Bombay Dyeing & Manufacturing Company Ltd

INDUSTRY STRUCTURE AND DEVELOPMENTS

The preceding 12 months have witnessed sluggish activity in Mumbai's real estatemarket, primarily owing to slow regulatory approvals, limiting the number of new launches,and thereby restricted supply of new projects in the market.

Mumbai's property prices continued to increase marginally, due to the limited supply inthe aforesaid period. However, many potential buyers who had postponed their purchase inanticipation of declining prices have gone ahead with their purchase decision before theclosure of the financial year.

At higher prices, the demand appears to be modest, especially in Central Mumbai whereyour Company's land parcels are located. Elevated interest rates on home loans havecontinued to impact demand adversely.

However, a silver lining was the introduction of the amended Development ControlRegulations (DCR) for Mumbai. It seeks to create a level-playing field for developers andreduce the period for scrutiny and approvals of real-estate projects. This, in turn, willenable your Company to accelerate construction as well as the marketing/sales processes.

OPPORTUNITIES AND THREATS

The scarcity of land in the city, increasing on-road congestion and infrastructureinadequacy will lead to a higher demand for residential accommodation, especially inCentral Mumbai, a location equidistant from the commercial hubs of South Mumbai andBandra-Kurla Complex in North Mumbai. In addition, the Central Mumbai itself is alsodeveloping into a commercial hub. Further, your Company's strategy of undertakingintegrated mixed-use developments within the island city of Mumbai promoting the conceptof a 'city within a city' gives a competitive edge.

To exploit this opportunity, Bombay Realty proposes to develop 45-acre Spring Mills atDadar and 25-acre Textile Mills at Worli as 'Island City Center' (ICC) and 'WadiaInternational Center' (WIC), respectively. These will be luxury mixed-use projects,consisting of residences, offices, a luxury hotel, a mall, high street and a hospital. Asa part of this initiative, Bombay Realty has begun the construction of two residentialtowers at ICC and a high-end luxury retail space called 'The Plaza' at WIC, which willhave leading luxury brands. Coupled with your Company's brand, we expect to leverage theseland parcels to a superior profitable business proposition. Further, Bombay Realty is alsoevaluating the option of joint development of land parcels of the Wadia Group to enhanceshareholder value.

However, a large number of new projects are commencing in the vicinity, which willcater to the same luxury segment. This could put pressure in terms of excess supply andresult in slower pace of sale and consequent realization of the opportunity. Aslower-than-expected pace of reduction in interest rates may also further dampen therevival of demand for the real estate sector.

RISK AND CONCERNS

The market for residential property has been adversely impacted, due to higher interestrates and delays in approvals at various stages. The initial lack of clarity in respect ofthe new Development Control Regulation in Mumbai could further impact the approval processand consequently the development plans of your Company. Another key concern area is slowpace of demand in a generally recessionary economic environment.

The Company is addressing these risks through a process driven, flexible approach todevelopment in a planned manner. Further, we have aggressively invested in Brand Buildingand also adopted a consumer centric approach to differentiate from other competitiveofferings.

INDUSTRY STRUCTURE AND DEVELOPMENTS

Textile Industry contributes nearly 14% of the total Industrial Production of thecountry and also contributes 3% to the GDP of the country. The country earns about 27% ofits foreign exchange through textile export. Considering the slow global economic recoveryso far, there is a need to improve competitiveness of the sector in the global market.

Within textile, 'Home Textile' market is estimated at over Rs. 10,000 crores. Of this,the organized sector accounts for under 10%. The Home Textile category is expected to growat 8% p.a. and the share of organized sector is expected to improve.

The emergence of strong modern trade and rapidly growing large format stores isexpected to help upgradation of the market and also aid growth of organized sectorplayers.

With a view to spur the growth of the Industry, Maharashtra Government has recentlyintroduced several incentives which are expected to spur the growth of industry in thestate.

OPPORTUNITIES AND THREATS

Textile and clothing retail is bound to benefit from increased penetration and share ofmodern trade. The share of organized retail is expected to grow from 5% to 24% in 2020,benefitting players like your Company.

Increased disposable income, especially among the middle class will fuel the retailboom. Our priority categories, i.e. Bed and Bath linen are expected to continue to witnesshealthy growth.

Your Company has the widest range of designs and price points from Rs. 549 to Rs.10,000 for Bed linen to cater to consumers in every segment. The growing market andopportunities to leverage our Brand as well as distribution network represents opportunityfor the Company in the Domestic market.

However, the consumer demand could get impacted due to severe inflationary pressure asour Products form a part of discretionary spend basket. The prices will be furtheraffected by levy of excise duty, which is bound to hurt the consumers' pocket, and mayimpact the demand. Cheap imports, particularly from China by the trade, and duty freeimports from Bangladesh pose additional threat for the domestic players including yourCompany.

In the export market, while demand is expected to pick up in USA, slowdown continues inEurope which would have adverse impact on our Business. Your Company is focusing on a longterm sustainable profitable business model, and expects positive growth in the comingyears. This would also enable us to improve capacity utilization at our state of the artprocessing Plant at Ranjangaon. At the same time, strong competition from China andPakistan as also, other Indian Manufacturers still continues to be a threat for theCompany.

OUTLOOK

With stable cotton prices, overall business situation appears to be positive. While theCompany had to vacate low price point items last year due to steep increase in cottonprices, with the concentrated effort on Product Development, the Company has been able toregain some of the lost ground in mass market segment.

Assuming the inflation is brought under control and input prices remain at reasonablelevel, the domestic market is expected to continue to deliver a modest topline growth.With the continued effort on Retail upgradation and contemporary experience, the footfalland Brand image at the Retail level would be improved.

With the strengthening of Supply Chain Management, we expect to significantly reducethe cycle time from procurement to sale, strengthen the quality of the products and reducethe conversion cost. These initiatives are expected to positively influence the margins ofthe Business.

RISKS AND CONCERNS

High inflation could adversely impact the domestic demand, especially since the 'HomeCategory' is considered as 'non-essential' in the family's consumption basket. Aggressivecompetition by new players, who wish to enter the category pose a risk of the Companylosing its market share. The conversion cost could sharply escalate with severe energyprice rise as well as increased labour cost due to hike in minimum wages.

In the exports business, European situation remains a key concern.

The Company will focus on contemporary designs, better value proposition in the productbasket through continuous innovation and on cost management to mitigate the risks. We willalso strive to widen the customer base in the exports business to address the keychallenge faced in Europe.

INDUSTRY STRUCTURE AND DEVELOPMENTS

Polyester Staple Fibre (PSF) is produced from two major petrochemical intermediates,Purified Terephthalic Acid (PTA) and Mono Ethylene Glycol (MEG), and is used as substitutefor cotton to manufacture spun yarns, either wholly with polyester or blended with cottonor with viscose staple fibre (VSF).There are three major producers of PSF in the country.While the market leader is fully vertically integrated, the other two producers includingyour Company are stand alone PSF manufacturers.

Internationally, over 60% of global PSF capacity is located in China. Being the largestimporter and consumer of cotton as well, China thus has a dominant influence on polyesterand downstream textile industries.

The domestic PSF business saw a sharp reduction in volume and realisation especiallyfrom Q2 of 2011-12 due to tumbling of cotton prices from the historic high in Q4 of2010-11 and other extraneous factors like Japanese earthquake, euro zone crisis andconsequent increase in crude, RLNG and petrochemical prices in the world market. The sharprise in Rupee to US Dollar exchange rate in Q2 and thereafter made the matter even worse,as the key raw materials are primarily driven by global prices. The overall polyesterindustry's capacity utilization came down to barely 65-70% while your Company could manageup to 84% (as against 94% in the previous year).

The world PSF market was equally subdued due to a static demand in the westernhemisphere countries and a modest growth of around 6-7% in China.

OPPORTUNITIES AND THREATS

The opportunity for PSF is driven by its low price as compared to cotton and othersubstitute fibres, natural or man-made. With continuously rising demand for textileproducts in general, both in apparel and non-apparel or technical textile segments, demandfor PSF is expected to grow steadily over a long term. This would help your Company toachieve higher capacity utilisation and contain manufacturing costs.

However, if the cotton prices were to remain at an unattractively low level, close toPSF prices whereas the crude oil prices remain high as of now or even escalate further,the industry would face severe cost pressures thereby eroding the margin significantly.The improved availability of cotton globally at reasonable prices could also result indemand for PSF being adversely impacted as the preference for cotton (which is naturalfibre) based products would be preferred by the consumers.

OUTLOOK

While the year 2011-12 was not a rewarding period from business perspective, fewpositives could be derived out of the operation such as efforts toward energyconservation, maintaining a reasonably healthy capacity utilisation compared to theindustry average, an improved gross realisation and stable topline compared to previousyear. With our sustained efforts in these fronts coupled with anticipated improved demandand higher capacity utilization, we expect the business to improve and become profitable.This will further be aided by your Company's focus on speciality fibres, innovativeproduct mix and long term measures for cost reduction by converting fuel from RLNG tocoal.

RISKS AND CONCERNS

The demand and prices of PSF are linked to availability and prices of cotton and anysignificant change in the size of crop in India as also globally could impact the demandof the product. Government's policy in export of raw cotton could also be a factor in thegrowth of demand. Wide fluctuation in crude oil prices and the resultant changes in theprices of PTA and MEG as well as exchange rate will affect prices of raw materials andconsequently, the margins of business. Addition of global or Indian capacity for PSF couldput pressure on pricing and also margins.

SEGMENT-WISE PERFORMANCE

Segment wise performance together with discussion on financial performance withreference to operational performance has been dealt within the Directors' Report whichshould be treated as forming part of this Management Discussion and Analysis.

INTERNAL CONTROLS

The Company maintains adequate internal control systems, which provide among otherthings reasonable assurance of recording the transactions of its operations in allmaterial respects and of providing protection against significant misuse or loss ofCompany's assets. The Company has implemented ERP packages with built in control checks.

The Internal Auditors have introduced several objective tools to assess strengths ofour internal controls as also, identify areas where it need to be further strengthened.The scope and authority of the Internal Audit are well defined in the internal auditcharter, approved by the Audit Committee. Internal audit plays a key role in providing anassurance to the Board of Directors of adequate internal control system. The auditcommittee at its meetings reviewed the reports of the internal auditors as well as theRisk Management process of the Company.

Special audits are undertaken based on the operational requirements and correctiveactions are taken accordingly.

HUMAN RESOURCES

Organizational re-structuring of PSF and Textile business was carried out through astructured review process to align with the changing business needs. The Company hasmaintained harmonious industrial relations in both the manufacturing facilities. A longterm settlement was signed in March 2012 with the internal union of workers at Ranjangaonunit in an amicable environment.

The manpower resources in real estate business have been significantly augmented duringthe financial year by attracting the right talent to handle the new project requirements.Functional training and employee engagement was given adequate weightage during the yearto enhance employee productivity and morale.

Re-training on occupational, health, safety and environment were carried out in boththe manufacturing facilities to improve awareness.

RESOURCES & LIQUIDITY

The Company's borrowings increased by Rs. 40 crores during the year. These have beenutilised to meet the working capital requirements. The Company received Rs. 30 crores fromthe Promoter towards conversion of preferential warrants into equity and Rs. 6 crores fromdivestment of its holding in a joint venture company.

The working capital requirement of the Company continued to be funded by a consortiumof banks led by State Bank of India.

Statements in this Management Discussion and Analysis describing the Company'sobjectives, projections, estimates, expectations or predictions may be 'forward-lookingstatements' within the meaning of applicable securities laws and regulations. Actualresults could differ materially from those expressed or implied. Important factors thatcould make a difference to the Company's operations include raw material availability andprices, cyclical demand and pricing in the Company's principal markets, changes inGovernment regulation, tax regimes, economic developments within India and the countriesin which the Company conducts business and other incidental factors.