MANAGEMENT DISCUSSION AND ANALYSIS1. Economy Overview
The global economy is still under recovery but the situation has improved significantlyas compared to the previous year. Companies around the world have shown better thanexpected results. There is a lot of optimism in the air about the strong recovery offinancial markets all over the world as well.
Backed by strong domestic demand and consumer confidence, the Indian economy has showngreat resilience and is back on the path of growth. The financial markets of India haveshown spectacular improvements with the sensex testing the 18,000 mark in April 2010 forthe first time in more than two years. A strong growth in the Indian manufacturing andagricultural sectors enabled the Indian economy to grow at a strong rate of 7.4% in2009-10.
Although inflation continues to remain high and still remains a cause of worry, theIndian economy is expected to grow at 9.5% in 2011. Higher agricultural productivity,industrial outputs, disposable incomes and strong fundamentals would all togethercontribute to the growth of the Indian economy in the coming years.
2. Industry Overview
The Global textile and apparel trade is estimated to be at US$ 580 billion and isexpected to reach US$ 805 billion by 2015. In the Agreement on Textiles and Clothing (ATC)which was fully implemented on January 1, 2005, all trade barriers (both tax and non-tax)imposed by the developed countries on imports from developing countries were eliminated,giving way for a free trade regime in the global textile trade.
Major growth of textile and apparel consumption is expected to come from US, EU andemerging markets like China and India. It is estimated that China and India would togetherbecome one of the largest consumption bases by 2015. One of India's oldest industries, thetextile industry has been and continues to be a major contributor to the country'seconomy. Indian textiles, handlooms and handicrafts are exported to more than 100countries, with US being the largest buyer. Readymade garments are the largest exportsegment, accounting for almost 41% of total textile exports.
The first half of the year was marred by sluggish export demand, increasing cost of rawmaterials and rupee appreciation. However, the stimulus packages announced by theGovernment and improving economic conditions gave some relief to the industry. Exportdemand is now picking up in the US markets, though it continues to remain weak in theEuropean Union Markets.
As per the provisional data released by Ministry of Textiles, exports of textileproducts fell only by 5.46% during Apr-Dec'09 as compared to a fall of 15.37% reported foroverall exports from India. Apparel exports showed a marginal increase of 0.37% in 2009-10compared to 2008-09 recording exports of M 504,790 million.
Some of the other developments for the industry during the year included:-
a) A cut in the TUFS scheme allocation announced in the Budget 2010-11.
b) Extension of 2% interest subvention on exports for another year till March 2011 tothe handlooms, carpets and handicraft industry.
c) Increase in the MAT to 18%
Efforts are constantly being made by exporters to explore new markets and increase aswell as improve market share. Smaller exporters with limited presence in the textile valuechain continue to be more vulnerable while large integrated players are expected tobenefit given that global retailers have been increasingly consolidating their supplierbase to a few integrated players to improve supply chain efficiency and reduce cost.
3. Business Overview
Bombay Rayon Fashions Limited (BRFL), a Mumbai based company formed in 1986 is anintegrated textile group, engaged in the manufacture, export and retailing of high-enddesigner range of fabrics and garments. The Company sells its products to other textilemanufacturers, exporters as well as retailers. BRFL is one of India's largest verticallyintegrated textile groups and also maintains itself as the largest garment manufacturer inIndia.
While 2009-10 was a challenging year with the market environment still gathering itsstand, the Company demonstrated its ability to operate in these times as well.
The Company believes larger integrated players like them benefited as the large globalretailers have been increasingly consolidating their supplier base to few larger andintegrated players to improve supply chain efficiency and reduce the costs.
The Company's net sales and net profit for 2009-10 stood at 16,147.66 million and M1,759.19 million respectively, an increase of 20.29% and 18.47% over the previous year.
Operations
The Company uses advanced production facilities to manufacture its productscost-effectively. The Company also believes that its integrated facilities and designcapability provides significant competitive advantages. The Company has 32 manufacturingfacilities across India with a total capacity to manufacture 220 million meters of fabricp.a. while the garment manufacturing facilities stands at 88.80 million pieces p.a.
The Company has successfully set up the Integrated Textile Parks set up under theScheme for Integrated Textile Park (SITP) at Islampur & Latur by Special PurposeVehicle Companies for providing infrastructure facilities to textile companies.
The Company continues to lay utmost importance to fashion and customer and its team ofdesigners based in New York and Amsterdam travel all over Europe and USA in order to keepabreast with the latest trends in the fashion industry.
Fabric that is manufactured is used for captive consumption, sold in the domesticmarket as well as exported to Middle East and European countries. In the domestic market,the fabric is sold under the brand name 'Bombay Rayon' in order to distinguish itsproducts in the market place.
Garments are largely exported to high-end retailers and fashion chains across US,Europe and Japan. Subsidiaries such as BRFL Europe B. V. and DPJ Clothing Ltd., UK helpthe Company to focus on marketing and distribution in Europe and UK.
Sector - wise distribution of sales
In 2009, the Company acquired the Italian brand 'GURU' and retail business of JamSession Holdings S.r.l, an Italian Company. The first GURU store was launched in Mumbai tobe followed by a second one in Delhi and then in Chennai. The Company continues to beoptimistic about the opportunities present in the domestic retail market and as it couldbe an important stream of growth in the near future.
Recent Developments
In the last two years, the Company has made several acquisitions to strengthen itspresence as an integrated textile player and a complete apparel company. Besides that, theCompany has also undertaken several expansion plans in order to gain from the economies ofscale.
During the year, the Company has commenced commercial production of its manufacturingfacilities of yarn dyeing, weaving, processing at Tarapur and garmenting at Ichalkaranji,Islampur, Latur & Osmanabad
With this the Company completed expansion plans till Phase IV. All the facilities areequipped with the latest technology and high level of automation.
The Company is now in the process to embark upon Phase V and VA of its expansion planfor setting up new weaving and yarn dyeing capacities in Maharashtra.
In order to be more cost competitive, the Company is further looking at outsourcingsome of its manufacturing to Bangladesh, given the competitive advantage the countryoffers. To that effect, the Company has opened a representative office there.
All the above steps are towards the group's desire to become a complete apparel companywith strategic focus on quality, cost and lead time.
4. SWOT Analysis
Strengths and Opportunities
Vertically integrated operations enables BRFL to take advantage of economies of scaleas well as put the Company in a preferred position with respect to large buyers who arelooking at efficiencies in terms of cost and turn-around time.
Its unique business model enables the Company to enjoy higher margin retentions on anoverall basis rather than the cost plus model followed by other garment manufacturers.
The strength of the product and operations provides the Company the opportunity to asignificant player in the global arena as well as the largest producer of fabric andgarments in the country.
Weakness and Threats
Rapid expansion and scale of operations could pose a threat if growth is not wellmanaged.
Uncertainty surrounding the global markets like the recent sovereign debt crisis inEuropean countries and the challenging retail environment that is the result of a weakenedeconomy continues to remain a threat in the near-term.
5. Risks and Concerns
In the course of conducting business operations, the Company is exposed to a variety ofrisks that are inherent to the industry they operate in. While the Company is confidentabout long-term prospects, the following risks and uncertainties could affect theirability to achieve its strategic vision and objectives for growth.
Given that BRFL operates in the fashion industry, the Company faces the risk of fastchanging trends and some of its products becoming obsolete.
The Company's results could also be impacted due to adverse economic conditions,changes in government policies and other regulations which could make exports from Indialess competitive in the global market place.
Besides, the market the Company operates in is highly competitive. While BRFL has astrong reputation due to its design capability, costing and lead time, competition riskcannot be totally eliminated.
Since substantial portion of the Company's revenues are earned in foreign currency,they are also exposed to risk from changes in foreign currency rates. The Company ismainly exposed to fluctuations in the U.S. dollar and the Euro.
However, as a vertically integrated textile group with superior production facilities,in house design capability and constant effort to minimise lead time the Company believesit has the adequate mitigants in place and is well positioned to lead a high growth path.
6. Outlook
The Company believes the global economic crisis is behind them. As a company, BRFL isoptimistic about the future as well as its growth path. With signs of continual recoveryin the US markets, which accounts for largest share of exports from the country, exportsfrom India are expected to gradually recover in 2011.
For the industry at home, large debt funded expansion plans undertaken in the past arelikely to translate into high leverage for some time. While the existing plans are likelyto be completed, further expansion plans might be undertaken only once the globaleconomies, stabilises.
The Company is confident in the ability to grow its business organically and, with fourcompleted acquisitions in less than three years. The Company considers the process ofstrategic integration of new businesses to be among its management team's core skill set.
The Company believes opportunities are expected to continue to arise as it anticipatesand responds to the ever-changing global marketplace. The Company will continue to focuson exports and making in-roads into the domestic retail market. The Company's desire tocontinue to look at better and more efficient ways to become a complete apparel companywill continue to drive its business strategy into the future and confirm BRFL's strengthas a global player with local execution skills.
7. Internal Control Systems and their Adequacies
At BRFL, internal control systems and procedure are adequately commensurate with thesize and structure of the business. The operating and business control procedures havebeen planned and implemented in a manner that ensures efficient use of resources, as wellas compliance with procedures and regulatory requirements. The Company has set up its owninternal audit department and has also engaged a firm of Internal Auditors to carry outaudits extensively throughout the year with the objective of testing the adequacy andeffectiveness of internal controls and recommending improvements. The Audit Committee holddiscussions with auditors periodically about internal control systems, the scope of auditincluding the observations and reviews of the quarterly, half yearly and annual financialstatements before submission to the Board. The Audit Committee ensures compliance ofinternal control systems.
8. Financial Performance
The Company recorded a total income of M 16,304.26 million from M 13,471.88 million in2008-09, an increase of 21.02%. The Company's EBIDTA stood at M 4,031.79 million asagainst M 3,260.74 million in 2008-09, an increase of 23.65%. Profit after Tax of theCompany stood at M 1,759.19 million against M 1,484.98 million in 2009-10, an increase of18.47%.
9. Human Resources
Human Resources at BRFL have gone through a sea change over the past two years. Thecentral HR team has systematised and decentralised most of the HR systems and activitiesto make it easier for the units to function independently. Given the various changes thatthe organisation has gone through, the key focus this year was on reviewing, recruitingand consolidating talent at various levels across establishments - the Mantra being 'Hirefor Attitude & Train for Skills' The way forward would be to focus on strengtheningthe performance management process and initiating various practices that encourageemployee engagement, development and long-term commitment in form of vertical and lateralgrowth opportunities through job rotations and enhancements to deserving employees. As onMarch 31, 2010 the total strength of employees was 30,988.
10. Cautionary Statement
Statements in the Management Discussion and Analysis describing the Company'sobjectives, projections, estimates, and expectations 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 economic conditions affectingdemand/supply and price conditions in the domestic and overseas markets in which theCompany operates changes in Government regulations, tax laws, statute and other incidentalfactors.