GTN Textiles Ltd Management Discussions

GLOBAL SCENARIO

The global economy staged a strong rebound at the start of FY 2021-22 driven by accelerated vaccination and opening of economies. It was short-lived, though, as rising infections and reimposition of lockdowns dampened sentiments in the First and second quarters. Governments and central banks in major economies continued to extend policy support to stabilise the economy and boost private investments and consumption. However, supply chain disruptions leading to commodity inflation, energy price volatility coupled with rising freight and shipping costs, enhanced the risk of inflation.

In the third quarter of FY 22, the world economy started weakening once again while inflation rose much sharply than anticipated due to doubling of energy prices over the year, localised wage pressures, rising food prices and lingering supply constraints. Further, a resurgence in COVID-19 cases in Europe and Japan held back a broader recovery. In China, fresh COVID-19 outbreaks and a faster-than-expected withdrawal of fiscal emergency measures played spoilsport. On the positive side, international trade made strong gains and services activity surprised on the upside.

The weakness in the fourth quarter of FY22 due to new virus variants emerged and localized mobility restrictions were imposed. Further, rising energy prices, supply side disruptions, higher and broad-based inflation. Furthermore, the breakout of the Russia-Ukraine conflict in February 2022 kept the world on edge. Although the probability of a full-blown geopolitical crisis is low, the world remains on tenterhooks as it closely watches the evolving scenario. Inflation is expected to rise more than anticipated, demanding more aggressive policy responses.

Its a fact that inventory levels are high at the moment. Due to high inflation in the US, demand has slowed, especially for home textile products as it is more price sensitive than apparel and garments.

INDIAN TEXTILE INDUSTRY

The Indian economy expanded by 8.7% in FY2021-22, rebounding from a 6.6% contraction in FY2020-21, reiterating the countrys status as one of the fastest-growing major economies in the world. Indias textiles sector is one of the mainstays of the national economy. It is also one of the largest contributing sectors of Indias exports contributing 11 per cent to the countrys total exports basket. The textiles industry is labor intensive and has one of the largest employers. Demand is not as robust as it used to be a year back. Ukraine crisis that resulted in a rise in energy prices as one of the major reasons for the dip in demand from the US and Europe this year

Indias exports, too, have begun moderating on a sequential basis after touching a record high in FY22. After seeing a rise of 41 per cent in Indias textiles and apparel exports to $44.4 billion in FY 2021-22, the increase in cotton prices is leading to sector is seeing a demand drop of at least 10 per cent during the first two months of the FY23, compared to the same time in FY22. High tariffs faced by Indian exporters in key markets, such as, EU as compared to zero duty access given to competing nations like Bangladesh, Sri Lanka, Pakistan, and Turkey, which affected export performance. Further, logistic is one of the major constraints with Indian exporters. For comparative purposes, the turnaround time (TAT) (from order to delivery) is 50 days for Bangladesh and 63 days for India, whereas time taken to reach port is 1 day for Bangladesh and 7-10 days for India.

Indian textile producers are witnessing initial signs of a demand slowdown as high energy and food prices have weakened demand for products such as curtains and bedspreads in the top export markets of the US and Europe. Indian government has come up with a number of export promotion policies for the textiles sector.

Some of the initiatives taken by the government to further promote the industry are as under:

• Duty free entitlement to garment exporters for import of trimmings and other specified items increased from 3 per cent to 5 per cent. This initiative is expected to generate an additional RMG exports estimated at Rs 10,000 crore (US$ 1.61 billion).

• Emergency Credit Line Guarantee Scheme for restart of operations suffered by Covid-19 pandemic outbreak.

• Moratorium of Principal and Interest payments during covid period

• The government has also proposed to extend 24/7 customs clearance facility at 13 airports and 14 seaports resulting in faster clearance of import and export cargo.

• Introduction of Remission of Duties and Taxes on Export Products (RoDTEP). It is a new scheme that is applicable with effect from January 1st, 2021, formed to replace the existing MEIS. The scheme will ensure that the exporters receive the refunds on the embedded taxes and duties previously non-recoverable.

• Extension of Rebate on State and Central Taxes and Levies (RoSCTL) scheme for garments and made-ups exports till March 2024

• production-linked incentives (PLI) in textiles to boost production of apparel and garments for setting up of seven mega textile parks, and to increase the production and exports of man-made fibers.

• The free-trade agreements (FTAs) with the United Arab Emirates and Australia will also push up export growth

• Prime Minister Mega Integrated Textile Region and Apparel (PM MITRA) scheme for the betterment of the infrastructure of the textile industry

• The proposal for imposing duty on branded items was dropped providing relief to the entire value chain.

FUTURE OF INDIAN TEXTILES INDUSTRY

The future for the Indian textile industry looks promising, buoyed by both strong domestic consumption as well as export demand. With consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade with the entry of several international players like Hugo Boss, Liz Claiborne, Diesel, Kanz, Marks & Spencer, Guess and Next into the Indian market. The organized apparel segment is expected to grow at a compound annual growth rate (CAGR) of more than 13 per cent over a 10-year period.

Weakening rupee and easing cotton prices would help increase Indias competitiveness. cotton prices are set to weaken amid slackening demand and global recessionary fears. A better crop outlook could also drive cotton prices lower.

Demand is not as robust as it used to be a year back, but opportunities are coming up as well. Several countries are adopting the China-plus-one strategy. Sri Lanka has also been vacating space in the sector. The COVID-19 pandemic had challenged the textile industry drastically which is now on a recovery stage. Increasing demand for apparel from the fashion industry coupled with the growth of e-commerce platforms is expected to drive the market growth in the ensuing years. BUSINESS OVERVIEW, INDUSTRY DEVELOPMENTS, OPPORTUNITIES AND THREATS

The Company is engaged in business of manufacture and export of high-quality combed cotton yarns. The yarn is manufactured from the worlds best sources of long and extra-long staple cotton like American Supima, Egyptian Giza, contamination free Australian and American cottons and superior Indian cotton like Shankar-6 and DCH-32. The company manufactures yarns of various counts ranging from NE 20s to NE 100s. Permutations and combinations in spinning and finishing process results in yarns of varied qualities for specific end users. The company was amongst the first in India to manufacture compact yarn using the breakthrough technology of compact spinning, and also uses state-of-art machineries across its plants. Presently, the Company has a capacity of 51,808 spindles at Aluva, Kerala, consisting of 27600 compact spinning and 24208 ring spinning. The Company has promoted Patspin India Ltd., which has 2 plants at Palakkad in Kerala and Ponneri in Tamil Nadu having a capacity of 1,14,000 spindles, consisting of 70,752 Compact Spinning and 43,248 Ring Spinning, and also capacity for value added products i.e. Twisting, Gassing and Soft winding.

The promoters have 5 decades of experience in spinning industry with its first unit in Kerala in 1966. The company derives its strength from rich experience of promoters in marketing of cotton yarns in international market for over 4 decades. The company has built up an excellent customer base over the years by supplying consistent quality and timely deliveries of yarns. With flexibility to produce varied counts of cotton yarns, carded, combed, single and twisted, multi fold and gassed, the company is able to retain its customers

The promoters have 5 decades of experience in spinning industry with its first unit in Kerala in 1966. The company derives its strength from rich experience of promoters in marketing of cotton yarns in international market for over 4 decades. The company has built up an excellent customer base over the years by supplying consistent quality and timely deliveries of yarns. With flexibility to produce varied counts of cotton yarns, carded, combed, single and twisted, multi fold and gassed, the company is able to retain its customers

As reported in the previous year 2020-21, on account of continued liquidity stress, working capital constraints and lack of orders have resulted in lower capacity utilisation and continue to impact the performance of the company. Due to default in debt servicing, Lenders have classified accounts of the company as NPA as on 31.3.2021.

The company had submitted a proposal to its lenders to sell its non-core assets (surplus land at its Kerala plant and offices in Mumbai), to enable the company to regularize the account, obtain required working capital and to continue normal operations. The same turned out to be non- feasible due to lack of orders, continued liquidity stress, working capital constraints, steep increase in cotton prices and above all unsustainable wage levels of the workmen. This has led to discontinue own manufacturing and resort to contract manufacturing operations. Consequently, the company had to submit a revised proposal to its Lenders to sell assets of the company and to pay their entire outstanding dues by 31.12.2022. The Bankers have approved the Revised proposal and issued NOC for sale of assets of the company and to repay entire outstanding dues and closure of accounts by 31.12.2022. Meanwhile, due to steep increase in raw material (raw cotton) price and above all unsustainable wage level of workmen, even the contract manufacturer found his operations unviable and cancelled his job work orders with effect from 13.6.2022. Consequent to this, Management had to discuss the situation with Labour and their Unions on the possibility for revival of the business. Finally, Workmen and their unions have endorsed non- viability of the cotton yarn manufacturing business at companys plant in Alwaye and have agreed for a) permanent closure of operations and b) Companys proposal to settle their dues. The Management has executed a Memorandum of Settlement with the workmen and employees of the company on the severance compensation payable.

The company is making all efforts to sell the assets to repay dues of Lenders and Workmen, within the stipulated time limit. Your Board is also making all efforts to overcome the current situation and hoping for better prospects for the company going forward.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has a proper and adequate internal control system to ensure that all assets are safeguarded and protected against loss from unauthorised use or disposition and that all transactions are authorized, recorded and reported correctly. The internal control is supplemented by an extensive programme of internal audits, review by management and documented policies, guidelines and procedures. The internal control is designed to ensure that financial and other records are reliable for preparing financial statements and other data and for maintaining accountability of assets.

DISCUSSIONS ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE Please refer to Directors Report on performance review.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED

The Company recognizes the importance and contribution of its human resources for its growth and development and is committed to the development of its people. The Company has been adopting methods and practices for Human Resources Development. With utmost respect to human values, the Company continues to develop its human resources, through a variety of services by providing appropriate training, motivation techniques and employee welfare activities. Industrial relations were cordial and satisfactory.

As on 31st March, 2022, the Company has about 466 employees in its various offices and factory.

CAUTIONARY STATEMENT

Statements made in this report describing the Companys projections, estimates, expectations or predictions may be forward looking predictions within the meaning of applicable securities laws and regulations. Actual result may differ from such estimates, projections, etc. whether expressed or implied. Factors which would make a significant difference to the Companys operations include availability of quality raw cotton, market prices in the domestic and overseas markets, changes in Government regulations and tax laws, economic conditions affecting demand / supplies and other environmental factors over which the Company does not have any control.