Management Discussion and Analysis
Readers are cautioned that this discussion and analysis contains forward-lookingstatements that involve risks and uncertainties. When used in this discussion, the wordsanticipate, believe, estimate, intend,will, and expected and other similar expressions as they relate tothe Company or its business are intended to identify such forward-looking statements. TheCompany undertakes no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events, or otherwise. Actualresults, performances or achievements, risks and opportunities could differ materiallyfrom those expressed or implied in these forward-looking statements. Readers are cautionednot to place undue reliance on these forward-looking statements as these are relevant at aparticular point of time & adequate restrain should be applied in their use for anydecision making or formation of an opinion.
The following discussion and analysis should be read in conjunction with the Company'sFinancial Statements included herein and the notes thereto.
OVERVIEW OF THE ECONOMY
The growth of Indian economy has been very fast following the slowdown due to globalfinancial crisis in 2007-09. As per quick estimated data released on 31st January 2011,growth of 2009-10 is estimated at 8.0 percent as compare to 8.6 percent in 2010-11 as peradvance estimated data of Central Statistic Office (CSO) released on 7th February 2011,the turnaround was strong, with a rebound in agriculture and continued momentum inmanufacturing. The deceleration in community, social and personal services, as alsoindustry, remained a cause for concern. The medium to long-run prospect of the economy,including the industrial sector, however, continues to remain positive. On the demandside, a rise in savings and investment, and pick-up in private consumption resulted instrong growth of GDP at constant market prices at 9.7 per cent in 2010-11. The estimatedlevel of growth in the GDP at constant 2004-05 prices at factor cost (real GDP) in 2010-11was composed of: growth of 5.4 percent in agriculture, growth of 8.1 per cent in industry,and a decelerated growth of 9.6 per cent in services.
Food items largely drove inflation, which remained at elevated levels for greater partof the year. Despite tightening of the money markets and moderate growth in deposits, thefinancial situation remained orderly with a pick-up in credit growth, vibrant equitymarket and stable foreign exchange market.
In last three years the Indian economy had been severely buffeted by two shocks inrapid succession—the onset of global financial crisis in 2007-09 and erratic monsoonresulting in drought in 2009-10. This period of economic stress severely tested thepolicymakers. Yet the Indian economy came through with resilience and strength, byfollowing counter-cyclical macro-economic policies, structural measures to promote growthand social spending to provide a stronger foundation to protect the poor.
In tandem with world trade volumes, India's exports fell rapidly following thedeepening of the global financial crisis through 200809. The exports, however, rose in thesecond half of 2009-10, which continued through 2010-11 until June 2010. Thereafter,growth decelerated till October 2010 and picked up subsequently to reach 36.4 per cent inDecember 2010, which is the highest growth in last two years. The cumulative export growthin April-December 2010-11 was 29.5 per cent and reached $ 164.7 billion during the period.India's merchandise imports, also affected by the global recession, fell to $288.4 billionwith a negative growth of-5.0 per cent in 2009-10.Trade deficit (on customs basis)increased by 2.4 per cent to $82 billion in 2010-11 (April-December). The lower level ofsurpluses on the invisible balance, the relatively higher import growth compared to exportgrowth in first half of 2010-11 raised concerns of unsustainable current account deficitlevels.
Indian Textile Industry
The last year i.e. 2010-11 was a commendable year after the previous challenging yearfor the Indian textiles industry. Even as the Indian economy recovered rapidly from theslowdown caused by the global financial crisis, inflationary trends and volatility incommodity prices led to strong demand side pressures.
The US$ 70 billion Indian textile industry contributes about 14 per cent to industrialproduction, 4 per cent to the country's Gross Domestic Product (GDP) and 17 per cent tothe country's export earnings, according to the Annual Report 2009-10 of the Ministry ofTextiles. The Textile Industry is the second largest provider of employment afteragriculture. Thus, the growth and all round development of this industry has a directbearing on the improvement of the economy of the nation.
As on 30.9.2010, there were 1896 Cotton/Man-made Fibre Textile Mills (non-SSI) in thecountry with an installed capacity of 38.53 million spindles 5,18,000 rotorsand 57,000looms.
Production of Cloth in Mill Sector
(in million sq.metre)
|Item ||2003-04 ||2004-05 ||2005-06 ||2006-07 ||2007-08 ||2008-09 ||2009-10 ||2010-11 (P)April-Oct |
|Cotton ||969 ||1072 ||1192 ||1305 ||1249 ||1259 ||1419 ||808 |
|Blended ||253 ||243 ||252 ||330 ||422 ||426 ||475 ||272 |
|100% Non Cotton ||212 ||211 ||212 ||111 ||110 ||111 ||67 ||49 |
|Total ||1434 ||1526 ||1656 ||1746 ||1781 ||1796 ||1961 ||1130 |
Cotton and Cotton Yarn
The prices of cotton and yarn have increased in the country during the current year2010-11 as compared to previous years by almost 100%. The average prices of cotton are:
Average price of selected variety of Lint Cotton
|Cotton variety ||2008-09 ||2009-10 ||2010-11 (upto January.11) |
|J34 ||6126 ||7599 ||11206 |
|H-4/Mech-l ||6100 ||7806 ||11698 |
|S-6/S-4 ||6307 ||7990 ||12014 |
|DCH-32 ||8635 ||11740 ||15023 |
|LRA-5166 ||5995 ||7518 ||11411 |
The production of raw cotton has increased from 290 lakh bales in season 2008-09 to 295lakh bales in 2009-10 and is estimated to grow to 329 lakh bales in 2010-11. Theproduction of cotton yarn has shown an increase of 12.6% in 2010-11 (April to December) ascompared to 2009-10 (April-December).
Technology Upgradation Fund Scheme (TUFS)
The Government has restructured the Technology Upgradation Fund Scheme (TUFS) - theflagship scheme of Ministry of Textiles for upgradation of technology in the textile andjute sectors. Recently, Ministry of Textiles has issued the Government Resolution onRestructured Technology Upgradation Fund Scheme for the period 28.04.2011 to 31.03.2012(both the days inclusive) with an overall subsidy cap of Rs. 1,972 crores during theperiod. The Government Resolution lays down the financial and operational parameters andimplementation mechanism for the Restructured TUFS.
There will be an overall subsidy cap of Rs. 1,972 crores from the date of thisResolution to 31.03.2012, which is expected to leverage an investment of Rs. 46,900crores, with sectoral investment shares of 26% for spinning, 13% forweaving,21% forprocessing, 8% for garmenting and 32% for others.
Indian Retail Market
Total retail sales in India will grow from US$ 395.96 billion in 2011 to US$ 785.12billion by 2015, according to the Business Monitor lnternational (BMI) India Retail Reportfor the second-quarter of 2011. Strong underlying economic growth, population expansion,the increasing wealth of individuals and the rapid construction of organized retailinfrastructure are key factors behind the forecast growth. With the expanding middle andupper class consumer base, there will also be opportunities in India's tier II and IIIcities. Organized retail in India is expected to increase from 5 per cent of the totalmarket in 2008 to 14-18 per cent and reach US$ 450 billion by 2015, according to aMcKinsey & Company report titled 'The Great Indian Bazaar: Organised Retail Comes ofAge in India'.
According to the report by Mckinsey, India is the only market in the world where men'sapparel (around 40 %) is much larger category than women's (around 30%). Also, in women'swear, ethnic apparel (Salwar Kameez and the Saree) constitute around 90% of the totalspending. Men's apparel will likely continue to account 40% to 50% of the apparel marketin 2015. At current rate of adoption, no-ethnic apparel for women is likely to compriseless than 10% of the market in 2015. According to the report, in the absence of adequateinformation, quality control and trust in retailers, people use brands as a proxy for allthese. In apparel, brands serve as a proxy for the latest fashion as well as the rightquality.
The Financial year 2010-11 proved to be a superior year for your company. The demandfor denim and shirting fabrics is robust inspite of increase in cotton prices by almost100% during the year. Company has closed the financial year 2010-11 with 15% growth insales and 38% growth in Operating Earnings before Interest Depreciation and Taxes(Operating EBITDA). Company's PAT has shown a substantial rise by 156% compared to theprevious year.
The standalone financials of the company is as under:
(Rs. in Crores)
|Particulars || |
Year ended 31 march
| || |
| ||Amount ||% of Sales ||Amount ||% of Sales |
|Net Sales & Operating lncome ||2,691.22 || ||2,316.89 || ||16 % |
|Other income ||34.51 || ||11.83 || ||192% |
|Total Income ||2,725.73 || ||2,328.72 || ||17% |
|Material Cost ||1,233-35 ||46% ||1,035.12 ||45% ||19% |
|Manpower Cost ||273-90 ||10% ||240.90 ||10% ||14% |
|Other expenses ||772.93 ||29% ||731-43 ||32% ||6% |
|Total Expenditure ||2,280.18 ||85% ||2,007.45 ||87% ||14% |
|EBITDA ||445-55 ||17% ||321.27 ||14% ||39% |
|Depreciation ||116.16 ||4% ||113.80 ||5% ||2% |
|Interest and Finance Cost ||194-59 ||7% ||155-47 ||7% ||25% |
|PAT ||134.80 ||5% ||52.00 ||2% ||159% |
Revenue, Sales and Operating Income
Revenue of the Company under review increased by 17% compared to previous year. Salesand operating income also increased by 16%. Company's Fabric revenue from Denim andshirting business shown a growth of 26% and 23% respectively in terms of sales and 6% and12% in terms of volume. Fabric revenue grew by whopping 28% compared to previous yearwhereas revenues from the apparel business went down by 42% on the closure of one of theknits garmenting facility as well as decrease in jeans volume. Other income in largely isbecause of sale of land.
The raw material cost in absolute terms has increased by around 19% compared to theprevious year. But the raw material cost, as a percentage to sales, was higher bymarginally 1% during the year. In this scenario of rising price, company is able to keepits raw-material to sales ratio intact because of its improved buying efficiency andcorrectly timing the market. Further economies of scale and blending of various types ofyarns helped in achieving the same. In addition to this because of robust demand, companyis able to pass through the increase in the prices of Cotton and Yarn to its customers.
The direct materials largely include Dyes & Chemicals which were marginally lowerthan last year at Rs. 193 crores due to change in the product mix and appreciation ofrupee during the year.
Power cost this year has gone up by 17% in absolute value owing to the increasedoverall volume of the company as well as there has been a continuous rise in prices ofGas.
Man Power Cost
The salaries and wages figure for the year is higher by 14% in absolute value. However,Manpower cost, as a percentage to sales, was constant at 10% compared to previous year.Further, it is expected that because of new capacity addition, this cost in proportion tosales will reduce in the coming years.
The other costs have gone up by 6% in absolute terms. But, other cost, as a percentageto sales reduced from 32% to 29% during the current year largely because of economies ofscale.
Operating Margins (Profit)
During the year under review, company's EBITDA margin increased from 14% in theprevious year to 17 % in the current year. The major variable attributing to the rise inthe operating margin was reduction in other cost.
Net Interest & Finance Cost
The net interest and finance cost for the current financial year is Rs. 195 crores asagainst Rs. 156 crores for the previous financial year. The foreign exchange gains onaccount of FX rate changes for the year were Rs. 5 crores compared to profit of Rs. 22crores in the previous year. In absolute terms, the rise was 25%, but interest cost as apercentage to sales remains constant at 7%. There are two major reasons resulting inincrease in the cost. First being the requirement of higher working capital because ofincrease in raw material cost and second being the tight monetary policy throughout theyear, which kept the interest rate upward trending. But, on the other side, because of theimproved results and increased in rating of the company in 2009-10 compared to previousyears, company was able to better negotiate with bankers.
Since more than 50% of your Company's revenue is dollar denominated, it hedges itsposition in the foreign exchange market. Hence, for all decision making purposes, thedollar rate is frozen. The accounting standard requires restatement of all assets andliabilities at the exchange rate prevailing at the end of the quarter. Therefore, dollardenominated working capital borrowings are reinstated every quarter and all profit or lossbooked in the financial statements.
Depreciation as a percentage to sales decreased from 5% in the previous year to 4% inthe current year. Company had done total capital expenditure of Rs. 181 Crores.
Profit Before Tax (PBT) and exceptional items
Net Profit before tax was Rs. 135 Crores compared to Rs. 52 Crores in the previousyear. The significant increase is attributable mainly to increased volume, efficiency andmaintaining margin across the product lines.
Net Profit (PAT)
Profit after tax stood at Rs. 135 Crores in the current financial year compared toRs.52 Crores in the previous year.
The debt of the Company was Rs. 1,812 Crores against Rs. 1,871 Crores last year.
Working Capital & Liquidity
The net current asset during the year has gone up 12% in absolute terms. But, Company'sturnover ratio has improved from 2.24 to 2.33 in the current year.
BUSINESS REVIEW & DEVELOPMENTS Denim
After an excellent 2009-10, Denim business has done well again in the year 2010-11. Itposted improvements in Unit sales, Revenue, EBIDTA and ROCE. The total volume for Denimregistered growth of 6% backed by growth in Exports volume by 5% and that in Domesticmarket by 6%. There has been a continuous effort to de-risk business. New high-endcustomers like Hugo Boss and G- Star were acquired and market share was increased in newimportant markets like Hong Kong/Japan. In the Indian market, market-share with Brandslike Levi's, Lee, Wrangler, Pepe etc. were increased. There is a Continuing thrust oninnovation. Company launched exclusive products called 'Excel Denim' during the year.These have helped improve the design quotient as well as margins.
Denim business wasable to sweat its assets better than last year. Weaving, Spinning,Dyeing and Finishing - all areas of operations were run on better efficiencies. On theback of initiatives like TPM (Total Predictive Maintenance) and Continuous Improvement theuptime of machines improved. Due to a major focus on Quality Control and Process Controlthere was a dramatic improvement in quality and a substantial reduction ingeneration ofwaste.
HR and IR Initiatives
Innovative HR and IR (Industry Relations) strategies resulted in reduction of attritionrate & absenteeism, - maintenance of average age at 37 years, giving challengingleadership roles to youth from within the organization, bringing-in talent and therebybest practices from other industries like automobile, lnfrastructure etc.
Shirting fabric in terms of volume grew by 27% compared to last year and by 23% interms of sales. There is a 44% growth in sales in Brands Fabric Retail business. US marketcontinues to contribute in shirting export business and having YoY growth of more than 50%in the current financial year. To meet the new demand, company is targeting to increasethe capacity to 4.5 mn metre per month from the third quarter of the next year.
The exports in volume grew by almost 24%, whereas the volume in domestic market grew by10%. Company has Improved focus in higher contributing Market of Brands and Retail throughde bottlenecking capacities to produce small length orders. Company launched extensiverange of women's wear fabric. In this segment Several International Brands & Retailersare planning to shift their sourcing away from China & looking for stable &reliable vendor source. India is natural choice as next destination for sourcing due toCotton advantage. Retailing the shirting fabrics under the brand name ofArvind emerged successfully and has opened more than 1000 retail outlets. Theoutlook for Shirting fabric business continues to remain positive.
Shirts Sales in value terms grew by 19% whereas Jeans garments sales reduced by 15%where in volume terms there is reduction of 16% and 43% respectively. Knits garments fellby 51% by volume and 46% in terms of value. Company has closed one of its Knits garmentingplant owing to its conscious decision of the management to improve the productivity,profitability and return on capital employed.
The Rupee which had appreciated to 44.18 in early April 2010 remained volatile andgenerally depreciated to 47.74 by end of May 2010. Later it appreciated to 43.97 byOctober 2010. Since then it consolidated between 44.20 & 46.05 on a broader range& between 44.35 & 45.10 on a rather narrow range. The Company had taken forwardcover on net dollar exposure and the average exchange rate for the entire year was inrange of Rs.48.00 to a US dollar.
Arvind Lifestyle Brands Limited & Arvind Retail Limited:
Arvind Lifestyle Brands Limited
The year 2010-11 was a milestone year for Branded Apparel business which recorded salesof Rs. 422 crores against a sale of Rs. 253 crores in the previous financial year clockinga growth of 67%. PAT of the company has grown by 400% during the year and return oncapital employed is 14.5%.
Arrow and Flying machine continued its upward journey by growing at 51% and 39%respectively. Gant, the bridge to luxury brand shown another good year with a growth ofmore than 100%. US Polo and IZOD the two brands launched last year has shown atremendously fast and received a good market feedback. During the year, the Companysuccessfully launched and positioned yet another brand Engerie.
Arvind Retail Limited
The retail business had another good year with sales of Rs.397crores posting a growthof 40% compared to last financial year. Mega-Mart made rapid progress in the current yearto emerge as the leading Value Retail player in the country. Currently Mega-Mart isoperating with a retail space of 6.25. lakh sq.ft. compared to 4.5 lakh sq. ft. last yearwith 204 small format stores and 6 large format stores.
Arvind Products Limited
Arvind Products Limited (APL) registered revenue growth of 30% and operating profitgrew by 3%. Company made certain changes in the one of its plant so that we can handle allNon yarn dyed fabrics (top weight & Bottom weight fabrics) in this plant, rather thanonly Bottom weight fabrics. This flexibility will help immensely in maximizingproductivity, realization for the plant and to improve the bottom-line. The majorcustomers in Exports market are Banana Republic, Polo Ralph Lauren, Edie Bauer, Land end,Marks & Spencer, C&A, Diesel, Cortefiel, Bugati, Ahlers etc. The Voiles Divisionof the Company is engaged in manufacturing high quality Cotton and blended Voiles. TheCompany enjoys a unique position in the 2x2 rubia segment and continues its leadership interms of quality and quantity, with a major 40% of Market share within its fold.
Anup Engineering Limited
Anup Engineering Limited is engaged in engineering and fabrication business listed onAhmedabad Stock Exchange. The Company's revenue fell by 2% and EBIDTA fell by 60% largelybecause of time overruns and lack of product diversification.
After being harshly battered by recession in the global markets and currency volatilityin FY2009, credit profile of the company improved and expected to further improve withrevival in the domestic demand and signs of improvement in the global markets. However,appreciation of rupee and significant rise in cotton prices raise concerns on theprofitability.
Improvement in production across product lines has been seen throughout the financialyear 2010-11 and with the introduction of Technology Upgradation Fund Scheme (TUFS),capacity additions/ modernization will help support this surge in the demand. In addition,this will further help company of keep its overall borrowing cost under control viewingthe current higher interest cost.
Company had sold some parcel of land during the current financial year and expected torealize further in the coming years. The recent development of partnering Tata Housingunder 50:50 JV for developing integrated township help company in improving the capitalstructure and return on capital employed and add substantial value for the shareholder.
Viewing the surge in demand with increase in operating margin, introduction of TUFS andunlocking value through sale of land and sharing profit out of development, company plansto expand its capacity across the product line keeping in mind the diversification of theproduct profile. Company also plans to steadily invest in the two fully owned subsidiariesArvind Lifestyle Brands Limited and Arvind Retail Limited, which shows combined growth ofmore than 35% from last two years. Company's recent move in the Technical Textile/AdvanceMaterial will help it to diversify its product portfolio and cater the more stableindustrial textile market.