Ashnoor Textile Mills Ltd Management Discussions.

A. Business overview of Ashnoor Textile Mills Limited (ATML)

Ashnoor Textile Mills Limited is engaged in manufacture and export of terry towels. It has only one plant located at Gurgaon. The company is making its entire export to U.S.A. which constitutes nearly 90% of the total sales. So, the business prospects of the company are dependent on global and Indian economy; particularly the economic conditions in U.S.A. As far as the cost structure is concerned, the two important factors are fuel and cotton yarn. The operations of the company are also affected by exchange rates and export incentives by the government of India.

B. Industry Structure and Developments

Indias textile sector has the second-largest employment, employing 32 million workers. It has the potential to double this employment in the next seven years as per the vision document (for 2024-25). It is a sector, which provides livelihoods to millions of households. It is also a storehouse of traditional skills, heritage, and a carrier of heritage and culture. The various policy documents of the Government have also highlighted the importance of textile sector with regard to generating formal and productive jobs, having potential for broader social transformation and generating exports and growth. This is also a sector, which is undergoing a huge churn due to automation, digital printing and the relentless rise of e-commerce. All these developments may completely change the face of this industry.

Terry towels form on integral part of the home-textile segment. The demand for terry towels varies across the countries depending upon various factors like population, demographics, living style, economic status and its climatic conditions. In India, terry fabrics are manufactured mainly in decentralized handloom and power looms sectors. Most of terry fabric centres are situated around Chennai, Panipat, and Sholapur. However, terry fabrics are also manufactured in organized sector. But, the volume of production of terry fabrics in organized sector is much lesser than that of the production in decentralized sector. Until last decade, only 10-15% of terry fabric production was produced in organized sector. We are one of the prominent terry towel manufacturers in organized sector. Most of the organized sector units are engaged in catering to market of export and high-quality segment of domestic market, which covers mainly of hospitals and leisure industry.

C. Opportunities and Threats and Future outlook

Global Economic Conditions

Global GDP grew by 3.8% in 2017 which was the fastest since 2011. The growth was higher in second half of the year which exceeded 4%. The said growth was primarily driven by improved conditions in U.S.A. Another reason is that commodity producers such as Russia, Brazil and Saudi Arabia which had been suffering from depressed prices benefitted from upswing in demand and prices.

 

Statistical source: IMF World Economic Outlook April 2018

U.S.A Economic Conditions

US consumer confidence index, employment population ratio, personal consumption expenditure and new home sales have been showing an improving trend. US retail sales have been at all time high of USD 4.99 trillion in 2017 and are expected to show a gradual growth over the next few years. Since the company is predominantly exporting its products to U.S.A, its fortunes are linked with the growth scenario in that country. The healthy US economic conditions and future outlook argues well for the growth of the company in the times to come.

Indian Economic scenario

The Indian economy witnessed a growth of 6.7% in FY 2018 and emerged as the fastest growing major economy in the world. With GDP growth averaging 7.3% between 2014-15 and 2017-18, India is emerging as one of the best performing economies of the world. Looking forward, the GDP growth is expected to be in the range of 7.5% in the next few years which is quite healthy. The Government has adopted favorable policies for textile industry in the country which is providing huge employment apart from generating huge foreign exchange earnings. The favorable policy framework of the Government for the textile sector is likely to provide a conducive atmosphere to the company.

Cotton Yarn

Cotton yarn is the main raw material for the products manufactured by the company. India is the largest producer of cotton as well as net exporter of cotton and cotton yarn. This gives a competitive edge to the Indian exporters of cotton products. The year started with high cotton prices of around Rs. 43,000-44,000 per candy and the domestic as well as international cotton prices continue to be at higher levels with occasional variations. So, this is a major challenge for the company and it is making all the efforts to pass on the cost to its buyers.

Foreign Exchange

Indias currency has faced considerable volatility for most part of the year vis-a-vis the US dollar. During the last 4 months the rupee has depreciated quite sharply and presently is trading in the range of Rs.70/- per dollar. This is a positive for exporting companies like us which has helped in partially off-setting cost escalations due to high cotton prices and rising prices of crude and its derivates. The company adopts the policy of partial hedging the currencies to achieve a balance between protection of forex earnings and taking the advantage of depreciating rupee.

GST and Export Incentives

In 2017, GST was introduced in the country which was a major change. Although in the initial months there were bottlenecks and disruptions but now the situation has normalized. The government has been very helpful in introducing liberal incentives in form of MEIS, ROSL, duty drawbacks and GST refund. On the net basis, the management feels that the company is in an advantageous position post introduction of GST as far export incentives are concerned.

D. Segment Reporting

The company has only one segment of activity namely-Terry Towels, in accordance with the definition of "Segment" as per the Accounting Standard 17 issued by the Institute of Chartered Accountants of India. The performance for the same has been discussed details in this report.

E. Risks and Concern

Indias share of textile exports in total exports (at 12%), is half of what it was in 1996. Bangladeshs garment exports exceeded Indias in absolute terms back in 2003 and today, it exports twice that of India. Even late starter Vietnam overtook India in 2011. Their growth in exports has been at 20% per year, against Indias 8%. In overall textile trade globally, India has a share of merely 5%, against Chinas 39%.

So, continuance of favorable textile policies by the Government of India to counter the global competition is utmost desirable. Volatility of exchange rate coupled with competitive currency war is another concern although the Indian rupee has traditionally been depreciating over the years which is a rather positive for the export of terry towel industry.

Very recently we have witnessed an era of trade wars initiated by US administration. Although, it is primarily targeted towards China, there is always a risk of India also being one of the targets.

Lastly, the vulnerability of the Indian economy to the risk of potential outflows and rise of crude remain a big macro risk. The worldwide unwinding of monetary easing coupled with the rise in interest rates is another area of concern.

F. Internal Control Systems and their Adequacy

The Company maintains adequate systems of internal controls to ensure that all assets are safeguarded against loss from unauthorized use or disposition. The Companys policies, procedures and guidelines are in place to ensure that all the transactions are authorized, recorded and reported correctly. The Company has an internal audit system commensurate to its size and the nature of its business. The Company also has adequate procedures for internal financial controls to detect and prevent frauds and to protect the Companys resources. The financial statements are prepared in accordance with the accounting standards issued by Institute of Chartered Accountants of India.

G. Financial and Operational Performance

During the year under review, revenue from operations increased from Rs. 81.51 Crore to Rs.88.32 Crore. However, the net profit after tax decreased from Rs.2.91 Crore to Rs.2.18 Crore indicating decline in profitability.

The increasing cost has been one of the main reasons for this decline in profits. During the financial year 2017-2018, the dollar also traded in the lower range below Rs.67/- which had a depressing effect on the export realizations. The rising trend of cotton yarn has also been responsible for decline in profitability. However, the balance sheet of the Company has been strengthened as the Company has ploughed back all the cash accruals. The promoters have also introduced new funds to augment the working capital of the Company. Accordingly, it has witnessed an all around improvement in the financial indicators namely net worth, debt equity ratio, net working capital current ratio.

In the current year, the Company has managed to capture new overseas buyers and a healthy jump in exports and profits is envisaged. Overall, the Company foresees a better future on operational and financial fronts.

H. Human Resources/Industrial Relations and Number of people employed during the year

The Company has always valued its human resources. It believes in unlimited potential of each of its staff. Its dedicated and efficient employees are great assets of the Company and most important ingredient for achieving excellence in performance. During the financial year, the overall industrial relations remained cordial in the Company.

I. Accounting Treatment

The financial statements have been prepared to comply with the Indian Accounting Standards (Ind-AS) including rules notified under the relevant provisions of the Companies Act, 2013.

Disclaimer

Readers are cautioned that this discussion and analysis contains certain forward looking statements. All these statements always have certain risks and uncertainties. Actual results could differ materially from those expressed or implied and the Company is not bound to publicly update or revise forwarding looking statements. Therefore, readers are cautioned not to place undue reliance on these forwarding looking statements.

Sd/- Sd/-
SUNEEL GUPTA SANGEETA GUPTA
Managing Director Whole Time Director Place: Gurugram
DIN-00052084 DIN-00052121 Date: May 29, 2018