Pokarna Ltd Management Discussions.

Global and Indian Economy Overview

The year 2018 started on a strong growth trajectory on account of robust growth in most of the major economies. However, the year witnessed many challenges leading to weakening global expansion, especially in the second half of the year. The Global economic growth rate, which touched 4% in 2017, softened to 3.6% in 2018 and is expected to further decline to 3.2% in 2019 before strengthening to 3.5% in 2020. The softening of growth rate was on account of weaker growth in developed economies, increasing trade tension and tariff hike between US and China, reducing business confidence, tightening of financial conditions and higher policy uncertainties across many economies.

Growth in the United States is expected to decline to 2.6% in 2019 and soften further to 1.9% in 2020 with the unwinding of fiscal stimulus. The downward revision to 2019 growth reflects the impact of the US government shutdown and somewhat lower fiscal spending than previously anticipated, while the modest upward revision for 2020 reflects a more accommodative stance of monetary policy than in the October forecast.

Despite of global headwinds, Indian economy continued to be the fastest growing major economy in the world registering GDP growth rate of 6.8% in FY 2019. The growth was achieved on account of robust consumption, recovery in investment and improvement in monetary policy. The country is expected to continue its growth trajectory with GDP growth rate at 7% in 2019 and 7.2% in 2020. (Source: IMF, World Economic Update)

Stone Industry Overview


Current size of the Indian Granite and Marble industry is estimated to be around US$ 3 billion. The industry is highly fragmented with presence of large number of organized and unorganized player. The industry is concentrated in Andhra Pradesh, Karnataka and Rajasthan as majority of the processing units are clustered around the mining area. The entry barriers to the industry are very limited. The key downstream industries include real estate and construction sector across the globe. The real-estate industry is cyclical in nature and is exposed to various external factors such as the disposable income, interest rate scenario, etc.

China is the largest buyer of granite blocks accounting for over 80% of share in exports of granite blocks from India. Chinese enterprises process Indian material for domestic consumption and also export significant quantity of processed granite to the US.

During the year under review, export of granite blocks from India reduced by 4.5% from US$ 451 Million to US$ 430 Million. Export of Granite blocks to China decreased 5.3% from US$ 373 Million to US$ 353 Million. While, the Export of granite slabs from India increased marginally by 1.6 % from US$ 791 Million to US$ 804 Million. Indias export of processed granite to the US increased 6.3% in volume terms while in value terms it decreased by 5.6% from US$ 154.47 Million to US$ to 145.86. Million. (Source: http://magazine. stonemag.com/2018-us-hard-surface- imports report/importreport2018- granite/)

The U.S. Trade Representative (USTR) in March 2019 announced that the United States (US) intended to terminate Indias status from Generalized System of Preferences (GSP) program. The Companys granite slabs and cut to size products are currently amongst the products that are eligible for duty-free treatment under the US GSP program. Termination of Indias status as a beneficiary developing country under the GSP program would mean that Companys Granite slabs and cut to size products when imported into the US may be subject to certain safeguard measures or levies.


Quartz is one of the hardest natural materials on earth and appears similar to that of granite. The key distinguishing factors of Quartz is that they are naturally scratch and stain resistant and non-porous. Indias export of quartz surfaces products to the US increased from US$ 38.69 million to US$ 69.54 Million. The main application of crystalline mineral is for kitchen and bathroom counters, though it is more commonly used in jewellery and electronics. (Source: http://magazine.stonemag.com/2018-us-hard- surface-imports-report/importreport2018-quartz-surfaces/)

Global Quartz Surfaces Sales by Regions (2013 — 2018)

(Million SFT)
2013 2014 2015 2016 2017 2018E
North America 97.5 111.3 126.1 142.4 157.7 176.5
Europe 53.4 60.5 67.9 75.0 82.3 90.1
Asia Pacific 122.2 136.6 152.1 169.5 188.6 213.2
South America 23.0 25.5 28.4 31.9 35.2 39.2
Middle East & Africa 35.0 39.8 45.0 50.7 58.3 63.4
Total 331.1 373.7 419.6 469.5 522.2 582.4

Source: Global Info Research, 2018

In April 2018, a U.S. producer petitioned the U.S. Department of Commerce and the U.S. International Trade Commission to investigate alleged dumping by and subsidies to Chinese producers and to levy countervailing and anti-dumping duties against quartz surfaces imports from China. In June 2018, the ITC made a preliminary finding that imports from China were injuring the U.S. industry and preliminary countervailing and anti-dumping duties were levied. Final decisions in these investigations are expected in June 2019.

In May 2019, a U.S. producer petitioned the U.S. Department of Commerce and the U.S. International Trade Commission to investigate alleged dumping by and subsidies to Indian producers and to levy countervailing and anti-dumping duties against quartz surfaces imports from India. The U.S. Department of Commerce has initiated its investigation and is expected to make a preliminary determination regarding countervailing duties in October 2019, and in December 2019 for anti-dumping duties. PESL categorically denies allegations of subsidies and dumping and will vigorously defend itself against the unfounded allegations. Final decisions in these investigations are expected in April 2020.


The global apparel segment witnessed healthy growth in sales volume on account of growth in digital market space despite of store downsizings and slower growth in retail space. The Indian textile and Apparel segment accounted for around 4% share in the global market. India is 5th largest exporter of readymade garments/ apparel in the world as per the WTO in its World Trade Statistical Review 2018. The textile sector is one of the largest sources of employment generation in India, with 45 million people employed directly. The industry contributes significantly towards the growth of Indian economy due availability of key raw materials such as cotton, wool and silk. The GoI has also been investing in scheme for Integrated Textile Parks and the Technology Upgradation Fund Scheme to training workforce and to encourage private investment in the Indian textile and apparel industry.

Growth in downstream industries providing opportunities in the US market

• Within the kitchen product market countertops and flooring round out the top four products at $14.64 billion and $12.82 billion, respectively.

• In the bathroom product market, the top five categories that represent more than half of the spend includes flooring ($11.84 billion), showers ($11.82 billion), vanities ($9.78 billion), bathtubs ($9.69 billion) and countertops ($8.8 billion).

• The residential kitchen and bath market in the United States is expected to grow at 4.1% to reach US$ 177 billion in 2019.

• The construction market will continue its growth trajectory in both 2018 and 2019. It is estimated to grow at 4.8% for 2019, bringing the residential construction market to $716 billion.

(Source: US based National Kitchen & Bath Associations Market Outlook report for 2018-19)

Source: US based National Kitchen & Bath Associations Market Outlook report for 2018-19

Pokarnas position in the US market

The demand for granite slabs and quartz surfaces products in US market is depended on commercial and residential housing starts and remodelling investments. Our standalone and consolidated performance and financial results are dependent on continued access to the US markets and tariffs and other trade barriers that restrict or prevent access represent a continuing risk to us. Any retaliatory tariffs and trade tensions between US and China may impact demand for our products. As we enter 2019, many macro-economic conditions around the world could impact our results.

Industry Outlook

Countertops Market

Global kitchen countertop market is expected to grow from US$ 92.93 Bn in 2017 to US$ 135.47 Bn by 2025 at a CAGR of 4.9% between 2018 and 2025. The global countertop market is showing an upward trend throughout the world on account of several factors such as rising rates of employment, increasing disposable incomes and low interest rates, particularly in the United States, which has encouraged the demand of residential construction. Hence, the global countertop market is growing steadily as residential construction and private spending on home are increasing. A steady rise in the countertops sales is due to a rise in the residential construction and increase in the private spending on homes.

While on one hand, the market faces challenges like increasing rates of interest and rising sales price of existing homes, on the other hand, the market value of countertop market is set to rise due to an increasing preference of higher priced materials rather than the laminates. In addition to this, residential remodelling activity is expected to rise as homeowners continue to opt for larger kitchens and multiple bathrooms, expanding the space devoted to countertops. Increasing construction activity in the countertop-intensive office, retail, lodging, and institutional markets will also drive growth of countertop market in the coming period. (Source Big Market Research).


Annual growth in the US market for home improvement and repair is expected to slow considerably by the end of the year, according to the Leading Indicator of Remodelling Activity (LIRA) recently released by the Remodelling Futures Program at the Joint Center for Housing Studies of Harvard University. The LIRA projects that gains in renovation and repair spending to owner-occupied homes in the U.S. will shrink from 7.5 percent in 2018 to 5.1 percent in 2019.

Natural stone markets are becoming more and more sensitive to fashion trends. Competition in natural stone markets is stiff particularly from Brazil and China. In the long run, in our opinion, large growth may not be expected in the granite industry.

A decrease in the average price for granite over the past few years has made it available to a significant portion of the mass market, while high-end homes, hotels as well as commercial retail, are moving more and more towards variety of engineered surfaces. As a result, quartz surfaces, porcelain, sintered material, certain high end exotic natural stones other than granite, recycled materials and other niche materials and are likely to benefit as high-end homeowners, hotels as well as commercial retail seek novel, higher-value materials.


The quartz market is anticipate to grow at a CAGR of 5% between 2019 to 2024. The growth will be driven by demand for quartz sand in the petroleum industry and the demand for high- purity quartz in the semiconductor industry. Emerging technologies in the development of quartz crystal will further provide boost to the Industry in the short-term period.

Global Quartz Surfaces Sales Forecast by Regions (2018 — 2023)

2018E 2019F 2020F 2021F 2022F 2023F
North America 176.5 195.7 217.5 242.6 270.8 300.5
Europe 90.1 98.5 107.2 116.8 128.1 139.3
Asia Pacific 213.2 240.4 270.8 303.6 340.0 382.9
South America 39.2 43.2 47.7 52.7 58.3 64.5
Middle East & Africa 63.4 69.2 75.1 81.7 89.0 96.8
Total 582.4 646.9 718.2 797.4 886.2 984.1

Source: Global Info Research, 2018


The global apparel market is expected to grow by around 4% CAGR supported by increasing population, changing lifestyle and introduction innovative products backed by introduction of better technology equipped with Artificial Intelligence (AI) across the globe. The Indian market is anticipated to growth at a CAGR of 14% between 2018-2023 to reach US $ 198 Billion by 2023. The major challenge to industry in 2019 will be uncertainty in terms of volatile global economic growth, uncertain outlook of US and China trade conflict and adverse outcomes of Brexit. However, development of fashion retail outlets and supermarkets along with growth of digital market in developing economies such as India and China is expected to increase the global textile and apparels demand in short-term.

About the company and Business Overview

Pokarna is a supplier of both raw and processed granite with quarrying operations in Telangana, Andhra Pradesh and Tamilnadu and two granite processing facilities around Hyderabad. Majority of our finished granite products are exported to the U.S. and raw granite blocks are exported to China. We also manufacture and retail apparel under the brand name STANZA.

Pokarnas wholly owned subsidiary - Pokarna Engineered Stone Limited ("PESL") is Indias largest exporter of natural quartz surface to the U.S. and has earned significant reputation for its innovation in design and performance. PESLs research, design and development efforts are key factors in its success. PESL is committed to growing share in many markets through its differentiated designs strategy. PESLs differentiated designs strategy is aimed at developing products with exotic natural stone-like appearance and complex detailing while being high in performance and priced reasonably. During FY 2019, PESL started supplying products to IKEA in India. Under the arrangement with IKEA, PESL gives complete solution and service by undertaking on site measurement, home delivery and installation and after sales warranty of its products and services to IKEAs customer. On the similar lines, PESL is working on creating the groundwork and platform for offering stone installation and maintenance related services in India to retail and other institutional clients.

During the year under review, PESL commenced building of greenfield facility near Hyderabad for manufacturing quartz surfaces and it is expected to be in commercial operations by March 2020.

Financial Performance


Lower processed granite sales volumes lower than expected quarry production volumes led to decline in granite revenue by 5.80 % to Rs 13901.74 lakhs. EBITDA for the segment stood at Rs 3328.37 lakhs as against Rs 3849.34 lakhs in FY2018. During the year, Apparel business generated revenues of Rs 729.47 lakhs as against Rs 846.04 lakhs in FY2018. Operations at sub-optimal level coupled with elevated operating cost are primary factors for the subdued performance of the business. The divisions revenue was entirely derived from domestic market. EBITDA for the segment stood at H-274.50 lakhs as against H-317.60 lakhs in FY2018.

Our Apparel business has been reclassified from discontinued operations to continuing operations, Company took a depreciation charge of Rs 493.24 lakhs on its books and therefore our Profit after tax was down by 59 % to Rs 667.62 lakhs.

The Board of Directors of the Company have decided not to pursue restructuring solution for Apparel business of the Company as despite continuous efforts, no attractive restructuring solution could be identified. Accordingly, Apparel Business has been reclassified from discontinued operations to continuing operations. Consequently, in accordance with lnd AS 105 Non-current Assets held for Sale and Discontinued Operations, the assets and liabilities of Apparel Business have been restated in the financial statements as at 31st March, 2019 and corresponding previous periods.

The Board has recommended a final dividend of Rs 0.60 per equity share this year compared with Rs 0.60 per equity share in the previous year. This is consistent with Companys strategy to distribute surplus capital to shareholders while maintaining an efficient and resilient capital structure with the flexibility to investment for long term growth.


On Consolidated basis we recorded a strong operational and financial performance in FY 2019. The increase was driven by PESLs improved operational performance complemented by increased average realisation per square foot. In FY2019, consolidated revenue was up by 37 % to Rs 46221.99 lakhs compared with Rs 33746.66 lakhs in FY2018. Net Debt to EBITDA ratio which represents the strength of our balance sheet was at 1.15 times, compared to 1.84 times as at 31st March, 2018. The interest cover for the Company continues to be stable at 4.99 times. Our Return on capital employed improved by 30 % to 30 %, compared with 23 % in FY2018. In FY2019, underlying EPS was at 26.02 per equity share, higher than the previous year earnings of 13.62 per equity share.

Risk & Concerns

Principal risks and uncertainties as set out below may impact the Companys and its subsidiarys business. The risks are not set out in any particular order and do not comprise every risk we encounter in conducting our business and does not necessarily reflect the likelihood of their occurrence or the relative magnitude of their impact on our business:


Quarrying activities of the Company are subject to the hazards and subsoil risk, i.e. the risk of known and unforeseeable effects and difficulties originating from the subsoil (all underground, geological risks).

Several of the Companys quarries and pits are at an early stage of development. As a result, there can be no assurance that the colour, texture, quality and other characteristics of the granite slabs processed and blocks mined from the quarries will be consistent with the material that has been quarried to date If the granite block extracted is of a lower quality than expected, then demand for, and the realisable price may be lower than expected.


Company may incur losses unless and until such time as some or all the quarries are at a level of development which allows the production of commercially significant volumes of material and generation of sufficient revenues to fund continuing operations.


We plan to mitigate this risk through the implementation of robust health and safety training and practices, supported by detailed procedures. The Company has instilled a zero-tolerance attitude for safety incidents at all levels of operations. All significant incidents on site are required to be reported to the Board of Directors. Other operational risks are mitigated using trained personnel, detailed monitoring of operations on a technical and geological basis to ensure that issues are identified and addressed promptly.

We mitigate these risks with the use of highly trained quarry personnel and geologists, and the detailed assessment of the resource including, where appropriate, drilling, technical surveys and third-party reviews.


We mitigate these risks by having approved business plans and targets while working within strict working capital controls and robust budgeting and cost control processes.

Companys quarrying operations are subject to environmental regulation. Environmental legislation is evolving in a manner that may require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees.

The continued success of our existing operations and future projects are in part dependent upon broad support and a healthy relationship with the respective local communities. Failure to identify and manage local concerns and expectations could affect the organizations reputation and social license to operate and grow

We derive substantial income from exports. We have foreign currency loans and we also import some portion of our raw materials and a significant part of our consumables and capital equipment. Any volatility in the Currency exchange rate would therefore impact the Company.


Apparel business of the Company is now a continuing operation. Losses of the apparel division impact overall profitability of the Company.

We mitigate these risks by developing policies and procedures to ensure that environmental standards are met in excess of current local legislation. We will continue to monitor evolving standards within each of its operating environments.

We mitigate these risks by having periodic engagements with all local communities to establish relations based on trust and mutual benefit. Our focus is on local consent prior to accessing resources or starting work. We seek to identify and minimise potential negative operational impacts and risks through responsible behaviour - acting transparently and ethically, promoting dialogue and complying with commitments to stakeholders. The Boards Corporate Social Responsibility (CSR) Committee decides the focus areas of all CSR activities, budget and programmes to be undertaken.

We mitigate these risks by not speculating in forex. The Audit Committee reviews our forex-related matters periodically and suggests necessary courses of action as may be needed by businesses from time to time, and within the overall framework of our forex policy.


We plan to mitigate this risk by focusing rigorously on improving performance of this business and become operationally positive.

PESLs capital plans include, from time to time, expansion, productivity improvement, technology upgrades, operating efficiency optimization and repair or replacement of its existing facilities and equipment. If the capital expenditures associated with these capital projects are greater than we have projected or if construction timelines are longer than anticipated, our financial condition, results of operations and cash flows may be adversely affected.

PESL faces intense competition from manufacturers of quartz surfaces using Chinese technology and this can impact its average realisation.

Trade arrangements with certain customers include the provision of short-term credit. The Company is therefore exposed to the credit risk for a portion of its sales.

Like many other organisations, our reliance on computers and network technology is increasing. Any cyber security breach could have an impact on business operations.


Substantial portion of Companys products are exported to the US. Companys financial results are dependent on continued access to the US markets and tariffs and other trade barriers that restrict or prevent access represent a continuing risk to us.

We mitigate these risks by using capital prudently. We believe our capital resources will be adequate to meet our current projected operating needs, capital expenditures and other cash requirements. We have track record of good relations with banks, and of raising borrowings in last few years. We have taken necessary steps to ensure that construction and operation timelines for the capital expenditure projects are within the time limits set.

We plan to mitigate the effects of decreased average selling prices by continuous improvement in our operations and supply chain costs, improve our inventory management control and increase sales of premium products for which we are able to charge higher prices.

We mitigate this risk through assessment of individual customer credit limits and tight credit monitoring with ageing of balances outstanding.

We have standard operating procedure in place for information and IT security. IT security policies and procedures are defined. An IT system is in place to monitor logical access controls


We plan to mitigate this risk by diversifying into other markets and strengthening our position in non-US markets where we are already present.

The Companys efforts to continue its growth and efficient operations will place significant demand on its management resources. Our highly skilled workforce and experienced management team is critical to maintaining its current operations, implementing its development projects and achieving longer-term growth

We plan to mitigate this risk by continuously investing in initiatives which widen our talent pool. Our performance management system is designed to provide reward and remuneration structures and personal development opportunities to attract and retain key employees.

At present there are no risks to the continued existence of the Company. In our belief, the commercial opportunities available far outweigh the potential risks.

Internal control systems and their adequacy:

The scope of the Internal Audit function is defined annually. With a view to maintain independence and objectivity in its working, the Internal Audit function reports directly to the Audit Committee. Based on the reports of internal audit function, process owners undertake corrective action in their respective areas. Significant audit observations and corrective actions thereon are presented to the Audit Committee of the Board

The Company has designed and implemented a process driven framework for Internal Financial Controls (‘IFC) within the meaning of the explanation to Section 134(5)(e) of the Act. The Company has sound IFC commensurate with the nature and size of its business operations and operating effectively and no material weaknesses exist. The Company has robust policies and procedures which, inter alia, ensure integrity in conducting its business, safeguarding of its assets, timely preparation of reliable financial information, accuracy and completeness in maintaining accounting records and prevention and detection of frauds and errors.

Human Resource and Industrial relations

Your Company strives towards building a transparent and conducive work environment for its employees. The focus is on covering all aspects of employee lifecycle to provide them a holistic experience. Your Company recognizes that workforce with a proper work-life balance will be a motivated and committed contributor. During his / her tenure, the employee is exposed to different roles, assigned various tasks and multiple skill development activities to keep them motivated and progressive. Further, the Company also conducts interventions to gather ideas around innovations to engage and develop employees. In FY 2019, the Company including PESL employed 736 number of employees.

Cautionary Statements

Certain statements in this report may be forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties like regulatory changes, local, political or economic developments, technological risks, and many other factors that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statements.

Important factors that could make a difference to your Companys operations include economic conditions affecting demand/supply and price conditions in the overseas and domestic markets in which your Company operates, changes in the Government regulations, tax laws, statutes and other incidental factors. Your Company will not be in any way responsible for any action taken based on such statements and undertakes no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.