International Hometex Ltd Management Discussions

INTERNATIONAL HOMETEX LIMITED ANNUAL REPORT 2006-2007 MANAGEMENT DISCUSSION AND ANALYSIS 1. Overall Review: The Home Textiles market continues to grow for the Indian product. Having said that the composition of growth and export percentage have changed. The one single factor that has led to decline in the growth of export of Textile goods from India is the appreciation of the Indian Rupee. A ten percent appreciation of the Rupee vis-a-vis the dollar in the year under review coupled with an inflation rate of around 5% has posed great challenges to all exporters in general and especially for textile exporters owing to stiff competition from neighboring countries as well as continued growth in capacities within the country. A combined effect of the same has been an erosion of margins as well as capacities being under utilized within the country. If the Rupee continues its appreciation as is anticipated it shall pose major hurdles in the home textile industry to even maintain its exports at current levels. On the other hand the retail market in India is getting more organized with the set up of new retail chains across India. Also, with the per capita consumption seeing a rise within India the demand for Home Textile goods has increased significantly. The income of an average Indian middle class has seen an upsurge and with this the increase disposable surplus has led to increase in buying power. Thus demand for goods from within the country having increased dramatically, more and more manufacturers are turning to the local market for selling their products. Thus some of the unutilized capacities have been moved towards the local market and although the price realizations may riot be very remunerative to start with, but with the organized retail trade growing rapidly in India it is a question of time when these capacities shall be gainfully employed for sales within India. One of the major worries for the, industry remains the continued investment in additional capacities in almost every sphere of Home Textiles. With funds under TUFS being available and the scheme having been extended, additional investments at lower fund cost are being set up across the countries. Further, with some states offering major sops to attract investment there is some justification for setting up a unit in that state. However, this leaves the existing units at a disadvantage and in a scenario of over capacity within the country the new investment will merely boil down to being a swap in capacities from old to new in the long term. 2. Business Segment: a) Industry Structure & Development: Towel Division: The hectic pace of investment in the Home Textiles industry continues unabated. Also, during the period under review the Rupee appreciated sharply against the dollar. A combines effect of the same has been the under utilization of capacities. New capacities are being unable to get enough business and have dropped prices in the hope of garnering business. Existing mills owing to set up of new capacities have lost some business and all this because the industry has not been able to increase its market size owing to the Rupee appreciation which is making the Indian Home Textiles steeply priced when compared to our competing countries. It is anticipated that the trend shall continue in the medium term thus putting pressure on capacity utilizations as well as profitability. A couple of factors helped the industry. Firstly, a stable cotton helped the industry at a time when it would have been unable to absorb the shock of any rise in raw material prices. Secondly, the growth in demand for Home Textiles goods from within the country. This has helped in reducing the under utilization of capacities to start with and with a promise of being a big market in the medium term, especially with the growth of organized retail trade within the country. Multi Filament Yarn Division: The companys new venture is the manufacture of Polypropylene, Nylon & Polyester multi filament yarn. The industry has seen an increase in raw material prices owing to the firming up of crude prices. Most of the increase, the industry has been able to pass on, which has led to the increased prices of the end product. Also, cheaper imports mainly from China has had some effect on the demand for Indian manufactured goods. A rising rupee has also affected the industry by bringing about lower realizations. The industry has tried to mitigate this by importing its requirement of raw materials and thus trying to keep its profit margins intact. b) Opportunities & Threat: The company is committed towards being a niche player in Bath Textiles. Its vision to be a Bath solution company is a step closer. During the period under review the Company commissioned its Extrusion plant for the manufacture of Multi Filament yarn in Polypropylene, Nylon & Polyester. The Companys product quality has been well appreciated in the market and the Company is now in its second phase of setting up the downstream facilities for manufacture of value added yarn for the Home Textiles sector. This phase is set to be completed by October 2007 and the company is already inundated with orders for its products from Oct/Nov 2007. The Companys plan for the setting up of the Bathmat manufacturing plant shall be taken up from Jan 2008 onwards and has a completion time of 18 months. The Companys Terry Towel division continued to maintain its share in the value added segment. The appreciation of the Rupee has put a lot of pressures on the Companys margins and the Company has thus been able to only marginally improve the bottom line. The company could maintain the profit levels owing to better utilization of capacities as its UVR eroded by around 9% in the year under review. The industry continues to be plagued by over capacities within the country as well as around the world. Thus competition is severe and prices tend to be under pressure especially in a scenario where demand from developed countries have either stagnated of have reduced a bit because of slow down in their economies. During the year under review, electricity prices were raised in Maharastra. In the new price structure the per unit cost of electricity has risen from Rs. 3.90/- unit to an average price of around Rs. 5.70/- unit i.e. a 46% increase in the electricity cost. The Company has been unable to pass on this increase in cost to the buyers in full as competition from other manufacturers within the country has made it difficult for any upward revision in prices. On the other hand the Company was able to save costs in the purchase of furnace oil by 15% and owing to better utilization of the steam generated from the boiler the company has been able to bring down the Furnace Oil consumption from 0.91 ltrs / kg of fabric to 0.81 ltrs / kg of fabric. i.e. a saving in consumption by 11%. This has to an extent set off the increase in cost of electricity in the Terry Division. However, in the Multi Filament Yarn division the Company continues to bear the brunt of rise in Electricity cost and is exploring the possibility of setting up a mini power plant of about 3.5 MW to bring the cost of electricity down to Rs. 2.75/- unit and have the steam available at negligible cost. On the marketing front, the Company has taken steps to acquire a 27% holding in a USA based Company viz., Gordon & Ferguson Inc. The Company is in the textile import and distribution business and had a turnover of about Usd 20 million for the year ended 31/12/06. G&F also owns three strong brands in the US market. The Company now envisages to sell its product under these brands within the USA. This shall have the benefit of firstly being able to deal directly with US retailers and thus being able to shore up the margins in the coming years. Also, the company has access to these Brands for the Indian market and is studying the best way possible launch these brands in India in the mid terms. The Company is also studying the feasibility of getting into retailing. The Company plans to retail Home Textiles on a pan India basis. The Company is in the process of making its presentations to Venture Capitalists and seeking guidance on how best to enter this venture and the modes of finance available for the same. Once it has been able to make a bankable report on its foray into retail the management shall approach the shareholders for their necessary approvals. c) Risks & Concerns: The towel division continues to be plagued by over capacity. Also, with stiff competition from Pakistan and China on the low to mid end and from Turkey and Brazil on the mid to high end there is a difficulty in getting remunerative prices. This continues to have a negative impact on the profitability of the Company. The rise in electricity cost is hampering the Multi Filament Yarn division. Any further increase in the same shall have adverse impact on the divisions working. As the towel division requires steam in big quantities and the Multi Filament Yarn requires lots of electricity, the company is in the process of setting up a mini power plant to meet its requirement as almost 50% of current costs of steam and electricity. The Company plans to complete the same in 18 months time. The appreciation of the Rupee by around 15% in the last 18 months has deeply affected the working of the Company. The UVR in the towel division is down 9% owing to the same and it is only because of capacity utilizations that profits could be maintained. Although the government did increase the DEPB by 3% it has been too late as also grossly insufficient to meet the requirements. If the rupee continues to appreciate in the future the companys profits and capacity utilizations will be adversely affected. d) Outlook: It has been the Companys endeavor to be a multi-product company and to be in the value added sector. To this end all steps taken by the Company are slowly and steadily falling into place. The Companys aim to be a bath solution Company is set to fructify in the year 2009 once the bath mat project is set up. The Company now has a marketing arm in one of the biggest markets for Home Textiles i.e. USA. These shall have the effect of helping the Company to maintain a 15-20% growth levels in the next few years as well as improve the realizations of the Companys product. Steps taken to set up the power plant shall result in huge savings as combined billing for these two for both division included on 85% capacity basis is about Rs. 350 lakhs per year and this can be got down to about Rs.200 Lakhs annually. This saving of Rs. 150 Lakhs will help reduce cost and shore up the margins. The Company is very optimistic that with all the above efforts taken in the prior years the Company is now set to have a sustained growth and to meet the challenges that the industry faces currently and in the future. 3. Internal Control Systems and their adequacy: The Company has proper and adequate systems of internal checks and controls in order to ensure that all assets are safeguarded against loss from unauthorized use or disposition and that all transactions are authorized, recorded and reported correctly. Management regularly reviews the internal control systems and procedures to ensure orderly and efficient conduct of business. 4. Financial Performance: For the year the Company recorded the sales and other income of Rs. 5669.74 Lacs registering a growth of 47.70% over a previous year. Profit was Rs.227.03 Lacs as against Rs. 510.92 Lacs for the previous year. 5. Human Resource Development / Industrial Relations: The human resources of the Company is its prime asset contributing through dedicated hard work, creativity and innovation in the productivity, and profitability of the Company. The Company seeks to attract and retain best talent available. The Company presently has 343 employees on its rolls. Industrial relations have been cordial and satisfactory during the year under review. 6. Cautionary Statement: Statements in this Management Discussion & Analysis describing the companys objectives, projections, estimates, expectations or predictions may be forward looking statements within the meaning of the applicable securities law and regulations. These statements are based on certain assumptions and future expectations/events. Actual results could however differ materially from those expressed or implied. Important factors that could make a difference to the Companys operation include global demand- supply patterns, raw material availability and prices, cyclical demand and pricing in the companys principal markets, changes in the government regulations and tax structure, economic development within India and the countries in which the Company conducts business and other incidental factors such as litigation and industrial relations. The Company assumes no responsibility in respect of forward looking statements herein which may undergo changes in the future on basis of subsequent developments, information or events.