Kitex Garments Ltd Management Discussions.

I. ECONOMY

GLOBAL ECONOMY

The outbreak and spread of the CoVID-19 pandemic, and consequential measures have resulted the global economy into biggest slump since the Great Depression of the 1930s. Most of the global economies were closed/ shut down and many of the CoVID affected patients were quarantined/ isolated in order to control the spread of virus. As per the June 2020 projections of the IMF, the global economy is projected to contract at 4.9% in 2020 over the previous year, after a growth of 2.9% in 2019.

Advanced economies are more severely impacted economically, with a projected contraction of 8%, with emerging markets and developing economies at -3%. The Global Economy projection for FY 2021 is with a growth of 5.4%, however there are a lot of uncertainties in the assumptions made in June 2020.

Global medical communities are coming together and working hard to discover vaccines (prevention) and drugs (cure) for the virus infection, and the recovery of the global economy will be dependent on the timing of these.

Nearly 90% of the globe has experienced some degree of lockdowns and supply chain disruptions, low consumption and increasing unemployment. From a health perspective, the primary challenges as a fallout of the pandemic include containment of the infection, mortality and recovery rates of infected population, readiness and availability of healthcare facilities and supplies to treat coronavirus infected, as well as all other diseases in populations. Most countries have announced huge fiscal stimulus packages, especially to help the weaker and underprivileged sections of society. During the month of February 2020, Index of Industrial Production (IIP) grew by 4.5% as compared to 2.1% in January 2020. Around 8 crores industries registered a growth of 5.5% (Year on Year basis) in February 2020, the highest growth since March 2019. Industries are rapidly trying to evolve their business models to adapt to the new model. The retail sector across the globe has witnessed a steep decline in demand, mainly due to social distancing and remote working, cessation of travel and discouragement of public gatherings. Retailers and realty are having to rethink their short term and long term models, with most malls being either closed, or seeing very low footfall. Retailers are looking at renegotiating with all their stakeholders: realtors, financiers and suppliers, while simultaneously trying to improve the customer relationship during such times of crises.

INDIAN ECONOMY

India was under lockdown from March 25, 2020 to May 1, 2020, in order to contain the spread of the coronavirus. During this time, the economy came to a standstill, and with public transportation across the nation being shut, significant bottlenecks in supply chain and movement of migrant labourers caused concerns. With the partial re-opening of economic activities across the country, movement of goods and people resuming, the number of cases have now surpassed to new high, putting India in the 4th position of countries with the largest number of coronavirus infected people. As of July 2020, India has about 1.4 m confirmed cases of Covid-19, 918 k recoveries and about 32,500 deaths.

The Indian Government announced a stimulus package of 20 lakh crores, around 10% of the Indian GDP. The stimulus is aimed to assist mainly the daily wage labourers and MSMEs, who are deeply impacted by the pandemic and facing survival issues.

As per the IMF report Jun 2020, India is projected to contract to 4.5% decline in 2020, compared to a growth of 4.2% growth in 2019. Export of goods shows negative growth of (34.6%) in March 2020 against positive growth in the month of February 2020. On the other side, Imports of various materials also shown negative growth of (28.5%) in March 2020 against positive growth of 2.5% in February 2020. The Indian apparel industry may take a hit of about Rs. 1 lakh crore in 2020, as per the Clothing Manufacturers of Association of India (CMAI) estimates. On the exports side, shipments worth Rs. 23 k crores are at stake for Indias apparel exporters, following order cancellations, supply disruptions and payment delays amid the pandemic.

US ECONOMY

The United States has been severely impacted by the pandemic, with more than 4m confirmed cases, 1.3m recovered and about 149k deaths. The current administration, as well as the Centre for Disease Control, the premier public health agency of the United States, have come under criticism for their handling of the pandemic. The healthcare system of the United States is under a lot of strain, unemployment is high at ~14%, consumption is low and several businesses are facing risks of closures and bankruptcies. Real GDP in the US has declined by 5% in Q1 2020 (3rd estimate, Bureau of Economic Analysis, June 2020). As per the IMF report Jun 2020, the US economy is projected to contract to 8% decline in 2020, compared to a growth of 2.3% growth in 2019.

Analysts estimate the US retail sector, which also includes auto and fuel, to take a hit of 10.5% in 2020, a level not seen since 2016. Brick and mortar retail sales will fall by 14%, whereas online sales are expected to increase by 18%, mitigating some of the severity in retails decline.

The overall size of the US apparel market is estimated at ~$368 billion in 2019, with about $268 billion brought by in-store sales. The recession and uncertainties have made frugality a priority, thereby reducing discretionary spends across all groups of people. More than 2200 stores across the country are expected to close, and top apparel retailers such as Neiman Marcus, Brooks Brothers and Ascena Retail group have filed for bankruptcy in 2020.

II. INFANT APPAREL SECTOR

The market for baby clothes encompasses all clothing and accessories for children upto a height of 85 cm. The revenues from this sector are estimated globally at ~ $43.7bn in 2020, a 2.1% decline yoy. On the brighter side, this is expected to grow at a CAGR of 5.5% from 2020-25. The US revenues is sized at $8bn, comprising about 18.3% of the global market. (Source: statista.com) The clothing is largely segmented as outerwear and underwear, in a 65:35 ratio. Distribution channels are largely offline and online, with the online channel gaining a lot of traction in the post pandemic world. Major retailers in the Infantswear segment are Carters Inc., Cotton On Group, Hennes & Mauritz AB and Gerber Childrenswear LLC.

Despite apparel being a discretionary spend in the pandemic era, Infantswear could be less impacted due to the inherent reasons of buying clothes for infants. Infants outgrow their clothes very quickly, add to this that several women also work and have additional disposable income, making this a fairly stable market. In India, the online childrenswear sales trebled after the lockdown was lifted, showing the pent up demand of parents who were waiting to shop before the lockdown.

ONLINE DISTRIBUTION CHANNEL OF INFANTSWEAR

With a growing population gaining access to the internet, as well as the physical distancing and other pandemic impacts, online sales are witnessing a surge across the retail industry. Online events and promotions and discount offers, all contribute to the rise of online Infantswear sales. Psychological factors such as showcasing the baby in the best possible clothes, and growing influence of social media such as Facebook and Instagram, all contribute to a growing demand for Infantswear. Other factors influencing babywear choices are comfort, safety, convenience and hazards such as buttons and embellishments etc. Marketing is also important in the Infantswear segment; effective advertising, product promotions and pricing strategies are all factors that influence sales. Online shopping is facilitated by door delivery, contactless payment and secure e-transactions.

II. INDUSTRY SCENARIO

Review of Operations

During the year under review, your company had recorded excellent growth in Q2 & Q3 and had lined up various investment strategies to increase the capacity. But CoVID-19 pandemic struck various future plan and unfolded the realities of various crisis. During the month of April & May, 2020, your company utilized the opportunity by supplying Personal Protective Equipment (PPE) kits to hospital and other organizations and this was carried out by the company without any additional investment in the existing infrastructure. Your company has a vertical setup with knitting and processing of fabrics, until finished garments are done in-house. The facility at Kizhakkambalam near Kochi in India is a 350000 sq. ft garmenting factory and manufactures fabrics in its 240 meters long and 70 meters wide process house in an area of 200000 sq. ft., and is one of the largest in the world under one roof. The process line is equipped with digital dispenser system for error-free, automatic and computer controlled preparation of color guidelines, high quality knitting machines, most modern dyeing, printing and finishing machines that use cutting-edge technology. Its garmenting unit uses latest machinery for pattern Computer Aided-Design (CAD), plotting and grading. It has Automatic spreader machines which enhance the speed of spreading and Automated cutting machines that enable faster & precision cutting. The factory is equipped with latest sewing machinery ensures stain-free, quality sewing and state-of-the-art spectrophotometer ensures electronic color reading & transmission. The plant produces knitted fabrics that are of exceptional quality, and is well appreciated and recognized by reputed infant apparel brands in the United States and Europe.

Market & Customers

During the year under review, your company received and continue to receive enormous order confirmations from major infant garment buyers viz., Gerber Childrenswear LLC, Carters, Buy-Buy Baby, Ross Stores, Amazon, Target, Sams Club, Oshkosh and Walmart who can contribute major part of your Companys turnover in coming years. On a good day, the Company manufactures 4.32 lakhs pieces of infants apparel and dispatches as whole container of them to the US. The companys products are sold in over 18 countries through our clients. In terms of clients the key market for the company is USA (99%) followed by Europe (1%). Company has an Associate in USA by name Kitex USA LLC which takes care of the new forward integration initiatives in USA. The company has also set up a Design Studio in US for value added design services.

Seasonality

The company experience seasonal fluctuations in the sales and profitability due to the timing of certain holidays and key retail shopping periods, which generally has resulted in lower sales and gross profit in the first half of the calendar year versus the second half of the year. Accordingly, our results of operations during the first half of the year may not be indicative of the results we expect for the full year.

IV. SCOT ANALYSIS

The Board of Directors of the Company have listed out the Strength, Challenges, Opportunities and Threats affected the company, the details of which are as given below:

Strengths/ Opportunities

• With increase in infants and considering various factors like growing trend of nuclear family system, increased spending on children and better focus on this segment by organised players, the Infantswear segment will grow in coming years.

• Distribution network globally drives the brand closer to consumers through our buyers.

• Operates a vertically integrated manufacturing facility which helps in ensuring quality of products, operational flexibility and optimized operating expenses and fully automatic robotized yarn dyeing with Advanced Relaxed Open-width (German) Tensionless processing.

• Growth in organized Infantswear retail provides a greater opportunity for branded play.

• Changing trends and brand consciousness making consumers more aspirational and discerning.

• The increasing need to serve consumers at their doorstep provides a big opportunity to the e-commerce business.

• The Company has a global and culturally diversified Management Team driving growth across geographies.

• Biological effluent treatment at international standards treated effluents are re-used by the Company in toilets and irrigation for internal horticulture.

• Generation of bio-gas from the biological wastes produced. The gas is then used for cooking.

• Workplace Conditions Assessment (WCA) program - Sustainable and ethical practices for work place people, products and environment.

• Assurance of product safety with following practices and policies in place:

– Purchase of dyes and chemicals from approved list of international suppliers.

– Strict small parts pull testing at production stage.

– Stringent broken needle policy.

– Metal detection scanning for all products before being packed.

Challenges/ Threats

• Few international Infantswear brands have commenced operations in India realizing that India is likely to emerge as one of the largest Infantswear manufacturing hub in the world in the coming year.

• The overall closure of markets, malls and highstreets due to lockdown which is expected to affect the business, is considered short threat.

• A prolonged lockdown due to COVID-19 in many parts where the Company operates can have a significant impact on its business. Consumer will be cautious in purchase of clothing for their children due to CoVID-19 pandemic.

V. REVIEW OF FINANCIAL PERFORMANCE

The Company continues to strengthen its market leadership in Infantswear across US markets during the year. It delivered yet another year of consistent growth in turnover and profit and fortified its manufacturing capabilities.

STANDALONE PERFORMANCE

On standalone basis, your company reported a total income of Rs. 78,357.54 lakhs signifying a growth of 24.52% over previous financial year. The Revenue increased due to the better orders from the buyers. The operating profit stood at

Rs. 14,317.12 lakhs compared with Rs. 13,019.01 lakhs in the previous year. Total employee benefit expense has increased by 15.60%. Our effective tax rate is at (19.64) % when compared to the previous year. The net profit for the year was Rs. 10,867.39 lakhs against Rs. 8,145.55 lakhs reported in the previous year. The EPS from continuing operations for the reporting year was Rs. 16.34.

CONSOLIDATED PERFORMANCE

On consolidated basis, total revenue for the financial year under review was Rs. 77,839.77 lakhs as against Rs. 62,927.58 for the previous financial year, 23.70% growth. Profit before tax was Rs. 13,786.82 lakhs and net profit after tax was

Rs. 10,337.09 lakhs for the financial year under review as against Rs. 13,000.35 lakhs and Rs. 7144.55 lakhs for the previous year.

VI. RATIOS:

Ratios Financial Year
FY 2020 FY 2019
Return on net worth 16.14% 13.77%
Current ratio 3.25% 2.95%
Interest coverage ratio 21.38% 34.55%

VII. OUTLOOK

Since company is in Infantswear business, we expect that business will grow in good pace and there is also a possibility of getting new good order from existing/ new buyers from across globe considering trade war between US and China. We are continuously monitoring the current situation to grab the opportunities and also ready to face any challenges.

VIII. SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE

The Company is engaged in the business of manufacturing garments and there is no separate reportable segment.

IX. RISK & RISK MITIGATION

Your Company continues to strengthen its robust Risk Management Framework and the same was reviewed by the Audit Committee periodically. The Committee focuses on ensuring that risks promptly identified initially and a mitigation plan is developed and monitored periodically to ensure that risks are being addressed accordingly. The Committee operates with following objectives especially related to risks:

• Identify and highlight risks affecting the company.

• Facilitate discussion around risk prioritisation and mitigation. The companys approach in addressing business risks includes periodical review of such risks and thereby mitigating it effectively.

• Provide a framework to monitor and mitigate the risk affecting the Company.

Your company believes that managing risk helps in maximizing return. Some of the risks that the company is exposed to are:

FINANCIAL RISKS: The Companys policy is to actively manage its foreign exchange risks within the framework laid down by the Companys forex policy approved by the Board. Given the interest rate fluctuations, your Company has adopted a prudent and conservative risk mitigation strategy to minimize financial and interest cost risks.

COMMODITY PRICE RISKS: The Company is exposed to the risk of price fluctuations of raw materials as well as finished goods. The company proactively manages these risks through forward booking, inventory management and proactive vendor development practices. Your companys reputation for quality, product differentiation coupled with the existence of a powerful brand image with a robust design and marketing network in US mitigates the impact of price risk on finished goods.

REGULATORY RISKS: The Company recognized its risks attached to various statutes, laws and regulations. The company is mitigating these risks through regular review of legal compliances carried out through our internal as well as external compliance audits by our customers.

HUMAN RESOURCE RISKS: Retaining the existing talent pool and attracting new talent are the major risks affecting the company. We have initiated various measures including rolling out of strategic talent management systems, training and integration of learning and development activities. Our company has collaborated with various agencies like Integrated Skill Development Scheme (ISDS), Kudumbashree which helps to identify, nurture and groom labour talents within all states of India to prepare them for future business leadership.

STRATEGIC RISKS: Emerging businesses, capital expenditure for capacity expansion etc are normal strategic risks faced by your company. However, your Company has well-defined processes and procedures for obtaining approval for investments in new businesses and capacity expansions.

PANDEMIC RISKS: Pandemic risks like Covid 19 which causes severe social and economic destructions impacts our clients business. It also disrupts the companys supply chain and regular operations which results in inability to delivery the products thus impact the revenue. The management has shown its ability to respond to such situations with safe and prudent business continuity plans and continues engagement with our customers to ensure gradual recovery while going forward.

X. 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 unauthorized use or disposition and those transactions are authorised, recorded and reported correctly. The internal control is exercised through documented policies, guidelines and procedures. It is supplemented by an extensive program of internal audits conducted by in house trained personnel. The audit observations and corrective action taken thereon are periodically reviewed by the audit committee to ensure effectiveness of the internal control system. The internal control is designed to ensure that the financial and other records are reliable for preparing financial statements and other data, and for maintaining accountability of persons. Apart from the above the company has engaged Messrs. K Venkitachalam Aiyer & Co, Chartered Accountants to conduct Internal Audit during the year 2019-20.

XI. HUMAN RESOURCES/ INDUSTRIAL RELATIONS

Human Resources (HR) of the Company plays vital role in managing, guiding and motivating the companys workforce. In this pandemic situation, its our responsibility to take precaution not only to manage the present crisis situation, but also to protect our workforce. The Company is also cautious in grabbing emerging opportunities in Infantswear sector and also maintain stakeholders value at the maximum. The Company during CoVID-19 pandemic, has implemented various measures to protect employees from such situation, the details of which is as below: Employees staying at the companys accommodation are permitted to work at the registered office and factory premise. We have been taking utmost care in following safety standards as prescribed by the government like office sanitizations, strictly enforcing social distancing for all personnel, installation of hand sanitizing machine, dispensers, use of masks and other protective measures to prevent the spread of CoVID-19, in our office and factory premises. Employees also being monitored with the help of contactless infrared thermometer and anyone suffering from fever or not wearing mask are not permitted to enter the office premises. Connectivity through VPN access has been made available to the officers who have been working from home. We have utilised various ways to conduct the meetings digitally. All activities relating to account closing, reconciliation of accounts and payments have been made seamlessly during lockdown period.

The Companys HR philosophy is to establish and build a high performing organization, where each individual is motivated to perform to the fullest capacity to contribute to developing and achieving individual excellence and departmental objectives and continuously improve performance to realize the full potential of our personnel. The Company has designed and implemented performance management system of employees that helps in achieving its goals. The Company is giving direct employment to 5535 employees. Industrial relations are cordial and satisfactory.

XII. CAUTIONARY STATEMENT

Statements made herein describing the Companys expectations or predictions are "forward-looking statements". The actual results may differ from those expected or predicted. Prime factors that may make a difference to the Companys performance include market conditions, input costs, govt. regulations, economic development within/outside country etc.

For and on behalf of the Board of
Kitex Garments Limited
Sd/-
Sabu M. Jacob
Kizhakkambalam Chairman and Managing Director
July 29, 2020 (DIN: 00046016)