Koutons Retail India Ltd Management Discussions

GLOBAL ECONOMY:

There is an apprehension that the process of global economic recovery that began after the financial crisis of the 2008 is beginning to stall and the sovereign debt crisis in the euro zone area may persist for a while. There is an effort to build firewalls around these danger zones, but the world has little experience with this; so we need to be prepared for breaches in the walls. The US economy has shown some improvement but economic growth remains sluggish. The global economic environment, which was weak at best through the early part of 2011, turned adverse after Sept-Oct. 2011. The global recovery was threatened by developments happening in the euro area and fragilities elsewhere. The global GDP grew 3.8% in 2011, significantly lower than the 5.2%growth in 2010.

Capital flows to developing countries in 2011 declined considerably as compared to inflows of the previous year. Growth in U.S. is hardly emerging and E.U. seemed to have entered recession, while growth in several major developing countries like Brazil, India, and to some extent Russia, South Africa and Turkey has slowed, in reaction to domestic policy tightening. As a result the general economic growth and world trade slowed sharply.

Volatility in capital flows resulting from the spillover effects of monetary policy choices and other uncertainties in the advanced financial markets further impacted exchange rates and made the task of macroeconomic management difficult in many emerging economies. This has brought out a new dimension of globalization in the post financial crisis world, where easy monetary policy in one set of countries may result in inflation elsewhere due to cross-border capital flows. Unemployment situation in advanced economies in general, and the peripheral economies of the eurozone in particular, which had deteriorated in the wake of global crisis has not improved.

INDIAN ECONOMY:

India has over the years become a more open economy. The total share of imports and exports accounts for close to 50 per cent of GDP while that of capital inflows and outflows measures up to 54 per cent of GDP. Yet economic outcomes and their impact on growth and development arising from the interaction between the domestic and external economies are contingent on a large number of factors. Though economic outcomes are to some extent contingent on choosing policies appropriate to the conditions characterizing an economy, the relative position of an economy vis-a-vis other countries in a global setting could facilitate (or even constrain) policy choices. In 2011-12, India found itself in the heart of these conflicting demands namely balancing growth and price stability without adequate innovative autonomy in policy making to sustain economic growth. As a result, Indian economic growth declined to 6.5% in 2011-12 from 8.4% in 2010-11. Despite low growth, India remains one of the fastest-growing global economies, as all major countries including the fast-growing emerging economies witnessed a significant slowdown. The economic slowdown seems to be there due to two critical factors: euro zone area crisis and near-recessionary conditions prevailing in Europe; sluggish growth in many other industrialised countries, like the US; stagnation in Japan; tightening of monetary policy, inflationary pricing trends in food and non-food categories, slowed down investment and growth, particularly in the industrial sector

INDIAN READY MADE APPAREL MARKET AN OVERVIEW

After the turmoil of 2011, the biggest challenges facing the global apparel industry in 2012 continue to include rising costs, political and economic uncertainty, increased competition at retail, pressure to integrate supply chains and the shift towards faster fashion cycles. Against such a background, the ability to quickly adapt to changing conditions and pressures will separate the winners from the losers.

As our industry is based on change and is global in nature, the rising costs of labour, raw materials, issues of sustainability, and the uncertainty around sourcing are all challenging it and forcing it to evolve.

Given the global nature of the industry, an issue affecting one part of the world can greatly affect the sentiments in another part of the world. The changing role of Asia, particularly in China and India, as the primary producer of apparel and footwear, is a driving force behind this change. With its growing middle class, these two countries are beginning to shift from an export-based economy to a domestic consumption economy. Comparing to the international readymade garment market, the Indian readymade garment market is still in a growing phase.

FDI IN RETAIL: A MUTUALLY BENEFICIAL ARRANGEMENT

Without foreign input or large-scale investment, India will remain a kirana kingdom. In this situation, the addition of foreign knowledge and productivity gains through economies of scale are more difficult to achieve, but not completely impossible. Indian companies are already employing foreign techniques and making significant investments in the retail space. Global players, with constraints in their domestic markets, are looking at emerging economies like India for growth. The Indian domestic players are also gearing up to face competition. Indian players are enhancing and diversifying their product range, improving the look and feel of products, creating a larger distribution presence (for example, outlets, shop in shops, etc.). Obviously, for all this, the Indian players need funds. Where will this funding come from, considering that most of the Indian retail players are currently bleeding. Access to global funds, therefore, becomes an imperative choice.

Indias market fundamentals already support growth- market size of $US 350 Billion, organized retail penetration is being only 58 percent and yet the industry growing at 15-20 percent CAGR. Strong demographic dividends (for example, 350 million strong middle class, large young brand conscious population where 50 percent are under 25 years) further add to the strong credentials of the country. Creating an enabling investment framework will contribute manifold and have a multiplier effect on the development of retail industry as a whole.

THE CHALLENGES

Brands and retailers are feeling increased pressures; theyre being squeezed tightly by rising costs of goods and uncertain consumer demands. Raw material and component prices, production and labour costs, excise duty and much higher logistic costs have been fluctuating as much as the economic outlook. Consumer confidence has impacted their spending habits in this recession and they expect better "deals" every time they buy.

FUTURE OUTLOOK

In India, apparel industry seems to have not come out of its worst but still expectations hereon are showing some signs of growth. It is noticed that foreign buyers are keen on dealing with Indian garment exporters/ traders/retailers for various business options. In the face of such demand, Indian garment manufacturers and exporters constantly have to maintain high quality in finished products and continuously provide innovations in style & design to attract the attention of prospective buyers.

The growth in the Indian Garment Industry has come due to the rise in the earning levels, changing consumption patterns, higher consumption level of the consumer in urban and semi urban cities. There is a strong base for the production of raw materials and there is a huge labour base in the market - both skilled and unskilled, which are still available at cheaper price than other markets. This helps in the growth of the industry

With the recent developments in the Indian Retail Sector supported by governmental aids, the Management of the Company is positive on the performance of the Company in the financial year 2012-13. Although the Company has suffered a loss during the financial year, the management is very optimistic on the outlook of the Company in the years to Come. The management is working on the strategy to increase the sales/exports of the Company and to reduce its financing costs, so as to recover from its losses.

FDI: IN INDIA

Indias young population, higher disposal income, and up gradation in living standards, coupled with growing consumer demand, have made the country an emerging consumption story and an attractive destination for FDI. Due to inaction on the part of Government to bring down the reforms and clearance of pending bills with it, the confidence of Indian businessmen and investors is low at the moment, the liberalization of the FDI policy will act as a life-saving drug that will provide a big boost to the retail industry. FDI in retail has the potential to bring into India foreign capital, technology, and managerial expertise of big international retailers. It can develop an efficient linkage between the back-end supply chain and the front-end via capital investment and technological inputs.

OPPORTUNITIES ANDTHREATS.

Opportunities:

Once the business climate improves, the Company proposes to have its retail outlets in the Tier II Cities so that it can increase its presence across India, and reinstating those outlets which were shut down in the previous financial year.

Enhancing the role of value addition and innovation in apparel designing Looking at the new avenues of collaboration with foreign brands.

Lower competition due to the elimination of all other players in the market under discount format. E-commerce

Threats:

Fluctuation in Rupee value

The steep fall & volatile fluctuation in rupee value posses a big threat to general business environment.

State of Recession in the economy

The apparel industry has got severely hit during recession because of less liquidity in the market.

Competition from global players

The major brands from all over the world are giving tough competition to India.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY:

The internal control system is supplemented by extensive internal audits, regular reviews by the management and well-documented policies and guidelines to ensure reliability of financial and all other records and to prepare financial statements and other data. Moreover, the Company continuously upgrades these systems in line with the best accounting practices. The Company has independent audit systems to monitor the entire operations and the Audit Committee of the Board reviews the findings and recommendations of the internal auditors. The Company is continuously upgrading its internal control systems by measuring state of controls at various locations.

REVIEW PERFORMANCE

Your Company remains extremely buoyant and optimistic about the future of apparel retail in India. The companys mission is to provide not only a good clothing but also a complete fashion guide which suggests what to wear, when to wear and where to wear. Your Company is aimed at the middle class customer and everyone who wants premium clothing at best prices, our brand is the good choice.

Financial Performance:

During the current financial year, the Companys sales in the domestic market have declined steeply due to recession in the Indian economy. The initial model followed by Koutons was of franchisee whom stock was given on consignments but at present it is being converted to cash & carry model. The loss during the current financial year is mainly attributable to the decline in the domestic sales, declined production capacity utilization and selling of slow moving inventory below the cost price. However the Company is confident that it will improve its performance in the financial year 2012-13. As a reason the Company considered the Preferential issue of equity shares to Promoters and others by way of Preferential Allotment/Private Placement/QIP/ADR/GDR/FCCB issues or by any other means for a value upto USD 200 Million.

Discussion of Financial Performance with respect to Operational Performance

The financial statements have been prepared in accordance with the requirements of the Companies Act, 1956 and applicable accounting standards issued by the Institute of Chartered Accountants of India. The details of the financial performance of the Company are appearing in the Balance Sheet, Profit & Loss Accounts and other financial statements forming part of this Annual Report. For financial highlights please refer heading FINANCIAL RESULTS of the Directors Report.

Material Developments in Human Resources:

The Company regards its human resources as amongst its most valuable assets and proactively reviews policies and processes by creating a work environment that encourages initiative, provides challenges and opportunities and recognizes the performance and potential of its employees attracting and retaining the best manpower available by providing high degree of motivation, training and structured compensation was the main thrust of the Human Resources Department this year.

The total number of employees of the Company as on March 31,2012 stood at 375.

Cautionary Statement:

This report may contain forward-looking statements based on certain assumptions and expectations of future events. Actual performance, results or achievements may differ from those expressed or implied in any such forward-looking statements. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent developments, information or event.