Filatex India Ltd Management Discussions.

GLOBAL ECONOMY

Global prospects remain highly uncertain a year into the pandemic. New virus mutations and the accumulating human toll raise concerns, even as growing vaccine coverage lifts sentiment. Economic recoveries are diverging across countries and sectors, reflecting variation in pandemic-induced disruptions and the extent of policy support. The outlook depends not just on the outcome of the battle between the virus and vaccines—it also hinges on how effectively economic policies deployed under high uncertainty can limit lasting damage from this unprecedented crisis.

Global growth is projected at 6% in FY22, moderating to 4.4% in FY23. The upward revision reflects additional fiscal support in a few large economies, the anticipated vaccine-powered recovery in the second half of FY22, and continued adaptation of economic activity to subdued mobility.

High uncertainty surrounds this outlook, related to the path of the pandemic, the effectiveness of policy support to provide a bridge to vaccine-powered normalization, and the evolution of financial conditions.[1]

6%

Projection of global growth for FY22

INDIAN ECONOMY

After growing at a steady rate for years, Indias economy had already begun to slow down before the onset of the COVID-19 pandemic. Between FY17 and FY20, growth decelerated from 8.3% to 4.0%, with weaknesses in the financial sector compounded by a decline in the growth of private consumption.

The implementation of a national lockdown on March 25, 2020, brought economic activity to a halt, affecting both production and consumption. As a result, growth was negative in the first half of the fiscal year (April to September 2020) and only modestly positive in the second half. Over the entire FY21, Indias economy is estimated to have contracted by 7.3%.

In response to the COVID-19 shock, the Government and the Reserve Bank of India took several monetary and fiscal policy measures to support vulnerable firms and households, expand service delivery (with increased spending on health and social protection) and cushion the impact of the crisis on the economy. Thanks in part to these proactive measures, the economy is expected to rebound in FY22 and growth is expected to stabilize at around 6-6.5% thereafter.

Just as the economy was recovering, India witnessed the fury of the second wave of COVID-19 in Q1 FY22 which destabilized the country again. The second wave was more devastating in its effect compared to the first, causing extreme stress on healthcare infrastructure. In the second wave rural areas started reporting more cases than urban ones, the distress and panic was widespread. An analysis of more than 50 most severely hit districts indicated that 26 were in rural areas.

Rural areas in the state of Maharashtra, Andhra Pradesh and Kerala were the worst impacted. The situation was further aggravated, due to the inadequacy of medical infrastructure in the rural areas and the rush of patients from villages and smaller towns to urban centers.

We believe that economic fallout of the second wave of the pandemic, at worst, is likely to remain restricted to the first half of this financial year, although availability of vaccines and revival in private consumption will determine the speed of economic recovery.

GLOBAL TEXTILE INDUSTRY

Asia Pacific is expected to be the largest shareholder in the global polyester fibre industry. The rapid urbanization and industrialization in developing countries such as India and China are driving the regional market. Additionally, the growing disposable income in the region has led to the increase in demand for better living standards, thereby aiding the market.

The presence of key players in China, Vietnam, and India are expected to propel the regional growth. The market is further propelled by factors such as the presence of abundant raw materials and the growing demand for textiles, carpet, and home furnishing and decor goods in the region.

The developing regional flooring and furnishing industry and the growing polyester fibre exports from the Asia Pacific countries are expected

Asia Pacific is expected to be the largest shareholder in the global polyester fibre industry

to provide new growth opportunities to the market. Meanwhile, North America and Europe are projected to witness a steady growth rate in terms of sales of the polyester fibre.

The global lockdown imposed amidst the coronavirus (COVID-19) pandemic significantly affected the global textile and apparels industry due to disruption in supply chains, transportation restrictions, and unavailability of workers.

However, as the year progressed the textile industry saw an upward trend and towards the end of the financial year it was well on the path to making an overall improvement in its performance.

INDIAN TEXTILE INDUSTRY

Indias textiles industry is one of the oldest industries in the Indian economy, dating back to several centuries. The industry is extremely varied, with hand-spun and hand-woven textiles sectors at one end of the spectrum, while the capital- intensive sophisticated mills sector on the other end. The decentralized power looms/ hosiery and knitting sector forms the largest component in the textiles sector. The close linkage of the textiles industry to agriculture (for raw materials such as cotton) and the ancient culture and traditions of the country in terms of textiles makes it unique in comparison to other industries in the country. Indias textiles industry has a capacity to produce a wide variety of products suitable for different market segments, both within India and across the world.

When the COVID-19 pandemic hit India, the country witnessed months of nationwide lockdown causing an overall decrease in consumption of all products - food, consumer, textiles, etc. It readily impacted the various industries in India and textile was one such industry that took a massive hit. The textile and clothing industry being a labor and capital intensive one, was further compromised due to the mass exodus of the migrant laborers across the country. This disruption in workflow and production schedule impacted many companies and the industry as a whole. Prolonged closure of malls and retail showrooms made the situation only worse.

Following the measures to cope up with COVID-19 after a restart, the textile industry expected a U shape recovery but witnessed more like V shape recovery. This recovery was experienced across the whole textile sector. From July onward the fabric units started functioning again amidst scattered orders from domestic buyers. By November, not only were the fabric manufacturers able to exhaust their unsold inventory but also the entire fabric and apparel chain experienced unprecedented business opportunities leading to firm demand for fibers and filaments.

Domestic textile units received extra export business as global brands found it risky to depend on suppliers from a single country due to the pandemic. China being the dominant supplier lost some portion of its supply to India. This new situation led to an advantageous position for many small fabric and apparel units in India.

This in turn perked up the demand for yarns and fibers further and remained strong as even imports of fabrics to India from China reduced substantially.

Domestic textile units received extra export business as global brands found it risky to depend on suppliers from a single country due to the pandemic.

The government also introduced several restrictions on the import of fabrics and garments from Bangladesh that now required a minimum 35% of value addition by Bangladesh suppliers in order to benefit under the Free Trade Policy. This will restrict Chinese textile imports from Bangladesh into India and lead to an increase in demand from the Indian producers.

 

[1] IMF Report, April 2021, Managing Divergent Recoveries World Economic Outlook, April 2021: Managing Divergent Recoveries (imf.org)

[2] Preferred Fiber & Materials - Market Report 2020

[3] Preferred Fiber & Materials - Market Report 2020

POLYESTER INDUSTRY OUTLOOK

With an annual production of around 57.7 million MT, polyester had a share of approximately 52% of the global fiber production in 2019.[2] The growth of the global market for polyester fibre is primarily driven by the rising demand for sports apparels, quick-dry clothing, and outdoor activity equipment such as tents, sleeping bags, and waterproof liners, among others. Additionally, the increasing preference for polyester fibre over cotton owing to its abrasion resistance, higher strength, and anti-wrinkle properties is likely to aid the market growth. The increasing demand from various industries such as automobile, electronics, and hospitality are projected to provide ample growth opportunities to the market. Additionally, the increasing application of polyester fibre in goods such as drapes, mattress, carpets, and rugs for commercial and residential application is expected to push the market further.

The global shift in fashion towards man- made fibers was finally noticed by the Indian government and the additional anti-dumping duty on PTA was abolished by the Ministry of Finance in the budget announced in February 2020. This abolishment has levelled the playing field for the Indian manufacturers and has made a positive impact in the domestic business environment as well as global competitiveness.

Government has also announced production linked incentive PLI under which manmade fiber garments and technical textiles are expected to be the main recipients. As Polyester constitutes almost 90% of man-made filaments, this is expected to further boost the demand for polyester filaments in India.

RECYCLED POLYESTER INDUSTRY OUTLOOK

As the volumes of plastic waste became visible in public places, beaches, and tourist destinations, it caught the attention of not only several international organizations monitoring the environment, but the public at large. Initial efforts of the industry were focused on collecting pet bottles, cleaning them, shredding them into flakes, which were melted and homogenized.

The growth of the global market for polyester fibre is primarily driven by the rising demand for sports apparels, quick-dry clothing, and outdoor activity equipment such as tents, sleeping bags, and waterproof liners.

Many plants came up and China became the key player in making fibers from waste bottles. Several plants came up in India also. Bottle collections starting from rag pickers to scrap dealers became organized. The bottle scrap has no intrinsic value unless there are units to process this scrap into a useful material. This process is called mechanical recycling. However, this step though quite effective for bottle and container grade polyester served a limited purpose as it does not address the utilization of textile waste.

While the share of recycled polyester is increasing and reached 14% in 2019[3], it is not yet advancing at the speed and scale required. As the fiber with a 2/3rd market share, the impact scale of polyester textiles is enormous. While using plastic bottles, which constitute 1/3rd of the Polyester consumption, as feedstock is a good start, the need to move towards textile-to-textile recycling and urgently improve social conditions in waste collection and recycling is imminent.

In terms of the ecosystem, all textile fibers whether natural or synthetic though essential create compelling environmental issues like consuming large quantities of water, polluting water streams with dyes & processing chemicals, washing adds microfibers which are now settling in oceans, etc. Polyester is a polymer of two hydrocarbon products, and it can be chemically reversed and de-polymerized.

Many companies have experimented with depolymerization and lots of study material is available on the subject. However, it is only after the sustainability of textiles gathered momentum, by way of greater awareness of customers and equal zeal showcased by large brands to commit funds to the cause, that recycling by way of reversing the polyester towards the virgin material has come back into focus. This process is called chemical recycling. The market share of chemically recycled polyester is still very low. With new operations starting the commercial production of chemically recycled polyester and further companies in the research and development phase, the market share of chemically recycled polyester is expected to grow in the coming years.

COMPANY OVERVIEW

Filatex India Limited is rated among the top five manufacturers of Polyester Filament yarns in India. It manufactures a wide variety of yarns; POY, FDY, DTY and Air Textured Yarn (ATY) in full range of coarse and fine deniers, in all kinds of shades and varieties like Bright, Semi Dull, Black and Dope dyed colours. The company manufactures in its two manufacturing units - Dahej (Gujarat) and Dadra (Union Territory of Dadra & Nagar Haveli).

The company started with a small capacity of 5,000 TPA in 1996 and today it has reached a capacity of over 3,80,000 TPA.

The plant at Dahej has an integrated spinning facility with continuous polymerization while the plant in Dadra manufactures Dope Dyed Polyester and Polypropylene Yarns.

+3,80,000 TPA

Combined production from the plant at Dahej has an integrated spinning facility with continuous polymerization while the plant in Dadra manufactures Dope Dyed

Polyester and Polypropylene Yarns

Financial Overview

Overall, the company has performed well in FY21 despite the economic slowdown of the country in the first quarter of the year. Filatex was able to pick up its reins in the subsequent quarters and performed exceptionally well in the Q4 of FY21.

The Company achieved its highest ever quarterly EBITDA of INR 188.7 crores and EBITDA margin of 22.1% in Q4FY21. The company also utilized its surplus cash to reduce debt in FY21 which helped it achieve a Debt - Equity ratio of 0.77.

Qua rterly Performa nce FY 2020-2021

(INR in lakhs)

Particulars Q1 Q2 Q3 Q4
Production (MTs) 16,833 72,733 85,220 83,906
Sales (MTs) 20,439 75,234 86,535 77,698
Revenue from operations (Net Sales) 14,501 50,779 72,159 85,276
EBITDA (605) 4,451 12,017 18,871
PBT (before exceptional item) (3,727) 1,267 9,118 17,305
PAT (2,797) 938 6,603 11,839

Key Financial Ratios

Disclosures of key changes in financial indicators

[SEBI (LODR) (Amendment) Regulations, 2018, Para 3(x)(b)]

Ratio FY20 FY21
Debtor Turnover Ratio in days 14.90 19.69
Inventory Turnover Ratio in days 22.59 34.92
Interest Coverage Ratio* 4.46 7.73
Current Ratio 1.21 1.36
Debt Equity Ratio 1.21 0.77
Operating Profit Margin 7.98% 15.60%
Net Profit Margin 4.37% 7.45%
Return on Net Worth 22.77% 24.48%

 

* For the purpose of calculating interest coverage ratio, EBITDA has been considered before other income & interest covers interest on term loan, working capital loan and exchange difference regarded as an adjustment to borrowing cost.

Debtor Turnover Ratio (days)

Debtor Turnover Ratio of the company stood at 19.69 days as at 31.03.2021 as against 14.90 days as at 31.03.2020 shows increase by 32.14%.

During the first half of FY21, the manufacturing facilities of the company were shut for almost 8 weeks and on resumption, gradually increased its production and reached optimum levels by end of September 2020, which caused substantial loss of revenues. Therefore, keeping full year revenues as denominator gives a skewed picture. However, if we consider changes in comparison to FY20 with the second half of FY21 (H2FY21), the Debtor Turnover Ratio arrives at 11.59 days as against 14.90 days. Therefore, this indicates an improvement of 22% was observed in the ratio.

Inventory Turnover Ratio (days)

Inventory Turnover Ratio of the company stood at 34.92 days as at 31.03.2021 as against 22.59 days as at 31.03.2020 shows increase by 54.58%.

Similarly, as explained above, if we consider changes in comparison to FY20 with the second half of FY21 (H2FY21), the Inventory Turnover Ratio arrives at 22.39 days as against 22.59 days. Therefore, technically, no major change was observed in the ratio.

Interest Coverage Ratio

Interest Coverage Ratio of the company stood at 7.73 times as at 31.03.2021 as against 4.46 times as at 31.03.2020 shows improvement by 73.32%.

Despite the turmoil of COVID-19 in the first half of FY21, the demand for textiles bounced back in the second half. This along with almost full capacity utilization of our value-added capacities resulted in improved EBIDTA of INR 347.34 Crores from INR 222.13 crores in FY20.

Also, the company has utilised its available surplus partially to reduce its long-term debts and strengthened its net working capital.

Debt Equity Ratio

Debt Equity Ratio of the company stood at 0.77 times as on 31.03.2021 as against 1.21 times as on 31.03.2020 showing an improvement by 36.36%.

During the year, the Company has generated healthy cash accruals and has retained a portion of the same into the system, resulting in substantial improvement in its Tangible Net Worth. Also, the Company has used its accruals to reduce its long-term debts. Thus, the company was able to improve its Debt Equity Ratio.

Operating Profit Margin (EBIDTA Margin)

Operating Profits Margin (EBIDTA Margin) of the company stood at 15.60% as at 31.03.2021 as against 7.98% as at 31.03.2020 shows improvement in margin by 95.49%.

The Company has reported revenues of INR 2,227.15 crores as compared to INR 2,782.07 crores in the previous year. The operating profit EBIDTA achieved during the year was INR 347.34 crores as compared to INR 222.13 crores in FY20.

The Company has achieved a production of 258690 MT in FY 2021 as against 332181 MT in FY2020, a drop of around 22% which is quite in line with the number of days lost due to mandatory lock down. However, the increase in profit in FY21 despite less production is due to several factors like upon resumption of normal operations - almost full capacity utilisation of yarns, a good pent-up demand in the downstream sector and drop in raw material prices which fell in the international markets.

The company has a diversified product portfolio with partially oriented yarn (POY), draw textured yarn (DTY), fully drawn yarn (FDY), polypropylene yarn, polyester chips and narrow woven fabrics.

The contribution of value-added product viz. DTY has increased from 28% in FY20 to 42% in FY21. The government has also taken effective steps to plug loopholes by imposing value addition norms on garments that have curbed duty-free imports from Free Trade Agreement (FTA) countries and increasing custom duty rates from 10% to 20% on the import of around 300 textile products. Along with the removal of Anti-dumping duty on PTA (the key raw material), all these initiatives have led to an improvement in the polyester industrys competitiveness.

With a diversified product mix, firm demand and government support, the company was able to achieve improved Operating Margin (EBIDTA margin) in FY21.

Net Profit Margin

Net Profit Margin of the company stood at 7.45% as at 31.03.2021 as against 4.37% as at 31.03.2020 showcasing an improvement in margin by 70.48%

The improvement in the overall Operating Profit Margins (EBIDTA margins) , as explained above, has also led to a positive impact on Net Profit Margins.

Return on Net Worth

Return on Net Worth of the company stood at 24.48% as at 31.03.2021 as against 22.77% as at 31.03.2020 shows improvement by 7.51%

The company substantially improved its profitability by way of adding more value- added products. This helped the company improve its Return of Net Worth in FY21.

Overall Performance

Though FY21 has not been the kindest of years, and despite its many economic curveballs the company is pleased with its performance. The company witnessed a high EBITDA and EBITDA margins growth at INR 347.34 crores and 15.6% respectively. The PAT and PBT also saw a steady rise despite the many hurdles in the form of lockdowns and shortage of labor.

Increase in texturized yarn capacity, a value-added product with global demand, has opened access to a larger market, spread all over the country and abroad.

GROWTH PLANS & PROSPECTS

Filatex is setting up a 30 MW captive thermal power plant in Dahej which will ensure stable power supply, reduce the energy cost and result in savings of INR 40 crores annually.

With a view of further scope for improvement in performance, the company has decided to increase its CP melt capacity by 50 TPD. This additional melt along with surplus chips volume will be utilized for manufacturing around 120 TPD of Polyester Partially Oriented Yarn at Dahej plant. The company also plans to replace two existing POY lines (144 ends) with two new POY lines (192 ends) at the Dadra plant increasing the POY capacity of the plant by 5 TPD as well as further improving the quality of the yarn produced.

The product basket at present, offers Partially Oriented Yarn (POY), Fully Drawn Yarn (FDY), Drawn Textured Yarn (DTY) and the new launched Air Textured Yarn (ATY)

30 MW

Captive Thermal power plant setup in Dahej for stable power supply

in full range of coarse and fine deniers in all kinds of shades and varieties like Bright, Semi Dull, Black and dope-dyed colours as well as Polyester Chips and Narrow Woven Fabric. Moving forward, the company is focused on researching and developing new filaments with niche characteristics to add to its product portfolio.

The demand for recycled polyester is increasing rapidly in line with consumer awareness and acceptance as leading brands in fast fashion segments are promoting sustainability in the textile industry. This has led to an increase in the global demand for recycled polyester fibre. Increasing demand for recycled yarn coupled with increasing application areas of Polyester yarn is anticipated to accelerate the market growth for coming years.

The Company has setup a small pilot plant for researching new and improved ways of recycling polyester to reduce polyester waste and its effects on the planet. Post successful trials, the company plans to build a larger capacity plant of around 1000 kgs per day for further trials before going ahead with a full-scale plant.

HUMAN RESOURCES AND INDUSTRIAL RELATIONS

The company recognizes its people as its most valuable resource. To that effect, the company has formulated policies to nurture the talent of employees and to ensure growth possibilities are offered, and their capabilities grow in tandem with their responsibilities. The HR management considers the capability, commitment and sincerity while evaluating talent within the company. To retain talent, the company has offered ESOS toits senior employees. Second tranche of ESOS has been granted which also covers good performers as well, irrespective of their levels. As a welfare measure "Group Accident Insurance Scheme" has been introduced for all the employees.

Consistent and fair HR policies ensure that industrial relations continue to be peaceful and cordial and results in increasing productivity and effectiveness .The Company aims at creating a development-oriented approach for its employees by building systems, processes and focusing on recruitment of good quality manpower. Focus on transparent performance appraisal and productivity linked incentive schemes have resulted in a motivated workforce and increased productivity. Another significant step for promotion or recruitment at senior level is carrying out temperament tests and management aptitude tests which help in judging the soft skills which are essential to steer the companys operation.

The company regularly conducts training programs to improve the skill sets and work capability of employees at various levels which are necessary for their growth. A great deal of emphasis is placed on creating a succession plan for all key positions. This emphasis is extended to well qualified, young family members who are going through arduous training programs in different facets of operations.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Filatex has a strong internal monitoring & control system to achieve efficiency of operations, processes and to safeguard the companys assets against any loss from unauthorized usage and ensure proper authorization of financial transactions.

The Companys internal control system is commensurate with its size, scale and complexities of its operations. The Company has a Budgetary Control system and actual performance is regularly monitored by the Management. It has well defined organization structure, authority matrix and internal guidelines and rules.

The internal control system ensures that the financial and other records are reliable for preparing financial statements and maintaining proper records of assets.

The company continues to have an independent agency as the Internal Auditor to review "Operations & Systems" audits in accordance with the audit guidelines stipulated by the audit committee. The internal auditors, as part of their assignment, evaluate and assess the adequacy and effectiveness of internal control measures and compliance with general accounting principles & statutory requirements. The internal audit reports are discussed / reviewed by senior management and the audit committee of the Board and on its recommendations appropriate actions are initiated to ensure full compliance.

STATUTORY COMPLIANCE

The Chairman & Managing Director and CFO make a declaration at each Board Meeting regarding the compliance to the provisions of various statutes, after obtaining confirmation from all the units of the company. The company secretary ensures compliance in accordance with Companies Act, SEBI regulations and provisions of the Listing Agreement.

FORWARD LOOKING STATEMENT

The Management of Filatex has prepared and is responsible for the financial statements that appear in this report. These statements are in conformity with the latest accounting principles generally accepted in India.

The statements describing the Companys objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations. The Management has made these statements based on its assessment, expectations, and projections about the future events.

Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include key raw materials availability and prices, cyclical demand of the products in the markets, changes in Government regulations, exchange rate fluctuations, tax regimes, economic developments within India and the countries in which the Company conducts business and other incidental factors. The Management undertakes no obligation to publicly update any forward- looking statements, whether as a result of new information, future events or otherwise.