MANAGEMENTABHISHEK INDUSTRIES REVIEWS THE HEALTH OF ITS BUSINESSES in real-time, coveringperformance, strategy and compliance. This real-time monitoring helps the managementidentify potential risks and opportunities leading to proactive derisking and opportunitymaximisation. The Company’s Audit Committee and Board of Directors strengthenedgovernance practices to protect stakeholder interests.
The following report comprehensively analyses the business and environment impact onits performance which should be interpreted along with the audited financial statementsand notes for the year ended March 31, 2009 and March 31, 2010. The report should also beread in conjunction with the business divisional overview pages of respective segmentspublished in this Annual Report. All reference to ‘AIL’, ‘Abhishek’,‘we’, ‘our’ or ‘the Company’ in this report, refer toAbhishek Industries Limited.
Business overview
Abhishek Industries operates in two exciting segments – textile and paper. TheCompany manufactures yarn, terry towels, paper and sulphuric acid. The Company also hascaptive power plants to cater to the needs of its business segments. Over the years, theCompany has evolved into a global player with manufacturing units in Barnala (Punjab) andBudni (Madhya Pradesh). The Company progressively invested in state-of-the-art technology,equipment and quality, leading to competitiveness.
Economic overview
The acute financial crisis passed and a global economic recovery commenced from thesecond and third quarter of 2009 led by major Asian economies and developing countries. Asa result, global economy is expected to grow 2.7 percent in 2010 and 3.2 percent in 2011following a 2.2 percent degrowth in 2009. The growth of developing nations is expected tostrengthen from a low 1.2 percent in 2009 to 5.2 percent in 2010 and 5.8 percent in 2011.On the contrary, developed countries – hardest hit by the financial crisis – areexpected to grow 2.7 percent in 2010 and 3.6 percent in 2011 (Source: World Bank).
Despite drought and slowdown, India posted a robust 7.4 percent GDP in 2009-10. TheIndex of Industrial Production (IIP) stood at 10.4 percent in 2009-10, compared with 2.8percent in 2008-9. The manufacturing sector grew 10.8 percent during 2009-10 against 8.9percent in 2008-9. Moreover, India is projected to grow 8.5 percent in 2010-11.
Textile industry
Global and Indian overview
The global textile and apparel industry underwent a transformation following theelimination of quotas in 2005, enabling new players to enter the global market. Chinarepresents around 40 percent of the global trade in textiles. However, recent costincreases in China created opportunities for India, Pakistan, Vietnam, Cambodia andBangladesh, enjoying low labour and manufacturing costs. The global textile and clothingtrade is expected to grow to US$800 billion by 2014.
The Indian textile and apparel industry contributes about 14 percent of India’sindustrial production, 12 percent of its export earnings, 4 percent of GDP and employs 85million people (directly and indirectly).
India is the second-largest producer of cotton and cellulose fibre/yarn and thefifth-largest producer of synthetic fibers/yarn in the world. India accounts for 20percent of the world spindleage, 6 percent of the world’s rotors and 62 percent ofthe world’s loomage.
The domestic textile industry covers a gamut of activities from the production of rawmaterial like cotton, jute, silk and wool to value-added products like fabrics andgarments. The industry is expected to grow from US$55 billion in 2008-9 to US$115 billionby 2011-12, following a projected FDI of around US$6 billion by 2015, targeted towards thecreation of greenfield units in textile machinery, fabric and garment manufacturing (Source:IBEF). The domestic market is likely to grow to US$106 billion by 2015 while theexport market is likely to grow to US$66 billion.
Indian textile and clothing export outlook
| Year | World exports of textiles and clothing | India’s exports of textiles and clothing | Share of India |
| (at long term projected average growth of 7 percent per annum) | (at targeted average growth of 20 percent per annum) | (percent) |
| 2008 | US$612 billion | US$21 billion | 3.4 |
| 2015 | US$996 billion | US$66 billion | 6.6 |
(Source: FICCI)
Overall textile and clothing imports declined 13.26 percent from US$2.92 billion in2008-9 to US$2.53 billion in 2009-10
(Source: Confederation of Indian Textile Industry). India’s per capita cottonconsumption is lower than in developed economies; the industry expects to enhance fibreconsumption through a wider reach in rural areas and launch of new products.
Per capita consumption of cotton
| Country | Per capita consumption (in kg) |
| India | 5-6 |
| China | 14.6 |
| North America | 38 |
| Thailand | 19.8 |
| World average | 10.8 |
| (Source: FICCI) | |
Further, initiatives taken by the Indian government to strengthen the textile industryare yielding positive results.
Advantage India
Following the relaxation of import restrictions on the multi-fibre arrangement (MFA)from January 2005, the market became competitive. India is attractively placed tocapitalise; the country possesses abundant raw material and is one of the world’slargest cotton yarn producers, enjoying a presence across the value chain and trainedlow-cost manpower.
The Indian textile industry, which was impacted by the global recession, is on the pathof recovery, except cotton textile exporters who may face another challenging year owingto loan repayment. A probable recovery is expected to be backed by growing exports,sustained domestic demand and enhanced value-addition.
Home textile industry overview
Global and Indian overview
The world home textile market is estimated at US$ 35 billion. The US and EU account fornearly 70 percent of the home-textile market; the other major markets comprise Japan,Australia and New Zealand. Potential growth markets in home-textile are China, Russia,South America, India and the Middle East. The industry is estimated to grow at a CAGR of 4percent. The Company is primarily engaged in the terry towel segment of the industry.
Terry fabrics belong to the group of pile fabrics, wherein additional loose (withlesser tension) yarn is introduced to form loops, called piles, to give a distinctappearance and effect. Historically, terry towel production was predominant in developedcountries like the US, Australia, Japan and Europe, among others. However, during the lastfew years, terry towel production in developed countries declined as these countriesincreasingly outsourced their requirements of home textiles (especially terry towels) todeveloping countries owing to lower labour costs.
The global market for terry towels is concentrated in the US and EU. India’sexports declined in 2009-10, owing to a sluggish offtake of consumer products in thewestern markets. EU’s imports declined sharply in 2009; as a result, nearly allexporting countries suffered a double-digit decline in their exports excluding India.Increasing outsourcing – as product baskets widen and the scope for value-additionincreases – is expected to stabilise the realisations for low-cost producers likeIndia, Bangladesh and China.
The Indian terry towel industry evolved from a domination by handloom and powerloom toorganised automation. India’s edge is derived from its large domestic market, lowcost labour, cotton abundance, willingness to manufacture short runs (whereas Chinafocuses on high output), product development and global quality. Following the entry ofmajor players in national retail, India’s terry towel consumption is likely toincrease. Besides, a marked shift in consumer preference from generic products tovalue-added special products (quick dry and antimicrobial towels) is expected to emerge.
Abhishek Industries’ response
The Company embarked on various initiatives to strengthen its working. The Companyoptimised production cost, enhanced capacity and overall efficiency. The divisionundertook several initiatives in the area of operations, marketing, quality and R&D. Adetailed discussion of the Company’s response is given under the business divisionoverview published in this annual report.
The Company, in collaboration with the Natific team, developed quality products forJCP’s largest-ever towel program, conducted internal process audits based on therequirements of the Deming Award (Japan) and Baldridge Quality Award (UK), and implementedthe Trident Harmonised Manufacturing Process for enhanced quality.
In response to industry dynamics, the Company planned an expansion of its textileoperations covering spinning, terry towels, sheeting and power co-generation at anestimated investment of Rs 30,000 million, either directly or through any special-purposevehicle promoted by the Company.
SWOT of the home textile division
The strength of the division lies in its being one of the world’s largest terrytowel manufacturers, possessing state-of-the-art technology and a strong client base. Thedivision perceives the opportunity for carving out a larger market share of value-addedproducts in the emerging markets of India, Latin America, the Middle East and East Europe.
The increased dumping of low quality products and dependence of raw material prices onclimatic uncertainties can affect profitability. Further, a long product life cycle oftowels can affect fresh demand, whereas a volatility in foreign currencies threatenmargins.
Yarn industry overview
Global and Indian overview
Global fibre (cotton, wool, silk) production dropped 5.1 percent to 23.49 milliontonnes in 2009-10 mainly owing to slower demand following the 2008 crisis. However, demandis expected to revive, led by emerging economies like China, Bangladesh and India.
Cotton yarn demand is derived from downstream fabric demand, which, in turn, is used tomanufacture readymade garments and home textiles for domestic and exports. A bulk of theyarn demand is derived from the domestic segment (i.e. 57 percent), catalysed by risingdisposable incomes and improved awareness regarding fashion trends. As a result, domesticyarn sales are expected to rise to 62 percent of production by 2013-14. India’scotton spinning industry performed well towards the later part of 2009-10 as the globalcotton crop was low and Indian turned in a bumper crop (Source: CRISIL).
Cotton yarn demand in India is expected to grow at an overall CAGR of 4.4 percent from2,897 million kg in 2008-9 to an estimated 3,599 million kg in 2013-14. Export demand isexpected to remain sluggish owing to mature growth in the US and the EU.
In India, sizeable loans disbursed under TUFS in 2006-7 resulted in a significantcapacity addition in 2008-9. Although investments in the last couple of years were not aslarge as those in 2006-7, they translated into sizeable spinning capacity addition. Withdemand expected to revive, industry capacity utilisation is set to increase from 62percent in 2008-9 to 69 percent by 2013-14.
Abhishek Industries’ response
During 2009-10, the Company commissioned new yarn units in Budni (Madhya Pradesh),developed value-added products (air rich yarn, soya-cotton-modal, core spun yarn andbamboo cotton) and modernised legacy equipment. The division took several initiatives inthe area of operations, marketing, quality and R&D. A detailed discussion of theCompany’s response is given under the business division overview published in thisannual report.
SWOT of yarn division
The strengths and opportunities of the division are: flexible switching of capacitybetween finer and coarser segments, state-of-the-art technology, easy raw materialavailability, strong client base and geographical diversification.
Increased competition from low-cost manufacturing countries and the proposed fixationof a minimum support price of raw cotton represent divisional challenges.
Paper industry
Global and Indian overview
The global paper industry is concentrated in North America, Europe and Asia. The US isa leading producer, producing over 100 million tonnes per annum, nearly a third of theworld’s paper production. The Asian paper market is growing faster than Europe andAmerica; Asia is expected to account for 38 percent of global paper consumption by 2015.Asia’s principal paper producing and consuming markets are Japan, China, India,Malaysia, Singapore and Thailand.
Although the overall industry’s demand/capacity ratio remained low in 2009, it isexpected to increase over five years as economies revive, led by developing countries.Asia dominates the demand for paper and paperboard (P&B). Over 2003 to 2008, P&Bconsumption increased in Asia and Africa although the rate of increase was slower as usersgradually shifted to online content.
The cost of key raw materials (pulp and wastepaper) declined 22 percent in 2009 owingto a declining demand in certain regions. However, as demand outstrips supply, pulp andwastepaper prices are expected to increase 15-20 percent in 2010 and another 6-8 percentin 2011. India ranks fifteenth among paper producing countries. With stable economicgrowth, the Indian paper industry steadily grew at a 6.5 percent CAGR from 6.8 milliontonnes in 2003-4 to 9.3 million tonnes in 2008-9. The paper and paperboard demand in theIndian context is expected to grow at 6.8 percent CAGR from 7.7 million tonnes to 10.7million tonnes across 2008-14
(Source: CRISIL).
Owing to an increased focus on quality paper, raw material imports as a proportion ofdomestic consumption is expected to increase from 26 percent (imported wastepaper andpulp) in 2008-9 to 28-30 percent by 2011-12. Average pulp and wastepaper prices declinedin 2009, owing to low demand. However, with Asia emerging as the principal demand driver,raw material prices are expected to rise.
India’s low per capita paper consumption can also be seen as a major industryopportunity. The demand for paper (especially specialty) is expected to increase owing toincreasing literacy, investment in the education sector, expected increase in vernacularprint media and increase in the standard of living and per capita income.
Abhishek Industries’ response
The Company invested in the latest technology and expanded capacity, enabling it toemerge the world’s largest wheat straw-based paper manufacturer. During the yearunder review, the Company focused on value-added products, innovations and quality. Thedivision took several initiatives in the area of operations, marketing, quality andR&D. A detailed discussion of the Company’s response is given under the businessdivision overview published in this annual report.
SWOT of paper division
The division deploys eco-friendly paper manufacturing technologies. Proximity to rawmaterial and a large product portfolio, catering to diverse value-added requirements,represent other strengths.
On the other hand, a slow pick-up in exports coupled with planned industrywide capacityexpansion and low quality ASEAN imports are perceived as challenges.
Chemicals
Overview
The chemical industry encompasses organic and inorganic chemicals, dyestuffs, paints,pesticides and specialty chemicals. Some of the prominent individual chemical industriesare caustic soda, soda ash, carbon black, phenol, acetic acid, methanol and azo dyes. Theestablished chemical industry in India has recorded a steady growth in the overall Indianindustrial scenario.
Considering the modest per capita consumption of chemicals in India (relatively belowthe prevailing world level), there is a tremendous scope for growth of the sector.
Abhishek Industries’ response
The chemical division is capable of producing 100,000 tonnes per annum of sulphuricacid. The Company also produces battery-grade sulphuric acid. The chemical division catersto the need of leading battery manufacturers, detergent, zinc sulphate, alummanufacturing, dyes chemicals and fertiliser industries, among others.
Power
Overview
India is the world’s sixth-largest electricity consumer and Asia-Pacific’sthird-largest power generator (after China and Japan). India accounts for about 3.5percent of the world’s total annual energy consumption, with a per capita consumptionof 631 kwh, compared with the world average of 2,873 kwh in 2009-10. The countrytraditionally depended on thermal power, which accounts for around 63 percent of theinstalled capacity. The transmission segment needs significant capacity additions in linewith the increasing generation capacity. India’s transmission and distribution(T&D) system is a three-tier structure comprising regional grids, state grids anddistribution networks.
If India’s economy continues to grow at an average 8 percent, power demand isexpected to increase by 315-335 GW by 2017. This would require a five to ten-fold rise inpower generation.
Abhishek Industries’ response
The Company established a 50-MW power generation unit, ensuring uninterrupted powersupply leading to smooth production and reduced power costs. The power plant is equippedwith the latest technology (AFBC) and multi-fuel boilers. The Company implementedfuzzy-logic technology to manage lime kiln burners.
Financial analysis with respect to operational performance
Revenues
The Company’s net turnover increased 29 percent to Rs 18,033.6 million in FY2009-10. Of the total turnover, Rs 8,394.8 million was owing to income from exports. Asnapshot of the segmental financial performance for FY 2009-10 and its comparison with thepreceding fiscal year are tabulated below:
| Division | Current year | Previous year | Growth |
| Sales * | PBIT | Sales * | PBIT | Sales * | PBIT |
| Yarn | 4655.8 | 362.2 | 3397.0 | 58.4 | 37 percent | 520 percent |
| Towels | 8435.4 | 1504.4 | 7560.5 | (95.3) | 12 percent | 1679 percent |
| Paper and chemicals | 4942.4 | 212.8 | 3023.1 | 326.3 | 64 percent | -35 percent |
* Excluding inter-segment sales
The share of the textile segment in the Company’s external sales was 73 percent,which is lower, compared with 78 percent in the preceding year. During the FY 2009-10,yarn sales grew 37 percent over the preceding year. Yarn production increased 20 percentas the Company started commercial production in Unit V of the yarn division at Budni,Madhya Pradesh. The division, during the year, also concentrated on the production ofvalue-added yarns. The proportion of external sales in the total sales of yarn increasedfrom 71 percent in FY 2008-9 to 75 percent in FY 2009-10. The contribution of the yarndivision to the net sales of the Company increased from 24 percent in FY 2008-9 to 32percent in FY 2009-10. Following an increase in revenue and yarn realisations, thedivision’s PBIT registered an increase of 520 percent over the preceding year.
The net sales of the terry towel division grew 12 percent in 2009-10, whereas the totalproduction of terry towels increased 3 percent. The contribution of towels to the netsales of the Company decreased from 54 percent in FY 2008-9 to 43 percent in FY 2009-10,mainly owing to a remarkable increase in revenues of the paper and yarn divisions. TheCompany has taken forward contracts and option deals to hedge its exports. Owing to areversal in the provision of losses on account of foreign currency hedging and betterrealisations, the division reported a PBIT of Rs 1,504.4 million against a loss of Rs 95.3million in FY 2008-9.
The net sales of the paper and chemical divisions witnessed a significant increase of63 percent in FY 2009-10 with an 84 percent increase in total paper production. Theincrease in production was in line with capacity enhancement of the paper division coupledwith state-of-the-art technology, which was stabilised during the last financial year. Thesale of chemicals, primarily sulphuric acid, registered growth owing to a higherproduction in FY 2009-10. On the overall, PBIT of the division registered a 35 percentdecrease in FY 2009-10 owing to lower realisations across all segments of the papermarket.
Expenditure
Raw material cost: Raw materials represent the largest component of total expenditure,rising 28 percent in absolute terms in FY 2009-10 against a 34 percent increase in FY2008-9.
During the year under review, the quantity of raw material consumed increased onaccount of a rise in production by different business units in addition to a sharpincrease in raw material prices. As a percentage of net sales, the cost of raw materialremained at 51 percent in FY 2009-10. As bulk of the raw material sourced by the Companyis agro-based, the Company is exposed to price fluctuations on account of the monsoons andcrop performance.
Manufacturing expenditure: The Company’s manufacturing cost, as a proportion ofnet sales, increased from 13 percent in FY 2008-9 to 14 percent in FY 2009-10 owing totopline growth, increase in power cost and a higher purchase of materials for resale.Manpower cost: The Company’s manpower cost as a proportion of net sales increasedmarginally from 9 percent in FY 2008-9 to 10 percent in FY 2009-10. Increase in personnelcost was mainly owing to additional requirement to service expanded capacity andperformance-linked incentives.
Selling cost: The Company endeavoured to rationalise its distribution and supply chaincosts. Selling costs remained at 5 percent of net sales in FY 2009-10.
Administrative cost: Administrative costs decreased from 3 percent of net sales in FY2008-9 to 2 percent in FY 2009-10 through better asset utilisation.
Depreciation: A sum of Rs 1,744.40 million was provided towards depreciation during theyear under review. The cost on account of depreciation in absolute terms increased by 50percent in FY 2009-10. A significant increase in depreciation was owing to new capacitiesof the paper and yarn businesses and expansion in the towel business of the Company.
Profit and profitability
Earnings before depreciation, interest and taxation (PBDITA) increased 39 percent fromRs 2,569.4 million in FY 2008-9 to Rs 3,559.9 million in FY 2009-10. The Company earned anet profit of Rs 564.6 million in 2009-10 against a loss of Rs 530.4 million in FY 2008-9.The Company’s earning per share stood at Rs 2.54 on a face value of Rs 10 for theyear ended March 31, 2010.
Balance sheet review
The Company’s balance sheet size increased to Rs 22,822.5 million, as comparedwith Rs 20,361.4 million during the preceding fiscal year owing to capital expenditureincurred by the Company for augmenting manufacturing capacities.
Share capital
The Company’s total paid-up share capital remained Rs 2,221.9 million during theFY 2009-10. Each equity share of the Company possessed a paid-up value of Rs 10. The bookvalue of each share stood at Rs 22.63, as on 31 March, 2010.
Reserve and surplus
The profit after tax during the year was Rs 564.6 million; the entire profit wasploughed back into the business. The Company’s reserves stood at Rs 2,806.1 millionas on March 31, 2010 against Rs 2,241.5 million in the preceding year.
Secured and unsecured loans
The Company’s total borrowings increased from Rs 15,569.0 million in FY 2008-9 toRs 17,110.6 million in FY 2009-10. Secured loans, which amounted to Rs 17,000.1 million,formed a predominant part of the total borrowings. The Company’s diverse debt basketenabled it to minimise costs.
Fixed assets and investments
The Company’s gross block stood at Rs 23,387.8 million as on March 31, 2010,compared with Rs 21,032.1 million at the end of the preceding financial year. Thisincrease in gross block was on account of an expansion in the Company’s textilebusiness. The Company recently (in Q1 of FY 2010-11) completed Phase II of its yarnexpansion project in Budni, Madhya Pradesh, wherein 48,096 spindles were added.
Working capital
The Company’s net current assets increased from Rs 2,363.7 million to Rs 5,284.9million in FY 2009-10. The Company continued to purchase cotton at strategic points sinceit is available seasonally and maintained sufficient inventory, avoiding disruption inyarn production. As regards other raw materials available throughout the year, the Companydeployed just-intime (JIT) inventory management to minimise carrying costs.
Internal control system and their adequacy
The Company designed an internal control system, which is independent and has anobjective assurance and consulting activity designed to add value and improve anorganisation’s operations. The objective of the internal control system is to bring asystematic, disciplined approach to evaluate and improve the effectiveness of riskmanagement, control and governance processes.
The internal control and audit framework is robust and rigorous, considering the sizeof the organisation, complexities faced and overall risk profile. The internal auditorsstrive to assess the control and governance process for the organisation. The Company alsoretained management auditors to periodically review systemic adequacy and processrefinement.
The internal audit report, plans, significant audit findings and compliance withaccounting standards is in turn reviewed by the Company’s Audit Committee to ensureproper audit coverage and adequate consideration along with execution of theauditors’ recommendations.
Human resource management and industrial relations
At Abhishek, human capital management is guided by values and policies. Theorganisation firmly believes that its core strength is its people, adequately empoweredfor entrepreneurship, making the Company a great place to work in. During the year underreview, the Company continued to enhance its activities in all areas of human resourcemanagement and facilitation, including labour relations, client services, organisationaldevelopment, occupational health and total compensation.
The Company’s approach to leadership development, business transition, diversityand human resource planning continued to add value to organisational effectiveness. Theorganisational strength of people is positioned to assist the organisation attract,motivate and retain a talented workforce.
Workforce composition
The Company’s organisational structure comprises Institution Builders, DevelopmentCoaches, Frontline Entrepreneurs and Facilitators. Towards the close of the financial yearunder review, the total strength of the Company was about 10,000 employees.
| Management team | |
| Institution builders (IB) | 7 |
| Development coaches (DC) | 49 |
| Frontline entrepreneurs (FLE) | 139 |
Outlook
The Company is excited in its outlook. The various initiatives coupled with processstabilisation and capacity expansion are expected to yield handsome results. The Companykeeps on exploring various avenues for growth and toward this the management is exploringthe possibility of restructuring the existing businesses. The eco-friendly technology,massive capacities, motivated manpower make our outlook optimistic.
Cautionary statement
This discussion contains certain forward-looking statements based on currentexpectations, which entail various risk and uncertainties that could cause the actualresults to differ materially from those reflected in them. The actual could be materiallydifferent from the ones stated in this report. Market data and product informationcontained in this report is gathered from published and unpublished reports and theiraccuracy cannot be assured.
The management reserves every right to re-visit any predictive statement as may bedeemed fit.