MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION AND ANALYSIS REPORT-2014-15 Moderate global growth continues amid challenges and risks. Global economic growth is expected to increase marginally at 3.1 per cent in 2015 and 3.3 per cent in 2016, compared with an estimated growth of 2.6 percent for 2014. An expected US interest rate increase, remaining EURO area fragility, a further slowdown in developing economies and geopolitical conflicts pose major concerns for the global economic outlook. According to the World Bank & International Monetary Fund, India is on course to overtake China, the hardest-hitting heavy weight economy for years, to claim the position as the world's fastest growing, big economy in the next two years. Forecasts for India are raised saying "growth in Asia's third-largest economy would accelerate in the coming years even as much of the world is slowing down, in view of changes implemented to make the Country's economy more efficient and vibrant. The opening up of the coal industry to private investors, a deregulation of diesel prices to reduce the fiscal subsidy bill, a relaxation of labour market laws, and a linking of cash transfers with efforts to increase financial inclusion" were all cited by the report as helping in India's progress towards supercharged growth. Propelled by sustained demand, the Global Textile and Apparel Trade is expected to grow rapidly in the years to come. The strong expectation that India will bounce back as a world textile superpower by regaining its lost glory and reputation, has been substantiated by the latest ITMF (International Textiles Manufacturers Federation) data. With domestic consumption of approximately $68 billion and export value of roughly $40 billion, the sector accounts for about six percent of the $1.8 trillion Indian economy and nearly 13 percent of the country's total export basket. The Indian Textile and Apparel Industry grew at a CAGR of 13 percent during 2008-13 and is projected to expand at 12 percent to attain a size of $440 billion by 2025. Being the second largest employment provider to the Indian Economy, around 45 million workers are benefited directly or indirectly accounting for 21 percent of the total employment generated in the economy. The core competency enabled Indian Textile Industry to emerge as the World's second largest Textile Exporter, overtaking Germany and Italy. Abundant availability of raw materials and skilled workforce has made India a brferred sourcing hub. With consumerism and disposable income on the rise, the sector has experienced a rapid growth in the past decade with several international players having entered Indian market. As for India's position in the global textile value chain, the numbers are imbrssive. India hosts roughly 25 percent of the global spinning capacity. And, because of the TUF program in the recent past, the age structure of this capacity is relatively young - that means productivity. India produces 20 percent of global cotton supply both for domestic use and for export. About 27 percent of the foreign exchange earnings are on account of export of textiles and clothing alone. The future looks bright for the Indian Textile and Apparel Industry. Our Performance Despite the challenges faced by the Spinning Industry, the vibrant Garment sector entailed the Company to achieve enhanced revenue over last year. Garment sales have grown by 34% and Yarn & Fabric Sales by 30%. Compared to last year, conversion of Yarn into Fabrics has increased -Increase in 'value added products'. The congenial cash flow enabled br-payment of some of the high cost debts thereby reducing finance cost on consolidated financials. As a twin blow to the industries 20% non-peak hour power cut and increase in Power Tariff were announced by the State. Sourcing power from other avenues became unattractive as the TANGEDCO started charging additional charges. These, coupled with power evacuation issue at State level pushed up the power cost. To meet the situation the Company had tied up with some of the Tamilnadu Power Producers under group captive consumption by investing in the Equity Capital of those Companies. Hike in the Minimum Wages and the wage level for PF Contribution by the Governments added Labour cost considerably. All these factors impacted the EBITDA level marginally over brvious year. However our prompt expansion in Garments to meet the spurt in demand and conversion of some of its spindle from ring spinning to compact spinning that improves the quality & productivity of the yarn, will tend to off-set the aforesaid factors. Moreover resorting to regular nominal Capex and prudent choosing of further area of Expansion would result in cordial cash flow. Because of our competitive advantages (power, labour, close to buyer's market, etc.), integrated operations, diversified product mix, growing exports and strong balance sheet we are much positive on further progress and growth. COTTON Swelling Global cotton stockpiles drove the prices of cotton to the longest slump as demand slows in China, the World's top consumer. The free and stable cotton policy of the government during the past few years led to the largest ever acreage under cotton in India during the season. The repetitive record output brdiction and waning Exports to China, due to change in its reserve Policy, led its decline in prices even below MSP that prompted CCI to procure cotton to an extent of 86 lakh bales so far. The Indian cotton price was lower than international price since the beginning of the current cotton season till recently. However, now the Indian cotton prices are substantially above the international prices. Textile units have appealed to the Cotton Corporation of India (CCI) to release cotton stocks with it as prices have gone up in the last few weeks. The Indian cotton Balance sheet is given below. YARN Indian yarns have become more competitive in International Market, because Indian spinners have specialized in producing superior quality yarns. Spinning margins have been shrinking because of the devaluation in cotton inventories. Indian Cotton yarn export is estimated to have declined by 15 percent during 2014-15, with a steep fall in shipments to China due to slow down in its Textile Industry. Exporters have tried to compensate from elsewhere. As yarn prices fall, fabric prices do not fall as much and therefore fabric margins improve. In fact, both yarn and fabric segments, our margin drop would be lesser than the margin drop of pure spinning companies. The brsent Lean trend in yarn exports is only temporary. The outlook on the Indian cotton spinning industry has improved after the brssure witnessed in H1 FY 2015 and is expected to remain stable over the next year. GARMENTS Driven by sustained demand the Company has enhanced its Garment manufacturing capacity to 59 Million pieces per annum through Brownfield addition and Greenfield establishment. Current year performance will reflect its full production. Knitwear exports from Tirupur, the Asia's largest Knit-wear cluster have registered a growth of 15.5 percent in terms of rupee and 15.9 percent in terms of foreign currencies during 2014-15 financial year according to a brss statement. As per the data knitwear products worth Rs. 20,730 crore were exported from Tirupur cluster during 2014-15 fiscal when compared to Rs. 18,000 crore worth of exports registered in the brvious fiscal. After years of slow growth, Tirupur looks set to exploit overseas orders that are getting diverted from nearby competing Countries, where the industry is increasingly facing issues related to workshop safety, labour rights, higher wages and political uncertainty. Customers recognise that Tirupur is a better place when it comes to quality, delivery and reliability. However, fortuitously for Tirupur, the past few years have eroded the edge those Countries enjoyed over Garment Exports from India. INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY Your Company has in place an adequate system of internal controls, with documented procedures covering all corporate Functions. Necessary checks and balances are in place to ensure that transactions are adequately authorized and reported correctly. The Audit Committee considered the systems as laid down and satisfied itself of the adequacy and effectiveness of the internal financial control system as laid down and kept the Board of Directors informed. To maintain its objectivity and independence, the Internal Audit function reports to the Chairman of the Audit Committee and to the Managing Director of the Company. The scope and authority of the Internal Audit function is defined in the Audit Committee Charter. The Internal Auditor of the Company conducts Audit of various departments to ensure that necessary controls are in place. The Audit Committee reviews these controls periodically. Based on the report of internal audit function, corrective actions in the respective areas are taken to further strengthen the controls. Significant audit observations and recommendations along with corrective actions thereon are brsented to the Audit Committee of the Board periodically. HUMAN RESOURCES One of the Key Issues the Textile Industry grappling with is Labour shortage. However, its impact on K.P.R is minimal in view of its acclaimed 'Five Star' rated Labour care such as provision of safe shelters, nutritious food, hygienic working conditions and enormous facilities for a comfortable living and more than all a 'feel at home atmosphere'. To further ensure a bright & prosperous life ahead of each & every Employees at KPR group, they are offered higher education facilities with the tie-up of Leading Universities, which remained a distant dream for those who hailed from downtrodden rural areas. With the high standard of such coaching, every year the Employees prove their outstanding talent in the Government conducted Examinations. Towards their social contribution, they have participated in 'Swachh Bharat (Clean India) Campaign' at various villages in a massive way. GREEN INITIATIVES Towards green initiative, planted numerous trees in the Villages and at all the Units; Re-cycling waste water at all plants and uses it for productive purposes; Producing Bio-gas from human waste, thereby reducing usage of LPG; Installed a massive Effluent Treatment Plant with zero discharge system at its Processing facility since its inception. OPPORTUNITIES & STRENGTHS Textile Industry's growth depends upon certain significant factors as detailed below: Raw Material: The major Raw material is Cotton which is available aplenty in India, the second largest producer of cotton and net exporter. Increase in area of cultivation and record production in the recent years ensures availability of quality cotton throughout the Year. Availability of Labour: Textile is a Labour Intensive Industry. Availability of Labour, more particularly skilled work force is essential for its Growth. India has the largest labour resource in the world. The Industry and the Government are taking the initiative to enhance the skilled labour resource. Improvement in Domestic Consumption: Fuelled by factors including rising disposable income, growth in organised retail, increasing brand awareness, rapid urbanisation and increase in working age population, the domestic consumption is growing rapidly. brVAIL OVER COMPETING COUNTRIES Buoyed by both strong domestic consumption as well as export demand the Indian Textile Industry is set for strident growth. China, India, Pakistan, Thailand, Indonesia are some of the leading countries in terms of installed machinery capacity. However, sharp improvement in raw material supplies, steady surge in domestic as well as global demand, decline in Chinese exports to major markets, Labour and Safety issues at Indonesia & Bangladesh extend an edge to Indian Textile Industry over other competing countries. WEAKNESS & THREATS While there is a proper structure for risk management, which is regularly implemented across the organization, there are certain regular risks and concerns that surface in the business. The threats to the Company, closely monitored and addressed, comprise of: • Foreign exchange fluctuation risk: Significant portion of our revenues is sourced from exports, exposing us to foreign exchange risk. We have always taken a conservative stance on it, fully hedge our risk. • Volatile raw material prices: For us, cotton is the utmost crucial raw material. Cotton being commodity, whose supply is dependent on the forces of nature, has been quite volatile in nature. But over the years, we have learned to assess the situation and respond to them. In the recent years, we have also successfully explored into new geographies to source the same high quality cotton, putting us in a better position to mitigate domestic supply constraints. • Rising Competition: Abundant availability of cotton in India and rising domestic consumption, gives an impetus to rising competition in business. We believe competition is healthy and we will continue to adopt new technologies, diversify our product offerings, strengthen marketing network. ROAD AHEAD The future outlook for the Indian Textile Industry looks promising. With consumerism and disposable income on the rise, the sector has experienced a rapid growth in the past decade. The up-trend is expected to remain for a long term. There are positive drivers which indicate further growth, such as availability of cotton in abundance with potential for higher yield; emerge of ample opportunities to produce value added products; garment market's upbeat; thriving export and domestic market demands etc. |