Kallam Textiles Ltd Management Discussions.

A) GLOBAL ECONOMIC OVERVIEW

The COVID-19 pandemic led to a market situation where demand for the goods and services decreased significantly There is low order intake and sales of components moreover on average companies in all regions of the world suffered significant numbers of cancellations and/or postponements of orders. Export orders, orders of apparel in retail shops departments stores, outlets stores etc, dropped dramatically. This situation has led brands and retailers across the board to cancel and/or postpone orders significantly. Fabric and yarn prices are weak, which will continue to pressure the margins of industry participants. Flence, this exceptional market situation gave rise to losses in all the business groups in the first half of 2020

B) INDIAN ECONOMIC PROSECTIVE

The Indian textile industry has taken a major hit due to COVID-19. This is because most of the Indian yarn exports to China had fallen significantly due to the US-China trade war. The majority of downstream players incurred inventory losses due to the ongoing geopolitical tensions. This further lead to the decline in prices by more than 40% month on month in March 2020. Indian ready-made garments players have been hoping of a revival in demand and shift of orders from China since the start of a pandemic. However, with the spread of coronavirus in Europe, demand and orders have been reduced due to the pandemics impact on consumer behaviour and habits.

i) Cotton Production and Trend in cotton price

Cotton output in India was expected to grow by 13.6 percent y-o-y to 6 Million tonnes during the FY 2019-20 on account of higher yields backed by favourable monsoon conditions. Also, an increase in MSP for in FY 2019-20 is believed to have aided its output. The MSP was raised by 2 percent to Rs 5,255 per quintal and by 1.8 percent to Rs 5,550 per quintal for medium staple and long staple variety, respectively, for CS 20. However the cotton production had declined by 15.7 per cent to 5.3 million tonnes in CS19 due to unfavourable monsoon in several parts of India.

The domestic cotton prices on a y-o-y basis declined by 7.1 percent to Rs 115 per kg and by 13.2 per cent to Rs 105 per kg, respectively, during the first 6 months (October 2019-March 2020) of CS20. This was mainly on account of a fall in international cotton prices. The price of domestic cotton variety declined to Rs 113 in March 2020 from Rs 116 per kg in January 2020.

The international cotton prices had declined to their lowest level in August 2019 for the period to $1.6 per kg from $1.9 per kg, fall of 18.3 per cent. Estimates of higher global production amid stable consumption, US-China trade war that found no major breakthrough in July 2019 resulted in the price fall. Post this, the international prices improved on a m-o-m basis till January 2019 to average at $1.74 per kg which declined to $1,69 per kg in February 2019 due to Covid-19 challenges.

The cotton yarn output remained in the range of 4.1 million to 4.2 million during FY 17 to FY 19. The production which was stable during FY18 increassed in FY19. During the first 10 months (April-january)of FY 20 cooton yarn output declined by 4% to 3.4 million tonnes.

Similarly weak cotton yarn export demand during FY19-20 affected Indias output. Exports in India account for around 28 per cent of the total cotton yarn production and thus movement in exports have an impact on its output and prices Cotton yarn outbound shipments from India declined by a sharp 23.8 per cent to 0.8 MT during April 2019-January 2020 from 1 Million Tonn in the same period last year. A drastic 42.6 per cent fall in cotton yarn exports to China (accounting for about 35 per cent of the total cotton yarn exports) affected the overall outbound shipments. In addition to this, exports from India to rest of the world also fell by 13.6 per cent.

Higher cotton (raw material) prices in India due to increase in MSP has raised the cost of production for spinners making it difficult for them to compete in the international market thus affecting exports. Also, lower cotton production in India during CS19 supported higher domestic prices. In addition to this, India has a price drawback in exporting cotton yarn to China as competitors like Vietnam, Pakistan and. Indonesia enjoy duty free entry to Chinese cotton yarn market. All these factors impacted the export unit realisation of Indias cotton yarn.

Cotton yarn imports by India are quite small when compared to exports. During the last two years FY18 and FY19, the imports had declined by 15.5 per cent and 18.6 per cent, respectively. The trend however saw a change and the cotton yarn imports by India increased by 4.9 per cent to 4.9 thousand tonnes during the period April 2019-January 2020. The exports of cotton yarn on the other hand declined by 23.8 per cent during this period.

OUTLOOK:

The export scenario of the Indian textiles industry remains weak. The demand for textiles will be low in both the markets domestic and international. Even after the lockdown is lifted, demand for textiles will take time to pick up. This is because footfalls will be low in malls and retail stores as people will avoid visiting crowded markets.

The world will not be the same after Covid-19. For the textile industry is very important to recover the trust of the consumer on the other hand income loss among the consumers may translate into a fall in consumption of non-essential goods and services like garments, in turn affecting the prospects for businesses and economies

We are looking at very low consumer sentiment and therefore much less consumption this year because of cut in buying budgets to prepare for these eventualities. Retailers and brands have already started halting production lines

Migration of labour during the Lockdown is going to be a big issue, .large chunk of workers have already gone back to their villages and it may take a minimum of four to six months to see businesses back to normal

"Since the entire value chain is impacted, support package has to be made available to the entire value chain - -both MSMEs and large companies

OPPORTUNITIES & THREATS [SWOT ANALYSIS]

 

(i) Opportunities

Subdued domestic demand and declining export demand due to lockdowns in global markets on account of COVID-19 come as a double blow for textile companies While domestic demand expected to revive in third quarter of FY21 with the onset of festive season and reopening of retail spaces, export demand would fairly depend on recoup of major economies such as the US and the UK & China

The ongoing economic slowdown is likely to contract the demand by 25-35 per cent across yarn, fabric and apparels in FY21 as compared to the previous fiscal. However, we expect a short-term opportunity to cater to those markets which were earlier catered by China and Bangladesh

As food and clothing will continue to remain key purchases, there is always hope for this industry.

Threats

• safety and health of the workers and staff;

• disrupted supply chains

• lack of demand or the fear significant drop in demand

• Lack of liquidity.

• Cotton contamination and quality problem.

• Increased pressure on prices.

• Competition from international brands.

OUR COMPETITIVE STRENGTHS:

 

Manufacturing facility with locational advantage and state-of-the-art machinery to deliver quality products

We have two manufacturing facilities in the state of Andhra Pradesh and our hydro power plant is located in the state of Telangana. Our manufacturing facility located in Guntur, AP enjoys locational advantage since Guntur is a major and one of the best quality cotton growing areas in India that produces MCU5, which is long staple cotton and is suited for fine counts. It is also a major centre for cotton breeding in southern zone. Our Guntur unit is located NH5, Golden Quadrilateral connecting Chennai and Calcutta and in proximity to Krishnapatanam port and Vishakhapatnam port which helps in saving logistics cost for export operations. Further, our weaving and dyeing units are located near to trijunction with highway access to Chennai, Hyderabad and Calcutta. .All the manufacturing facilities are well equipped to deliver quality products.

Quality control measures

Our Company has implemented stringent quality control measures to produce superior quality yarn and fabric for our domestic and international customers. As the quality of our products depends on the raw material quality, so we source the superior quality raw material from farmers/suppliers. We carry raw material inspection on Uster HVI Spectrum and Uster Afis Pro -2 for 2.5% SL, uniformity, MIC, Strength, Short fiber content % and neps /grm. Bale management system is followed for consistent superior yarn quality, and for this, cotton stock is maintained for 5-6 months. Carding and combing process is optimized for NRE of 75% to 85% and 65% to 70% respectively. RIETER D35 /D40 /D45 draw frames are maintained for less than 0.50%.In ring frame breakages are maintained below 5 to 6 breaks per 100-spindle hour. In auto coner utmost care is taken for achieving 85% splice strength with defect-free packages.

Further, apart from in process inspection system, our mill has adopted stringent final inspection procedure before dispatching yarn to its customers.

Wide range of products across cotton yarn and woven fabrics businesses

We have continuously expanded our range of products to cater to the customized requirements of our customers. Our product range includes Ring Spun combed yarn (from Ne.30s to Ne.80s combed warp / compact), TFO ring spun yarn, Open End yarn (from Ne10s to Ne20s), TFO open end yarn, BCI certified yarn and woven fabric such as yarn dyed shirting and bottom weight fabric. Our yarn dyed shirting includes cotton range and blended products.

Experienced management team with strong industry expertise

Our Managing Director, Mr. Poluri Venkateshwara Reddy, has been instrumental in developing Ginning Business of our Company. He has in depth knowledge in selection of Kapas and Cotton. Mr. Gurram Venkata Krishna Reddy, Joint Managing Director and CEO, has vast experience in Manufacturing of Cotton Yarn. He also looks after the day-to-day affairs of the Company.

OUR STRATEGY

 

Improvement in range of our Products:

We are focusing on development of more specialized and customized grades for specific applications in conjunction with our customers. For this purpose, we are also focusing on improving our technical expertise to support customers and market development.

Customer relationship, sales, and distribution strategy

In India, we have been selling our products mainly to customers in South and Western India. Furthermore, our growth also depends on our ability to attract additional fabric and garment manufacturers, and distributors. Accordingly, we intend to continue to focus on developing and strengthening our sales and distribution network, and introducing integrated solutions for the benefit of our customers. As a part of our sales and distribution strategy, we propose to penetrate the domestic market further and at the same time we propose to continue our endeavor to establish a global presence for our products through the export market in the near future by further developing strategic relationships with key clients

Captive power: Clean/Green Energy

We are working on reducing electricity cost. SITRA report on Energy monitoring is submitted. Operational Cost Optimization-Captive Power Electricity is one of our biggest costs by adding captive power generation will reduce our operational costs. Increasing our captive solar power generation will help us strengthen our PAT in the future. We have total requirement of 40MW solar power to feed all the units so far we are executing net metering project under HT metering GNT 509, GNT3035 & ONG 828 totaling 3MW capacity.

Our fabric made of organic or BCI cotton in combination with clean energy will make our fabric more sustainable and attract clothing brands in the future

RISK & AREAS OF CONCERNS:

The Key factor in determining a companys performance is the companys ability to manage the risks in it business/ environment effectively. Many risks exist in a companys operating environment and they emerge on a regular basis,Viz Currency Risk, Commodity price Risk and Human Resource Risk. Risk management is embedded in operating framework of your Company. The risk management framework defines the risk management approach of the Company and also includes the periodical review of such risks. Your Company believes that managing risks helps in maximizing returns. The Board and the Audit Committee review the risk management framework periodically

Other risk, factors include:

Rising input costs
Labor availability
Weak economic environment and consumer sentiment
Competition
Trade Barriers

THE DETAILS IN RESPECT OF ADEQUACY OF INTERNAL FINANCIAL CONTROLS WITH REFERENCE TO THE FINANCIAL STATEMENTS AND RISK MANAGEMENT PRACTICES.

The details regarding adequacy of internal control system is available in the Directors Report.

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

 

i. Safety, Health And Environment:

Safety, Health and Environment is one of the primary focus areas for your Company. We are conducting our business with respect and care for people and the environment. We have the responsibility towards the utilization of natural resources.

Your Company will always set the objectives and targets that result in continuous improvement of our Safety, health and environmental performance Your company has Complying with agreed corporate requirements that embrace the duty of care, including compliance with applicable laws

//. Human Resources And Industrial Relations:

The Company takes pride in the commitment, competence and dedication shown by its employees in all areas of business. Your Directors wish to convey their gratitude and place on record their appreciation for all the employees at all levels for their hard work, solidarity, cooperation and dedication during the year. Industrial relations were cordial throughout the year.

During the Year under review 580 employees were employed in various activities of the company DISCLOSURE OF ACCOUNTING TREATMENT:

Disclosure of Accounting Treatment in the preparation of the financial statements, the Company has followed the Accounting Standards referred to in Section 133 of the Companies Act, 2013. The significant accounting policies, which are consistently applied, are set out in the Notes to the Financial Statements.

MARKETING APPROACH AND MARKETING SET UP

Our team including Directors through their relevant experience have maintained good rapport with our customers. Timely delivery of quality products has played an instrumental role in creating and expanding a work platform for our Company. We have dedicated teams of Marketing Personnel in our Ring Spinning and Open End Division as well as Weaving and Dyeing Division. The Marketing division has well trained team with six officials for spinning division and seven in weaving division. The marketing division is headed by an official of the rank of Vice President and is directly under control of our executive Directors. The sales and marketing of Yarn and fabric is based on factors such as quality, easy availability and competitive pricing of the products. Our client base includes reputed corporate houses in the India textile industry and in the global markets we export our products to a number of countries as well. Some of our major domestic corporate clients include Universal Cottex, Gimatex Industries Limited to whom we sell our Yarn and Jhakaria Fabrics to whom we sell fabric. We also export our products to Paramount Textiles Limited in Bangladesh, Zhejiang Zhongda Group International Trading Co. and Xiamin ITG Group Co. Ltd. in China. Our Company has loyal and committed customer base who keep buying company products from time to time

MANUFACTURING FACILITIES:

 

The details of our manufacturing facilities are as given below:

Ginning, Spinning & Open End Plants - Our Ginning, Spinning and Open End plants are located at NH 5, Chowdavaram, Guntur -522 019, Andhra Pradesh, spread in an area of 23.14 acres. We operate 59,280 spindles of Ring Spinning out of which 34,416 are compact & 24,864 are Non-Compact and 2,912 rotors for manufacturing open end yarn. Ginning Division has a installed capacity of 28 Gins. Ring Spinning Division has a production capacity of 420 tons per month whereas our Open end Division has a capacity of 500 tons per month.

Weaving & Dyeing Plants - Our weaving and dyeing divisions are located at Kunkupadu - 523265, Addanki, District - Prakasam, Andhra Pradesh spread in an area of 134.01 acres. Our Weaving division has production capacity of 248 looms whereas our dyeing division has a capacity of 3,000 kgs per day.

Hydel Plants - Our Company has three hydroelectric plants with a total capacity of 4.0 MW, two with the capacity of 1.6 MW each and one with 0.8 MW. The plants are located at Nelakondapalli - 507160, District - Khammam, Telangana spread in an area of 39.06 acres. These plants are on 16th & 17th branch canal of Nagarjuna Sagar project left to main canal.

FINANCIAL PERFORMANCE REVIEW AND ANALYSIS

In FY 2019-20 and 2018-19, our revenue from operations was Rs. 29161.07 lakhs and Rs. 31073.59 lakhs respectively and net profit after tax for FY 2019-20 and 2018-19 was -1208.87 lakhs and 665.42 lakhs respectively

The decrease in operating profit as a percentage of revenue for the current year as compared to the previous year was primarily attributable to a decrease of gross profit as a percentage of revenue during the same period.

The details of sale of our products for FY 2019 - 2020 is as under:

Year ended 31st March, 2020 Year ended 31 st March, 2019
Particulars Quantity (in Kgs) Revenue (in Rs.) Quantity (in Kgs) Revenue (in Rs.)
i) Cotton Yarn 56,02,493 1,26,95,38,882 62,41,574 1,51,78,82,661
ii) OE Yarn 42,43,215 54,66,28,708 53,55,285 71,33,86,805
iii) Cotton Waste 17,56,137 10,92,54,494 23,00,864 12,85,64,180
iv) OE Waste 9,06,119 1,48,00,133 11,11,863 1,50,66,145
v) Cotton Seed 62,34,476 14,09,58,984 80,66,756 16,21,94,466
vi) Cotton Lint 30,90,655 33,81,37,533 40,40,225 50,17,62,828
vii) Damaged Kappas 8,479 1,78,059 2,30,458 5,76,125
viii) Sale of Gray Fabric (Mtrs) 2,27,66,614 1,31,62,56,087 2,50,85,324 1,57,17,07,953
ix) Sale of Fabric Waste 1,14,037 59,62,506 1,41,524 58,12,032
x) Sale of Dyed Fabric (Mtrs) 29,83,816 28,84,04,940 27,40,134 26,01,68,150
xi) Sale of Dyed Yarn (Kgs) 5,79,764 20,75,29,108 5,36,681 19,14,61,503
xii) Sale of cut pieces cloth and shirts 813 1,70,177 702 1,61,996
xiii) Gray Yarn 7,73,718 22,28,01,429 13,20,955 34,00,15,284
xiv) Sale of Power (KWH) 60,36,955 2,84,42,118 38,39,254 1,83,10,472
4,48,90,63,158 5,42,70,70,600
Less: Total inter-divisional transfer
Cotton Yarn 23,35,294 65,67,19,769 39,90,555 1,07,15,10,087
OE yarn 4,20,028 5,79,26,654 7,62,433 10,87,45,464
Dyed yarn 5,69,910 20,34,83,523 5,36,681 19,14,61,503
Gray Yarn 7,73,718 22,28,01,429 13,20,955 34,00,15,284
Cotton Waste 15,41,683 10,28,27,416 19,92,581 12,13,80,157
Cotton Lint 30,90,655 33,81,37,533 40,40,225 50,17,62,828
1,58,18,96,324 2,33,48,75,323
TOTAL 2,90,71,66,834 3,09,21,95,277

CAPACITY UTILISATION:

Manufacturing

Fiscal 2019-20

Fiscal 2018-19

Fiscal 2017-18

Facility Installed capacity Capacity Utilization Installed capacity Capacity Utilization Installed capacity Capacity Utilization
Ginning Division 28 Gins 50% 28 Gins 50% 28 Gins 50%
Spinning Division 59,280 Spindles 94.79% 58,096 Spindles 95.85% 56,400 Spindles 95.80%
Open End Division 2,912 Rotors 99.62% 2,912 Rotors 99.55% 1,248 Rotors 98.8%
Weaving Division 248 Looms 97.52% 248 Looms 96.35% 248 Looms 96.71%
Dyeing Division 3,000 KG/Day 55.19% 3,000 KG/P.A 69.14% 3,000 KG/P.A 10.5%
Hydel Plant 4MW 14.67% 4MW 9.43% 4MW 1.76%

C) KEY FINANCIAL RATIOS

Particulars 31-03-2020 31-03-2019
1. Debt Service Ratio:
Earnings Available for Debt Service 20,52,55,381 29,87,32,337
Interest 16,52,79,210 7,42,49,065
Repayment During the period for long term loans 32,02,20,062 25,36,66,950
0.42 0.91
2. Interest service coverage ratio:
Earnings before interest and Tax 7,06,56,990 32,66,26,124
Interest Expenses 24,23,58,893 20,59,90,565
0.29 1.59
3. Debt/Equity Ratio
Total Debt 3,80,92,11,766 3,76,25,25,382
Equity 2,05,86,80,987 2,18,54,95,251
1.85 1.72
4. Current Ratio
Current Assets 1,74,23,79,213 1,77,26,44,202
Current Liabilities 219,14,53,241 1,88,60,26,734
0.80 0.94
5. Net Profit Margin
Net Profit 7,06,56,990 32,66,26,124
Revenue 2,91,61,07,399 3,10,73,59,121
0.02 0.11
6. Operating Ratio
Revenue 7,06,56,990 32,66,26,124
Sales 2,91,61,07,399 3,10,73,59,121
41.27 9.51

CAUTIONARY STATEMENT:

Statements in the Directors Report and Management Discussion and Analysis Report describing the Companies objectives, projections, estimates, expectations may be "forward looking statements" within the meaning of applicable security laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make difference to the companys operations include, among others, economic conditions effecting demand / supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and incidental factors.

For and on behalf of

; Board of Directors

Sd /- Sd /
G.V. Krishna Reddy P. Venkateswara Reddy
Date : 31-07-2020 Joint Managing Director - Managing Director
Place : Chowdavaram, Guntur DIN: 00018713 DIN :00018677