Century Textiles & Industries Ltd Management Discussions.

This report covers the operations and financial performance of the Company for the year ended 31st March, 2019 and forms part of the Annual Report.

1. Overall Review:

During the year under review, earnings before interest, tax and depreciation (EBITDA) of the Company have shown considerable growth as compared to the previous year with respect to its continuing operations i.e. Pulp & Paper, Textiles and Real Estates. Pulp & Paper and Real Estates Divisions have primarily contributed to this growth. The performance of the Textiles Division has also improved marginally, despite various headwinds during the year. Working and operational parameters at all the plants of the Company were satisfactory.

It is heartening to mention that the Companys first ever residential project at Kalyan viz. Birla Vanya, has been launched in the first week of April, 2019 which has received a good response from the customers, with 80% of launched inventory sold.

The Board of Directors of the Company at its meeting held on 20th May, 2018 approved a Scheme of Arrangement between the Company, UltraTech Cement Ltd. (UltraTech) and their Shareholders & Creditors ("Scheme") for demerger of its Cement Divisions and merger into UltraTech. Further, the shareholders of the Company at its meeting held on 24th October, 2018 have also approved the aforesaid Scheme of demerger of its Cement Divisions. Accordingly, the Cement business has been shown as discontinued operations in the financial statements. The matter of demerger is with National Company Law Tribunal at Mumbai and it is expected that the full process of demerger will be completed in the first quarter of the financial year 2019-20.

During the financial year 2017-18, the Company had recognized the sale of its Yarn and Denim units (Y&D units) (included in the textile segment). Pursuant to the objections raised in the Court, against the transaction by the workers of the Y&D units, during the year, the Company has terminated the Business Transfer Agreement and has taken back possession of the Y&D units. The Company is exploring various alternatives for disposal of the units. Accordingly, the assets and liabilities of the Y&D units are classified as assets held for disposal and the operations have been classified as discontinued operations.

2.1 Business Segment – Textiles (Cotton Textiles):

(a) Industry Structure and Development:

The Textile Industry overall, is going through tough times due to the structural transformation after GST and due to the weak market position in the Domestic as well as overseas markets. E-Commerce/On-line sales are growing with reputed brands retailers. That coupled with low cotton production and increasing prices, is putting pressure on prices and margins.

(b) Opportunities and Threats

Chinas rising manufacturing cost and shifting of focus from exports to its own growing domestic consumption will offer an opportunity for the Indian textiles sector to grab the market share of China in the developed world, especially the European countries and the United States, which cumulatively comprise around 60 percent of the global export market.

Retaliatory tariffs between China and USA is bound to have a ripple effect on other nations economies. With this move, the USAs domestic market will become costlier and at the same time Chinese Garment factories will lose business. But the competition will rise in other markets. However, this is a good opportunity for India to cater to the US market. The conclusion of the much-awaited Indo-EU FTA will open up new opportunities for exports. However, its delay is certainly restricting export of textiles to the EU, as competing nations like Pakistan and Bangladesh enjoy the duty benefit of 6% to 8% as against Indian Products.

The increase in export benefits announced in March, 2019 in Made-ups will give relief to exporters in times to come. The World, including the advanced countries, are becoming increasingly inward-looking and resorting to protectionist measures, thereby, putting multilateral system of trading at risk. This could pose a serious challenge in the export markets. The duty free import of fabrics from China into Bangladesh and in return the Garments are being imported duty free into India from Bangladesh is hitting hard the Indian Textile Industry.

(c) Segmental Review and Analysis:

The Financial Performance of our textile unit in Bharuch has been affected by the slow down in the retail markets and the margins have been under pressure due to the liquidity crunch in the unorganized sector, who are affected during this fiscal because of higher compliance cost, eroding market share and limited ability to pass on the increase in raw material prices. Birla Century (BCJ) will be focusing on out to out business and approaching directly the International and Domestic Brands for better realization and also spreading Over the Counter/Ready to Stitch (OTC/RTS) business Pan India with a deeper penetration to the 2-tier and 3-tier cities with a large distribution network.

BCJ as a textile manufacturing composite unit started the brand building process to encash accreditation of LEED certification, Made in Green (MIG) Tag, Fair Trade and Global Organic Textile Standard (GOTS) certification. Further, it got approved for Inditex business (Brand Zara) in its very first audit and the 2nd stage environmental audit is in progress right now. We also cleared the ECP audit for Marks and Spencer (M&S) which is very fundamental requirement of M&S for business initiation under sustainable development. This will help to develop business directly with brands & retailers in the coming days.

(d) Risks and Concerns:

Due to the cash crunch and weak demand in the Indian and Export markets, it is difficult to pass on the cost to end customers, hence the margins are under pressure. Further, globally consumer shifting preference from cotton fibre to man-made fibre, which are available at lower prices, is also putting pressure on prices.

(e) Outlook:

We are in the process of restructuring the customer & product portfolios to focus more on direct exports catering to International Brands. To boost export of its Textile products, the Company has incorporated a Wholly Owned Subsidiary viz. Birla Century Exports Pvt. Ltd. in November, 2018. Further, to expand our reach in the US market and to have increased margins, we have incorporated a Limited Liability Corporation in the USA to have direct business relations with local players in the USA. The Company is also working on OTS/RTS business in India which will help to increase margins.

2.2 Business Segment – Cement (Cement & Clinker):

(a) Industry Structure and Development:

India is the second largest producer of cement in the world after China. The total installed capacity in India is approximately 472 million tonnes against China, which has crossed 2300 million tonnes.

Historically, cement demand growth had been higher than the GDP growth of the country. However between FY13-FY17, cement growth was slower than the GDP growth which in turn put a strain on the capacity utilization levels. FY18 saw a positive correlation with cement growth surpassing GDP growth and this positive correlation is expected to continue in the coming years. Cement production in India is 337 million tonnes in FY 2018-19 as compared to 298 million tonnes in FY 2017-18, witnessing a growth of 13% on a year on year basis. Major growth contributors have been infrastructure and low cost housing.

The Indian cement industry has absorbed the impact of demonetization, sand shortage issues, transitional issues related to implementation of the Real Estate (Regulation and Development) Act (RERA) and introduction of Goods and Services Tax (GST) in FY 2017-18 and has shown steady growth in FY 2018-19. The capacity utilization is expected to increase by approximately 3% in FY 18-19.

The country has immense potential for growth in the construction and infrastructure sector and the cement industry is expected to benefit from the same. Various government initiatives like smart cities, affordable housing and road/freight corridors are expected to provide a major boost to the sector.

(b) Opportunities and Threats:

The per capita consumption of cement in India is very low at around 210 kg compared to the world average of about 580 kg. Given the current state, wherein the per capita cement consumption is far below the world average, there is a substantial potential for growth.

The housing sector, which is the biggest contributor to demand with a 65% share, is expected to grow by 9%, led by the rural segment and cheaper availability of funds under the Credit Linked Saving Schemes (CLSS) targeted towards economically weaker segments and low income groups. The infrastructure sector which contributes about 15-20% to the countrys consumption is expected to show a growth of 15%, propelled by development of road infrastructure, national highways, metros and rail corridors.

(c) Segmental Review and Analysis:

As mentioned in the Overall Review under para No. 1 above, a scheme of demerger of Companys cement business is pending with National Company Law Tribunal at Mumbai for its approval.

During FY 2018-19, our cement division manufactured 10.91 million tonnes of cement as compared to 9.93 million tonnes in the previous year.

Despite the pressure from increase in input costs, mainly from power and fuel, the division has been able to improve its performance by delivering higher profitability. This was enabled by rich dividends yielded from its brand building exercises, enhanced productivity measures implemented across the organization and smart buying. Concerted efforts were made throughout the year to contain the variable cost per bag along with higher realizations from the market. Numerous initiatives on the procurement front, enabled the Company to moderate the impact of increasing input costs.

The Company continues to focus on optimizing costs and improving operational efficiency.

(d) Risks and Concerns:

The Indian cement industry continues to grapple with lower capacity utilization while operating at a level of about 71%, though the utilization has improved by about 3% over the previous year. Higher operating costs like power, freight and fuel have been putting increasing pressure on the margins. Cement companies have been facing challenges in the endeavour to pass on the increased input costs to the consumers.

(e) Outlook:

Cement industry is poised for steady growth, backed by housing and infrastructure development. Rural India is expected to have higher disposable income resulting in improved cement consumption. The continued focus by the government on initiatives like; Housing for all, Pradhan Mantri Awas Yozana, road projects, freight corridors, smart cities, metros and port development, will further add to the overall cement demand. Also the change in GST rates in the real estate sector is likely to have a positive impact on real estate development.

2.3 Business Segment –Pulp and Paper (Pulp, Writing & Printing Paper, Tissue Paper and Multilayer Packaging Board):

(a) Industry Structure & Development:

Globally, the paper industry is one of the oldest manufacturing sectors and paper being a commodity, this industry has a strong co-relation with the domestic as well as global socio-economic factors. Hence, Imports or Exports play a key role in fulfilling short-term dis-equilibrium between the demand-supply in the domestic and global market.

India being one of the fastest growing economies in the world, the demand for paper is expected to continue to grow in some form or the other. However, paper being a capital intensive industry, consolidation in the domestic market is expected to continue.

(b) Opportunities and Threats:

In the recent past, with the ban on plastic by various State Governments, the demand for packaging food paper products has grown. Century Pulp & Paper has a basket of paper products and is therefore in a position to benefit from such opportunity. The Governments continuous focus on education will also result into a positive demand for paper products.

Availability of low cost pulp and paper products from China and ASEAN (Association of South East Asian Nations) countries, in both Indian and International markets where Century competes in, is a matter of concern. However, efforts are being made constantly to improve the Divisions competitiveness in these markets.

(c) Segmental Review and Analysis:

With an endeavour to excel, Century Pulp & Paper Division (CPP) continued to improve its operational as well as financial performance in the year under review.

During the last quarter of the year, CPP had a major planned Plant shut of 45 days. This resulted, in a partial slowdown in some of the production lines. However, during the year under review, CPP has achieved a Y-o-Y growth of 6% and 20% on sales volume and sales revenue, respectively.

With increased demand for value added products and an improved order booking position, in future, we are hopeful of having further improvement in the business.

(d) Risks and Concerns:

Availability of wood and uninterrupted coal supply remain a major concern for the Indian paper industry. Supply of bagasse is also getting adversely affected, as other industrial usage of bagasse is now found to be more lucrative.

Volatility in the Rupee-Dollar rate, creates a short-term dis-equilibrium between demand-supply in the domestic market.

(e) Outlook:

Medium to long-term outlook of the Indian paper industry looks strong and is expected to grow in line with the countrys economy.

2.4 Business Segment – Real Estate:

(a) Industry Structure and Development:

India is one of the fastest growing economies of the world. The real estate sector contributed about 6-7% of Indias GDP in 2017 and is expected to touch $1 trillion by 2030.

Indias ranking on the Global Real Estate Transparency Index moved up to 35 over the last two years and ease of doing business improved to 100th in the World Banks scale of countries. The countrys positive image in the global economy is attracting significant capital inflows.

The fundamental growth drivers of the real estate industry are rapid urbanisation, rising household incomes and the growing economy, coupled with favourable government thrust, through policy and regulatory measures. These are collectively driving demand for residential, commercial and retail space across urban centres in India.

The sector is witnessing a series of fundamental reforms on the regulatory and macroeconomic fronts such as implementation of the Real Estate (Regulation and Development) Act, establishing State Level Real Estate Regulatory Authorities (RERA), implementation of a low interest rate regime, as well as the introduction of the Goods and Services Tax.

These led to a temporary slowdown in the residential real estate absorption across most major cities in the country since 2016. As the sector stabilised after the fundamental, structural and regulatory changes, residential real estate absorption witnessed a revival in 2018. There was a resurgence in sales across top seven cities (Delhi NCR, Bengaluru, Mumbai, Kolkata,

Chennai, Hyderabad and Pune) with nearly 136,500 units being sold during 2018 compared to less than a lac units sold in 2017. There has been a rise in housing prices by 3% across top 7 cities and a reduction in residential inventory overhang from 43 months to 36 months year-on year.

(b) Opportunities and Threats:

Over the last few years, the real estate sector in India witnessed a series of regulatory reforms aimed at driving transparency, governance, financial discipline and regulation and large corporate and organised players are fast gaining market share across the major cities. Your Companys brand, strong balance sheet and financial strength, position us to capitalise on this huge opportunity.

Indias first Real Estate Investment Trust (REIT) was launched in March 2019 and was oversubscribed. This is a very encouraging development for the real estate sector, as it provides an avenue for developers to raise growth capital by monetising their existing properties.

The Government has taken an aggressive stance to promote affordable housing in the country. Initiatives such as Smart City Project, Pradhan Mantri Awas Yojana (PMAY), creation of National Urban Housing fund, by the Government have given a boost to this segment. Moreover, the GST on affordable houses was lowered from 12% to 8% (on the value of under construction properties). The same was reduced to 1% from 1st April, 2019. However, to make projects truly viable in the affordable segment, there needs to be focus on land availability (with adequate connectivity and social infrastructure) and faster approvals through a single window clearance. Your Company will continue to evaluate the different opportunities that emerge in this segment, and may foray into this space in the future when the timing is right.

In the first half of FY 2019, default by a leading NBFC in scheduled payments lead to a liquidity squeeze and hence, the NBFC sector witnessed a reduced flow of credit to address the asset liability mismatch, affecting availability of funds to the corporate sector, including real estate. However, efforts by the Central bank to provide liquidity to NBFCs through banks is expected to soothe concerns.

(c) Segmental Review Analysis:

The landmark commercial projects Birla Aurora and Birla Centurion are fully leased out. During the year, your Company received the final approvals for its first ever residential launch at Kalyan (named Birla Vanya). Birla Vanya was registered with the Maharashtra Real Estate Regulatory Authority (MahaRERA), following which, market activation was undertaken for the launch of the project. The project has received good response from customers which was launched in the first week of April 2019.

The team is undertaking the design for the Worli project and is now awaiting clarity on Development Control Regulations (DCR) applicable to the Project.

(d) Risks and Concerns:

Unfavourable changes in government policies and the regulatory environment can adversely impact the sectors performance. The sector faces substantial procedural delays with regards to land acquisition, land use, project launches and construction approvals. Retrospective policy changes and regulatory bottlenecks may impact profitability and affect the sectors attractiveness and companies operating within the sector.

Besides these, rising costs of manpower and construction as well as availability of skilled labour and manpower are other challenges that operators in the sector grapple with on an ongoing basis.

(e) Outlook:

Post implementation of The Real Estate (Regulation and Development) Act, 2016 (RERA), and post GST changes, your Company expects that the consolidation that has been witnessed in the sector will continue. The residential real estate space has witnessed an improvement in absorption compared to the last year and the trend is expected to continue, with a larger share of the market coming from the organised and corporate players. Your Company is confident of capitalising on the immense growth opportunities in this space and shall continue to focus on establishing its presence in key focus markets of NCR, Bengaluru, Mumbai and Pune.

3. Internal control systems and their adequacy:

The Company has a well-established framework of internal controls in all areas of its operations, including suitable monitoring procedures and competent personnel. In addition to statutory audit, the financial controls of the Company at various locations are reviewed by the Internal Auditors, who report their findings to the Audit Committee of the Board. The Audit Committee is headed by an Independent Director and this ensures independence of functions and transparency of the process of supervision. The Committee meets on a regular basis to review the progress of the internal audit initiatives, significant audit observations and planning and implementation of the follow-up action required. The Company conducts its business with integrity and high standards of ethical behaviour and in compliance with the all applicable laws and regulations that govern its business.

4 (a) Highlights of the Companys Financial Performance:

Particulars Consolidated Standalone
2018-19 2017-18 2018-19 2017-18
1. Revenue from Operations 3940.53 3946.92 3940.53 3946.92
2. Earnings before finance cost, tax, depreciation and Amortization (EBITDA) 1047.49 851.18 1060.19 851.18
3. Less: Finance Cost 95.89 211.81 95.89 211.81
4. Profit before depreciation, amortisation and taxation 951.90 639.37 964.30 639.37
5. Less: Depreciation and amortization 193.00 199.31 193.00 199.31
6. Profit before taxation 758.90 440.06 771.30 440.06
7. Less: Deferred Tax Debit 264.30 160.56 264.30 160.56
8. Profit after tax from continuing operations 494.60 279.50 507.00 279.50
9. Add: Profit after tax from discontinued operations 174.07 92.16 174.07 92.16
10. Net Profit for the year 668.67 371.66 681.07 371.66

Consolidated EBITDA for the year at Rs 1047.49 crores is up by 23.06%. Standalone EBITDA for the year at Rs 1060.19 crores is up by 24.56%. Consolidated EBITDA margin rose from 21.57% to 26.58%. Standalone EBITDA margin rose from 21.57% to 26.90%. Interest cost has gone down from Rs 211.81 crores to Rs 95.89 crores. For the Company as a whole, the technical performance of all the plants has been satisfactory.

(b) Details of significant changes (i.e. change as compared to immediate previous financial year) in key financial ratios:

Ratios 2018-19 (%) 2017-18 (%) Change (%)
Debtors Turnover Ratio 18.90 17.70 7%
Inventory Turnover Ratio 2.17 1.94 12%
Interest Coverage Ratio 4.50 3.00 50%
Current Ratio 0.56 0.58 -3%
Debt Equity Ratio 1.07 1.59 -33%
Operating Profit Margin % 20.02 16.56 21%
Net Profit Margin % 8.03 4.54 77%
Return on Net Worth 20.30 13.53 50%

Positive changes in key financial ratio are due to robust performance of the company leading to Cash profits used for reduction of debts & consequently interest on it.

(c) Return on Net Worth during the year is 20.30% as compared to 13.53% in the previous year.

5 . Human Resource Development/Industrial Relations:

The total number of employees as on 31st March, 2019 was 7759 (6928 as on 31st March, 2018). Number of employees increased due to termination of Business Transfer Agreement for Yarn and Denim units (Y & D units) and possession of Y & D units taken back by the Company. The industrial relations in all units of the Company continue to be cordial. Your Company believes that its employees are its core strength and development of people is a key priority for the organization to drive business objectives and goals. Robust HR policies are in place which enables building a stronger performance culture.

6. Health and Safety Measures:

As a conscientious and caring employer, the Company actively pursues safety and health measures continuously. We believe in good health of our employees. Modern occupational health and medical services are accessible to all employees through well-equipped occupational health centres at all manufacturing units.

The Company has always considered safety as one of its key focus areas and strives to make continuous improvement on this front. The Company is committed to complying with all relevant regulations and ensure safer plants by conducting safety audits, risk assessments and periodic safety awareness campaigns and training to employees.

7. Cautionary Statement:

Statements in this report on Management Discussion and Analysis, describing the Companys objectives, projections, estimates, expectations or predictions may be forward looking, considering the applicable laws and regulations. These statements are based on certain assumptions and expectation of future events. Actual results could, however, differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include finished goods prices, raw materials costs and availability, global and domestic demand-supply conditions, fluctuations in exchange rates, changes in Government regulations and tax structure, economic developments within India and the countries with which the Company has business contacts. The Company assumes no responsibility in respect of the forward looking statements herein, which may undergo changes in future on the basis of subsequent developments, information or events.