Pearl Global Industries Ltd Management Discussions.

INDUSTRY OVERVIEW

Indias textiles and Garment sector is one of the oldest industries in Indian economy dating back several centuries. India is currently the worlds second largest textile and apparel producer behind China. The whole textile and apparel industry represents over 4% of Indias total GDP, 10% of manufacturing production, more than 14% of Industrial Production and more than 14% of Countrys export earnings every year, making it the largest manufacturing sector in India. Today, Indias textile and apparel industry is worth about 120 billion, with an employment total 105 million people directly and indirectly. Indias textile and apparel industry directly employs over 45 million people, which makes it one of the largest source of employment generation in the country. The future for the Indian textile industry looks promising, buoyed by both strong domestic consumption as well as export demand.

Indian khadi products sales increased by 33 per cent year-on-year to Rs 2,005 crore (US$ 311.31 million) in 2016-17 and is expected to exceed Rs 5,000 crore (US$ 776.33 million) sales target for 2018-19, as per the Khadi and Village Industries Commission (KVIC).

The fundamental strength of the industry in India is its strong production base of wide range of fibre/yarns from natural fibres like cotton, jute, silk & wool to synthetic/man-made fibres like polyester, viscose, nylon & acrylic. India is the largest producer of cotton. Cotton yarn, one of the largest segments in indias fibre market, representing over half of share in Indias total fabric production. Readymade Garment sector is the largest contributor to Indias total textile and apparel exports, representing around 41% of countrys textile and apparel exports. The textile Ministry of India earmarked Rs.690 crore (USD) 106.58 million) for setting up 21 readymade garment manufacturing units in seven states for development and modernization of Indian Textile Sector.

However, presently, the Industry is facing problems of reduced drawback (from 7.5% to 2.5%) and ROSL (from 3.5% to 1.7%), partly countered by higher Merchandise Exports from India Scheme (MEIS) from 2% to 4%.The industry has sought higher allocation from the government to meet the requirements of duty drawback and refund of state levies (ROSL) under the new GST regime. The fund allocation in Union Budget 2018-19 increased 14.7 per cent to337,148 crore over the previous year.

The Apparel Export Promotion Council recommends the government to expedite the process of India-EUFTA finalization, as this will help exporters to have better market access that is already enjoyed by Indias competitors like, Bangladesh, Vietnam and Cambodia. As per a study conducted by AEPC, if the Indo-EUFTA is signed it will increase Apparel Exports by around USD 2 billion per year. However, EU will also enjoy duty free export facility to India, which needs to be addressed.

COMPANY OVERVIEW

Our product range includes knits, woven and bottoms (basic and complex designs) across men, women and kids wear segments. We have a well diversified and de-risked manufacturing base across India, Indonesia and Bangladesh. We have a total capacity to manufacture around 62 million garments per annum (including own and outsourced facilities).Our revenue structure is primarily export based, with a major contribution coming from exports to the United States. We provide total supply chain solutions to customers-value retailers and high end fashion brand, retails in the United States and Europe. Our business model enables us to offer superior quality products across various countries, catering to all kinds of consumers. Our esteemed global clientele includes premium retailers in USA and Europe, including GAP, Banana Republic, Kohls, Macy, Ralph, Lauren, Tom Tailor and next among others.

Pearl Global Industries Limited (PGIL) is one of Indias largest listed garment exporters, manufacturing from multiple sourcing regions within India and countries within South Asia. A preferred long-term vendor to most leading global brands, we are amongst the leading player in our Industry. Our mainstay business is to create value from competitively manufacturing and exporting fashion garments to leading global brands. We have now also ventured into e–retail through established digital channels and our own e-com portal SbuyS.in, giving consumers access to global fashion at attractive values.

We strive to be the most preferred vendor to the top global apparel brands and be ranked amongst the top garment manufacturers in the world, in terms of quality, service standards and ultimately-customers satisfaction, keeping in line with our broader vision.

1. Our manufacturing facilities

Country Name Factories Capacity (In Million per annum)
India Pearl Global 8 16.6
Bangladesh Norp knit 3 21.6
Indonesia PT Pinnacle 2 3.6
Vietnam Pearl Global Vietnam 1 2.4
Total 14 44.2

2. Our Pillars of Strengths

a) A Multi Location Manufacturing capability

Global apparels sourcing market is witnessing a shi3 from China to other low-cost Asian countries, primarily Bangladesh, India and Indonesia. Our Company already has a strong manufacturing presence in leading sourcing nations such as India, Bangladesh,Indonesia and Vietnam. Each of these countries exhibits certain core advantages.

b) Design Cell

Our Company has a dedicated in house design team of 75+ designers in Hong kong, India and Indonesia. The design teams continuously observe the trend in all markets across the world and visit almost all the globally renowned fashion and textile fairs to refresh their inspiration for new design ideas. As a result they are well equipped to serve the global brands from concept boards to ready new samples. New design ideas also emerge from our various marketing teams, who are close to and in continuous conversations with buyers located in Hongkong, London, USA and Germany. There is an increased focus being placed on creating brand-specific product designs to generate and accelerate business opportunities for global brands and retailers.

3. E-Commerce Channels

We have already ventured into e retail through our own retail platform www.SbuyS.com. Our vision behind this is to provide internationally trending and fashionable garments to the Indian consumer at an attractive value. In addition to our own retail platform, we have established tie-ups with leading online retail platforms such as Flipkart, Snapdeal, Jabong, myntra fashion, You, and Amazon. We are confident of capitalizing on this growing opportunity. We expect tie channel to evolve gradually and become more significant in the coming years. Since our margin contribution through this channel is substantially more than our B2B business, our topline growth in our B2C business will have a positive effect on our bottom lines.

SBUYS is a popular brand among online shoppers for western women wear and kids wear. It brings in the latest international fashion in Women wear (21-29 yrs) Young Girls wear (15-20 yrs) and kids wear (4-10 yrs) SBUYS has completed three years and is showing exponential growth YoY. The brand is managed by a team of experience and dedicated professionals. Its business is driven by its own e-com portal WWW. SBUYS.IN and other leading online e-tailers. It is all set to tap the huge potential of women wear and kids wear market thru online retailers and strategic brand tie ups.

COMPANY PERFORMANCE AND MANAGEMENT OUTLOOK

The company has achieved a gross income of Rs.758.79 Crore compared to Rs.903.48 Crore in last financial year.

Going forward, as the expanded capacity in Vietnam become fully operational, the share of overseas manufacturing will increase leading to improvement in overall margins.

In the last year as the expanded capacities in Bangalore and Chennai fully operational, the share of in house manufacturing already increased leading to improvement in overall margins.

Forward integration into online fashion apparel retailing in the brand "SBUYS". Online retailing is a high-growth space and offers strong potential to build a business model with healthy margin profile.

GOVERNMENT INITIATIVE

The Indian government has come up with a number of export promotion policies for textile sector. It has also allowed 100 percent FDI in the Indian Textile sector under automatic route.

The Directorate General of Foreign Trade (DGFT) has revised rates for incentives under Merchandise Exports from India Scheme (MEIS for two sub sectors of textile industry-Readymade garments and made ups from 2% to 4%.

The Ministry of Textiles is encouraging investments though increasing focus on schemes such as Technology upgradation Fund Scheme (TUFS) under Union Budget 2018- 19 Rs.2300 (USD355.27 million) Crore have been allocated for TUFS and Rs.30 Crore (USD 4.63 million) for the scheme for Integrated Textile parks, under which there are 47 ongoing projects. The cabinet committee on Economic affairs (CCEA),Government of India has approved a new skill development scheme named Scheme for capacity Building in Textile Sector (SCBTS)

The Textile Ministry will organize Hastkala Sahyog Shivirs in 421 handloom-handicrafts clusters across the country which will Benefit over 1.2 lakh weavers and articians. The textile Ministry of India earmarked Rs.690 crore (USD106.58 million) for setting up 21 readymade garments manufacturing units in seven states for development and modernization of Indian textile sector.

The Union Ministry of Textile, along with Energy Efficiency Services Ltd (EESL) has launched a technology upgradation scheme called SAATHI (Sustainable and Accelerated Adoption of Efficient Textile Technologies to help small industries) for reviving the power loom sector in India.

OPPORTUNITIES & THREAT

Rising cost of labour in china and marginal price difference in fabrics prices in India and china are helping India. Since costs are rising in china, the media to long term business will move to other countries which can better or match china cost and delivery capabilities. Since buyers are looking at alternate markets for sourcing, India has greater chance, being economically and socially stable country. Besides, large garment industry in India is getting more organized for higher demands.

However, the inflationary situation in India demands for rise in wages for workers also. Cotton prices are also rising in India, which require authorities intervention like ban on cotton exports. Due to rising cost, India faces competition from low cost countries like Bangladesh and Indonesia.

In todays market scenario, where most of the top retailers of the world are consolidating their vendor bases, stand alone vendors are going out of business and there share is being taken over by companies like PGIL. Vendors that are able to offer value addition in terms of design input, provide different sourcing options and have the operational and financial resources to meet retailers increasing requirements are being categorized as their "Preferred Vendors". This gives the vendor an edge over the competition. Due to all its investments over the last couple of years, your company through its subsidiaries has already been categorized as Preferred Vendor by various big Retailers in US and Europe.

RISKS MANAGEMENT & CONCERNS

The overseas buyers are reducing not only their orders but also their prices due to serious liquidity problems being faced by them.

Garment manufacturing is totally a labour intensive and even After greater automation it will remain so. The obsolete and antiquated labour legislation has hindered the growth of the extremely labour intensive garment manufacturing. The restrictive industrial and labour laws restrain managements capability to respond professionally, effectively and speedily to the fast changing dynamic international textile scenario and request for labour reforms with flexible labour laws to increase productivity. There is an urgent need for flexible labour norms specific to garment manufacturers and exporters to enable them to meet the increasing international competition especially with regard to employment of casual labour and overtime hours of work during high season which are necessitated by the requirement of meeting tight delivery schedules required for export.

The Company has established factories and operating in the region for long time continuous efforts for betterment of labour has been conducted to improve the condition both at work and home for labour company till now havent faced any labour issues in terms of strike etc.

The Company is undertaking various measures like lean manufacturing at ground level to increase the productivity and further reduce rejection to improve margin.

INTERNAL CONTROL SYSTEM

The Companys internal control system has been designed to provide for:

i) Accurate recording of transactions with internal checks and prompt reporting through SAP

ii) Adhere to applicable Accounting standards and policies.

iii) Review of capital investments and long term business plans.

iv) Periodic review meetings to manage effectively implementation of system.

v) Compliance with applicable statutes, policies, listing requirements and operating guidelines

vi) Effective use of resources and safeguarding of assets.

vii) IT systems with in built controls to facilitate all of the above.

The Company has adequate systems of internal controls to ensure that transactions are properly recorded, authorized and reported apart from safeguarding its assets. Your company has successfully implemented SAP for its manufacturing units and will continue upgrading the same.

The Company has its own Corporate Internal Audit set up which carries out periodic audits at all locations and all functions and brings out deviations to internal control procedures. The observations arising out of audit are periodically reviewed and compliance ensured. It has successfully implemented SAP for its manufacturing units and will continue upgrading the same.

HUMAN RESOURCE MANAGEMENT

Our success depends on our ability to recruit, train and retain quality personnel. Accordingly special emphasis is placed on human resources function in our Company.

The Company adopts a "People first" approach to leverage the potential of employees. Systems and methods to improve employee productivity continuing skill up-gradation and training and by emphasizing the importance of quality products and customer satisfaction.

CAUTION STATEMENT

Investors are cautioned that this discussion contains statements that involve risks and uncertainties. Words like anticipate, believe, estimate, intend, will, expect and other similar expressions are intended to identify such forward looking statements. The Company assumes no responsibility to amend, modify or revise any forward looking statements, on the basis of any subsequent developments, information or events. Besides the Company cannot guarantee that these assumptions and expectations are accurate or will be realized and actual results, performance or achievements could thus differ materially from those projected in any such forward looking statements.