Management Discussion and Analysis A. ECONOMIC OVERVIEW 1. Global Economy Global growth remained broadly on track at about 2.8% in Real GDP in FY 2015 after hitting a somewhat soft patch at the start of the year. It is largely expected to pick up to 3.2% in 2016-17, in line with brvious forecasts. Divergence across major economies will narrow in 2015-16 as growth plateaus in the United States and strengthens in the Euro Area and Japan. 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 economic outlook. Lower oil prices will support consumer spending and hold inflation at record lows in the short term, but these effects will wane by 2016. Activity in China will continue to decelerate modestly in line with expectations, with the slowdown buffered by scaled-up monetary and fiscal accommodation. (Source: worldbank.org) A strong U.S. dollar is expected continue to weigh on exports, driven brdominantly by private consumption. Growth in United States is expected to strengthen modestly to 2.7% in 2015 and further to 2.8% in 2016. Overall, policy in the United States is expected to remain accommodative and the fiscal stance will be broadly neutral. As a result of sustained job creation, the unemployment rate is approaching structural levels and inflation is expected to move closer to the U.S. Federal Reserve's target in 2016. This, together with neutral fiscal policy and healing household balance sheets, should support a steady growth trend in U.S. in 2015-16. However, the European economy continues to be in choppy waters. Greece is facing a severe crisis in its loan repayments to the International Monetary Fund (IMF), and the trajectory shows a strong probability that any further delay or default can threaten its association with the European Union. The European economy is more stable to handle the immediate fallout from a Greek exit compared to 2012. However, a number of countries in the European economic periphery still continue to experience weak economic growth and continue to have very high public and private sector debt levels. This makes them especially vulnerable to swings in investor sentiment once global liquidity conditions are normalised and the perception becomes widesbrad that Euro membership is no longer irrevocable. Even though the Greek economy is relatively smaller to have big global impact, a sense of nervousness exists among other EU countries with high debts and repayment difficulties, dampening overall business and consumer sentiments. 2. Indian Economy With strong global ties and a dynamic investment atmosphere, India will outgrow China and its BRIC peers with a GDP growth of 7.5% in 2016, from 7.2% in FY2015. India, a major oil importer, will be a big beneficiary of the decrease in energy prices as it is consequently increasing real income and spending. This includes removing infrastructural bottlenecks as well as implementing reforms to education, labour, and product markets for raising labour force participation and productivity. As the Government is pushing forward with subsidy reforms, lower oil prices offer an opportunity to decrease energy subsidies and replace them with better-targeted programmes. (Source: International Monetary Fund (IMF) projections) a. Outlook of Global Economic Growth in Real GDP Growth is expected to be strong in the coming years on the back of reforms, pick-up in investments, rebounding consumer demand and lower prices. A ranking of investment destinations for attractiveness to foreign investors has placed India at the top among 110 countries. Based on the Baseline profitability Index (BPI), India tops the list as the most viable option for attracting investors around the world. This can be primarily attributed to drivers such as Government stability, high growth forecast and an overall sense of investment protection. (Source: Global Survey Report - Ernst & Young) B. INDUSTRY OVERVIEW 1. Global Textile and Apparel Market The global Textile and Apparel market is expected to touch $805 billion in 2015, compared to $650 billion in 2010, according to the Global Textile and Apparel Industry: Vision 2015. This is projected to touch $1,060 billion by 2021. The global textile industry has evolved through distinct consumption and production hubs. Production was earlier located in developed economies such as the U.S. and UK, but over the years manufacturing has shifted to developing economies such as India, China, and Bangladesh, due to a specific cost advantage offered by these countries. Although textile production in developed economies is slowing down, the developing economies continue to witness robust production as they contribute over 60% of the world textile production. a. The Evolving Global Industry Structure The global textile and apparel industry is undergoing structural changes to sustain itself in a dynamic environment. Till a few years back, market players were focused on organic growth to increase sales. However, in the face of increased competition, companies have now started to focus on growth through mergers and acquisitions. Inorganic growth enables companies to access new markets, enhance their product portfolio and achieve value chain integration in a shorter span of time. In developed economies, value retailers (providing products that rebrsent value for money proposition) grew by an average CAGR of 17% between 2005-2010, in comparison with average CAGR of 2% registered by brands. Going forward, the trend is expected to grow stronger as consumers will rationalize their spending, aiding the growth of value retailers at the expense of brand. (Source: Technopak) 2. India's Textile Market India's total textile and apparel industry (domestic plus exports) is a $108 billion market, of which roughly $40 billion is export oriented. This is projected to grow at a CAGR of 9.5% and almost double at $221 billion by 2021. India is one of the largest producers of textiles and apparels in the world, second only to China. Textile industry plays a significant role in India's economy, which is largely dependent on textile manufacturing and exports. The industry is the second largest employer after agriculture, providing direct employment to over 45 million people. The Indian Textile Industry contributes approximately 5% to India's GDP and 14% to overall Index of Industrial Production (IIP). Furthermore, the textile and apparel exports it contribute roughly 11% to India's export earnings. Textile exports have grown by roughly 11% over the last decade and accounts for 5% of India's total global trade. With rising GDP growth in India and a subsequent growth in consumer spending, India's textile and apparel sector witnesses a plethora of opportunities to flouri^ irrespective of the global market conditions.(Source: wwvraua Technopak) a. Growth Triggers • Political and economic stability • Flexibility in production quantity • Skilled and cost-efficient talent pool b. Government Initiatives India's overall textile exports grew by 9% CAGR since 2000, with promotion policies for the textiles sector. It has also allowed 100% Foreign Direct Investment (FDI) in the Indian textiles sector under the automatic route. c. India's Trade Scenario As per latest available statistics, exports of RMGs account for 47% of India's total textiles export. India's textiles products, including handlooms and handicrafts, are exported to more than 100 countries. However, the USA and the EU account for about two-thirds of the total textiles exports. The other major export destinations are China, U.A.E., Sri Lanka, Saudi Arabia, Republic of Korea, Bangladesh, Turkey, Pakistan, Brazil, Hong- Kong, Canada, Egypt, among other nations. (Source: Outcome budget, Textile industry) The Indian government has come up with a number of export fibre exports registering the highest CAGR in recent years. India share of worldwide textile and apparel exports currently stands at 4%. This figure is estimated to grow to 8% by 2020 and will open up huge potential for Indian players. U.S. is the biggest export destination for Indian textiles and apparel. The US Department of Commerce, places India as the second-highest exporter of textile and garments, surpassing China. (Source: Technopak Advisors) C. COMPANY OVERVIEW Pearl Global Industries Limited (PGIL) is one of India's largest listed garment exporters, manufacturing from multiple sourcing regions within India and countries within South Asia. A brferred long-term vendor to most leading global brands, we are amongst the leading players in our industry. Our mainstay business is to create value from competitively manufacturing and exporting fashion garments to leading global brands. We have now also ventured into e-retail through established digital channels and our own e-com portal"Sbuys.in", giving consumers access to global fashion at attractive values. Our product range includes knits, woven and bottoms (basic and complex designs) across men, women and kids wear segments. We have a well-diversified and de-risked manufacturing base across India, Indonesia and Bangladesh. We have a total capacity to manufacture around 5 million garments per annum (including own and outsourced facilities). Our revenue structure is primarily export based, with a major contribution coming from exports to the United States. We provide total supply chain solutions to customers - value retailers and high- end fashion brand retails in the United States and Europe. Our business model enables us to offer superior quality products across various countries, catering to all kinds of consumers. Our esteemed global clientele includes brmium retailers in USA and Europe, including GAP, Banana Republic, Kohl's, Macy, Ralph Lauren, Tom Tailor and Next, among others. We strive to be the most brferred vendor to the top global apparel brands and be ranked amongst the top garment manufacturers in the world, in terms of quality, service standards and ultimately - customer satisfaction, keeping in line with our broader vision. a. Additional Capabilities • Fabric Development Centres We have Fabric Development Centres in China and India as well as Design and Product Development teams across the globe. Our Fabric Development teams circulate the latest fabric ideas amongst the designers, who develop a product profile. This profile is shared with manufacturing facilities for the purpose of product development. Our design and product development teams support all three streams of our business across all the locations. • In-house hand-work set up in North India and Bangladesh We have one of the largest in-house embroidery facility with a capacity of 500 installed heads in North India and another 100 installed heads in Bangladesh. • In-house washing capacity Our in-house washing capacity is established in North India and Bangladesh with a capacity of 50,000 pieces a day and 35,000 pieces a day, respectively. • Garment dyeing facility A garment dyeing facility has been established in Bangladesh, with a capacity of 10,000 pieces a day. 2. Multi-Speciality Manufacturing: We have a strong foothold in the prominent garment manufacturing hubs - in I ndia and across the globe. This enables us to diversify our manufacturing capabilities and to customize our products to market needs. D. OPERATIONAL HIGHLIGHTS: With additional capacities and promising growth in new markets and geographies, we bettered our operational performance during the year. We continued to amplify our strengths, while diversifying our footprint in the global market. Some of the key operational highlights during the year are as below: • Market Diversification Currently, ~90% of our sales are accounted by United States. However, the seasonal decline in sales of wovens during the fall season (August-November) results in lower capacity utilization at our Indian facilities. Hence, we are continuously endeavouring to diversify our sales to newer geographies in Australia, UK, Germany, Canada, Mexico, Chile and South Africa. • Capacity Growth We made a capex of Rs. 53.45 Crores during FY2015, which was mainly applied towards (modernization of existing plant as well as capacity expansion at Bangalore and Chennai). As a result, our aggregate production capacity is expected to increase by 8.8%, from 5 million units FY2014 to 5.44 million in FY2016. E. OUR PILLARS OF STRENGTHS 1. A Multi Location Manufacturing Capability Global apparel sourcing market is witnessing a shift from China to other low-cost Asian countries, primarily Bangladesh, India and Indonesia. Our Company already has a strong manufacturing brsence in leading sourcing nations such as India, Bangladesh and Indonesia. Each of these countries exhibits certain core advantages. 2. Design Cell Our Company has a dedicated in-house design team of ~75+ designers in Hong Kong, India and Indonesia. The design teams continuously observe the trends in all markets across the world and visit almost all the globally renowned fashion and textile fairs to refresh their inspiration for new design ideas. As a result, they are well-equipped to serve the global brands from concept boards to ready new samples. New design ideas also emerge from our various marketing teams, who are close to and in continuous conversations with buyers located in Hong Kong, London, USA and Germany. There is an increased focus being placed on creating brand-specific product designs to generate and accelerate business opportunities for global brands and retailers. 3. E-Commerce - a B2C Endeavour via E-Commerce Channels In view of the phenomenal rise witnessed in the consumption of products through online retailing within India, especially in textiles, we have recently ventured into e-retail through our own retail platform "www.SBUYS.com ". Our vision behind this is to provide internationally trending and fashionable garments to the Indian consumer at an attractive value. In addition to our own retail platform, we have established tie-ups with leading online retail platforms such as Flipkart, Snapdeal, Jabong, Myntra, Our Company has a dedicated in-house design team of ~75+ designers in Hong Kong, India and Indonesia. The design teams continuously observe the trends in all markets across the world and visit almost all the globally renowned fashion and textile fairs to refresh their inspiration for new design ideas. Fashion and You, Hopscotch and Amazon. We are confident of capitalising on this growing opportunity. We expect tis channel to evolve gradually and become more significant in the coming years. Since our margin contribution through this channel is substantially more than our B2B business, our topline growth in our B2C business will have a positive effect on our bottom lines. F. MANAGEMENT OUTLOOK The future of India's textile industry looks promising. This positive outlook is driven by improving revenue prospects from rebounding economic growth in key export destinations; and by stabilising input costs and continuing favourable policies supporting our industry. The future for the domestic textile industry is also buoyant due to strong domestic consumption. With consumerism and disposable incomes on the rise, the textile sector is experiencing a rapid growth and we hope to surf forward on this positive wave. Our main market in the USA looks relative healthy with both employment and consumption on a steady rise. We expect our business into the USA to grow consistently over the near term. Simultaneously, we expect to continue our steady penetration into other markets, allowing us to use our capacity in lean seasons and so gradually improve our ROIs. We also intend to strengthen our existing association with various apparel brands by becoming a larger, more service orientated vendor-partner to them. We are geographically well positioned to produce from the most cost-effective supply bases in Asia, keeping us highly competitive and relevant to our customers. Above all, we expect to maintain and step up our profitability from superior value-added products and meticulous management of our costs and processes. We are geographically well positioned to produce from the most cost-effective supply bases in Asia, keeping us highly competitive and relevant to our customers. Above all, we expect to maintain and step up our profitability from superior value-added products and meticulous management of our costs and processes. Income from Operations Income from operations for FY 2015 came in at Rs 1,023.74 Crores. The growth in income from operations was strong in second half with revenues increasing by 18.3% QoQ in the third quarter and 36.2% QoQ in the fourth quarter. The improvement in revenues was driven by demand scenario gradually improving in the US and ramp up in capacity utilization. Earnings before interest tax debrciation and amortization (EBITDA) EBITDA for the full year FY2015 came in at Rs 49.7 Crores at margins of 4.8%. EBITDA Margin expanded strongly in the second half of the year driven by improving capacity utilization. EBITDA margins in third quarter were 5.4% increasing by 228.2 bps QoQ and 6.1% in the fourth quarter registering an increase of 68 bps QoQ. Interest and Debrciation Interest Expense for FY2015 was Rs 23.49 Crores. Interest cost is minimal due to low leverage levels. Debrciation & Amortisation expense for FY2015 came in at Rs 15.85 Crores. Profit after tax Profit after tax for FY2015 came in at Rs 25.07 Crores. PAT margins for the full year were 2.4%. Similar, to the trend in EBITDA and Revenues, PAT margins improved in the latter half of the year. PAT margins for the third quarter and fourth quarter came in at 2.9% & 3.3% respectively, improving by 209.4 bps QoQ and 45 bps QoQ respectively. Improving demand in US coupled with the increase in utilizations levels, efficient control on operating costs drove the expansion in PAT margins in Q3FY2015 and Q4 FY2015. Capacity Utilization is expected to be over 70% during FY2016 as compared to Average of 62% in FY2015. With further improvement in capacity utilizations, the margins can improve significantly. Leverage Consolidated debt in FY2015 was Rs 166.68 Crores, net debt in FY2015 was Rs 61.1 Crores. In terms of leverage, the company is in a comfortable position with Net Debt to Equity ratio of 0.2. The low debt to equity ratio enables the company to undertake expansion going forward without putting too much stress on the balance sheet. H. RISK MANAGEMENT I. Fluctuations in the international market Overseas buyers are reducing not only their orders, but also their prices owing to serious liquidity problems being faced by them. The fortunes of garment exporters would, therefore, continue to fluctuate in a rough weather in the international market. 2. Changes in Labour Policy Garment manufacturing is largely and will remain a labour intensive industry, despite the introduction of greater automation. The obsolete and antiquated labour laws have hindered the growth of this labour intensive industry. Restrictive industrial and labour laws restrain one's capability to respond professionally, effectively and speedily to the fast-changing dynamic international textile scenario. New norms are needed to enable players to compete effectively in international markets, especially when it comes to employing casual labour and deploying overtime hours to meet season-driven tight delivery schedules. 3. Labour Costs and Changing Prices of Raw materials The industry is generally facing rising labour wages and input costs of key raw materials such as cotton. 4. Risk Mitigation: Company is developing markets other than USA to reduce it's concentration on US business. Company has successfully been able to penetrate into Australian and European market. The Company has established factories and operating in the region for long time, continuous effort for betterment of labour has been conducted to improve the condition both at work and home for labour. Company till now haven't faced any labour issues in terms of strike etc. The Company is undertaking various measure like lean manufacturing at ground level to increase the productivity and further reduce rejection to improve margin. I. INTERNAL CONTROLS The Company's internal control system has been designed to provide for: • Accurate recording of transactions with internal checks and prompt reporting through SAP • Adherence to applicable Accounting Standards and policies • Review of capital investments and long-term business plans • Periodic review meetings to manage effective implementation of systems • Compliance with applicable statutes, policies, listing requirements and operating guidelines • Effective use of resources and safe-guarding of assets • IT systems with in-built controls to facilitate all of the above The Company has adequate systems of internal controls to ensure that transactions are properly recorded, authorized and reported, apart from safeguarding of the assets. The Company has adequate systems of internal controls to ensure that transactions are properly recorded, authorized and reported, apart from safeguarding of the assets. It has successfully implemented SAP for its manufacturing units and will continue upgrading the same. The Company has its own Corporate Internal Audit set up which carries out periodic audits at all the locations and functions and brings out deviations to internal control procedures. The observations arising out of the audits are periodically reviewed and compliance ensured. J. HUMAN RESOURCES Our Company's success depends on our ability to recruit, train and retain quality personnel. Accordingly, special emphasis is placed on the human resources function in our Company. The Company adopts a "People First" approach to leverage the full potential of its employees. Systems and methods are put in place to improve employee productivity, continuing skill up gradation and training and by emphasizing the importance of quality products and customer satisfaction. K. 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 differ 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. |