brandhouse retails ltd Management discussions

Management Discussion And Analysis Report

ECONOMIC OVERVIEW:

Across the world in 2012 the economy remained a worry. Global Gross Domestic Product (GDP) fell to 3.2% compared to 4% in 2011. However, the global economy has shown a lot of resilience and there are strong positives. The global economy is now moving on to a surer recovery mode. The IMF projects growth at 3.25% in 2013, increasing to 4.0% in 2014. GDP growth in emerging markets and developing countries is placed at 5.3% in 2013, increasing to 5.7% in 2014.

Developments on the global front, besides the issues at home, undeniably dented Indias growth level.

Slow growth, investor diffidence, the rupee falling to an all-time low and power outages added to the countrys woes. Indias GDP growth slowed markedly in 2012-13 to 5%, down from 6.2% in the previous year. The manufacturing sector recorded a growth of only 1.9% in 2012-13, down from 2.7% in 2011-12. Export growth in 2012-13 was 5.1% compared to 15.3% in the previous year.

In FY 2013-14, GDP growth is projected to rise modestly to around 6% due to revival in consumption, with much of the improvement likely only in the second half of the year. Industrial activity will continue to be adversely affected by regulatory bottlenecks.

These developments affect your companys growth and performance.

INDIAN RETAIL SECTOR:

In 2012, Government permitted 51% Foreign Direct Investment in multi brand retail. 100% Foreign Direct Investment in single brand retail may be allowed to attract investment in this sector which would accelerate the economic growth.

Alongwith investment slowdown, India now faces a challenge of consumption-led slowdown. Consumption demand and consumption-related sectors have also been impacted by inflation and high interest rates. However, demand seems to be returning after a tepid start in the first half of this fiscal and may finally show a marginal uptick in the full year.

OPPORTUNITIES, GROWTH, THREATS AND CHALLENGES:

Despite the current gloomy outlook, India is the third largest market in the world in terms of purchasing power. The steady increase in spending with earnings is a strong source of opportunity. In the coming years, manufacturers and retailers of consumer goods can expect a major boost in consumption. Aggregation of demand that occurs due to urbanization helps a retailer in reaping the economies of scale.

With the relaxation of Foreign Direct Investment (FDI) policy in retail sector, many foreign investors are also showing keen interest to enter into the Indian market. To become a flourishing industry, the Indian retail sector has to attract leading Indian and foreign players to make substantial investments.

Some of the challenges the industry is facing and needs to overcome are:

• Shortage of skilled workforce prevails in the retail sector.

• Retail majors are under serious pressure to improve their supply chain systems and reach the levels of quality and service desired by customers.

• The lack of proper infrastructure and distribution channels in the country results in inefficient processes.

• Insufficient and inefficient power supply to organized retail outlets makes it difficult for the sector to grow.

• High cost of real estate.

• Unhealthy competition from unorganized sector.

COMPANYS RETAIL BUSINESS:

Reid & Taylor

Reid & Taylor (R&T) is Companys brand offering in the premium suiting and garment segment. R&T has approximately 24% of the market share for worsted suiting and fabrics and is rated amongst the top two brands for premium clothing.

Belmonte

Belmonte is Companys brand offering in the mid premium segment that offers fabrics as well as garments retailed by the Company through a pan-India network. Belmonte offers fabric, suiting and ready-to-wear clothing and is a brand ideal for consumers who are both fashion and value conscious. The brand is very popular and is fast catching up the fancy of the middle lever buyer.

Carmichael House

Carmichael House is the brand that offers premium and mid-premium home textiles by S. Kumars Nationwide Limited. The brand offers a complete range of high quality home textiles including bed linen, towels, duvet covers and upholstery.

Oviesse Joint Venture

The Companys joint venture with Oviesse S.p.A Italy under the name of Brandhouse Oviesse Limited, established in 2009, offering quality fashionable apparel for men, women and children at affordable prices under the brand "OVS" failed to take off, especially in a recessionary market and with very limited stores outlets. Additionally, the joint venture companys plans for local sourcing did not come off which put continued pressure on margins. The joint venture partners have reluctantly decided to discontinue the franchise agreement and the business operations. Negotiations are on with the erstwhile partners to sort out the financial and administrative issues to bring about a final closure.

OUTLOOK:

"Reid & Taylor" and "Belmonte" remain key contributors to the overall performance of the Company. With the vastly limited product range at the Companys disposal and the slowness in opening more outlets because of finance and other considerations, growth in sales turnover and earnings for the Company are dependent largely, on improving consumer sentiment and a continued demand growth. Hopefully as the economy turns for the better, the Company has the potential and ability to take advantage in the marketplace.

RISKS & CONCERN:

The Company considers good Corporate Governance as a pre-requisite for meeting the needs and aspirations of its shareholders and other stakeholders in the Company. As part of the Companys efforts to strengthen Corporate Governance, the Board of Directors have formulated Risk Management Policy, which puts in place a risk management structure with clear definition of roles and responsibilities, as well as a risk portfolio involving a continuous process of risk identification, risk assessment, control assessment and risk monitoring, review and communication. The Company aims to:

- Identify, assess and manage existing as well as new risks in a planned and coordinated manner.

- Increase the effectiveness of its internal and external reporting structure.

INTERNAL CONTROL SYSTEMS AND ADEQUACY:

The Company is adhering to a system of internal controls for financial reporting of transactions and compliance with relevant laws and regulations commensurate with its size and nature of business. The Company also has a well-defined process for ongoing management reporting, and periodic review of businesses so as to ensure alignment with strategic objectives.

The internal audit function is carried out partly by internal resources and the balance activity is outsourced to Chartered Accountant firms. As part of the effort to evaluate the effectiveness of the internal control systems, the Internal Audit department reviews the control measures on a periodic basis and recommends improvements, wherever appropriate. The Internal Audit department reports directly to the Audit Committee of the Board. The Audit Committee regularly reviews the audit findings as well as the adequacy and effectiveness of the internal control measures. Based on their recommendations, the Company has been implementing a number of control measures both in operational and accounting related areas, apart from security related measures.

FINANCIAL PERFORMANCE ANALYSIS:

Revenues

In the Financial Year 2012-13, your Companys revenues grew modestly by 4% to Rs. 814.86 crore due to improved store sales and better volumes achieved.

Expenditure

Total expenditure during the period under review, excluding interest, increased by 8.72% to Rs. 802.61 crore from Rs. 738.25 crore last year. Total expenditure has increased due to rise in cost of raw materials and Company has written off stores deposits.

During the year under review the Company is trying to use its resources in very optimum manner and to reduce and control the costs.

Interest Cost

Interest Cost for the financial year 2012-13 is higher at Rs. 39.62 crore as compared to Rs. 29.92 crore in the previous year due to enhancement in the rate of interest in general and payment of overdue interest etc.

EBIDTA & NET PROFIT/LOSS:

During the year under review, EBIDTA stood at Rs. 19.13 crore as compared to Rs. 55.06 crore in the previous year and the Company has incurred loss of Rs. 55.50 crore in comparison to profit Rs. 8.50 crore in the previous year due to lower profit margins, higher burden of interest, diminution in the value of investment and written off goodwill.

CAUTIONARY STATEMENT:

Statements made in this report in describing the Companys objectives, projections, estimates, expectations or predictions may be "forward-looking statements" within the meaning of applicable securities laws and regulations. Forward-looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realized by the Company. Actual results could differ materially from those expressed in the statement or implied due to the influence of external and internal factors, which are beyond the control of the Company. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements on the basis of any subsequent developments, information or events.