Indian Card Clothing Company Ltd Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

A) Industry Structure and Developments:

During the financial year 2022-23, the Indian textile industry showed signs of recovery after the two years of pandemic but again started facing challenges emanating from disruption in global economy due to conflict between Russia and Ukraine, uncertainty in cotton prices and higher inflation. The Indian spinning industry, which differentiates itself with its widest varieties of yarn counts with different fibre mixing, relies on the production of quality products at an optimum cost. Good quality of card clothing is essential for achieving good quality of yarn and it is often said "carding is the heart of spinning".

The yarn quality depends on the extent of a thorough individualisation of fibre without rupturing it. The whole process of opening and aligning of the fibre needs to be gentle, yet achieve a maximum individualisation and removal of impurities. In the spinning process of yarn involving opening of fibre tufts to remove impurities, aligning, i.e., parallelising of the fibres and then spinning the fibre stands in a yarn, needs specific combination of machine configuration to process different type of fibres. The cleaning and aligning of the fibres are carried out on the first two process machineries i.e., Blow Room and Carding. Carding process involves extensive cleaning of impurities in fibre mixing and separation of fibres to individual level. This function of carding is carried out by moving surfaces covered with fine wire points, generally referred to as "Card Clothing". In a typical carding machine, a large rotating main cylinder is covered with fine metallic teeth and a number of narrow cast iron or aluminium flat bars covered with flexible wire points which travel in an endless path on belts around a portion of the main cylinder. The main Cylinder and the flat bars clothed with "Card Clothing" perform carding action while working at a very close proximity and at a different surface speed. As the extent of individualisation and cleaning of fibres depends on the Card Clothing, it is an important input for the spinning mills to produce quality yarn.

All new Carding machines are supplied with Card Clothing, which on completion of its life, is replaced with new Card Clothing. The re-clothing cycle of the Cards depends on production rate of the carding machine, utilisation of the machines and the total amount of fibre being processed. The volume of re-clothing depends on the installed operational capacity of carding machines.

The area of cotton cultivation during the financial year 2022-2023 was approx. 130 lakh hectares, which is higher than last financial year by approximately 7 lakh hectares. As against the total cotton production of 311 lakh bales during the financial year 2021-22, the initial estimate of the total cotton production during the year 2022-23 was 337 lakh bales. This estimation has been lowered further by Cotton Association of India (CAI) to 298.35 lakh bale of 170 kgs. each. The average yield in kilograms per hectare as projected for the financial year 2022-23 was 439 kilograms as compared to the actual yield of 428 kilograms per hectare in the financial year 2021-22. This is expected to reduce further as per the fresh estimate by CAI. [Figures are as estimated by the Committee on Cotton Production and Consumption (COCPC) in its meeting held on 20.04.2023].

After the pandemic years, number of non-operational cards became active in the domestic market in 2021-22. However, due to various factors mentioned above, demand for yarn in the year 2022-23 was lower, in effect, the total active cards in domestic market declined by approximately 17%. The reduction of active cards was throughout every segment of the industry. In high production card segment the reduction of active cards was approximately 14% (Source: ICCs proprietary data and analysis April 2023).

World-wide there are only a few reputed Spinning machinery manufacturers. In Europe, Reiter, Trutzschler and Marzoli are manufacturing carding machines, whilst in India it is Lakshmi Machine Works (LMW) who is engaged in the business of manufacturing carding machines. Companies like Crosrol shifted card manufacturing operations to China, while Saurer sourced carding machines manufactured in China. Both Rieter and Trutzschler have manufacturing facilities in India. However, Rieter does not manufacture cards in India whereas Trutzschler India manufactures specific card models which are different from the card models manufactured in Germany. Rieter, which owns Graf, supplies all its carding machines with Graf card clothing. Similarly, Trutzschler supplies carding machines from Germany and India with Trutzschler Card Clothing (TCC). TCC manufactures the bulk of its flexible tops for the worldwide reclothing market from India while the metallic card clothing manufactured in India is sold with its carding machines in India and in the re-clothing market. Trutzschler has begun construction of a new factory in India. The Indian manufacturer, Lakshmi Machine works manufactures cards and clothes cards from Lakshmi Card Clothing (LCC). The Cards manufactured in China uses both European and Chinese card clothing.

In the re-clothing market, for initial couple of re-clothing cycles, Graf and TCC are preferred for Rieter and Trutzschler cards respectively, by mills due to annual maintenance contracts promoted by the carding machine manufacturers. Card Clothing companies like ICC and Groz - Beckert compete for market share of re-clothing for all carding machines with the OEM suppliers like Graf, TCC and LCC. Chinese Card Clothing, though cheaper in cost, do not meet spinning mills expectations on quality front.

This year, inspite of decline in the total active cards, the company was successful in maintaining the overall sales as achieved in the financial year 2021-22. This was possible mainly due to increased sale of ProLyf card clothing by 14% and Non-woven wires sales by 32% as compared to their respective sales in the financial year 2021-22. With the increased sale of ProLyf Card Clothing and Non-woven wires, the Company was successful in establishing its presence in the high production card segment due to its prompt service, quicker delivery, acceptable quality at reasonable prices and introduction of new products in line with market needs.

Technical Textile industry have been classified in different segments based on the products being manufactured. Mobiltech industries are mainly in manufacturing of automotive carpets, seat covers, belt webbings, car mats, automotive headliners. Packtech industry are in the field of manufacturing of sacks, PP/ HDPE sacks, bags, jute bags, flexible bulk containers. Hometech industry manufacture blankets, mattresses, pillows, quilts, wipes, home furnishing, mops, blinds, carpets, floor coverings. Indutech industry refers to those industries, which produce filter, conveyors, belts, ropes, hoses, abrasive textiles, battery separators, filter bags, industrial felts, paper making felts & Sporttech Industry produce sport jerseys, gloves, shoe liners, sport shoe, thigh pads,sportswear .

Our success in technical textile in the financial year 2022-23 was primarily due to the growth in the segments like Mobiltech, Indutech, Sportech and Hometech. At present, India is a key exporter of certain commoditized products such as sacks & bags, flexible intermediate bulk containers (FIBCs), jute carpet backing. Segment like Packtech is the biggest one while Indutech, Home tech and Mobiltech are the growing segment. The technology-intensive products such as airbags, tyre cord fabric, glass fibre, are imported to a large extent.

B) SWOT Analysis:

Strengths

• Company is focused on Research and Development activities to innovate and develop new products for both shot staple cards and Non -woven Industry.

• A continual automation of fully installed and operational capacity at Nalagarh is ready to meet the market demand of high quality with minimum possible lead time for supplies.

• With the acquisition of the balance stake in Garnett wire Ltd., UK, a leading manufacturer and supplier of non-woven wires to technical textile industry in Europe, the company is poised for a very high growth in this market segment, thus, extending its footprint in the European market.

• A focus on the sustainable development in textiles includes recycling of the fibres. The Company has focused its efforts in developing various types of Card Clothing for the recycling industries. Heavy section wire range has been expanded for catering increased demand from recycling Industries both in Domestic and Export market.

• Company provides solution for many technical problems related to carding faced by spinning mills through its institutional knowledge and vast experience.

• The Company is perceived as a "value for money" brand in the market.

• Strong brand re-call due to its presence in the market for over 60 years.

Strong sales and service support in all major spinning centers in India as well as a wide distribution network. The Company has also established its own sales and service office in Turkey and Panipat and Ichalkaranji.

Weaknesses:

• The Company does not have a close association with a leading carding machine manufacturer neither in India nor overseas.

• Low-cost solutions offered by Chinese card clothing manufacturers with the strategy to gain market share in some south-east markets which are Companys stronghold.

Opportunities:

• New textile policy formulated by Government of India with an aim to attract large investment and employment generation in the textile sector to further boost domestic manufacturing and to create world class infrastructure at one place.

• Production linked incentive (PLI) scheme initiated worth Rs. 10,683 Crore for manmade fibre (MMF) products, MMF apparels and technical textile products over a period of five years.

• Reduction of customs duty on manmade fibres which will help to develop the non-woven and technical textiles.

• Opportunities arising out of development and high-quality new products and quality improvement initiatives taken by the Company.

• Expected growth in nonwoven and technical textile industry in India and overseas markets in which the Company has inherent product and application knowledge.

• The potential of unit volume growth in high production card market segments in which the Company has a lower share both in the domestic and export markets.

• Improved competitiveness of the Indian textile spinning industry relative to the Chinese textile industry.

Threats:

• Exorbitant rise in Cotton prices has forced mills to reduce cotton yarn production or shift to noncotton yarn like viscose, polyester - cotton etc. While the cotton prices increased by approximately 53%, the yarn price increase is only 21% as compared to the previous financial year. The impact of this is very high for small mills, however large size mills have less impact as they had planned to shift to finer mixing and secured sufficient export orders to avoid domestic glut situation. Continuous increase in cotton prices, diminishing stock of raw cotton and reduction in supply forecast has pushed the domestic industries in an uncertain situation.

• Continued shortage of dollar availability is expected to result into lowering of business from countries like Bangladesh, Egypt and Indonesia

• European card clothing manufacturers willing to reduce prices to capture market share in medium and high production card market.

• Competition from Chinese card clothing manufacturers who are endeavoring to position themselves as a value for money provider placing pressure on margins.

C) Operations

i) Product-wise Operational performance:

The Company has more or less maintained its turnover in this financial year after registering a growth in turnover of 30% in the previous financial year because of the very low consumption on account of war and cotton prices fluctuations. The Product-wise performance of the Company is as given below:

• Metallic:

The companys sale in Metallic sector remained same in the financial year 2022-23 as compared to the previous financial year. While there was a reduction in sale of standard wires by 5%, a good growth was achieved in ProLyf sales by 14% as compared to the previous year.

• Non-woven:

After taking over of GWL, company has seen a growth in demand of Non woven wires. In domestic market as well, there was an increased demand from Technical Textile Industries. There was an increase in sales of the non-woven sector by approx. 32% in the financial year 2022-23 as compared to the previous financial year.

• Machines:

The sales of machines remained same as the capital investments were sluggish in the financial year 2022-23.

• Servicing:

The servicing revenue during the financial year 2022-23 increased by 6% as compared to the previous year.

ii) Measures taken for improving the operational efficiency:

During the year, the team worked extensively on development of its new products, and its acceptability in super production card segment. The operations team at Nalagarh took various measures during the year to improve the operational efficiency. In its continuous efforts to improve its operational efficiency, principles of LEAN manufacturing were adopted. Various automation projects were undertaken during the year under review for the purpose of quality improvement of the products of the Company. Better production planning and improvement in uptime of the machines in the plant helped the Company to improve Overall Equipment Effectiveness (OEE) of the machines. In addition to this, various technical training sessions were conducted to consciously improve the operational efficiency. All this helped the Company to achieve its ‘on-time in full" (OTIF) target of 98% by making timely supplies to its customers. Strict controls were also exercised to control costs.

D) Outlook:

For increasing global competitiveness of the textile sector and with a view to making India a global hub of manufacturing under ‘Make in India initiative, the Government of India has initiated several export promotion and other policy initiatives which will benefit certain sectors of the Indian textile industry.

Several initiatives were undertaken by the Government for promotion of exports as per the details given below:

• 100 per cent Foreign Direct Investment in the Indian textiles sector under the automatic route.

• Under Production Linked Incentive scheme in Textile sector to attract investment in MMF fabric, MMF apparel and Technical Textiles, a total amount of approximately Rs 10,683 crore has been earmarked by the Government. A total of 61 applicants have been approved under Production Linked Incentive (PLI) Scheme for Textiles wherein the expected investment would be approximately Rs. 19,077 crores with a projected turnover of Rs. 184,917 crores and employment generation of approximately 240,134.

• Import duty of cotton reduced to zero.

• Uniform goods and services tax rate at 12% on man-made fabrics (MMF), MMF yarns and apparel effective from January 1, 2022.

• 7 Mega Integrated Textile Region and Apparel (PM MITRA) Parks planned with a total outlay of Rs. 4,445 crores (Source: Textile Ministry Press release dt 14 April 2022).

The Global technical textiles Industry is expected to reach USD 220 Billion by 2025 out of which the Indian technical textile sector expected to reach USD 50 Billion. India contributes to approximately 10% of the global consumption. Indias technical textiles market which is valued at US$ 17 billion has been growing at a CAGR of 12% since the last five years. (Source: Wazir Press release).

In view of the above, your Management is cautiously optimistic about the improvement in the present revenue levels in the coming financial year 2023-24. Further, the Company is fully focused on its efforts to carry out all round improvements in plant efficiency and productivity and develop new products for latest generation of carding machines and Technical Textiles Industry.

E) Risks and Concerns:

The card clothing industry depends on a limited number of suppliers for commodities like steel, cotton and rubber due to the criticality of raw material required for manufacturing card clothing. The card clothing manufacturers have very little control over such suppliers since their volume of business is comparatively small for the suppliers. Apart from the risk associated with the volatility in raw material prices the Company

is also exposed to other general risks related to volatility in Foreign Exchange rates, change in taxation structures, changes in interest rates, natural / manmade disasters, and political risks.

While tapping the growth opportunities, the major risks and areas of concern for the card clothing industry are, increasing input costs, high price of power and its inadequate supply and lack of infrastructure among companies in small and very small-scale sector.

The demand for Card Clothing in the re-clothing market is entirely dependent on the current operational capacity of carding machines, their production rate and consumption of fibre. Any slowdown in demand in the textile spinning industry, particularly cotton, directly impacts the prospects of the Company.

The Spinning Mills in India have faced following challenges during the financial year 2022-23:

• Steady increase in cotton price due to depleting stock and lower production in major cotton producing counties.

• Ongoing conflict between Russia and Ukraine causing an increase in the price of oil and its knock- on effects on the cost of transportation.

• Manufacturing cost of cotton garments and made ups in India is comparatively higher than other countries like Bangladesh and Vietnam due to comparatively higher cost of power and fuel in India.

• Loss of yarn export sale to Pakistan on account of trade barriers.

• Continued war between Ukraine - Russia has led to volatile and increased commodity and energy prices resulting into Increased food shortage and inflation which has dampened demand for garments from Europe affecting exports from India.

• Due to increasein interest rate by the Federal reserve of the United states, there was severe shortage of dollar availability in the markets like Bangladesh, Egypt and Indonesia. This impacted negatively on export to these countries by the Company.

• Earthquake in Turkey has resulted in heavy loss of infrastructure for the textile industries resulting into substantial decrease in demand for machine components and accessories.

F) Internal control systems and their adequacy:

The Company operates in ERP environment and has implemented the Oracle System for the purpose of "Internal Financial Controls" within the meaning of the explanation to Section 134(5)(e) of the Companies Act, 2013, read with Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014. The Company is in the process of upgrading the present version of its Oracle System to new Oracle version 12.2. The Company is also in the process of restructuring its Finance and Accounts function, including finance and accounts function at its branch at Turkey, and some of its other support functions and thereby re-defining the Risk Control Matrix for the purpose of maintaining adequate internal financial controls.

This has not affected any of the internal financial controls laid down by the Company during the financial year under review. The internal financial controls of the Company are adequate and were operating effectively during the year under review. The Board of Directors has adopted necessary internal control policies and procedure for ensuring the orderly and efficient conduct of its business, including adherence to the Companys policies, safeguarding its assets, prevention and detection of frauds and errors, the accuracy and completeness of the accounting records and timely preparation of reliable financial information.

The Companys manufacturing facility has ISO 9001 certification, which is renewed from time to time.

A firm of auditors manned by technically and commercially qualified personnel carries out internal audit, of Nalagarh plant, which is followed up by discussion with each department, the Chief Executive Officer and in the Audit Committee. Wherever risks have been identified in processes or systems, these have been addressed by implementing a more robust process.

The Company has a costing system to help control costs and to take decisions on pricing. Pursuant to Notification No. G.S.R. 725(E) dated July 31,2018 whereby the Companies (Accounts) Amendment Rules, 2018 were notified, the Company is maintaining the Cost Records under sub-section (1) of section 148 of the Companies Act, 2013. A certificate of a Practising Cost Accountant has been obtained certifying that the Company has maintained the Cost Records as per the statutory requirements mentioned above.

G) Financial performance and operational performance:

• Standalone Financial Performance

During the year under review, the Company earned a total revenue of Rs. 6,952.88 Lakh as against Rs. 6,123.96 Lakh in the previous year. The profit for the financial year 2022-23 has been Rs. 552.46 Lakh against profit of Rs. 19,134.40 Lakh for the financial year 2021-22.

• Consolidated Financial Performance

During the year under review, the Company along with its subsidiaries achieved a total consolidated revenue of 7,869.89 Lakh for the year ended March 31,2022, as against Rs. 7,220.21 Lakh for the previous year ended March 31,2023. The consolidated profit after tax for the year under review has been 374.87 Lakh as against consolidated loss after tax of Rs. 19,066.72 Lakh for the previous year.

H) Material developments in Human Resources / Industrial Relations:

Industrial relations of the Company were cordial throughout the year. Your Company recognises the need for a strong, dynamic and motivated Human Resources. Over the years Company has maintained consistency in its efforts in training and developing its human resource to sustain in the increasing competition.

I) Key financial ratios, significant changes therein and its explanation:

Particulars	2022-23	2021-22	Remarks
Debtors Turnover Ratio	83 days	71 days	Debtors increased due to lower collection.
Inventory Turnover Ratio	155 days	123 days	Inventory has increased due to lesser sales in proportion to the production.
Interest Coverage Ratio	7.07 times	3.27 times	Increase in interest coverage ratio (excluding exceptional items) has improved due to increase in operational profitability.
Current Ratio	8.54 times	19.82 times	Decrease in current ratio due to increase in noncurrent investments.
Debt Equity Ratio	0.09 times	0.07 times	Marginal increase in debt due to exchange rate fluctuation.
Operating Profit Margin (%)	59.24%	49.22%	Increase in operating profit margin due to 100% occupancy of premises in Powai.
Net Profit Margin (%)	9.7%	344.6%	Previous year net profit was higher due to profit on sale of Pimpri property.

J) Return on net worth, significant changes therein and its explanation:

Return on net worth for the financial year 2021-22 was 79.64% as against 3.01% for the financial year under review. Previous years EBIT was higher due to profit on sale of Pimpri property. As a result return on net worth has come down as compared to previous year.

K) Cautionary Statement:

Statements in the Management Discussions and Analysis Report describing the Companys projections, estimations, expectation and predictions may be "forward looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from the expressed or implied. Important factors that would make a difference to the Companys operations include demand and supply conditions, raw material prices, changes in government regulations, tax regimes, competition and economic developments within and outside the country.