Cheslind Textiles Ltd Management Discussions

Raw Material:

The Indian cotton balance sheet with close of cotton season 2012-13 has carry forward balance of 35 lakh Bales. The Global cotton balance sheet has carry forward balance of 1047 lakh Bales, thus while the scenario of cotton in India was not very comfortable in terms of carry forward balance, the global situation was not that alarming. The estimates for the crop for cotton season 2013-14 is 375 lakh Bales.

CTL has followed conservative norms of maintaining stock of cotton looking to fluctuation in the price and available working capital. It has worked with cotton stocks between 45 to 60 days. Looking to higher landed price for Shankar 6 Cotton, CTL took a conscious call for shifting to Karnataka and Maharashtra cottons. Looking to little high level of contamination in this cotton, contamination Sorter was added in blow room lines. With this the mixing costs for various final products have reduced and working is stabilised.

The trend of cotton price - Indian cotton and global cotton is as under:

Manufacturing:

As approved by CDR authorities, CAPEX of Rs. 5 Crores, as proposed was reviewed. With required changes this amount was decided to be spent in two parts. The first one involving CAPEX of approximately Rs. 3.20 Crores was taken up for adding Combers and Simplex Machines to improve the preparatory, so as to go for 100% production from combed cotton and with increase in carding production through various de-bottlenecking exercises to increase the ring frame production to the level of 26 MT per day (Project successfully completed in Q4 of the Financial Year 2012-13). The second one involving CAPEX of approximately Rs. 1.80 Crores was taken up for adding Carding Machines, Draw Frame, Conditioning Machines etc., for further increasing production from 26MT per day to 28MT per day (This project was successfully completed by June 2013).

In addition to above CAPEX proposals required certain modification, which are being done in the Humidification Systems so that with increased production the working conditions are maintained at required level. The shop floor team is gearing up to deliver production at increased levels as mentioned above.

Manpower:

With increase in production, manpower requirements have gone up and necessary steps have been taken for maintaining required on roll strength of workmen. Hostel facilities for workmen have been added to take care of additional requirement. Wage structure has been reviewed to keep in line with contemporary trends and for attracting the skilled work force. Looking to shortages of workers, male workers were recruited from other places. The training system is already in place and it is taking care about all new recruits and also for re-training for existing employees. With all these actions in place it is expected that CTL would be able to meet required manpower strength for achieving the increased production levels.

Marketing:

With increase in production as mentioned above, fine counts manufacturing has stopped and CTL has shifted to coarse counts. CTL is mainly focusing on Organic and Sustainable cotton products and now venture into BCI & Cleaner cotton yarn production. The Company has advantage of nomination by C&A and H&M, leading brands from Europe, for its products. These products give better price realisation and market positioning.

Marketing has delivered its call for additional production as above. During FY 13-14 the total order book is 9727 MT and total deliveries are 8910 MT.

Financial:

With CDR in place and earning cash profit, the financials of the company have been improving. The cash profits earned during period under review have been partially utilized for CAPEX as above, leaving balance for increase in net working capital requirement for enhanced working capital financing for the coming year.

Comparative understanding of the financial performance of the current year with that of the previous year is as follows:

Particulars	Year ended 31.03.14	Year ended 31.03.13 (12 Months)	Incr/(Decr) over previous year	Remarks
1. INCOME
Turnover (Net off excise duty & VAT)	26072	20115	5957	Production increase compared to previous year.
Other Income	321	188	133	Other Income- export incentives of SHIS and IEIS of Rs. 154lakhs, Sale FA-Rs. 34 lakhs, Foreign currency fluctuations Rs.74lakhs, M2M - Rs. 56lakhs etc.
Increase/(Decrease) in Stocks	209	52	157	Increase in stocks due to stock of finished goods at Port -123 MT.
TOTAL	26602	20355	6247
2. EXPENDITURE
Materials	16906	12025	4881	Raw material consumption increased due to increase in production, also increase in cotton price.
Operating and other Expenditure	7188	5975	1213	Expenses are higher due to increase in man power, increase in production, increase in wage rate and increase in power cost.
Financial Expenses	1473	1148	325	Finance expenses increased due to increase in Turnover.
TOTAL	25567	19148	6419
3. PROFIT/(LOSS) BEFORE DEPRECIATION	1035	1207	(172)
Depreciation	687	695	(8)	Depreciation has come down due to the age of machinery.
4. PROFIT/(LOSS) BEFORE TAX	348	512	(164)
Less: Income Tax	-	-	-
5. NET PROFIT/(LOSS) AFTER TAX	348	512	(164)

Certifications

All the certificates were renewed during the year on time and there is no major non compliance observed in any of the audits during the year.

The Company has following certifications:

• ISO 9001-2000 (QMS) issued by BUREAU VERITAS CERTIFICATION valid upto 10.08.2014.

• Oeko-Tex (Hazardous Chemicals) issued by Testex valid upto 31.05.2014

• Organic Certificates GOTS issued by Control Union Certifications valid upto 20.11.2014

• Organic Certificates OE 100 (Organic Exchange) issued by Control Union Certifications valid upto 20.11.2014.

Strengths, Weaknesses, Opportunities and Threats:

Strengths, Weaknesses, Opportunities and Threats for the Companys operations in particular are analysed below:

Strengths:

• Diversified product portfolio representing a wide range of cotton yarn products including value added products like Organic, Elite yarns, slub yarn, BCI yarn, Cleaner cotton yarns etc.

• Broad customer profile ranging across Europe, Far East, Turkey, Middle East and Indian Ocean and established presence with top end domestic fabric producers/end users.

• Rich experience and knowledge base acquired over the years to achieve the desired technical and quality specifications as required by specific customers in :

• Mixing of various types of cotton

• Running spinning machinery at variable speeds

• Processing of finished yarn

• Support from its parent company (RSWM Ltd.) and LNJ Bhilwara Group.

• Availing of wind power at competitive rate to take care of power shortage in Tamil Nadu.

Weaknesses:

• Scarcity of financial resources.

Opportunities:

• Increased consumer demand for high end and value added shirting finished products in the domestic market, inspite of low levels of consumer confidence worldwide.

• Growing demand from West for 100% organic, Sustainable cotton products and increasing cultivation of organic cotton/ BCI cotton etc.

• Growing demand from West for Fair Trade cotton and BCI cotton.

Threats:

• Government and Statutory policies on cotton and cotton made products like: MSP of cotton, duty structure, export incentives, control of export of cotton and cotton yarn etc.

• Erratic Power supplies from the Grid and unplanned power cuts can lead to production loss.

• Availability of skilled manpower because of possible migration to alternate sources of employment.

• Unstable market for cotton and yarn due to Global factors.

Overall Outlook

Company has recruited sufficient man power. To overcome the problem of Power, the Company has entered into long term wind power contracts with wind power generators. The market is quite stable compared to last year, the future outlook is promising.

Risks and Concerns

Your Company is aware that there are always inherent risks in any business operations. The Company comprehensively assess these risks and adopts prudent risk management strategies.

• Market related risks:

The Company operates in a highly competitive environment with many small and medium sized players. The cost of raw material i.e. cotton is the major portion of the total costs of the product. The prices of cotton are unpredictable and are dependent on various factors like: production across the globe, quality of production, stocks (quantity and quality), Government and statutory policies, support pricing, subsidies, trading etc. Any adverse movement in their prices can have a negative impact on the performance of the Company.

The budgeted sales plan for each financial year is arrived at the time of preparation of the Annual Budget based on internal marketing objectives coupled with available production facilities in order to maximise contribution levels. Marketing plans are further broken up territory/country wise, mix wise and product wise. Any change in the sales/marketing plan profile can significantly alter the production plan, which is fine tuned on a month to month basis in order to maximise contribution. Change in production plans related to market situation can also affect the raw material availability and procurement plans. Consequently, it is important to adhere to overall marketing plans as far as possible and any major deviation will lead to sub optimal utilisation of assets and will have its consequent impact on contribution.

The selling price of individual product is another market risk and cannot be forecast easily. The selling price is dependent on the supply and demand of the finished products at the point-of-sale, which is dependent on the consumer sentiments. In the event of fluctuations in selling prices, it becomes necessary to explore alternate products and markets to utilise the available production capacity without drop in contributions.

• Raw material procurement related risks:

Raw material procurement plans are directly derived from the variety wise requirements generated from monthly production plans. Some varieties need to be covered on longer time perspective like Indian long staple cotton. As discussed earlier, the prices of raw cotton are dependent on a host of reasons, some of which are controllable and predictable and some of which are not controllable and unpredictable. In such a situation, it is very difficult to predict price trends. There are compulsions to make bulk purchases of these varieties keeping in mind the lead times and seasonal availability. Consequently, a drop in selling prices during the business cycle for products manufactured from such raw materials, are exposed to loss in profitability.

• Forex Management:

All export and import activities are hedged as much as possible at contracted rate at which deals are confirmed within a reasonable time. No export order is kept open.

• Energy cost:

The Company is mainly drawing power from TNEB & PEB grid power. Thus during severe power shortages, there can be possibilities of power cuts, which results in production stoppages. The company has covered 80% of power requirement of Bagalur plant through wind power, however change in Tamil Nadu Govt policy about wind power, will affect the wind power cost and availability.

• Risk of Change in Government policies

Change in Government policies, fiscal measures and regulatory framework may have adverse impact on the profitability of the Company. Adopting suitable strategies depending upon the nature of change so as to retain the market share and profit margin could minimise adverse impact of change in Government policies and fiscal measures.

Internal Control Systems:

• The Company has suitable and adequate system of Internal Controls commensurating its size and nature of operations primarily to ensure that -

• the assets are safeguarded against loss from unauthorised use or disposition;

• the transactions are authorised, recorded and reported correctly and

• Code of conduct, Policies and applicable statutes are duly complied with.

• As a measure of Internal Control System, which has been evolved over the years, the Company has established a methodical system of Annual Budgeting and Management Information System (MIS). These Controls are exercised at all stages of operations viz., production, quality assurance, repairs and maintenance, utilities etc. In addition, Administrative and HR activities of the Company are also brought within this purview.

• The Company has appointed Internal Auditor to examine the adequacy, relevance and effectiveness of Internal Control Systems. The Top Management and the Audit Committee of the Board review the findings and recommendations of the internal auditor.

• The Company is conscious of importance of systems control and so continuously assesses the quality of integrated software package, which has been installed at various locations that provides information to the Management. The software package is regularly upgraded based on the needs to suit the management reporting system to provide quicker and qualitative information to the Management.

Continuous reporting of these systems is made to the Board and Audit Committee for their review to upgrade, revise and to focus on determination of adequacy of the Control Systems. The composition and role of Audit Committee can be found in the Corporate Governance Report in the Annual Report.

Environment and Safety

The Company is conscious of the importance of environmentally clean and safe operations. The Companys policy requires the conduct of all operations in such manner so as to ensure safety of all concerned, compliance of statutory and industrial requirements for environment protection and conservation of natural resources to the extent possible.

Human Resources

The Company puts emphasis on formal training and development programmes to operators and workers, as a core activity and provides continuous training, both internally and externally, for upgradation of employee skills.

Cautionary Statement

Comments in this Management Discussion and Analysis outlining the Companys strategies and objectives are believed by the Management to be true and to the best of its knowledge at the time of preparation. Actual results may differ materially from those expressed or implied and hence the Company and the Management shall not be held responsible for any loss which may arise as a result of any action taken on the basis of information contained herein.