuing a pattern of disappointing outturns over the past several years. The growth observed in 2014 was marginal to 2.6%, rising marginally from 2.5% in 2013. While economic activity in the United States and the United Kingdom has gathered momentum as labour markets heal and monetary policy remains extremely accommodative, the recovery has been hampered in the Eurozone and Japan as legacies of the financial crisis linger, intertwined with structural bottlenecks. Disappointing growth in other developing countries in 2014 reflected weak external demand, but also domestic policy tightening, political uncertainties and supply-side constraints. Overall, global growth is expected to rise moderately to 3% in 2015, and average about 3.3% through 2017. Indian economy The latest indicators, emerging from the recently revised estimates of national incomes brought out by the Central Statistics Office, point out the fact that the markets began to be revived in 2013-14 and gained further steam in 2014-15. Factors like the steep decline in oil prices, funds inflow from across the globe, potential impact of the reform initiatives instituted by the newly-instated Central Government as well as its commitment to calibrate fiscal management, bode well for the overall macroeconomic situation. In the current fiscal the annual gross domestic product (GDP) grew at 7.3% as compared to a growth rate of 6.9% in 2013-14 under a new method for computing national accounts (change of base year from 2004-05 to 2011-12 and the new annual estimate of national income and other macro economic aggregates), thereby resulting in the upward economic growth rate. India surpassed China as one of the fastest growing economies with a robust 7.5% growth in the January-March quarter. One of the redeeming features has been the emergence of India as a large economy with a promising outlook, amidst the mood of pessimism and uncertainties that continue to persist in a number of advanced and emerging economies. Global textile and apparel industry China dominates global textile and apparel exports with a 40% share of made-ups, 37% of apparel, and 39% of fabric. India, Bangladesh, Vietnam, Turkey and Pakistan are the other major textile and apparel exporters. Asia is the leader in terms of the installed capacity of textile machinery; 86% of short-staple spindles, 45% of long-staple spindles, 55% of rotor spinning machines, 73% of shuttleless looms, and 85% of shuttle looms are installed in Asia alone. China, India, Pakistan, Indonesia and Thailand are among the leaders in terms of this installed capacity. The US, EU-27 countries, and Japan remain the key apparel importers. However, the apparel imports of emerging countries like Russia, China, and India have registered some momentum in recent times. Going ahead, with the recovery of the global textile and apparel trade in 2013, it is expected to reach a size of US$ 1.3 trillion by 2023. The American textile and apparel market: The U.S. textile industry is one of the more important employers in the manufacturing sector, with 232,000 workers, rebrsenting 2% of the U.S. manufacturing workforce. The United States is a globally competitive manufacturer of textiles, including textile raw materials, yarns, fabrics, apparel and home furnishings, and other textile finished products. The industry is globally competitive, ranking fourth in global export value behind China, India, and Germany. U.S. exports of textiles increased by 45% between 2009 and 2014, to $18.3 billion. With the revival of the economy, the outlook for the US textile industry for the year 2015 is also optimistic. The shipment of textile mills is expected to increase by 3-4% in 2015 over 2014. Value of apparel manufacturing is also expected increase by 5%. Also, the trade deficit in the US textile industry will gradually shrink. It is estimated that due to China's decreasing market share, imports of T&A to the United States will witness a marginal decline in 2015. This trend may continue in the years ahead. It is also estimated that the US textile exports will continue to grow for the fifth year on the trot in 2015. The EU textile and apparel market: The textile and apparel market lost some momentum towards the end of 2014 but managed to improve over the full year as compared to 2013. With economic recovery struggling to gather momentum in Europe, the evolution of EU textile and apparel activity during the third and fourth quarters of 2014 was clearly less favourable than in brvious quarters. Furthermore, the positive developments in terms of turnover, retail sales and exports of textile and apparel products have helped gradually improve the employment situation in the EU. China textile and apparel market: China is the biggest producer and exporter of textile and apparel products buoyed by a vertically-integrated supply chain and a diverse range of products. The increasing cost of manufacturing and unavailability of labour are emerging as challenges to China's textile and apparel industry. China's total textiles and garment exports stood at 1.83 trillion Yuan in 2014, showing an increase of 4.06% year-on-year, which was lower than the 4.9% growth recorded for all Chinese exports. With the rising per capita spend on apparel along with a 5 year CAGR growth of 13% (leading to 2013), the domestic Chinese apparel market is likely to surpass the growth of apparel exports for China. However, the Chinese textile and apparel industry is facing increased competition from other countries at a time when costs are continuing to rise which shows that the outlook for 2015 is not very optimistic for Chinese textile and clothing exports. (Source: The China Chamber of Commerce for Import and Export of Textile and Apparel) Policy change in China To boost demand for domestic cotton, China, the world's top consumer of cotton, will slash its import quotas for 2015. China will provide import quotas next year only for the 894,000 tonnes that it is required to be offered at low duties as per its commitments to the World Trade Organisation (WTO) and no additional quota would be made available as it was made brviously. Non-quota imports are subject to a 40% tariff, so the restricted availability of import quotas will dampen Chinese demand for foreign cotton and the same will hurt exports of many countries. The Chinese Government will also end the three-year-long programme to stockpile domestic cotton to support local growers and instead offer subsidies directly to farmers. The stockpiling in the past had pushed the prices of domestic cotton well above market prices, creating demand for cheaper imports. As the Chinese Government offloads its reserve stock of cotton, mills will get access to cheaper cotton from the local market and the same will reduce their dependence on imports. So, China is unlikely to be an aggressive buyer this year and its imports are expected to decline significantly. Indian textile industry India is the second largest textile manufacturing infrastructure in the world after China. India is one of the few countries in the world which has production at each level of textile manufacturing viz. fibre manufacturing, spinning, weaving, knitting, processing and garmenting. The Indian textile and apparel industry was estimated at $108 billion in 2013. It has grown at a CAGR of 13% between 2008 and 2013 and is projected to continue to grow at a CAGR of 12% and attain a size of $440 billion by 2025. With an estimated domestic consumption of approximately $68 billion and an export value of roughly $40 billion, it contributes to about 6% of the $1.8 trillion Indian economy and nearly 13% of the country's total exports basket. It is also the second largest provider of employment after agriculture, providing jobs for around 85 million people directly and indirectly. The domestic market for textiles, apparel and technical textiles is estimated at approximately $68 billion. The total market has grown at a yearly growth rate of 13% over the past five years. By 2030, it is estimated that 40% of India's population will live in urban areas. India, by then, will have 68 cities with population of more than one million each. This migration away from rural areas into cities will clearly accelerate consumption growth, including that of textile and apparel products. India has a very powerful and imbrssive cotton yarn and fabric business sector that will now be looking at what it can achieve in the non-cotton and cotton/man-made blends and 100-percent man-made textiles. The sector appears to have the confidence and capability to shift its focus towards India's growing man-made textile industry. India's position in the world textile trade • Second largest producer of raw cotton • Second largest producer of cotton yarn • Second largest producer of cellulosic fibre/yarn • Second largest producer of silk • Fourth largest producer of synthetic fibre/yarn. • Largest producer of jute Indian export scenario India is the second largest exporter of textile and apparel products with a global trade share of approximately 5%. India has a vertically-integrated supply chain and produces a diverse range of products. The share of textiles in India's exports (60%) is much higher than that of apparel (40%). Overall, the exports from India are expected to grow at a CAGR of 9% over the next decade. The rate of growth of apparel exports will continue to be higher than that of textiles Cotton scenario in India Cotton prices in India have witnessed a consistent fall during the fiscal 2014-15. The fall in prices can be attributed to the expected record harvest owing to increased acreage, subdued demand from the domestic mills and fall in export demand from China. A bumper cotton crop, rising international inventories and continued demand stagnation from China is likely to drive cotton prices further down. Over the past few years, India has achieved significant growth in terms of cotton production. About a decade ago, India was barely self-sufficient but is now poised to overtake China to become the world's largest producer of raw cotton. The area under cotton cultivation in India has increased from 85.76 lakh hectares in 2000-01 to 115.53 lakh hectares in 2013-14, while yield has grown from 278 kilograms per hectare to 518 kilograms per hectare during the same period. During the year 2014-15, the area under cotton cultivation in India has further increased to reach record level of 125 lakh hectares. During the year, India had witnessed less than satisfactory monsoons early in the rainy season, which propelled many farmers to switch to planting cotton, which needs less water to grow, leading to all-time high cotton acreage. Indian Cotton Federation (ICF) estimates a record harvest of 40 million bales during 2014-15, a growth of about 8% over 37.5 million bales in 2013-14. However, The demand for cotton in international market is sliding, which can be largely linked to China's new cotton policy, as China constitutes about 60% of the India's cotton exports. Cotton export from India is estimated to fall from a high of 11 million bales in 2013-14 to 6-7 million bales in 2014-15. Outlook The Indian textile industry occupies a significant place in the country's economy providing employment directly or indirectly to around 85 million people. Cotton is a major raw material for the Indian textile industry, constituting about 65% of its requirements, and is primarily used by the textile industry to produce thread, fabrics, linen and apparel. The fall in yarn prices and weak realisations are expected to adversely affect the operating performance of spinning mills. Furthermore, if the yarn prices continue to remain soft and exports decline, the Indian spinners may witness escalating inventory levels, hampering their profitability. Cotton yarn exports from India are expected to decline if demand from China continues to stay low. The fall in demand in the export markets will also impact the capacity utilisation levels of Indian spinning mills, further dampening returns SWOT analysis Strengths Raw material availability: The fundamental strength of the Indian textile industry is its strong production base of a wide range of fibres/yarns from natural fibres like cotton, jute, silk, and wool to synthetic/man-made fibres like polyester, viscose, nylon and acrylic. Inexpensive trained manpower: The textile and apparel industry in India benefits from a large pool of skilled workers at competitive rates. Though the wages across the globe are consistently increasing, wage rate growth in India is still lower than several other textile and apparel exporting nations. To address the rising demand for skilled manpower in the textile and apparel sector, the government has launched a Scheme for Growth and Development of Technical Textiles (SGDTT) and Integrated Skill Development Scheme (ISDS) for the textiles and apparels sector. The scheme focuses on building capacities of institutions providing skill development and training in the sector. India's large population base with government initiatives ensures proper and economical availability of trained manpower to the sector. Government support for textile sector: The Indian Government has initiated various schemes to support the textile sector. These schemes provide numerous benefits to Indian textile manufacturers. Some of the schemes are: E> Scheme for Integrated Textile Parks (SITP) E> Restructured Technological Upgradation Fund Scheme (RR TUFS) E> Integrated Skill Development Scheme (ISDS) E> Swarnajayanti Gram Swarozgar Yojana (SGSY) E> Market Development Assistance (MDA) > Market Access Initiative (MAI) E> Technology Mission on Technical Textiles (TMTT) Apart from the Central Government, many State Governments are also making efforts to attract investments in their state. States like Maharashtra, Gujarat, Tamil Nadu, Karnataka, Andhra Pradesh, Rajasthan, Madhya Pradesh and Punjab have come up with a host of investment-related incentives in the sector. These policies provide support in addition to Central Government schemes like RR TUFS, thereby making investments more attractive. The benefits generally include subsidised power, stamp duties, refunds of taxes along with capital and interest subsidies. Weakness Unorganised fabric manufacturing and processing sector - The weaving and fabric processing sector in India is largely unorganised. The unorganised units suffer from a lack of capacity and many of them use outdated technologies. Scales as well as quality are the key areas of concern for these unorganised units. Lower efficiency - Productivity levels in India are low compared to peers including China, Bangladesh, Turkey, among others. Quality and cost of power - In some parts of India, there is erratic and limited power supply with poor quality. Cost of power in India on an average is higher compared to key competing countries like China, Bangladesh and Vietnam. Infrastructure bottlenecks - The various infrastructure bottlenecks like poor road and ports and high cost of power has impaired the growth of the industry. Low focus on product and process development - Design and product development is yet to receive a significant attention from the Indian textile business. In general, spending on research and development by Indian textile and apparel companies is very low and only a few of them have quality product development centres. Opportunities: Growth in domestic demand - Domestic demand will increase owing to urbanisation and rising income levels of consumers. Also, the organised retailing sector is booming and with further opening up of the sector for FDI, several international brands are expected to enter India soon, providing thrust to the domestic sector. China vacating space in international trade - Per capita spending in China is expected to grow from US$122 in 2013 to US$377 by 2025, which will make their domestic market very attractive for Chinese manufacturers. On the supply side, China is facing few challenges which will make it less competitive in international trade. Overall China's share in global trade is expected to reduce from 40% to 35% by 2025. This lower-than-market performance will create a vacuum worth USD 100 billion by 2025. India seems to the biggest beneficiary in the back of these developments. Threats: Competition from other exporting countries: Competitors like China, Bangladesh, Turkey, Sri Lanka, Germany, Italy and Vietnam, among others, have upgraded their core strengths and carved out their own niches in the global market. Bangladesh's apparel export has already surpassed that of India. Vietnam, in the last few years, has also wolfed down on a larger chunk of the market. Similarly, Myanmar and Ethiopia are capturing the attention of the global investor and buyer community. All these countries will pose a tough competition to India in the near future. Core competencies One-stop solutions provider: The Company possesses the expertise to manufacture all types of spun-dyed yarns. The Company is in a league of its own as majority of the spinning mills in India are mostly engaged in manufacturing of grey cotton yarn. The Company has developed an entrenched expertise in manufacturing yarn from any fibre (synthetic and natural) in 100% or any blend (1-99%), in any form (grey, dyed and mixture) in a wide count range (6-60s counts) Value-added product portfolio: The Company largely manufactures high-margin, niche yarns like cotton melange yarn, polyester cotton dyed yarn, slub yarn, roving grindle yarn, modal yarn, tencel yarn and linen yarn. The Company garners most of its revenues from manufacturing such products as the same fetch higher realisations than normal grey/greige yarns. Efficient sourcing of raw materials: The Company leverages its eight -decadal sectoral knowledge to manufacture high-quality and new varieties of yarn. The Company procures raw materials from reliable suppliers who possess the ability to manufacture customised fibres, which in turn helps the Company to manufacture specialised yarns. Economies-of-scale: The Company's large capacity and the optimum utilisation of its assets enhanced economies-of-scale and improved its capacity utilisation from 95.52% to 95.86% in 2014-15. Superior reach: The Company possesses a wide marketing network of agents, dealers ensuring seamless connectivity with its customers, pan-India and abroad. Qualitative consistency: The Company's products are available at competitive prices and are benchmarked to the international quality standards - ISO 9001 and Uster quality certifications. State-of-the-art technology: The Company has invested prudently towards upgrading and modernising assets which help it to stay competent. The Company has invested around H287 crore in plant upgradation, modernisation and expansion in the past five years leading to 2014-15 helping it strengthen its portfolio and productivity. Policy developments and programmes Governmental initiatives: While the US and the EU continue to remain primary markets for Indian textile and garment products, the Indian Government has taken various initiatives to reduce India's dependence on these markets. • The Central Government implemented the Focus Market Scheme, introducing duty credit scrips (which the textile exporters can avail on exports to 26 additional countries apart from the existing destinations), to encourage textile exporters to focus on new markets and reduce their reliance on the US and the EU. • Additionally, in 2013, the Indian Government signed MOUs with governments of various countries such as Mauritius, Iran, Japan, Uzbekistan, Romania, Sri Lanka and Myanmar to provide a fillip to the Indian textile sector. • The passage of The Textile Undertakings (Nationalisation) Laws (Amendment and Validation) Bill, 2014 is expected to ensure effective resuscitation of sick textile units. Union Budget 2014-15 allocated a sum of H5 billion for developing a textile mega-cluster based in Varanasi with six more centres at Bareilly, Lucknow, Surat, Kutch, Bhagalpur and Mysore. • The 'Make in India' campaign intends to enable the Indian textile industry to achieve a 20% growth in exports and sustain a 12% growth rate in the domestic market till 2024-25, as suggested in the report of the Expert Committee on Vision, Strategy and Action Plan for Indian Textiles and Apparel Sector. The campaign also plans on providing investment opportunities to foreign companies and entrebrneurs across the entire value chain of synthetics, value-added and specialty fabrics, fabric processing set-ups for all kinds of natural and synthetic textiles, technical textiles, garments and retail brands. Technology Upgradation Fund Scheme (TUFS) Allocation for the flagship scheme of Technology Upgradation Fund (TUFS) has been revised to Rs.1,520 crore for 201516. Payments under the scheme had been pending for the last three quarters and the provision had to be doubled to disburse the pending amount. The hike in service tax would have an adverse impact on the textile industry. While the government had extended the optional Cenvat route for cotton textiles this year too, it had not considered some of the major demands of the textiles and clothing sector. The prices of Indian man-made fibres were 23 per cent higher when compared to international prices and, therefore, the growth of the sector in the country was stagnant. The need to remove import duty and reduce Central Excise on man-made fibres and allocation of adequate funds for the ongoing and pending projects under the Technology Upgradation Fund Scheme had also been overlooked. Scheme for Integrated Textile Park (SITP) Integrated greenfield textile parks have been set up under the flagship Scheme of Ministry of Textiles namely 'Scheme for Integrated Textile Parks' (SITP) aimed at creating world-class infrastructure for the Textile Industry. In order to provide a fillip to the apparel manufacturing industry and generate additional employment, particularly for women, the Finance Minister has announced an additional grant up to Rs.10 crore per Park for apparel manufacturing units within the Parks up to Rs.50 crore. This additional support to apparel manufacturing units is expected to generate direct employment to up to 4,000 persons in each Park by leveraging the infrastructure already created. This additional support would be available during the 12th Five Year Plan. The guidelines are set under which additional assistance up to Rs.10 crore per Park, for promoting investments in apparel manufacturing, would be provided. (Source: Textile Ministry) Integrated Skill Development Scheme (ISDS) The textiles sector has the second largest share of employment after agriculture. With technological modernisation being the key to high industrial growth, labour-intensive industries like textiles require not only skilled workforce, but also massive vocational training for skill upgradation of the existing workers engaged in the organized as well as unorganised sectors (including handlooms, powerlooms, sericulture, wool, khadi, among others). To fill up the demand supply gap, a focused and financially sustainable strategy needs to be put in place during the Twelfth Five Year Plan. As per the NSDC report, the overall employment in the textile and clothing sector is expected to increase from about 33 to 35 million in 2008 to about 60 to 62 million by 2022, translating into an incremental human resource requirement of about 25 million. Of this, the mainstream textile and clothing sector has the potential to employ about 17 million persons incrementally till 2022. The Twelfth Five Year Plan approaches skill development with a focus on skill-enhancement and faster generation of employment, in order to reap the demographic dividend. Skill building can be viewed as an instrument to improve the effectiveness and contribution of labour and push the production possibility frontier outward to take growth rate of the economy to a higher trajectory. Skill building could also be seen as an instrument to empower the individual and improve his/her social acceptance or value. (Source: Textile Ministry) Integrated Processing Development Scheme (IPDS) The primary objective of the IPDS is to facilitate the textile industry to become globally competitive using environmentally friendly processing standards and technology. The scheme would facilitate the textile units to meet the required environmental standards. The IPDS would create new processing parks as well as support the upgradation of existing processing clusters specifically in the area of water and waste water management as also to promote research and development for a cleaner technology in the processing sector. (Source: Textile Ministry) Growth enablers Rising incomes: India's monthly per capita income, the measure of standard of living, is likely to be H7,378.17 (USD 118.68) for 2014-15, up over 10 per cent from last year, after a revision in the method of calculations. (The revised method of calculation takes into account gross value added in goods and services as well as indirect taxes. Also, the base year has been changed from 2004-05 to 2011-12). The per capita net national income during 2014-15 is estimated to be H88,538 showing a rise of 10.1 per cent as compared to H80,388 during 2013-14 with the growth rate of 12.3 per cent. (Source: CSO). The increase in per capita income is indicative of the improving standard of living, which translates into greater disposable income for discretionary items like clothes, entertainment and luxury. <http://articles.economictimes.indiatimes.com/2015-02-09/> news/58967932_1_capita-income-constant-prices-central-statistics-office Per capita expenditure on apparel: Apparel remains largely a discretionary purchase compared to other consumer goods, making it more prone to economic shocks. The global apparel market has been shaped by three contrasting regional movements - robust growth in emerging markets, fragile recovery in the United States, and a sharp slowdown in Western Europe. The global per capita expenditure on apparel is estimated to increase from USD 36 in 2012 to USD 138 by 2025. Organised retail: The organised retail of textiles in India is set to double by 2018 growing from $8 billion in 2013 to $18 billion in 2018 which give a positive notion that organised retail has arrived in the Indian market helping the sector explore the opportunities and grow substantially. The growth of the organised retail has been over 20% y-o-y compared to over 80% in developed regions. (Source: Technopak) High receptivity of apparel towards corporatised retail: The share of corporatised retail in apparel has increased from 14% in 2008 to 19% in 2013. The comparatively high corporatisation in apparel retail has resulted in higher formalisation of the apparel retail ecosystem. The growing reach beyond the major urban centres and the development of alternative retail channels will continue to drive the growth of the apparel category. Age profile: Every third person in an Indian city today is a youth. In about seven years, the median individual in India will be 29 years, very likely a city-dweller, making it the youngest country in the world. India is set to experience a dynamic transformation as the population burden of the past turns into a demographic dividend. More than 50% of India's current population is below the age of 25 and over 65% below the age of 35. The population in the age-group of 15-34 increased from 353 million in 2001 to 430 million in 2011. Current brdictions suggest a steady increase in the youth population to 464 million by 2021. With the West, Japan and even China aging, this demographic potential offers India and its growing economy an unbrcedented edge that economists believe could add a significant 2% to the GDP growth rate. These favourable demographics are expected to pave the way forward for the textile sector. Urbanisation: India is on the brink of an urban revolution, with its population in towns and cities expected to reach 600 million by 2031, which pegged the gap in urban infrastructure investment in the country over the next 20 years at a whopping $827 billion. Over the last two decades, India's urban population increased from 217 million to 377 million and this is expected to reach 600 million, or 40% of the population by 2031. The urbanisation will induce the growth of the textile industry as standards of living will improve palpably. Human resources The Company believes that the human capital is the most valuable weapon in its arsenal. A motivated and efficient workforce can help it attain its target in a realistic manner. Taking cognisance of that fact, the Company provides extensive training to its employees in order to develop their skill sets and keep them motivated. As on March 31, 2015, it has an employee base of 11,832. Internal control system Given the magnitude and nature of its business, the Company needs to maintain sound and commercial practice with an effective internal control system. The system ensures that all transactions are authorised, recorded and reported correctly to safeguard assets and protect them from any loss due to unauthorised use or disposition. The operating managers make sure that all operations within their area are compliant and safeguarded against all risks whereas on the other, auditors carry out random audits to detect flaws in the system, which makes it effective and efficient. Internal audit reports are brpared to create awareness and to take corrective actions on the respective units or areas, which need rectification. These reports are then reviewed by the management team and the Audit Committee for follow-up action. cautionary statement The statements in this management discussion and analysis report could differ materially from those exbrssed or implied. Important factors that could make a difference to the Company's operation include raw material availability and prices, cyclical demand and pricing in the Company's principal markets, changes in the government regulations, tax regimes, forex markets, economic developments within India and the countries with which the Company conducts business and other incidental factors. |