Patspin India Ltd Management Discussions.
GLOBAL TEXTILE INDUSTRY
The global textile and clothing trade is expected up to touch USD 1205 billion by 2025 from USD 801 billion in 2018. During 2018, the global export trade increased by 5.46% over previous year. China continued to have major share of world trade at USD 266.5 billion (33.2%), while next top nine countries share varied from 2.4% to 4.8%, with Indias share at USD 37.1 billion (4.6%), showing 5th rank. Amongst the top ten, Germany, Bangladesh & Vietnam showed highest growth ranging from 10% to 14%.
Estimate of world cotton production in 2018-19 is 25.7 million tons, consumption 26.6 million ton and ending stocks at 17.8 million tons. This reflects (-) 3.4% and (+) 1.2%change in global production and consumption respectively. Global trade in cotton is likely grow by 4.5%. The leading exporters of cotton may be USA, India, West Africa Region, Brazil and Australia. Over the last 10 years, area under cotton across the world averaged around 32 million hectares, and is expected to reduce marginally in coming season. India has worlds largest area under cotton cultivation, around 40% of the total cotton area in the world, and is also the largest producer of cotton having around 25% share with around 6 million tons of cotton being produced. It is relevant to mention here that in spite of worlds largest area under cotton cultivation, the yield per hectare is at 499 kilograms, which is one of the lowest in the world. It is imperative that we make vigorous efforts to increase the yield per hectare to at least world average of 750 kilograms per hectare.
The cotton supplies in international market were affected due to decrease in production in major producing countries like USA, Pakistan and Australia. ICACs forecast for 2018-19 is 87 cents per pound, with cotlook A index expected to range between 84 cents to 91 cents.
However, the ongoing trade war between USA and China, who have substantial presence in world trade, will continue to impact this sector.
INDIAN TEXTILE INDUSTRY
The Indian Textiles and Clothing market , which was around USD 102 billion in 2018 is expected to reach USD225 billion by 2024, with CAGR of 14.2% . Exports of Textiles & Clothing have marginally increased and reached a level of USD 37.5 billion. Though there was a decline in apparel exports, exports of cotton yarn, fabrics, and made-ups have grown marginally. During the Post-GST scenario, the export performance of textiles and clothing has deteriorated due to significant drop in export benefits.
The Spinning capacity, Cotton yarn production and cotton yarn exports for last five years are given below;
|Year||Spindles||Production||Exports (Million Kg)||Exports|
|(Millions)||(Million Kg)||(USD Million)|
For increasing employment in textile sector as well as productivity and quality, the Ministry of Textiles introduced Textile Upgradation Fund Scheme (TUFS) in April 1999. The said Scheme underwent many changes on different occasions with introduction of Modified TUFS, Restructured TUFS, Revised Restructured TUFS and finally Amended TUFS, covering different segments. The total investment attracted in the entire industry amounted to Rs.324.5 thousand crores and subsidy reimbursement towards interest and capital subsidy amounted to Rs.26.5 thousand crores, with employment generated to the tune of 47.65 lakhs as reported last. The spinning and composite segments of the textile sector are major beneficiaries under the Scheme. The package announced by the Government during 2016-17 in favour of garmenting and made-up sector was increased to Rs.7148 thousand crores from Rs.6000 thousand crores, was available up to March, 2019.
RAW COTTON SCENARIO IN INDIA
Global Cotton Production
Global production in 2018-19 was slightly over at 25.75 Million Tonnes, it was lower by 3.4% of previous year production, at the same time consumption has increased to 26.66 Million tonnes, just 1.1% higher than previous year consumption. Cotton consumption has been steadily increasing from season to season. This has resulted in decrease in year ending stock which was estimated at 17.85 Million tonnes, 4.8% lower than previous year ending stock.
The growing demand for cotton, changing trade policies and trade dispute between USA & China are contributing uncertainty in the global cotton outlook. The global trade in cotton during 2018-19 has increased to 9.45 million tonnes, an increase of around 4.5% over previous year.
Domestic Production Scenario
2018-19 season has commenced with opening stock of 42.91 Lakh bales,2% lower than previous season opening stock and lower production of 337 Lakh bales, 8.1% lower than previous season production. However as cotton imports have been estimated at 22 Lakh bales, higher than previous season import of 15.8 Lakh bales, this resulted in the availability of 401.9 Lakh bales, 6.5% lower than previous season availability of 429.5 Lakh bales. On the demand side domestic demand estimated at 311.50 Lakh bales, 2.4% lower than previous season demand of 319.06 Lakh bales. Global demand for cotton exports expected at 50 Lakh bales, 26% lower than previous season export of 67.59 Lakh bales. Season ending stock worked out to 40.41 Lakh bales, marginally lower than previous season ending stock of 42.91 Lakh bales.
Generally, the cotton yarn price does not increase in same proportion as increase in raw cotton prices as demand and supply of cotton yarn moves independently. Also, change in cotton price in India does not necessarily follow international trend. This is because high MSP (Minimum Support Price) of cotton protects the fall up to a level in spite of decline in international market. Normally, the MSP is increased by 4%, however, percentage increases have been steeper since year 2011-12 ranging anywhere from 10% to 28%.
As for 2018-19 season, a huge increase in MSP was announced for medium staple cotton from Rs.4,020 per quintal to Rs.5,150 (28%) and long staple cotton from Rs.4,320 to Rs.5,450 (26%) as committed in the Union Budget 2018-19 (MSP to be fixed at 1.5 times of cost of production).
Though the steep increase in MSP would have some impact on the predominantly cotton based Indian textile industry and cotton exports in the short run, it would greatly help the farmers to sustain their financial viability (cultivating cotton) and retaining the area under cotton.
BUSINESS OVERVIEW, INDUSTRY DEVELOPMENTS, OPPORTUNITIES AND THREATS
The Company is engaged in business of manufacture and export of high quality combed cotton yarns. The yarn is manufactured from the worlds best sources of long and extra long staple cotton like American Supima, Egyptian Giza, contamination free Australian and American cottons and superior Indian cotton like Shankar-6 and DCH-32. The company manufactures yarns of various counts ranging from NE 20s to NE 100s. Permutations and combinations in spinning and finishing process results in yarns of varied qualities for specificend users. The company was amongst the first in India to manufacture compact yarn using the breakthrough technology of compact spinning, and also uses state-of-art machineries across its plants. The Company has 2 plants at Palakkad in Kerala and Ponneri in Tamil Nadu having a capacity of 1,14,000 spindles, consisting of 70,752 Compact Spinning and 43,248 Ring Spinning, and also capacity for value added products ie. Twisting, Gassing and Soft winding.
The promoters have 5 decades of experience in spinning industry with its first unit in Kerala in 1966. The company derives its strength from rich experience of promoters in marketing of cotton yarns in international market for over 3 decades. The company has built up an excellent customer base over the years by supplying consistent quality and timely deliveries of yarns. With flexibility to produce varied counts of cotton yarns, carded, combed, single and twisted, multi fold and gassed, the company is able to retain its customers For Spinning industry, raw material is cotton, which is a seasonal product, the cultivation of which is mainly rain-fed and as such dependent on vagaries of monsoon. Adequate availability of raw cotton at right price is crucial for the company. However, as import of cotton is freely allowed, and since the company is exporting a part of its production, the risk of cotton availability as well as exchange rate fluctuation is partly mitigated.
The Government has announced Amended Textile Up-gradation Fund Scheme (ATUFS) for giving required thrust to post spinning segment. However, spinning segment is kept out of TUF Schemes which is a matter of concern for units which were set up in early 2000. These units require upgradation, modernization and or replacement. The government should seriously formulate such a scheme with fiscal support. It is estimated that 15-20 Million spindles may require such technical upgradation.
Goods and Service Tax (GST) Scheme which was introduced from 1st July 2017 initially caused a lot of difficulties. However, with greater understanding and modification of the GST system, the Textile Industry and Trade are in much comfortable interest subvention, duty draw back and MEIS which were available for state. However,strangelymanyof thebenefits exports of cotton yarn have been now denied to this sector. If these benefits are restored it will help the cotton yarn spinning mills immensely.
RISK AND CONCERNS
a. Raw Cotton, an agricultural product, is the key raw material used for the manufacture of cotton yarn. Almost 65 percent of area under cotton cultivation is rain-fed and hence is dependent on vagaries of monsoon, which this year has shown uncertain signs so far. Adequate availability of raw cotton at right prices is crucial for the Company. Any disruption in the supply and/or violent changes in the cost structure would affect the profitability of the Company.
b. Your Company follows an efficient inventory management system and a well-crafted strategy of procuring raw materials through a mix of spot and long-term contracts. The companys conscious efforts on maintaining a judicious mix of markets for its sales and thrust on specialty products like Better Cotton Initiative (BCI), Supima yarns and Giza yarns have also proved to be beneficial.
c. Volatility in foreign currency exchange rates vis-a-vis Indian Rupee is another area of concern since a sizable production of cotton yarn is exported by your company. The Company has in place various Management Information Systems, which enable the management to take decisions on exposures relating to exports and imports. The Company continues to strengthen these systems to minimize the risk involved due to adverse movement of exchange rates.
d. Your Company has a system of assessing the risks on an ongoing basis. This includes an effective internal control and management reporting system. Further, the framework also captures the existing practices to manage commodity price risk, interest risk, and foreign exchange risk etc. An important aspect of this framework is to promote a balanced approach that considers risk and return.
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
The Company has a proper and adequate internal control system to ensue that all assets are safeguarded and protected against loss from unauthorised use or disposition and that all transactions are authorized, recorded and reported correctly. The internal control is supplemented by an extensive programme of internal audits, review by management and documented policies, guidelines and procedures. The internal control is designed to ensure that financial and other records are reliable for preparing financial statements and other data and for maintaining accountability of assets.
DISCUSSIONS ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE
Please refer to Directors Report on performance review.
MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED
The Company recognizes the importance and contribution of its human resources for its growth and development and is committed to the development of its people. The Company has been adopting methods and practices for Human Resources Development. With utmost respect to human values, the Company continues to develop its human resources, through a variety of services by providing appropriate training, motivation techniques and employee welfare activities. Industrial relations were cordial and satisfactory.
As on 31st March, 2019, the Company has about 1631 employees in its various offices and factory.
Statements made in this report describing the Companys projections, estimates, expectations or predictions may be forward looking predictions within the meaning of applicable securities laws and regulations. Actual result may differ from such estimates, projections, etc. whether expressed or implied. Factors which would make a significant the Companys operations include availability of quality raw cotton, market prices in the domestic and overseas markets, changes in Government regulations and tax laws, economic conditions affecting demand / supplies and other environmental factors over which the Company does not have any control.