Nitin Spinners Ltd Management Discussions.

GLOBAL ECONOMY

As per the International Monetary Fund, world economic activity continues to firm up with brighter prospects and optimistic markets ahead. World growth strengthened in the year 2017 to 3.8% with a notable rebound in global trade. It has been driven by investment recovery in advanced economies, continued strong growth in emerging Asia, upswing in emerging Europe and signs of recovery in several commodity exporters. While US implemented various tax reforms, UK indicated strong recovery in demands after the Brexit episode. The emerging and developing economies (EMDE) performed satisfactorily, with China and India amongst the key drivers. Growth in China and India last year was supported by resurgent net exports and strong private consumption respectively, while investment growth slowed down. Growth is expected to be 2.5% in the advanced economies and 4.9% in the EMDE in the year 2018. Global growth is expected to be supported by accommodative financial conditions and the repercussions of expansionary fiscal policy in the US. According to the IMF, global growth is projected to tick up to 3.9% in the year 2018 backed by favourable market sentiments.

OVERVIEW OF THE WORLD ECONOMIC OUTLOOK PROJECTIONS, APRIL, 2018

Actual Projection
2017 2018
World Output 3.8 3.9
Advanced Economies 2.3 2.5
United States 2.3 2.9
Euro Area 2.3 2.4
Japan 1.7 1.2
United Kingdom 1.8 1.6
Canada 3.0 2.1
Emerging Market and Developing Economies 4.8 4.9
Russia 1.5 1.7
China 6.9 6.6
India 6.7 7.4
(Source: The International Monetary Fund)

INDIAN ECONOMY

India continues to remain the fastest growing economy globally. The countrys GDP growth rate was 6.7% for the year 2017-18. The country implemented several structural reforms towards formalisation of the economy and fostering digital financial inclusion. The better than expected growth numbers clearly indicate that the country has overcome the temporary disruption caused by demonetisation and GST implementation. Factory output recorded a growth of 7.1% in February, 2018, aided by strong show in manufacturing and capital goods sectors. Consumer Price Index (CPI) inflation moderated to 4.4% in February, 2018 which stood positive for the markets. Retail inflation averaged at 3.4% for the April-January 2017-18 period.

Stable macro-economic indicators such as structural reforms, business ecosystem improvement, focus on infrastructure development and liberal Foreign Direct Investment (FDI) regime have resulted in massive foreign capital inflows, making India a favoured investment destination.

Indias GDP is expected to rise to 7.4% in 2018-19 and 7.8% in 2019-20. Renewed investor confidence and expectations of continued progress on economic and institutional reforms will further unleash Indias high growth potential. Besides, digitisation, globalisation, suitable demographics and structural reforms, will further continue to drive Indias growth story. (Source: The Economic Times, Business Line, The Business Today, The Business Standard, KPMG research report, Livemint)

TEXTILE INDUSTRY industry has two broad segments. First, the unorganized sector consisting of handloom, handicrafts and sericulture and the second is the organized sector consisting of the spinning, weaving, knitting, apparel and garments segment.

Textile industry plays a very crucial role in the Indian economy. It continues to be the second largest employer in the economy, employing over 45 Million people. It contributes 4% to the countrys GDP and 21% to the industrial production. Textiles exports touched US$ 27.59 billion during 2017-18, which accounting for 15% of total countrys exports. The industry is gaining momentum backed by rising government focus and favourable policies. The ambitious launch of ‘Make in India initiative, is a part of governments renewed focus on the countrys economy.

KEY INDUSTRIAL DEVELOPMENTS Cotton prices

Cotton is the basic raw material for the textile industries. Its prices are influenced by both domestic and international factors. Rising cotton prices following the pink bollworm infestation in the cotton crops, higher Minimum Support Price (MSP) and unfavourable exchange rate fluctuation are the key concern to the industry.

During FY 2017-18, cotton prices witnessed volatility of around 19% (annualized). With physical market size of cotton estimated at around 68,000 Crores, the cotton industry faced annualized price risk of over 13,000 Crores. According to the Cotton Association of India, the area under cotton cultivation in India may shrink by 10-15% from 123 lacs acres to 110 lacs acres in the year 2018. However, there may not be much decline in the total production as the area under cotton in other states may compensate for any decline in area in pink bollworm aff ected states.

Furthermore, a 19% increase in cotton acreage and a resultant 11% surge in crop output in previous two fiscals are expected to moderate cotton prices in 2018-19, notwithstanding the rising prices in the last few months due to the pink bollworm issue.

Government Initiatives

The textile industry faced headwinds in the form of demonetisation and Goods and Services Tax (GST) implementation leading to sluggish demand and production challenges. However, the initial shockwaves subdued in the second half of the year and with recovery of demand and stabilisation of the sector post new reforms.

Government has made huge investments in initiatives like Schemes for Integrated Textile Parks (SITP) and Technology Upgradation Fund Scheme (TUFS) to encourage more private equity and to train workforce. Under Union Budget 2018-19, government has invested around 7,148 Crores (US$ 1.1 Billion) for the textile industry and 30 Crores (US$ 4.63 Million) for the Scheme for Integrated Textile Parks.

Besides, the Union Budget 2018-19 also announced to increase MSP prices of Kharif crops to 1.5 times the cost of production. However, any significant impact of the rise in cotton MSP on the textile industry is not expected as current cotton prices are at the same level.

(Source: IIFLResearch report, The Economic Times, Ind-Ra research report)

Key Strength of the Industry

• Strong and flexible production base of wide range of fibre/yarns

• Low cost and skilled manpower results in competitive advantage

• Availability of number of varieties of cotton fibre and fast growing synthetic fibre

• Vertical and horizontal integrated textile value chain from raw material to finished goods

• Globally competitive spinning industry with diverse design base

• Cost eff ective manufacturing facilities with lowest cotton yarn spinning cost

• Unique strength in traditional handlooms and handicrafts

• Growing economy with high potential domestic and international market

Opportunities and Threats

The textile industry as well as Company will be driven by increasing urbanisation and higher awareness of fashion trends. The future of the industry looks promising backed by consumerism, increasing population, aff ordability and rising disposable income.

The threats for the industry and the Company comprises of competition from emerging countries, especially China. Pricing pressures on finished goods, inflation, foreign exchange fluctuation, volatility in input cost, cotton crop, interest rates and power cost among others, comprise the key threats.

Outlook

On the global front, China is reporting positive activity and demand is picking up in the US and the European Union. The global textile mills market is forecast to reach US$ 842.6 Billion in value in 2020, an increase of 26.20% since 2015. The compound annual growth rate of the market in the period 2015–20 is predicted to be 4.80%.

The Indian textile industry is set for immense growth, buoyed by both huge domestic consumption as well as export demand. The industry is expected to reach US$ 226 Billion by 2022-23.

The Company has overcome from the temporary disruption caused by demonetisation & GST implementation and it has undertaken massive expansion project for manufacturing of finished fabric. The expanded capacity shall be partially operational in this financial year and therefore Company expects better results in the coming years.

Company Review

Nitin Spinners Limited (NSL), located in Bhilwara, Rajasthan, is one of the leading players in the textile industry. The Company manufactures 100% cotton yarn and knitted fabrics by using latest ultra-modern technology. The manufacturing unit is situated in Hamirgarh, Bhilwara. As a part of strategic initiatives, the Company plans to foray into finished fabric segment to fulfil the rising demand in the apparel industry.

Nitin Spinners has an installed capacity of 2,23,056 Spindles and 2,936 Rotors, producing 50,000 tons of yarn per annum. To move up the value chain, the Company has also established a Knit Fabric Division with 63 knitting machines, having installed production capacity of 9,000 tons of fabric per annum. The Company exports around 64% of its production to over 50 countries globally. The products are widely used in manufacturing apparel and garments, inner wear, terry towels, woven fabrics, home furnishings, carpets, denim, industrial textiles, medical textiles, mattresses stickings and socks, among others.

Operation Review

The Company has recorded revenue from operations of 1,145.25 Crores in the current year against 933.39 Crores in the previous year, an increase of 22.70%. During 2017-18, the EBIDTA (Earnings before interest, tax, depreciation and amortisation) increased from 134.25 Crores in 2016-17 to 157.17 Crores in 2017-18, with an increase of 17.07% on YoY basis. However, the PAT (Profit after Tax) decreased from 57.35 Crores in 2016-17 to 52.39 Crores in 2017-18 due to implementation of expansion project in the last year the Interest Cost, Depreciation and Tax increased substantially because of increased loan, assets base and non availability of tax incentive. The Company is operating in single segment i.e. Textiles.

Environment and Safety

The need for environmentally clean and safe operations is companys key priority. The Company policy requires the conduct of all operations in such a manner so as to ensure the safety of all concerned, compliance of statutory and industrial requirements for environment protection and conservation of natural resources to the extent possible.

Human Resources and Industrial Relation

Employees are the most valuable resource of any organisation. The Company considers employees as their biggest competitive advantages. The Company takes initiative like training and development for its people to increase the performance. The Company has taken various steps to improve and enhance skill of its people. The industrial relations remained cordial in our plant. The total strength as at the end of the financial year 2017-18 was 2967 employees.

Internal Control System and their Adequacy

The Company has appropriate systems for Internal Control. The systems are improved and modified continuously to meet with changes in business conditions, statutory and accounting requirements. The Company has strong Management Information System, which is an integral part of control mechanism. The Audit Committee of Board of Directors reviews the efficiency and eff ectiveness of internal control systems and suggests the solution to improve and strengthen. The Internal control system were tested during the year and no material weakness in design or operation were observed.

Risk Management

The Company believes that an eff ective, consistent and sustainable risk management framework is essential part of the work culture. Risk management must be fully integrated into the organisations governance policies. It is vital to identify, assess and act to minimise various risks. Some of the key risks identified include:

Risk Description Mitigation Measure
Global Economic Risk The Companys business areas are spread globally. It is always subjected to risks arising out of unfavourable economic situations, in any of the global regions. The Company maintains a balance between its domestic and international revenues. Moreover, the wide spread presence across several geographies, distributes risks and reduces overall dependency.
Foreign Exchange Risk The Company exports 64.36% of total turnover which means it has considerable exposure in foreign currency. Any fluctuation in forex market has a significant impact on the margins of the Company. The Company has well documented foreign exchange risk policy and currency risks are hedged accordingly through forward contracts.
Finance Risk A large portion of the Companys expansion plans have been financed through debt. The debt agreements are subject to financial covenants. The forecast cash requirements of the Company are closely monitored along with actual and projected to ensure adherence to covenants.
Commodity Price Risk The Company faces the risk of price fluctuation of cotton, coal as well as finished goods. This risk is not only dependent on agriculture sector fluctuations, but also influenced by government policies and the movements in international market. The Company understands the importance of the price value equation and the need to be sensitive to price changes to counter the volatility of input costs. This risk is managed through judicious purchase and stocking.
Individual Business Risk Apart from the risks on account of interest rate, foreign exchange and regulatory change, various business of the Company is exposed to certain operating business risks. The potential risks are proactively managed by regular monitoring and corrective actions.
Competition Risk The Company is continuously exposed to competition from emerging and established players in the industry. The Company continues to produce quality products and diversify its portfolio to prevent competition risk.

Cautionary Statements

Statement in this Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations or predictions may be "forward-looking statements" within the meaning of applicable laws and regulations. Actual results could diff er materially from those expressed or implied. Important factors that could make a diff erence to the Companys operations include raw material availability and prices, cyclical demand and pricing in the Companys principal markets, changes in Government regulations, tax regimes, economic developments within India and the countries in which the Company conducts business and other incidental factors.