Deepak Spinners Ltd Management Discussions.

INDUSTRY STRUCTURE & DEVELOPMENT

Textile Industry has historically been a key component of Indias economy. India Is the worlds second largest textile producer after China. Textile industry Is diversified In India and Is capable of producing a wide variety of textiles. Textiles add tremendous economic value for India, both in the form of 2% contribution to the GDP as well as through substantial employment throughout the country.

India has a significant share In the global yarn spinning and Is second only to China In production. Textile Industry contributes to 16% to the countrys exports. However, a sharp decline Impacted in the entire value chain of textile industry since the last month of the financial year 2019-20, due to closure of factories, and problems In shipment of goods to Importing countries following COVID 19 induced nationwide lock down and reduced demand from Importing countries due to similar lock down there. Industry Is facing labour shortage amid demand slowdown from both domestic and overseas markets.

Pursuant to the outbreak of COVID 19, Reserve Bank of India offered moratorium to the Industry to repay loans up to 3r* August 2020 and also granted emergency loans to scale through difficulties posed due to nationwide lock down.

OPPORTUNITY AND THREATS

If there Is one sector in the country that Is self-reliant end-to-end. It Is textiles. India has abundant supply of raw material, skilled labour and a strong domestic market. It is the largest producer of cotton, and the second largest producer of man-made fibres - polyester and viscose. Relatively newer entrants like Bangladesh, Vietnam and Cambodia have gained substantially in exports as compared to India due to Preferential Trades Agreements with major textile markets.

GST on cotton Is uniformly 5 per cent for fibre, yarn and fabric. But man-made fibres (MMF) are taxed at 18 per cent for fibre, 12 per cent for yarn and 5 per cent for fabric. This inverted tax structure makes MMF textiles costly. However, since past few years, there Is a global shift In fashion towards MMF. About 72 per cent of the global textile fibre consumption Is MMF. To be a serious player in the global market, India needs to have a fibre neutral tax policy.

Lack of duty free access to major markets is the major disadvantage India has vIs-a-vIs many competing countries. The global demand for MMF is expected to grow by 3.8% by the year 2021 primarily driven by Increasing consumption of MMF due to limited cotton production, and supply coupled with other factors such as Increasing demand for textile products due to Increasing population, relatively high cotton prices and Increasing applications of synthetic fibres Into Industrial applications. India Is competitively positioned In terms of low labour and power cost against most of the competing countries. Given the fact that China has begun to shift Its focus from exports to domestic market, has opened avenues for India to take up Its share and strengthen Its position In global textile trade. The ongoing trade war between China and USA and post COVID 19 back lash of most of the countries against China can open up new opportunities to India Lack of Investment In research and development, lowering margins due to fierce competition and e-commerce and volatile raw material prices may pose a threat to progress of MMF textile Industry.

SEGMENTAL REVIEW AND ANALYSIS

Your Company continues to operate In one segment only - synthetic yarn. The Company Is setting up upgraded electricity supply from 11 KVto66KVatthe BaddI Unit of the Company, which Is expected to be operational by March 2021. Once the line becomes operational, it will ensure substantial savings for the Company.

Our companys production continues to be at sustainable levels matching prevailing market demand.

Covid -19 Impact

The Covid 19 pandemic Is much more than a health crisis and Is having an unprecedented Impact on people and economies worldwide. As per the directives of the Central and State Governments in the wake of Covid 19 pandemic, the Company had suspended operations with effect from 23‘ March 2020 which adversely Impacted the business during the last quarter of the year. Though the scenario Is grim currently. It Is expected to show signs of revival from the second half of this financial year.

All safety protocols related to Covid 19 as advised by the Government are being Implemented and observed at factories and offices of the Company. The Company continues to fulfill its obligations with respect to all the existing contracts and agreements.

The Company does not foresee any material impact on account of non-fulfillment of obligations by any party In existing contracts or agreements.

The Company has also instituted across all its operations, focused cost control programs and sanctioned only necessary capital expenditure to conserve its finances.

OUTLOOK

Increased penetration of organized retail sector, growing population and rising income levels are likely to drive demand for textile product. It has been complemented by a growing young earning population, rising female work force which is exposed to changing tastes and fashion. More and more demand for fitness apparel, short fashion cycles, requirement of low cost and high performance material for automotive and industrial use have increased the demand for synthetic and MMF products. Growth in building and construction will continue to raise demand for non-clothing textiles.

Limited cotton production, relatively high cotton prices and versatile applications of MMF are other contributors to increase in demand for MMF textiles.

RISKS AND CONCERNS

Preferential Trade Agreements, including Free Trade Agreements (FTAs), help gain duty-free access to large textile markets such as the European Union (EU), Australia and the UK which, otherwise, levy 12-14 per cent import duty. India, unlike a few other Asian countries such as Bangladesh, Sri Lanka, Vietnam, etc lacks major FTAs with large importers of textile and apparels. FTAs with Bangladesh and Sri Lanka makes the matters worse for India, as other countries route their textile products duty free into India through them as India has no Rule of Origin in place. Indias FTA negotiation with EU has remained suspended since 2013.

Textile industry in India grapples with domestic issues including outdated technology, inflexible labour laws, infrastructure bottlenecks and a fragmented nature of the industry. Due to cash crunch and weak demand in the Indian and Export markets, it is becoming difficult to pass on the cost to end customer.

The rapid deterioration of the global economic outlook following the pandemic has severely impacted demand and margins.

INTERNAL CONTROL SYSTEMS AND ADEQUACY

The Companys internal control systems and procedures commensurate with the size and nature of its operations. The Company has adequate system of Internal Control to ensure that the resources of the Company are used efficiently and effectively, all assets are safeguarded and protected against loss from unauthorized use or disposition and the transactions are authorized, recorded and reported correctly, financial and other data are reliable for preparing financial information and other data and for maintaining accountability of assets. The management periodically reviews the internal control systems and procedures for efficient conduct of the Companys business. Internal Audit is conducted by independent Chartered Accountants, on quarterly basis. To maintain its objectivity and independence, the Internal Auditors report directly to the Audit Committee of the Board. The Audit Committee reviews the Internal Audit Reports and effectiveness of the Internal Control Systems. If required, the corrective actions are taken and the controls strengthened.

FINANCIAL PERFORMANCE

a) The report of the Board of Directors may be referred to for financial performance.

b) Details of significant changes (i.e. changes as compared to the immediately previous financial year) in key financial ratios -

Ratios F.Y. 2019-20 F.Y. 2018-19 Change (%)
Debtors Turnover Ratio 14.10 12.92 9.13
Inventory Turnover Ratio 3.64 3.82 (4.71)
Interest Coverage Ratio 4.04 4.48 (9.82)
Current Ratio 1.12 1.09 (2.75)
Debt Equity Ratio 0.59 0.86 (31.40)
Operating Profit Margin (%) 4.73 6.46 (26.78)
Net Profit Margin (%) 2.69 4.27 (37.00)
Return on Net Worth (%) 10.44 10.56 (1.14)

HUMAN RESOURCES

The employees on roll in the Company as on 31st March 2020 were 3323 (2883 as on 3T* March 2019). Relations with the employees were cordial throughout the year. The Company provides to its employees favorable work environment conducive to good performance with high degree of quality and assumptions and expectations of future events. Actual results covid however, differ materiality from those expressed or impaired. Factors that could make a difference to the Companys operations include market price both domestic and overseas availability and cost of raw materials, change in Government regulations and tax structure, economic conditions affecting demand / supplies and other factors over which the Company does not have any control. The Company takes no responsibility for any consequence of decisions made based on such statements and holds no obligation to update these in future integrity. The Company continuously nurtures this environment to keep its employees highly motivated and result oriented. Effective Human Resource Practices enabie building a stronger performance culture.

CAUTIONARY STATEMENT

Statements in this Management Discussions and Analysis Report describing the Company objectives, projections, estimates, expectations or predictions may be forward looking statements within the meaning of applicable security laws or regulations. These statements are based on reasonable