Damodar Industries Ltd Management Discussions

Global Economy Overview:

The global economy exhibited impressive resilience in 2023; however, the pace of growth remained slow. According to the International Monetary Fund (IMF), the global economy achieved a modest growth rate of 3.2% in 2023. Factors such as escalating geopolitical conflicts, higher inflation, prolonged higher interest rates, a sluggish recovery in China, and volatility in energy prices and food markets, have led to a slowdown in global economic growth. Furthermore, the Red Sea crisis has caused the biggest diversion of global trade in decades, leading to delays and heightened expenses for shipping lines.

Positive factors such as ongoing disinflationary trends and strong economic performance in the United States and several major emerging markets and developing economies indicate signs of stable growth and a reduced likelihood of a severe economic downturn. The US has witnessed the strongest recovery among major economies. Its GDP increased from 1.9% in 2022 to 2.5% in 2023, supported by a stronger performance in private consumption, swift containment of a looming banking crisis, a tight labour market, and rising wages. Despite experiencing a contraction in GDP growth of 0.4% in 2023, the Euro Area managed to avert recession and has shown fortitude in navigating through unprecedented shocks from the ongoing Russia- Ukraine war, surge in energy prices and the lingering effects of tight monetary policy.

Global inflation continues to recede at a faster pace from 8.7% in 2022 to 6.8% in 2023. While headline inflation has sustained a decline from its unprecedented peaks, core inflation has proven to be sticky and is expected to decline gradually. Advanced economies are returning to their inflation targets sooner than emerging market and developing economies, fostering optimism for continued easing of financial conditions and improvement of monetary policy frameworks.

The global economy is expected to maintain its resilience in 2024, with the IMF projecting a growth rate of 3.2% for both 2024 and 2025. Advanced Economies (AEs) are projected to witness a modest uptick in growth from 1.6% in 2023 to 1.7% in 2024 and 1.8% in 2025. Emerging Markets and Developing Economies (EMDEs) are expected to experience a slight decline from 4.3% in 2023 to 4.2% in 2024 and 2025. Global headline inflation is expected to decrease to 5.9% in 2024 and 4.5% in 2025. With the improvement in the economic landscape, the World Trade Organisation predicts a moderate recovery in global merchandise trade volume, with growth rates expected to reach 2.6% in 2024 and further increase to 3.3% in 2025.

Indian economy overview:

Amid a volatile global economic landscape, India shines as a beacon of stability. The Indian economy maintained a steady growth trajectory, solidifying its position as the fifth- largest economy in the world. According to the provisional estimates of gross domestic product (GDP) growth released by the National Statistical Office (NSO), Indias GDP growth rate has exceeded the second advance estimate and is estimated to reach 8.2% in FY 2023-24 compared to 7.0% in FY 2022-23. The fourth quarter of FY 2023-24 witnessed a robust growth rate of 7.8% Y-o-Y due to strong performance in the manufacturing sector. The overall economic growth was supported by strong domestic demand, increased investment, moderate inflation and a stable interest rate environment.

Indias per capita GDP in current prices is estimated at 2.11 lakh in FY 2023-24, achieving healthy growth of 8.6%. Rising levels of disposable income have led to an upswing in household consumption, stimulating demand across sectors. The growth observed in the Index of Industrial Production (IIP), Goods & Services Tax (GST) collections, manufacturing Purchasing Managers Index (PMI), per capita income, and increasing private capital expenditure collectively signifies strong economic momentum. Furthermore, headline inflation softened to 5.4% during FY 2023-24 from 6.7% in the previous year. However, volatile food prices hinder the trajectory of disinflation. The RBI opted to maintain the policy repo rate at 6.50% and remain vigilant to take effective measures to achieve the target of 4% inflation.

Indias economic outlook remains promising, with the IMF projecting a GDP growth rate of 6.8% in FY 2024 -25 and 6.5% in FY 2025-26. The economy is poised to benefit from the demographic dividend, increased capital expenditure, proactive government policies, robust consumer demand, and improving rural consumption prospects. As headline inflation eases towards the target, it is expected to stimulate consumption demand, especially in rural areas.

The governments continued emphasis on capital expenditure, and fiscal consolidation efforts, coupled with growing consumer and business optimism augur well for investment and consumption demand. Key government initiatives such as ‘Make in India 2.0, Ease of Doing Business and PLI scheme are poised to bolster the infrastructural and manufacturing base, enhance economies of scale, boost exports and position India as a global manufacturing hub. Furthermore, the Interim Budget 2024-25 outlines a comprehensive economic management strategy, including infrastructure development, digital public infrastructure, taxation reforms, and proactive inflation management. These measures lay the foundation for achieving the vision of a developed and self-reliant India by 2047.

Overview, Industry Structure & Developments, Outlook:

The textile and apparel industry contributes 2.3% to the countrys GDP. The Indian textile and apparel market size is valued at approximately US$ 165 billion in FY 2022-23, with the domestic market contributing ~76% to the market size and exports accounting for the remaining 24%. The market is projected to grow at a 10% CAGR to reach US$ 250 billion by FY 2030-31, driven by sustained growth in domestic demand and significant export potential. The industry witnessed several challenges in FY 2023-24, including fluctuating raw material prices, reduced demand, capacity under-utilisation, and the influx of imported fabrics and garments from China and Bangladesh. Additionally, sluggish demand persisted in major garment-importing countries for an extended period, significantly impacting exports. Indias textile exports declined by ~3% compared to the previous fiscal year, reaching US$ 34.4 billion in FY 2023-24. Within the textile sector, the segment encompassing cotton yarn, fabrics, made-ups, and handloom products witnessed a notable Y-o-Y increase in exports by US$ 740 million in FY 2023-24 over the previous year, due to a surge in cotton yarn exports. The segment of readymade garments, comprising 42% of total textile exports, experienced a 10% decline in FY 2023-24 compared to the previous year. Indias textile export performance was adversely affected by unfavorable economic conditions in Western markets, geopolitical tensions, inflation, and increased sea and air freight charges. The ongoing Red Sea crisis has notably contributed to a substantial rise in logistics expenses. According to CRISIL research, the domestic textile industry is on a path to recovery. Growth is expected to revive, supported by sustained domestic demand, stability in cotton prices, and export recovery. Additionally, it is anticipated that orders from major US retailers will rise as the backlog of inventory from FY 2022-23 diminishes due to improvements in global supply chain challenges and a gradual sales recovery.

Indias competitiveness is expected to improve in the medium term due to positive developments, such as free trade agreements (FTA) with the UK and the establishment of textile parks under the PM MITRA scheme and Scheme for Integrated Textile Park (SITP), further supported by conducive government initiatives. From allowing 100% FDI in the Indian textile sector to initiating various schemes, the government aims for comprehensive improvement within the textile industry, bolstering domestic manufacturing capabilities, and boosting exports in the textiles and apparel sector.

Opportunities:

The growing disposable income and a burgeoning middle class have led to changing consumer preferences and rising demand for high-quality textile and apparels. E-commerce expansion and meteoric rise of the retail sector are contributing to the growth of the industry.

There is a growing demand for environmentally friendly and sustainable textiles and garments as consumers are increasingly concerned about the environmental impact of textiles and are demanding more sustainable options. Comprehensive Economic Partnership Agreements (CEPAs) and Free Trade Agreements (FTAs) with various countries are poised to boost exports of Indian textiles and open up new markets for the sector. The trade diversification policy presents an opportunity for the Indian textile and apparel industry, as global companies are seeking to diversify their production and sourcing activities away from China. India is well-positioned to capitalize on this trend, capture a considerable share of this global shift and establish itself as a global manufacturing hub. The PM MITRA Parks across seven states in India would attract large investments, including FDI in the textile sector, generate huge employment and create an integrated textiles value chain. The rapid penetration of digital technology and social media influence is providing consumers with extensive access to fashion trends, styles, and brands. This shift in consumer behavior creates opportunities for branded textiles to cater to evolving consumer preferences.

Challenges

Fluctuations in raw material prices and the high cost of energy and transportation pose significant challenges for the industry players, as increasing prices exert pressure on margins.

Consumer demand for textiles and apparel may falter amid high inflation and economic slowdown in key markets. Sluggish demand in the international and domestic markets may lead to high inventories, low production and a decline in exports. The textile industry in India is highly capital-intensive, which impacts its competitiveness in the global market. Increasing competition from textile manufacturing hubs in countries, like Bangladesh, Vietnam, Indonesia and China will pose a threat to Indias textile and apparel exports. Furthermore, the industry faces stiff competition from international retailers and fashion brands. Rising labour costs, the shortage of skilled labour and overreliance on labour-intensive technologies may impact the operations. Stringent environmental norms and regulations may impact operations and profitability. Fast-changing trends and consumer preferences are shaping the textile industry and may impact demand.

Company Overview

Damodar Industries Limited is one of Indias most renowned manufacturers and marketers of Yarn. The Company boasts of a rich legacy and has earned a reputation for its superior quality Yarns wing different blends made from poly viscose, cotton, wool, linen, bamboo and stretch. The Company sells its products under different reputed brands. These brands have high recall value with consumers. The Companys vast distribution network across the country provides access to high-quality Yarns attractive price points. Damodars brands are the preferred choice in Indias fast-growing yet untapped market. The Company has established a remarkable global presence. The Companys highly integrated manufacturing is bolstered by its state-of-the-art manufacturing facilities situated in Amravati. These plants are equipped with modern technologies and intricately linked by a supply chain network.

Key Advantages

Strong brand recall: The Company has solidified its brand presence in both domestic and global markets. The brand ‘Damodar is synonymous with excellent craftsmanship, earning a reputation in the industry for its remarkable growth, steadfast reliability, and unparalleled fabric quality, which have been pivotal in its global success.

Strong distribution network: Leveraging a robust, pan-India distribution and franchisee network, the Company extends its market reach by penetrating the sizeable, unorganised, and untapped markets in India.

Market expansion strategies: The Company aims to utilize its market penetration strategy to broaden its network and seize market share from unorganised competitors in rapidly growing Tier II and Tier III cities, presenting a sizeable opportunity for expansion. Furthermore, Damodars targeted marketing campaigns, customised for specific markets, have earned it a loyal customer base worldwide.

Good governance: Good governance serves as a key cornerstone for the Company. Damodar adheres to a set of values and is committed to operate ethically. It strives to uphold transparency, compliance, and good governance across all operational levels. This commitment to social responsibility enhances the Companys reputation and brand image.

Experienced management with strong leadership: The Company continues to derive strength from strong leadership and the vast experience of its management team with a proven track record of remarkable growth, profitability and financial discipline. and customer behaviour and creates innovative designs, aiming to stay at the forefront of customer preferences in the highly competitive fashion industry.

Financial Review

(Amount in Rs.)

Key Financial Ratios:

Detailed explanation of ratios:

1. Net Profit Margin: Net Profit Margin has been mainly increased due to Net profit during the year 2023-24.

2. Interest Coverage Ratio: Interest Coverage Ratio has been increased due to increased finance cost in the year 2023-24.

3. Return on Net Worth: A high RoNW ratio of a company for maximum profit.

Human Resources and Industrial Relations:

Employees are biggest source for any Companys success and expansion. Our Human Resource Team based on their strengths, potential and determination towards work evaluates the employees. It is very important to keep the employees encouraged to take decisions and initiatives towards the betterment of their work. The company encourages and provides them a safe and motivating work environment. Furthermore various training and educational seminars and events are organized with proper importance given on health and safety issues. The Company has always followed process of Appraisal from time on time, to recognize talents and ensure that employees remain devoted to the organization on a long-term.

Cautionary Statement:

The content provided for Management Discussion and Analysis Report may vary with the anticipation made in the discussion statements.

It describes the Companys objectives, projections and estimates progressive within the meaning of applicable security laws and regulations. Actual results may vary from those expressed or implied, depending upon economic conditions, Government Policies and other incidental factors. Taxation laws, Economic Development, Cost of Raw Materials, Interest and Power Cost are among the few extraneous variables that influence the Companys operations.