nahar spinning mills ltd share price Management discussions


Economic Scenario

The Global Economies are witnessing a sharp slowdown with high rate of inflation. The continued geopolitical tensions, conflict between Russia & Ukraine, sharp rise in the fuel and food prices and lingering COVID-19 pandemic continues to weigh heavily on the world economies. The tightening of the monetary policy and increase in the interest rates by the various Central banks across the world has given a short term relief to the economies but the outlook of world economy is still uncertain. The projected Global growth is expected to fall from an estimated 3.5 percent in 2022 to 3.0 percent in both 2023 and 2024. (Source: IMF-World Economic Outlook, July 2023).

Inspite of the above said challenges, India remained one of the fastest growing economy in the world. It is expected that Indian Economy is likely to grow between 6.5 to 6.9 percent in the Financial Year 2023. This seem to be relatively good performance in comparison to other large economies of the world. The Government continued thrust on structural reforms and policy initiatives like Production Linked Incentive Scheme (PLI), Make in India Program, Higher spending on social welfare, Health care and Infrastructure etc. will give further push to Indian Economy and thus help in becoming the worlds Third largest economy by 2027.

INDUSTRY STRUCTURE AND DEVELOPMENTS

The Indian Textile Industry is one of the largest in the World, enjoying its presence in the entire value chain i.e. cotton, yarn, fiber and apparel. India is one of the largest manufacturer and exporter in the world and has a share of 4.6% of global trade in textiles. The Textile Industry continues to play a dominant role in the economic growth of the country. Its importance is evident from the fact that it is the largest contributor towards employment generation, Industrial Output and Export earnings. The industry is sustaining livelihoods to million of people in rural and semi urban areas by providing them employment directly and indirectly, including a large number of women and rural population. The sector has perfect alignment with Governments key initiatives of Make in India, Skill India, Women Empowerment and Rural Youth Employment. The Industry is contributing 7% of Industry output in value terms, 2% of Indias GDP and contributing 12% to the countrys total exports earning.

(Source: Textile Industry of India Outlook and Challenge by Infomerics Valuation and Rating Pvt. Ltd.)

The ongoing global slowdown coupled with sharp increase in the prices of raw cotton are posing serious challenges to the Textile Industry. In case the situation persists for the longer period then earning a reasonable margin will become a challenging task for the Textile Industry. Because of the prevailing Textile scenario, Spinning Mills have already cut down their production in the past few months. Even some small mills have closed down their operations due to prevailing adverse conditions.

Your Management is of the opinion that things will start improving in the Second Half of the current year. The Industry with the support of Government and its favorable Policies and initiatives will be able to meet the challenges of survival and record reasonable growth in the coming periods.

OPPORTUNITIES AND THREATS

We would like to inform that presently Indias share in the Global Textile export is just 4.6% which is minuscule as compared to Chinas Share. The trade tension between U.S. and China coupled with geo-political uncertainties has severely affected Chinese Textile Exports. It has provided an opportunity to the Indian Textile industry to grab the space vacated by China in the developed world especially in US and European Union. The Textile Industry must effectively utilize its fundamental strength of strong production base, availability of good quality raw cotton, skilled man power etc. and become a Textile hub for the International Buyers. This is a huge opportunity and it must be availed by the Textile Industry.

Moreover, in the changed global scenario, several countries have started working on China plus One strategy for the requirement of Textile Products. India should capitalize this opportunity and present itself as a credible alternative. India certainly has an edge to be an alternative manufacturing hub for global players as two major things required to run textile Industry are cotton and skilled work force and they are abundantly available in the country. More and more overseas buyers are looking at India as the next best alternative supplier of textile products and it is expected that more orders will shift to Indian Textile Industry.

We would also like to inform that relative success of the Spinning Industry is dependent on the availability of Raw Cotton at reasonable prices. The Raw cotton is the main Raw material (constituting approx. 60% of the total cost) for the manufacture of cotton yarn and it is dependent on the Nature i.e. Good/Bad Monsoon. So availability of raw cotton at reasonable prices is crucial for the spinning

Industry. Any significant change in raw cotton prices and Monsoon can affect the performance of the Industry. This year steep increase in the prices of raw cotton has severally impacted the performance of the Textile Industry.

Besides, exports continues to face stiff challenges from the small countries like Bangladesh, Sri Lanka and Taiwan etc., who have got the preferred treatment from the countries of European Union and U.S. The above mentioned factors have had and will continue to have a significant bearing on the financial performance of the Industry in the coming period too.

The Textile Industry is also not free from normal business risks and threats. The slowdown in the Global Trade because of the Geo political tension, High prices of raw cotton and lingering Covid-19 Pandemic in several countries, has affected exports of textile products. In case the situation continues then it may pose a threat to the performance of the industry in future too.

FUTURE OUTLOOK

The prevailing Geo-Political situation has severally affected textile industry. The high cotton prices coupled with slackness in Global demand have affected the fortunes of the Textile Industry. The Future is still not clear. Your management is looking at the future with optimism and expects that with the improvement in the global demand and softening of raw cotton prices in the coming periods, will give relief to the Textile Industry. We expect that in this challenging period, Government will support the Spinning industry in the form of favorable Textile policies, incentives and other benefits which are of paramount importance for the future growth of the Industry.

RISK AND CONCERNS

No industry is free from normal business risk and concerns. Indian Textile Industry continues to face stiff competition from small countries like: Bangladesh, Taiwan Sri Lanka and other emerging economies. The relative competitiveness of Industry is dependent upon the raw cotton prices, exchange rates and prevalent interest rates regime. The primary raw material for the manufacturing of yarn is cotton which is an agriculture produce. Its supply and quality are subject to forces of nature i.e. Monsoon. Any increase in the prices of raw cotton will make the things difficult for the Textile Industry resulting weak demand and thin margins. Thus availability of raw cotton at the reasonable prices is crucial for the spinning industry. Any significant change in the raw cotton prices can affect the performance of the Industry.

The high rate of interest is affecting the financial performance of the Textile Industry. The Spinning industry being more capital intensive requires huge funds, long term as well as short term in the form of working capital for its running. The Government must support the industry by providing cheap finance so that the industry remains financially viable. Though Government has taken some remedial measures in this regard but still a lot more is required so that the Textile Industry could meet the challenges ahead.

Moreover, the ongoing conflict between Russia and Ukraine and prevailing Geopolitical situation has caused supply chain disturbances and has thus affected global trade. The prevailing weak economic scenario, high prices of oil and energy, have caused slow down of the Global economies. The future is still uncertain and no one knows where it will lead to us? Thus, your Company consider it a possible risk and concern to the Industry.

In addition to the above, the other concerns like higher transaction costs, high cost of labour, continuously increasing prices of raw material are posing a risk to the growth of Indian Textile Industry. The Government should extend a helping hand to the existing Textile Units so that they can become globally competitive and contribute towards the growth of the country.

Internal Control Systems and their adequacy

The Company is maintaining an efficient and effective system of Internal Financial Control for facilitation of speedy and accurate compilations of financial statements. The Companys Internal Financial Control System is designed to ensure operational efficiency, protection and conservation of resources, accuracy and promptness in financial reporting and compliances with procedures, laws and regulations. The Companys Internal Control System commensurate with the nature of its business and size of its operations. In order to further strength the Internal Control System and to automate the various processes of the business, Company is making use of SAP S4 HANA application, which is based on SAP HANA database. It keeps all the data in memory which results in data processing that is magnitude faster than that of disk based system, allowing for advanced, real time analytics.

We wish to inform you that the period of the office of M/S Piyush Singla & Associates, Chartered Accountants, who were appointed as Internal Auditors of the Company for the FY 2022-23 has expired and because of their preoccupation have expressed their inability to continue in the office for the next year. Accordingly, pursuant to the provisions of Section 138 of the Companies Act, 2013 read with Companies (Accounts) Rules, 2014, Rules 2014, M/s Raj Gupta & Co., Chartered Accountants having Firm Registration No. 000203N appointed as I nternal Auditors of the Company for the FY 2023-24.

The company is also having internal audit department to test the adequacy and effectiveness of Internal Control Systems laid down by the Management and suggests improvement in the systems. Internal Audit Reports are discussed with the Management and are reviewed by the Audit Committee of the Board. During the year under review, companys Internal Controls were tested and no reportable weakness in the system was observed.

Apart from the above, an Audit Committee consisting of three Non Executive Directors has been constituted. All the significant audit observations and follow up actions thereon are taken care by the Audit Committee. The Audit Committee also oversees and reviews the adequacy and effectiveness of Internal Controls in the company. The Audit Committee met four times during the financial year under review. The company has also established a Vigil Mechanism as per Section 177(9) of Companies Act, 2013 read with Rule 7 of the Companies (Meeting of Board and its Powers) Rules, 2014.

Segment wise or Product wise Financial Operation and Performance

The Company is operating in single segment only i.e. Textile. We would like to inform you that ongoing conflict between Russia & Ukraine coupled with Global demand recession has impacted the companys performance during the year. High cotton prices and drastic fall in the prices of the yarns further aggravated the problems for the spinning industry.

Because of the reason stated above, companys top line as well as bottom was severally impacted. The company could achieve a total income of Rs. 2841.22 crores showing a downfall of 21.26% from the previous year. Likewise, the export at Rs. 1135.16 crores has also shown a decline of 47.82% over the previous year. The company could earned a profit before tax of Rs.150.34 crores only as against profit of Rs. 674.73 crores showing a drastic fall of 77.72% over the previous year. The Company earned a net profit of Rs. 110.79 crores as against profit of Rs. 502.19 crores showing a fall of 77.94% from the previous year.

The detailed performance has already been discussed in the Directors Report under the column Operational Review and State of Affai rs.

Material Developments in Human Resources/ Industrial Relations

Beyond Balance Sheet lies Companys singly biggest Asset Human Resources. The Company is of firm belief that the Human Resources are the driving force that propels a Company towards progress and success. The Company continued its policy of attracting and recruiting the best available talent so that it can face business challenges ahead. The Company also offers attractive compensation packages to retain and motivate the professionals so that they can give their best.

The total permanent employees strength of the Company was 9868 as on 31st March, 2023. The industrial relation continued to remain cordial during the year.

SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS

The SEBI LODR (Listing Obligation and disclosure requirements) (Amendment) Regulations, 2018 has mandated that Company should provide detail of Significant Changes in Key Sector Financial ratios. We would like to inform you that in the following key financial ratios there have been Significant Change as compared to the last year:

Particulars

Financial Year 2022-23 Financial Year 2021-22
INTEREST COVERAGE RATIO 3.12 4.41
DEBT EQUITY RATIO 0.47 0.63
OPERATING PROFIT MARGIN RATIO 9.68 24.09
NET PROFIT MARGIN RATIO 3.96 13.97
RETURN ON CAPITAL EMPLOYED 0.08 0.28
RETURN ON EQUITY RATIO 0.07 0.40
TRADE PAYABLE TURNOVER RATIO 34.34 108.41

The change in Interest Coverage Ratio is because of lower profitability during the year ended 31st March, 2023. The Debt Equity ratio is lower because of lower availment of working capital limits. Further, change in Operating Profit Margin Ratio, Net Profit Margin Ratio, Return on Capital Employed and Return on Equity Ratio is because of drastic fall in the net profits from 502.19 crores to 110.79 crores. The fall in T rade Payable Turnover Ratio is due to lower purchase coupled with increase in creditors. Your management is quite optimistic that with the recovery in the Global Trade company will be able to perform better in the coming periods.

Cautionary Statement

Though the statement and views expressed in the above said report are on the basis of best judgment but the actual future results might differ from whatever is stated in the report.

FOR AND ON THE BEHALF OF THE BOARD

Place: Ludhiana

JAWAHAR LAL OSWAL

Dated: 9th August, 2023

(CHAIRMAN)