Cantabil Retail India Ltd Management Discussions.

STATEMENT

Statements in this Management Discussion and Analysis of Financial Condition and Results of Operations of the Company describing the Companys objectives, expectations or predictions may be forward looking 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. The Company assumes no responsibility to publicly amend, modify or revise forward looking statements, on the basis of any subsequent developments, information or events. Actual results may differ materially from those expressed in the statement. Important factors that could influence the Companys operations include changes in government regulations, tax laws, economic developments within the country and such other factors globally.

The following discussions on our financial condition and result of operations should be read together with our audited consolidated financial statements and the notes to these statements included in the annual report. Unless otherwise specified or the context otherwise requires, all references herein to "we", "us", "our", "the Company", "Cantabil" are to Cantabil Retail India.

ECONOMIC OVERVIEW

Global Industry

The Retail Industry was valued at USD 23,460 billion in 2017 and is expected to register a CAGR of 5.3% during the forecast period (2018-2023), to reach USD 31,880.8 billion by 2023. The retail market is mature and highly competitive in the developed economies of Europe and North America. On the other hand, the developing economies of Asia-Pacific, Middle East, and Latin America have been instrumental in driving the market growth. Consumer spending, which typically accounts for around two-thirds of the GDP, has been a key indicator of the health of the retail market. Moreover, the increasing strength of online shopping has been amajor driver. Apart from this, the growing smartphone penetration across countries is driving the e-commerce channel.

Asia is the new frontier for retailing. Given the vast potential in terms of population and economic growth, Asia is set to become the backbone of the worlds economy. The region will emerge as the global leader in production with 50% of the worlds production output originating in the region by 2025, according to Euromonitor International.

With these favorable factors, Asia Pacific will be driving the global retailing industrys growth through 2023 and beyond. China and India are the standout performers. According to Euromonitor International, China will account for 25% of the industrys sales growth over the next five years followed by the US (21%) and India (10%), respectively. For context, South Korea will be the fourth fastest growing country, but with only 4% of growth.

Predictably, 2019 was a year in transition. There was stability in the positioning of the top five retailers and a few notable bankruptcies. The emphasis on understanding what consumers really want continued to expand the gap between the leaders and everyone else who followed. For retailers, understanding how consumer expectations are evolving has never been more important, especially with the convergence of supply chain, digital technologies, and other innovations.

The world has changed dramatically in the last few months. The COVID-19 pandemic and subsequent lockdown that the world has seen has put pressure on all economies. According to the International Monetary Fund (IMF), there is huge uncertainty about 2020 growth prospects. Alongside, with lock-downs in place and many stores shuttered, ecommerce has surged. Adoption has accelerated from previously uninitiated users as well.

Source:https://www.businesswire.com/news/home/20190102005213/en/Global-31.88-Billion-Retail-Industry- Analysis-Outlook https://www.forbes.com/sites/michellegrant/2019/01/24/four-megatrends-reshaping-the-global-retailing-industry/#7e6012098c3a https://www2.deloitte.com/us/en/pages/consumer-business/articles/retail-distribution-industry-outlook.html

Indian Industry

E-commerce has been growing and expanding steadily across India. Customers now have ever-increasing choice of products at the lowest rates. E-commerce is probably creating the biggest revolution in the retail industry, and this trend would continue in the years to come. It is projected that by 2021 traditional retail will hold a major share of 75 per cent, organized retail share will reach 18 per cent and e-commerce retail share will reach 7 per cent of the total retail market. Nevertheless, the long-term outlook for the industry is positive, supported by rising incomes, favourable demographics, entry of foreign players, and increasing urbanization.

Indias apparel market is expected to be worth $59.3 billion in 2022, making it the sixth largest in the world, comparable to the United Kingdoms ($65 billion) and Germanys ($63.1 billion), according to data from McKinseys FashionScope. The aggregate income of the addressable population (individuals with more than $9,500 in annual income) is expected to triple between now and 2025. India remains a complex market that presents challenges as well as opportunities. The apparel business is still largely unorganized, with formal retail accounting for just 35 percent of sales in 2016. Its share is likely to reach around 45 percent by 2025still a relatively low proportion. E-commerce leaders are moving to solutions based on artificial intelligence.

With the outbreak of COVID-19, the overall growth projections for India have consequently changed.It could significantly alter new store roll out strategy for the industry. Several retail businesses are witnessing extended store closures, lower footfalls and lean demand. Industry growth for the next few years will therefore depend on the severity of the pandemic in the country. In FY 2020, the country has grown at a rate of 4.2% (Source: International Monetary Fund). E-Commerce has always been a focus area in the industry. The COVID-19 situation has further amplified the growing importance of this channel. Overall, the retail sector faces key threats in the form of economic headwinds such as GDP slowdown due to COVID-19, decreased rural spending and rising commodity prices as well as e-tailing, which have affected the growth of the brick and mortar businesses. Unexpected yet unavoidable situations such as the recent pandemic have also impacted the performance of the retail industry, as people remain indoors and mostly consume essential goods and services. Organisations serving in the industry thus will need to remain agile and adaptable to identify these threats and work towards their effective mitigation.

However, post the announcement of the nationwide lockdown and closure of non-essential operations, the retail sector has been severely affected. Even as businesses open up in the green zones, social distancing will restrict footfalls and sales at stores and malls in the ensuing months. The retail industry is estimated to require 9-12 months to recover amid the pandemic. The demand for non-essential retail is projected to open with 40% of the value noted in pre-COVID-19 times. The cost of business across non-essential sectors is likely to increase by 30-35% post lockdown. Moreover, the non-essential industry is hit hard, especially due to the overlap of the lockdown with the peak season from March to May.

The situation is still evolving, and uncertainties continue for all businesses and economy. The short-term outlook remains unpredictable as the spread of the pandemic is still being evaluated in the country, and next steps are being charted out as the situation progresses. However, the strong enablers that characterise the Indian economy a young working population, a stable government, rising competitiveness and improving index of ease of doing business are expected to re-conform the countrys long-term growth trajectory.

Indias Demographic Dividend

The demographic dividend of India is tilted in favor of the consuming age group. In contrast to the increasingly aged populations in the West, Japan, and even China, India is expected to become the worlds youngest emerging economy by 2020, with around 64% of its population in the working age group. This young consuming class has new aspirations and is more open to experimenting with fashion brands and modern designs. In addition to such a favorable age group, the Indian fashion retail market is expected to deal with a heterogeneous consumer group. The Indian fashion consumer has been traditionally heterogeneous as a result of income disparities, the influence of ethnic clothing, regional preferences, etc. But in recent times, heterogeneity in taste, choice, and preferences has increased substantially even within consumers in the same region and same ethnic group, belonging to the same income level and age range. The Indian consumer is now conscious about his/her personality and selects such fashion products as might suit his/her personality the best. As a consequence, exclusive ethnic wear brands are multiplying in a market which is also accepting western wear fashion items more readily.

Source: https://www.ibef.org/industry/retail-india.aspx https://www.mckinsey.com/industries/retail/our-insights/how-indias-ascent-could-change-the-fashion-industry http://www.technopak.com/Files/fashion-retail-scenario-in-india.pdf

About Cantabil Retail India

Established in 1989, Cantabil Retail India Ltd. is in the business of designing, manufacturing, branding and retailing of apparels and accessories. The Company started its garment manufacturing and retailing business in the year 2000 and opened the first Cantabil store in September 2000 in New Delhi.

Over the years, Company has established 1,50,000 sq. ft. state of art manufacturing facility in Bahadurgarh, Haryana with a capacity to produce 10.00 Lakh garment pcs. /p.a that makes Casual trousers, Formal trousers, Suits & jackets and Shirts. Along with this, the Company also has two dedicated production units and two warehouses to ensure seamless & timely Logistics of quality products. The production facilities are equipped with high quality machines from reputed companies like JUKI, Durkopp, Brother, Ngai Shing, Kansai, Pfaff, Maier, Siruba, Sako and latest finishing equipment using hot and cold steam foam finishers from Veit and Macpi.

The Company sells its products under the brands- Cantabil, Kaneston, Crozo and Lil Potatoes through 302 Exclusive Brand Outlets (EBOs) in 16 states which are either Company owned / lease and Franchisee managed, or Franchisee owned, and Franchisee managed. The Company believes in building strong client relationships by effectively delivering good quality products and acknowledging the changing customer demands.

FINANCIAL OVERVIEW

The performance of the Company for the financial year ended March 31st, 2020, is as follows:

Performance Highlights with IND-AS 116 for the full year ended March 31st, 2020:

Revenue from operations was at Rs. 338.04 crore in FY20 as against Rs. 288.55 crore in FY19 YoY growth of 17.15% mainly driven by sales from existing stores as well as addition of 61 stores on a net basis

• EBITDA (excluding other income) stood at Rs. 84.85 crore

• EBITDA Margin was 25.10%

• Profit After Tax was at Rs. 16.43 crore

• PAT Margin was 4.86%

• Basic EPS stood at Rs. 10.06

Performance Highlights W/O IND-AS 116 for the full year ended March 31st, 2020:

EBITDA (excluding other income) stood at Rs. 46.37 crore in FY20 as against Rs. 29.61 crore in the FY19 YoY growth of nearly 56.63% mainly on account of higher sales and better operational efficiencies

• EBITDA Margin was 13.72% in FY20 as against 10.26% in FY19, a jump of 346 bps

• Profit After Tax was at Rs. 22.88 crore in FY20 as against Rs. 12.50 crore in FY19 YoY growth of nearly 83.01% mainly on account of better EBITDA and higher operational leverage

• PAT Margin was 6.77% in FY20 as against 4.33% in FY19, a jump of 244 bps

• EPS stood at Rs. 14.01 in FY20 as against Rs. 7.66 for the corresponding previous year, YoY growth of 82.90%

RESOURCES AND LIQUIDITY

As on March 31, 2020, the net worth stood at Rs. 118.07 crore and the debt was at Rs. 35.99 crore. The cash and cash equivalents at the end of March 31, 2020 were Rs. 4.05 crore.

The net debt to equity ratio of the Company stood at 0.27 as on March 31, 2020.

Over the years we have seen steady growth in the number of stores and consequently our retail business area.

Financial Year No. of Stores
FY 2019-20 302
FY 2018-19 241
FY 2017-18 184
FY 2016-17 168
FY 2015-16 154

Segment wise Business Performance

The Company is operating in three broad segments i.e., Mens wear, Womens Wear and Kids Wear. The Company is into manufacturing of shirts, denims, trousers, business and party wear suits, t-shirts, woollen jackets, pullovers, shorts, jeggings, kurtis and accessories for men and women.

Revenue share of four broad segments are stated below:

Name and Description of main products / services % to total turnover of the Company
Mens Wear 85%
Womens Wear 11%
Kids Wear 1%
Accessories 3%

RISKS AND CONCERNS

Like every business, the company faces risks, both internal and external, in the undertaking of its day-to-day operations and in pursuit of its longer-term objectives. A detailed policy drawn up and dedicated risk workshops are conducted for each business vertical and key support functions wherein risks are identified, assessed, analyzed and accepted / mitigated to an acceptable level within the risk appetite of the organization. The risk registers are also reviewed from time to time.

The Company faces the following Risks and Concerns:

Credit Risk

To manage its credit exposure, Cantabil has determined a credit policy with credit limit requests and approval procedures. Company does its own research of clients financial health and project prospects before bidding for a project. Timely and rigorous process is followed up with clients for payments as per schedule. The company has suitably streamlined the process to develop a focused and aggressive receivables management system to ensure timely collections.

Interest Rate Risk

The Company has judiciously managed the debt-equity ratio. It has been using a mix of loans and internal cash accruals. The Company has well managed the working capital to reduce the overall interest cost.

Competition Risk

This risk arises from more players wanting a share in the same pie. Like in most other industries, opportunity brings with itself competition. We face different levels of competition in each segment, from domestic as well as multinational companies. The Company has created strong differentiations in project execution, quality and delivery which make it resilient to competition. Furthermore, the Company continues to invest in technology and its people to remain ahead of the curve. A strong, stable client base consisting of large and mid-sized corporations further helps to insulate the Company from this risk. We counter this risk with the quality of our infrastructure, our customer-centric approach and our ability to innovate customer specific solutions, focusing on pricing and aggressive marketing strategy, disciplined project executions, coupled with prudent financial and human resources management and better control over costs. Thus, we do not expect to be significantly affected by this risk.

Input Cost Risk

Our profitability and cost effectiveness may be affected due to change in the prices of raw materials, power and other input costs. Some of the risks that are potentially significant in nature and need careful monitoring are Raw Materials prices, availability of Power etc.

Liability Risk

This risk refers to our liability arising from any damage to equipment, life and third parties which may adversely affect our business. The Company attempts to mitigate this risk through contractual obligations and insurance policies.

Real Estate Risk

There is risk in effective management of store expansion and operations in newer locations/cities/states. Availability of commercially viable real estate properties at suitable locations for new stores, timely execution of sale deeds and license registrations and getting regulatory approvals for these properties.

OPPORTUNITIES

Changing consumer preferences and growing Industrial base

• With ever changing consumer needs and demands, today consumers are looking for a complete package with good quality product and design.

• With rising income and urbanization, consumers purchasing power.

Partner with Retail Outlets

• Partner with established retail outlets like Shoppers Stop, Lifestyle, Central, etc.

THREATS

• Competition from local and multinational players

• Execution risk

• Regulatory changes

• Input Cost risk

• Attraction and retention of human capital

• Technological Advancements

INTERNAL CONTROL SYSTEMS AND ADEQUACY

The Company implemented proper and adequate systems of internal control to ensure that all assets are safeguarded and protected against loss from any unauthorized use or disposition and all transactions are authorized, recorded and reported correctly. The Company also implemented effective systems for achieving highest level of efficiency in operations, to achieve optimum and effective utilization of resources, monitoring thereof and the compliance with provisions all laws including the Companies Act, 2013, Listing Agreement, directions issued by the Securities and Exchange Board of India, labour laws, tax laws etc. It also aimed at improvement in financial management, and investment policy. The System ensures appropriate information flow to facilitate effective monitoring. The internal audit system also ensures formation and implementation of corporate policies for financial reporting, accounting, information security, project appraisal, and corporate governance. A qualified and independent Audit Committee of the Board of Directors also reviews the internal control system and its impacts on improvement of overall performance of the Company.

The Company has put in place internal control systems and a structured internal audit process vested with the task of safeguarding the assets of the organization and ensuring reliability and accuracy of the accounting and other operational data. The internal audit department reports to the Audit Committee of the Board of Directors.

Similarly, the Company maintains a system of monthly review of the business as a key operational control, wherein the performance of units is reviewed and corrective action is initiated. The Company also have in place a capital expenditure control system for authorising spend on new assets and projects. Accountability is established for implementing the projects on time and within the approved budget.

The Audit Committee and the Senior Management Team are regularly apprised of the internal audit findings and regular updates are provided of the action taken on the internal audit reports. The Audit Committee reviews the quarterly, half yearly and the annual financial statements of the Company. A detailed note on the functioning of the Audit Committee and of the other committees of the Board forms part of the section on corporate governance in the Annual Report.

During the year, the Company carried out a detailed review of internal financial controls. The findings were satisfactory and suggestions for improvement have been taken up for implementation. Policy guidelines and Standard Operating Procedures (SOPs) continue to be updated where required, to keep pace with business requirements.

HUMAN RESOURCES

The Companys HR philosophy is to establish and build a high performing organization, where each individual is motivated to perform to the fullest capacity: to contribute to developing and achieving individual excellence and departmental objectives and continuously improve performance to realize the full potential of our personnel. As on March 31, 2020, Company is giving employment to 2225 permanent employees and 625 contractual employees. Industrial relations are cordial and satisfactory.

Employees are critical to our business. The Company internally assess its employees to periodically identify competency gaps and use development inputs (such as skill up gradation training) to address these gaps. The Company has implemented staff training policies and assessment procedures and intend to continue placing emphasis on attracting and retaining motivated employees.

The Company also plan to continue investing in training programmes and other resources that enhance employees skills and productivity which will continue to help our employees develop understanding of the customer-oriented corporate culture and service quality standards to enable them to continue to meet the customers changing needs and preferences.

Information Technology

Our deep understanding of local needs and our ability to adapt quickly to changing consumer preferences has helped our performance driven growth. Our robust IT systems have significantly aided this growth by simplifying complex processes throughout our operations.

Our IT systems are equipped with an array of data management tools specific to our business needs and support key aspects of our business. IT has enabled our cash management systems, in-store systems, logistics systems, human resources, project management, maintenance and other administrative functions. This implementation has contributed positively towards minimizing product shortage, pilferage, out of stock situations etc. and has increased overall operational efficiency.

Impact of COVID-19

COVID-19 PERSPECTIVE: CONSUMER TRENDS

• Discretionary spends witnessing either cutbacks or postponement of demand

• Health and wellness, at-home entertainment and essential categories witnessing most traction

• Spends in categories like beverages and food delivery witnessing mixed performance

• Panic buying inducing a stocking up and savings-first mind set

• E-commerce witnessing a clear surge, even in traditional categories

COVID-19 PERSPECTIVE: SUPPLY CHAIN IMPERATIVES

• Understand changing customer needs

• Focus product and service offerings ensuring alignment with key customers

• Divert resources to newer channels, products and services appropriately

• Actively communicate with suppliers, manufacturing partners and logistics vendors to minimize business disruption

• Implement product/service allocation processes to reduce constraints in the supply chain

• Understand liquidity and business position of key suppliers

• Assess viability of current investment roadmap and ensure cost discipline

COVID-19 PERSPECTIVE: STEPPING UP

Disruptions in supply chains and stringent social distancing norms have led retail businesses to rethink their ways of working and unravelling new opportunities. Stakeholders and the society at large will remember a companys behavior during the crisis. Businesses that demonstrate responsibility will establish trust and a truly differentiated position. Companies have stepped up to mitigate the impact of the crisis, while preparing for the post-COVID-19 new normal, in primarily three ways:

• Mobilising emergency response teams and ensuring business continuity through digital tools and omni-channel

• Prioritising employee health and welfare and utilising the downtime for up skilling and re-skilling

• Expediting collections and lowering discretionary spends and non-key short-term costs

The future of retail, thus, will involve a combination of human and digital. The convenience of ordering online in a safe and secure environment of your home and of setting up safe delivery systems will play equally important roles. Investments in omni-channel capabilities will be accorded high priority. Online consultations will hold greater appeal as customers will be able to connect with personal shoppers and stylists through simple video calls. Overall, the definition of usual in shopping as usual will see a lasting change.

 

Source: BostonConsulting Group research; CT Group research

During the last quarter of FY 2020, COVID-19 spread globally and in India. This had an impact on the business operations of the Company. The Company started preparations to respond to this crisis and implemented various precautionary measures at each workplace to ensure personal safety and business continuity such as temperature monitoring, frequent use of hand sanitisers, use of face masks, frequent sanitation of frequently touched surfaces etc. Corporate Office switched to working with much lower attendance and also enabled more than 50% key employees across the Company to a Work from Home set-up. This ensured continuity and constant ability to support the business.

The Company has not announced any lay-offs or salary cuts for our employees and provided Emergency Leaves to employees to take care of any health issues that they may face. The business also rapidly adopted the new guidelines announced by the Central Government and the local authorities that enabled shopping with adequate social distancing and other safety measures.The establishment of online platforms is expected to become indispensable for offline stores and onlineoffline service integration is expected to increase. Omni-channel will be the way to go with customer convenience becoming a top priority and key differentiator.

Our business operations faced several challenges including:

• Temporary store closure for operations due to local restrictions.

• Significantly reduced footfall at operational stores

• Reduced employee attendance due to local transport restrictions

• Temporary stoppage of all manufacturing activities

• Disruption in Supply Chain due to restricted manpower, transportation and material unavailability

OUTLOOK

India is increasingly becoming a focal point for the fashion industry, reflecting a rapidly growing middle class and an increasingly powerful manufacturing sector. These forces, together with growing tech savviness, makes India too important for the fashion business and industry. Ten years ago, technology was for the few, with just five million smartphones in a country of 1.2 billion people and only 45 million Internet users. These figures have since increased to 355 million and 460 million, respectively, in 2018, and they are expected to double by 2021, when more than 900 million Indian consumers will be online.

The Company has entered the e-commerce segment as well which forms to be an essential and integral part to sustain and maintain its position in this industry. The Company has registered and associated with most of the renowned and eminent portals like Myntra, Jabong, Amazon etc. and is looking forward to create better brand visibility through these portals and further add up to the topline to achieve the Companys goal to become a recognized and well-known Company in the industry.

To build momentum around conventional stores, Indian players are innovating: retailers are leveraging on technology to enhance the in-store experience with digital marketing displays and improved checkout. Cantabil has also done restructuring and renovations of all the old format stores to match the current experience expected by the customers. Along with this, theCompany is also enhancing its brand image by providing value for money products with increased focus on high quality. The Company intends to focus on building strong customer relationships to generate more and more repeat customers and has been working towards it by propagating new launches, seasonal collection and offers through social media. The Company also emphasizes on training and development of the store staff as to provide customers with superior experience.

The kids wear market in urban areas is gaining momentum and expected to grow progressively over the coming years. Cantabils kids wear brand Lil Potato is also anticipated to grow gradually year on year and targets to become one of the well-established brands in kids wear in India.

With developing business opportunity, the Company intends to open over 70 stores throughout the year and over 200 stores in the following three years. The Company is very much suited to take into account the foreseen growth and trends of the market.