International Hometex Ltd Directors Report

INTERNATIONAL HOMETEX LIMITED ANNUAL REPORT 2006-2007 DIRECTORS REPORT Dear Shareholders, Your Directors have pleasure in presenting the 17th Annual Report & the Audited Accounts of the Company for the year ended 31st March 2007. FINANCIAL RESULTS: (Rs. in lacs) 2006-07 2005-06 Sales & Other Income 5669.74 3838.61 Profit before Interest, Depreciation & Tax 992.33 787.30 Less: Interest 307.84 226.67 Provision for Doubtful Debts 182.80 - Depreciation 275.66 235.71 Profit before Tax 226.03 324.92 Less: Provision for Tax 29.00 29.00 Add: Deferred Tax (30.00) (215.00) Profit after Tax 227.03 510.92 Balance Brought Forward from Previous Year 1161.51 650.59 Less: Expenses pertaining to Previous Year 34.49 - Profit available for appropriation 1354.05 1161.51 Appropriation are made as under: Transfer to Revenue Reserve - - Balance carried to Balance Sheet 1354.05 1161.51 PERFORMANCE: The sales and other income of the Company for the year under review was Rs.5669.74 lacs as compared to Rs. 3838.61 lacs for the previous year. There is an increase of 47.70% in sales and other income of the Company as compared with the previous year. The Company has made a profit of Rs.227.03 lacs during the year as against Rs. 510.92 lacs for the previous year. EXPANSION AND DIVERSIFICATION: A) MULTI FILAMENT YARN (MFY) & BATHMAT: The Company has been able to put the MFY division on stream during the course of the year under review. The capacity utilization was around 45% for the year under review. The Company has now in the process of setting up the down stream activities and is envisaged to complete the same by October 2007. The Company now envisages to start the setting up of the Bathmat plant from Jan 2008 onwards. It has a 18 month construction time and is envisaged to go on stream by the third quarter of 2009. The capital outlay for the project is about Rs. 250 million and the funding for the same is currently being tied up by the Company. B) ACQUISITION OF SHARES IN A US COMPANY: During the current year the Company has taken steps to acquire about 27% shares in Gordon & Ferguson Inc (GFI). The Company is based in New York, USA and is in the business of importing and distribution of Textiles. GFI also owns three brands of repute in USA. The Company will now sell its product directly to the US retailers thus improving its margins. The Company will also heave access for these brands for the Indian market. C) POWER PLANT: The Company is in the process of setting up a mini power plant of about 3.5 MW at a capital outlay of Rs. 750 lakhs. This will have the advantage of reducing the power cost of the Company by around 45% as well as making the steam available for the Towel division at negligible costs. The project is envisaged to be completed in about 18 months time. D) RETAILING: The Board of Management have shown their keen desire for the Company to make a foray into retailing of Home Textiles on a pan India basis. The Company is studying the viability of the same and the various formats for retailing. The Company is also in talks with Venture capitalists and is taking a good look at the finance models available for the retailing venture. PREFERENCE SHARES: The Company has issued Redeemable Cumulative Preference Shares of Rs.240.55 Lacs during the year. EQUITY SHARES: The Company has allotted 10,00,000 Equity Shares of Rs.10/- each (at a premium of Rs.10/- per Equity Share) to Promoter Group Company & 17,55,000 Equity Shares of Rs.10/- (at a premium of Rs.10/- per Equity Share) to others on preferential basis on 13th April, 2007 in terms of Special Resolution passed at the Extra Ordinary General Meeting of the company held on 29th March, 2007. The necessary formalities of listing of the said shares on Bombay Stock Exchange Ltd. is being completed. DIVIDEND: Keeping in view the requirement of funds for the working of the company, the Directors do not recommend dividend. DIRECTORS: Shri. V.K. Agrawal will cease to be Whole Time Director of the Company w.e.f. 14th October, 2007. Due to age he has informed the Board that he is not able to devote time for day to day affairs of the Company. Therefore he has requested the Board that he is continue as Director of the Company but he should be relieved from the position of the Chairman. The Board has decided to appoint Shri. V.K. Agrawal as Chairman Emeritus. Shri Vineet Agrawal has been re-appointed as whole-time Director designated as Chairman & Managing Director of the company w.e.f. 1st October, 2007 for a period of three years. The respective resolution regarding his re- appointment shall be approved by the Shareholders at the forthcoming Annual General Meeting. Shri. A. Indu Sekhar Rao & Shri Rakesh Agrawal retire by rotation and being eligible, offer themselves for re-appointment at the ensuing Annual General Meeting. AUDITORS: The Auditors, M/s. Pravin Manudhane & Co., Chartered Accountants. Statutory Auditors of the Company retire and offer themselves for re-appointment. PARTICULARS AS PER SECTION 217 OF THE COMPANIES ACT, 1956: None of the employees of the Company was in receipt of remuneration of Rs.24.00 lacs per annum or Rs. 2.00 lacs or more per month. Hence, provisions of Section 217(2A) of the Companies Act, 1956 read with the Companies (particulars of employees) Rules, 1975 as amended, is not applicable to the Company. Additional information relating to the conservation of Energy, Technology Absorption and Foreign Exchange Earnings and Outgo required under Section 217(1)(e) of the Companies Act, 1956 is set out in a separate statement attached to this report and forms part of it. DIRECTORS RESPONSIBILITY STATEMENT: Pursuant to the requirement under Section 217 (2AA) of the Companies Act 1956, with respect to the Directors Responsibilities statement, the Directors to the best of their knowledge and belief confirm that: i) in the preparation of the annual accounts the applicable accounting standards had been followed; ii) the accounting policies selected had been applied consistently and judgments made and estimates given are reasonable and prudent so as to give a true and fair view of the state of affairs of the company as at 31st March 2007 and of the profit of the company for the year ended on that date; iii) the proper and sufficient care have been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act 1956 for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; iv) the annual accounts had been prepared on a going concern basis. CORPORATE GOVERNANCE: As stipulated by Clause 49 of the Listing Agreement, the Report on Corporate Governance is given separately in this Annual Report. The Certificate of M/s. Pravin Manudhane & Co., Statutory Auditors of the Company regarding compliance of Corporate Governance Code is annexed to and forms part of the Directors Report. ACKNOWLEDGEMENTS: Your Directors wish to place on record the valuable co-operation and support received from the Banks, viz State Bank of India, The South Indian Bank Ltd., Indian Overseas Bank & Union Bank of India, Government & Semi Government authorities. Your Directors thank esteemed Shareholders for the faith reposed in the Company. Your Directors place on record their appreciation of Companys Employees at all levels for their dedicated performance. For and on Behalf of the Board Place: Mumbai, V.K. AGRAWAL Date : 5th July, 2007 Chairman ANNEXURE TO THE DIRECTORS REPORT: Additional information as required under the Companies (Disclosure of particulars in the Report of Board of Directors) Rules, 1988. A. CONSERVATION OF ENERGY: (a) Energy conservation measures taken by the Company: - The Company has been taking continuous steps to conserve the energy and minimize energy cost at all levels. - Monitoring the overall energy consumption, by reducing losses and improving efficiencies. (b) Additional Investment Proposals: - The Company takes necessary steps for investments in energy saving devices from time to time. (c) Impact of measures at (a) and (b) above for reduction of energy consumption and consequent impact on the cost of goods: - Per unit Electric consumption has reduced from 1.80 to 1.61. - Per Ltr. Furnace Oil consumption has reduced from 0.91 to 0.81. (d) Total Energy Consumption and Energy Consumption per unit as per Form A in respect of industries specified in the Schedule: FORM A: 4) POWER AND FUEL CONSUMPTION: Current Previous Year Year 1. Electricity: Purchased- Units (KWH) 23.88,308 14,17,335 Total amount (Rs.) 1,17,04,487 58.81,664 Rate per unit (Rs.) 4.90 4.15 2. Furnace Oil: Quantity - Ltrs. 6,97,755 7,11,225 Total amount (Rs.) 1,11,13,783 1,34,53,724 Average rate per unit (Rs.) 15.93 18.92 CONSUMPTION PER UNIT OF PRODUCTION: 1. Electricity (KWH): Fabric / Kg. 1.61 1.80 2. Furnace Oil (Ltrs): Fabric / Kg. 0.81 0.91 B) TECHNOLOGY ABSORPTION: I) Research and Development (R &D): 1. Specific area in which R & D carried out by the Company: a) Continuation of new fibres in the towel weaving viz. Modal Yarn, Bamboo and its blends and organic cottons. b) Trials of new chemicals in the Dyeing process to reduce the dye cycle time. 2. Benefit derived as a result of the above R & D: a) Company has secured orders for Bamboo and its blends and organic cottons. b) Cost of dyeing and steam consumption have been reduced owing to the chemicals trials being done at the mill. The product also showed marked improvement in its desired properties. 3. Future plan of Action: Continuation of the measures already initiated by the Company. Introduction of more process controls and detailed quality control as well as cost reduction techniques. 4. Expenditure on R & D: (Rs. in Lacs) Current Previous Year Year a) Capital - - b) Recurring 3.01 5.37 c) Total 3.01 5.37 d) Total R & D Expenditure as a % of Total turnover 0.06% 0.15% II) Efforts in brief made towards technology absorption, adaptation and innovation. 1. The Company has been developing in house modification/improvement in process technology in its various manufacturing sections, which when and if found suitable have been integrated in the manufacturing process. 2. Benefit derived as a result of the above efforts: The above have resulted in improving efficiency, quality & design of the companys product. C. FOREIGN EXCHANGE EARNINGS AND OUTGO: The information of Foreign Exchange Earnings and Outgo is contained in Note No. 5 & 6 of the Notes to the Accounts. For and on Behalf of the Board Place: Mumbai, V.K. AGRAWAL Date : 5th July, 2007 Chairman 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.