MANAGEMENT DISCUSSION ANALYSIS FORMING PART OF THE ANNUAL REPORT 1. INDUSTRY STRUCTURE, DEVELOPMENT AND PRODUCT WISE PERFORMANCE The Company is in the business of manufacturing of Cotton, Polyester, polyester-viscose Blended Yarns at Bhongir, Nalgonda District, in the state of Telangana, catering to both domestic and the export markets. In terms of textile units, Indian Textile & Garment industry is one of the largest in the world. Most of the processing units in India are independent units, with some being integrated with spinning, weaving or knitting units. 2. INDIAN TEXTILE INDUSTRY The Indian textiles industry is extremely varied, with a hand-spun and handwoven sector at one end of the spectrum, and the capital intensive sophisticated mill sector at the other. The decentralised power looms/ hosiery and knitting sector form the largest section of the Textiles Sector. The close linkage of the Industry to agriculture and the ancient culture, the traditions of the country make the Indian textiles sector unique in comparison to the textiles industry of other countries. This also provides the industry with the capacity to produce a variety of products suitable to the different market segments, both within and outside the country. The Indian textiles industry, currently estimated at around US $I08 billion, is expected to reach US $ I4I billion by 202I. The industry is the second largest employer after agriculture, providing direct employment to over 45 million and 60 million people indirectly. The Indian Textile Industry contributes approximately 5 per cent to GDP, and I4 per cent to overall Index of Industrial Production (IIP). The Indian textile industry has the potential to grow five-fold over the next ten years to touch US$ 500 billion mark on the back of growing demand for polyester fabric, according to a study. The US$ 500 billion market figure consists of domestic sales of US$ 3I5 billion and exports of US$ I85 billion. The current industry size comprises domestic market of US$ 68 billion and exports of US$ 40 billion, according to a study. 3. PRODUCTION OF YARN Spinning is a matured textile sub-segment in India. India is a leading spun yarn producer in the world and also the most cost competitive producer. Approximately, 75% of the total spun yarn produced in India is I00% cotton yarn. Global cotton supply continues to outpace demand, resulting in increase in cotton stocks for the fifth consecutive year. The growth in the domestic cotton yarn production has slowed down in FY 20I5 (YTD) as the spinning mills have been operating at high utilization levels which has resulted in capacity constraints. However, with changes in cotton policy in China leading to increased consumption of domestic cotton, the import demand of Indian yarn from China has reduced. This is also reflected in decline in the yarn exports from India by in HI FY 20I5 over the same period last year to 544 million Kg. The domestic yarn prices which had remained firm till July 20I4 have started declining since August 20I4 due to decline in the domestic cotton prices and also due to moderation in the export demand which has resulted in oversupply in the domestic market. The Indian yarn prices have declined by ~I7% over the period. 4. MAN-MADE FIBRES (MMF) Indian textile industry, however, is primarily cotton focused with cotton accounting for nearly 55% of total fibre consumption but consumption of polyester fibre is gaining momentum due to factors like fluctuation of cotton prices, increased brsence and sourcing by global brands where polyester fibre dominates, growth of women's wear segment, growth of virtual retail etc. Till 2000 fibre consumption at global level was majorly cotton focused. By 2030 it is expected that consumption of polyester will be more than double to that of the cotton fibre. In 20I4-I5, demand for most manmade filament & fibre was subdued due to a decline in prices of cotton yarn. Also, says a report, the levy in July 20I4 of anti-dumping duty on import of purified terephthalic acid (PTA), a major input, further hit domestic production of polyester filament yarn. The prices fell significantly in 20I4 also due to declining crude oil prices. From the levels of US $I000/ Tons in March 20I3, it fell to below US$800 / Tons by December 20I4. However, since the beginning of 20I5, the prices are heading upwards steadily. After tough competition from cotton last year, the manmade yarn and fabric industry is expected to grow at a higher rate of five to seven per cent in 20I5-I6, on the back of stable crude oil prices. 5. OPPORTUNITIES AND THREATS 5.I Opportunities: The future for the Indian textile industry looks promising, buoyed by both strong domestic consumption as well as export demand. With consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade with the entry of several international players like Marks & Spencer, Guess and Next into the Indian market. The organised apparel segment is expected to grow at a compound annual growth rate (CAGR) of more than I3 per cent over a I0-year period. • Low cost of production: With the growing economy, India is today a dream market for most marketers. The availability of low cost of skilled labour and creation of state-of-the art infrastructure by most companies, create an ideal situation for India to grow further. • Global competitiveness: Currently India is the second largest exporter of textiles in the word with a share of 5%, behind China enjoying a share of 39%. However, increasing labour cost in China and non-compliance of regulatory norms by large factories in Bangladesh, brsents India a significant advantage. • Vendors to partners: With large number of global textile players heading to India, the manufacturers are now not just supplying, but partnering with the world's leading brands. The long-term association does not only add sustained order book flow for the companies, but adds to the enhanced profitability levels as well. • Make in India: The government's thrust on the 'Make in India' concept aids in futuristic growth in more ways than one. An experienced, enriched and technologically empowered textile sector will only emerge as an international powerhouse in the coming time. 5.2 Threats: Firms in textiles sector are facing following problems in adding capacity due to: • Shortage of skilled manpower and labour related issues • Power shortage • High cost of capital • Uncertainty in market conditions • High prices of raw materials / intermediates • Low export demand and uncertainty of economic environment • Low domestic demand • Competition from imports • High financial charges 6. RISKS AND CONCERNS: • Economic slowdown Textile as a product is highly dependent on macro-economic scenario of the countries across the world. Any slowdown in the economy might have a direct impact on the operations of the Company. With the new government at the centre, the country is expected to potentially hit the sweet spot in the coming few years, and reaffirm its position as the fastest growing country in the world, overtaking China. This will adequately help the Company to sustain its topline and profitability levels. • Increase in cotton prices Cotton accounts for significant portion of the cost of production for textile. Volatility in the cost of raw material might dent the margins of the company and affect its bottomline. The Company has plants located within close proximity to cotton growing regions, which adds to savings on its procuring cost. In addition, it also sources bulk of its requirements from regulated government agencies, at reasonable cost and assured supply. • Apbrciation in Indian currency Majority of the revenues of the Company is derived through exports. Any significant apbrciation in currency might result in loss of revenues in near short-term for the Company. The volatility is currency is directly linked to raw material prices. Hence, any significant apbrciation in the currency, will result in decline of raw material prices, thus giving a natural hedge, with no impact on margins. 7. OUT LOOK: While the cotton production in India in the year 20I5-I6 is expected to decline by 3 to 5% as farmers shift to alternate crops, the cotton availability in India is expected to remain comfortable and further improve from that in the year 20I4-I5 with stock to consumption ratio expected at 28 to 33% at the end of the year 20I5-I6. The improvement will be driven by higher carry forward stock from the year 20I4-I5 as exports had declined due to lower demand from China and expectation of limited cotton exports in the year 20I5-I6 as well. Despite the decline in the production, India will remain the world's largest cotton producer. The cotton consumption is expected to increase by 3 to 4% in the year 20I5-I6 on account of low cotton prices which has resulted in a significant decline in the sbrad between cotton and polyester stable fiber and also the expected improvement in the global economic growth, which will lead to improved demand for textile products. In the FY 20I5-I6, crude oil prices are expected to remain stable at $60-70 a barrel. Also, market demand for polyester is likely to rise by five to seven per cent as per a study. But, exports could play spoilsport this year. With markets like Brazil, Turkey and Egypt under brssure for several reasons, demand for polyester yarn and fabric will be under brssure in FY 20I5-I6. 8. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY The Company has an adequate internal control system commensurate with the size and complexity of the organization. The Company has undertaken a combrhensive review of all internal control systems to take care of the needs of the expanding size of the Company and also upgraded the IT support systems. A system of internal audit to meet the statutory requirement as well as to ensure proper implementation of management and accounting controls is in place. The Audit Committee periodically reviews the adequacy of the internal audit functions. 9. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED: There are no material developments in the Human Resources area. The industrial relations have been generally satisfactory. The Company entered into long-tem wage agreements for a period of 4 years with workers' union. The Company constantly reviews the man power requirements and has a properly equipped Department to take care of the requirements. The total number of people employed by the Company as on 3I.03.20I5 was 47I. 10. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE The total Revenue for the year 20I4-I5 was Rs. 99.79 crores and profit after tax was of Rs. 0.I6 crores. |