Nahar Spinning Mills Ltd Management Discussions

ECONOMIC SCENARIO

The Prevailing Geo political situation, ongoing conflict in Europe, Middle east and Strained relation among several countries have impacted the economies of the World. Global Economies are witnessing a downward trend with high rate of inflation. Global growth is projecting at 3.2% in 2024 and 3.3% in 2025 (Source: World Economic Outlook July, 2024). The Textile industry too, has been affected by the prevailing global scenario and is facing the problem of waning demand. The red sea crisis has further aggravated the problems for the industry as not only the export of textile products has been affected but it has also increased the shipping costs because of rerouting. This in turn has impacted profitability of the industry.

Inspite of the above challenges, India remained one of the fastest growing economy in the world. Seeing the favorable economic indicator prevailing in the economy, International Monetary Fund raised India growth forecast for financial year 25 to 7 Percent from 6.8 percent projected in April,2024 .(World Economic Outlook released on July 16). This seems to be relatively good performance in comparison to other large economies of the world which are facing difficult times.

To put the economy on the faster pace of growth and sustainability development, Government and Policy makers have introduced several path breaking initiatives and policies in the area of Infrastructure, Social Welfare and Health Care sector to support the economic activities. For textile industry too, the Government has provided supportive environment and initiated several favorable policies like Production Linked Incentive (PLI) Scheme, PM Scheme for integrated textile Parks (MITRA) and Amended Technology Up Gradation fund Scheme (ATUFS) so that the industry can enhance its capacities and establish itself as a Global manufacturing Hub for International Buyers. The Government has also signed Free Trade Agreement (FTA) with several countries e.g. Australia, UAE and is in the process of negotiating with United Kingdom (UK) and European Union. These Initiatives will help the industry to boost exports to these countries and will help the Indian economy to become the worlds Third largest economy by 2027.

We are hopeful that the Government through its monetary and other policy initiatives will support the industry so that it could meet the challenges and emerge as a winner.

INDUSTRY STRUCTURE AND DEVELOPMENTS

India is Worlds Sixth largest exporters of textile and apparel products. The market size is growing at a Compound Annual Growth Rate (CAGR) of 14.59% and it is expected to reach $387.3 Billion by 2028 from $172.3 billion in 2022(Source Indian Brand Equity Foundation ). The Textile industry is catering to the basic need of the humans i.e. Clothing (Kapda). The textile industry is present in the entire value chain i.e. cotton, yarn, fiber and apparel. India is one of the largest manufacturer and exporter 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 the 2^nd largest employer after agriculture providing direct employment to 45 million people and 100 million in allied sector. 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 13% to industrial production in value terms, 2.3% 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 Government is fully conscious of the importance of the Textile Industry and the sector is going to be its key focus area in the new policies being framed so as to achieve the target of USD 5 Trillion economy by 2028. The Government through its supportive environment and policies like PLI Scheme, PM (MITRA) scheme and ATUFS scheme has extended a helping hand to the textile industry so that it can it increase its share in the global markets. With the fall in the raw cotton prices Textile industry has started showing positive signs of recovery. Your Management expect that things will start improving in the coming periods and with the support of Governments favorable Policies and initiatives, the industry will be able to meet the challenges and record reasonable growth in the coming periods.

In line with the global trends and to remain competitive, your company has enhanced its capacity by adding 31200 spindles at a capital outlay of Rs. 122 Crores. Thus companys total spindlage capacity stand increased to 5,73,408 spindles. The company has also modernize and upgraded its capacity at a capital outlay of Rs. 122 Crores, so that so that it remains globally competitive in terms of cost and quality.

OPPORTUNITIES AND THREATS After two years of difficult times due to fall in Global and domestic demand, textile industry has started showing positive sign of recovery across all the categories. Indian economy is likely to grow at 7 percent in Financial Year

2024-25 and this will provide a great opportunity to the textile industry to grow faster and increase its share in the

Global Markets. Presently Indias share in the Global Textile export is just 4.6% which is minuscule as compared to Chinas Share. In the changed Global scenario china is losing Share in the Global Trade due to Geo political equation with some countries such as US and European Union. Several Countries especially multinational corporation are cutting their exposure to china and exploring new Asian regions to diversify their production and supply chain activities. This has opened a new opportunity to the Indian textile Industry to grab the global space vacated by China. 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.

Besides, in the changed global scenario, several countries have started following China plus One Policy for their requirement of Textile Products. This is a Golden opportunity to the textile industry. India should capitalize on 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. The Govt is also providing supportive environment to further enhance and modernize capabilities and establish India as a global Market Hub for International Buyers.

Further, India has already signed Free Trade Agreement (FTA) with Australia & U.A.E & the negotiation with the UNITED KINGDOM (UK) and Europe are in advance stage. Once the FTA is signed it will open up a new opportunity for the Indian textile industry as it will provide more level playing field to the industry and will help in exporting the textile products freely.

Though opportunities are more for the Textile Industry but industry is not free from normal business risks and threats. The slowdown in the Global Trade because of the Geo political tension, higher prices of raw cotton affected exports of textile products. Moreover Red sea disturbances have also posed a serious threat to the shipment of textile products. In case the situation continues then it may affect to the performance of the industry in the coming period.

Besides, exports continues to face stiff challenges from the small countries like Bangladesh, Vietnam ,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 periods. So far drop in the China Shares in Global Textile Trade has been beneficial to Vietnam and Bangladesh mainly; While Indias share has remained the same. Textile Industry must work on

Quality as well as cost to garner more Export order from the International buyers.

FUTURE OUTLOOK

There are obvious challenges but also great opportunities to the textile industry to establish itself as a global manufacturing hub for the Global buyers. The rebound in the textile export on the back of the lower cotton prices and decline in the inventory level of the international buyers has started improving the fortune of the Textile Industry. Further the Free Trade Agreement (FTA) with the U.K. and Europe will play an important role in improving the performance of the textile industry. 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, Vietnam 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 significant increase in the prices of raw cotton will make things difficult for the Textile Industry resulting weak demand and thin margins. So 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. Presently, because of higher Minimum Prices, Indian cotton prices are bound to be more than the prevailing international prices which in turn will make Indian products less competitive in the Global Markets. The high rate of interest and electricity cost are 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. Likewise the government should provide the cheap electricity to the industry so that it can compete in the global markets.

The prevailing geo political situations coupled with red sea tensions has caused supply chain disturbance and has affected global trade. The prevailing 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 import duty on raw cotton, higher transaction costs, high cost of labour, continuously increasing prices of raw material are posing risks 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 Raj Gupta & Co., Chartered Accountants, who were appointed as Internal Auditors of the Company for the FY 2023-24 has expired but they express their willingness to be appointed as Internal Auditors of the company for the FY 2024-25. Accordingly, pursuant to the provisions of Section 138 of the Companies Act, 2013 read with Companies (Accounts) Rules, 2014, M/S Raj Gupta & Co., Chartered Accountants, having their office at Ludhiana, Membership No. 017039 and having Firm Registration No. 000203N, have been appointed as Internal Auditors of the Company for the FY 2024-25.

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 the Indian Textiles Industry is passing through a very difficult and challenging period. Despite the pickup in Global Demand, the prices of finished goods has not risen in proportion to the increase in the raw cotton prices, which in turn impacted companys performance. The company achieved a total income from operations of Rs. 3065.56 Crores showing an increase of 8.00% over the previous year. Likewise, the export at Rs. 1625.16 Crores has also shown an impressive increase of 43.16% when compared with the previous year. However, the profitability of the Company was severely impacted and the company could earn EBITDA of Rs. 99.11 Crores as against of Rs. 257.12 Crores in the previous year. After providing depreciation of Rs. 88.48 Crores and finance cost of Rs. 66.15 Crores, it suffered a loss of Rs. 55.52 Crores. After adjustment of tax (including deferred tax charge) of Rs. 10.30 Crores and CSR expenses of Rs.5.86 Crores, the net loss comes to Rs. 51.08 Crores. The Companys Reserves (other equity) stands at Rs. 1463.12 Crores as on 31st March, 2024.

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

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 10444 as on 31st March, 2024. 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:

The change in interest coverage ratio is due to negative profitability. The change in debt equity ratio due to lower availment of working capital limits. The fall in Net Profit Ratio, Return on capital employed is due to negative profitability. Geo-political situation coupled with high cotton prices and weak global demand resulting fall in Net Profit of the company. The fall in return on equity ratio is

due to decrease in income from investments. The increase in trade payable turnover ratio due to higher purchases coupled with increase in average 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.