Pokarna Ltd Management Discussions.

Global Economy Overview

Escalating trade tensions, tightening financial conditions, deteriorating risk sentiment, a slowdown in domestic investment, and rising policy uncertainties resulted in weak global economic growth in 2019. Global growth in 2019 recorded its weakest pace since the global financial crisis a decade ago, reflecting muted sentiments across countries. After growing at around 3.7% in 2018, the global economy saw a steep fall in 2019 and is anticipated to have grown at around 2.3%. Further, average real incomes in one-third of commodity-dependent developing countries, come to 870 million people, recorded the lowest levels of income since 2014 and it considerably impacted the global economy.

Weakening trade and subdued domestic investments are considered major reasons for the widespread slowdown witnessed around the world. In 2019, industrial production also declined and Global Manufacturing Purchasing Managers Index (PMI) fell to its lowest level since 2012. In contrast, private consumption held up relatively well for most countries, supported by firm labour markets and modest inflationary pressures. Further, signs that household spending had started to moderate in several large economies, with consumers becoming less optimistic, dragged economic outlook.

Outlook

The first quarter of 2020 looked promising with early signs of stabilization reinforced by favourable financial market sentiment. With supportive fiscal and monetary policies from central banks and rising domestic demand in emerging nations, economic revival seemed imminent. However, the Covid-19 pandemic proved to be a game changer, especially towards the end of March 2020 when countries were completely locked down and severe restrictions were imposed on manufacturing and supply chains. The virus outbreak affected millions, leading to massive loss of lives and compelled authorities to strictly stop all kinds of activity, bringing much of the worlds economic activity to a halt. This is likely to impact global economic growth severely and according to the International Monetary Fund, the global GDP is likely to contract 3% in 2020, with possibilities for a partial recovery in 2021. By the end of the year, around 170 countries will be reeling under the impact of the Coronavirus pandemic, recording lower GDP per capita. However, an uptick in economic activities is expected from 2021.

Indian Economy Overview

A key player in the global economy, the Indian economy emerged as one of the fastest-growing economies in early 2018, driven by strong consumption demand and steady growth across major sectors. But 2019 proved to be a difficult year for the Indian economy, with the countrys real estate, automobile, construction sectors, and overall consumption demand facing a serious and constant decline. After decelerating for 6 consecutive quarters, Indias GDP growth in FY20 sustained a steep fall to register an estimated growth of 4.2%, the lowest since FY09 when GDP was 3.1% and well below the 5% rate, estimated at the end of February 2020.

Low wages and inequalities in income resulted in diminishing domestic demand and it emerged as the biggest impediment to Indias economic growth. Further, subdued rural income, diminishing domestic demand (as reflected by a sustained fall in automobile sales), rapid decline in private investment, and curtailed credit financing from non-banking financial companies (NBFCs) further contracted demand. Banks also have shied away from financing large corporate projects, resulting in a steep fall in manufacturing and construction activities. The power sector was in an existential crisis for a major part of FY20 owing to non-honouring of PPAs, non-payment of dues, and falling tariffs. This led to the scaling down or closure of several power plants, a fact that could explain the falling IIP and declining manufacturing demand.

Economic growth was also marred by rigidities in the Indian labour market, marked by low labour force participation ratio, a high percentage of rural labour engaged in agriculture and the prominence of a large informal sector. Degrowth in almost all the core sectors also affected the Indian economy immensely. The agriculture and allied sector recorded a growth of just 2.8% in FY20 compared to 6.3% in 2016-17, whereas the industrial sector is estimated to have grown at 2.5% in FY20, compared to 6.9% in 2018-19. The manufacturing sector is estimated to have grown at 2.0% during FY20. One of the core sectors of the Indian economy, the services sector also saw degrowth in FY20 and registered growth of 6.9% compared to 7.5% in FY19.

Outlook

During the year, the government undertook several decisive measures to boost the Indian economy. But, the outbreak of the Covid-19 pandemic in India is likely to have a severe impact on an ailing economy. The sheer scale of disruptions caused by the phased national lockdowns, adopted by the government to contain the outbreak, is unprecedented in Indian history. While the lockdown may have been necessary to limit the spread of the coronavirus, it completely stopped economic activity, resulting in massive job losses and a dramatic curtailment of production and infrastructural activities. Consumption demand, the bedrock of the Indian economy, also remained subdued due to collapsing incomes and rampant job losses. Further, investor confidence was severely affected as small entrepreneurs failed to cope with the economic challenges posed by the virus outbreak.

Owing to the extended lockdowns, the Indian economy is likely to contract to 4.5% in FY21. Further, the economy is likely to see a deeper contraction in fixed investment as businesses may choose to curtail capital expenditure to conserve cash amidst elevated economic uncertainty. This is anticipated to further affect prospects for a quick recovery.

The pandemic has paralyzed economies, compelling businesses to reevaluate their strategies. Companies will need to build their financial muscle and focus on developing a lean structure to successfully navigate through an uncertain business environment. However, industry experts expect the Indian economy to bounce-back and record a growth of 6% in FY22, anticipating a gradual pick up in the latter half of FY21.

Stone industry overview

Global Granite Stone industry

Granite stones constitute more than two-fifths of the global natural stone market. Formed by the interlocking of feldspar, quartz, and mica crystals, granite constitutes about 70% to 80% of the Earths crust. Valued at around $35.12 billion, the global natural stone industry is expected to reach $48.06 billion by 2026, registering a CAGR of 3.9% from 2019 to 2026.

Granite stone, owing to its durability and multiple uses, has gained popularity since its origin more than 150 years ago. Utilized for making sculptures, memorials, gravestone, flooring tiles, countertops, bar tops, fireplaces, staircases, murals, paving stones, and curbing, granite stones find applications across several industries. Further, the usage of granite in household construction has also resulted in the rising preference for granite. Experts estimate, over the next five years the global granite market will register a CAGR growth of 4.1% to reach $19,460 million by 2025, from $16,540 million in 2019.

In terms of volume, the market for granite, marble and stone is projected to grow by 6.8 trillion metric tons worldwide, recording a compounded growth of 4.8%. Supported by factors such as rising demand for houses, increasing disposable income and greater focus on infrastructural development in developing nations, the industry is likely to reach 24.1 trillion metric tons by 2025.

Indian Granite Stone Industry

From innovative sculptures to classic memorials, Indian granite has fascinated the world with its beauty and its wide usage. Rich in mineral deposits, India today has one of the largest granite reserves in the world. With more than 110 different available shades, Indian granite also accounts for over 20% of the global granite reserves.

One of the top 5 granite producing countries along with China and Brazil, the Indian granite industry is a highly fragmented one with unorganised players dominating the industry. The largest producer of dimensional granite blocks, Indias granite production is mainly centred around the states of Andhra Pradesh, Telangana, Rajasthan, Karnataka, Tamil Nadu, Uttar Pradesh, Odisha, Madhya Pradesh, and Gujarat among others. Indian granite has become the most sought-after and extensively used stone for construction and structural purposes around the world. It is also renowned in the international market, not only for its elegance and aesthetic quality, but also for its durability.

However, 2019 proved to be a difficult year for the Indian granite industry. According to industry players, factors such as lack of policy support from the government and implementation of GST resulted in a slowdown in exports. For the first 10 months of FY20, granite export from India was valued at US$ 618.5 million. The overall export for FY20 was marginally higher, compared to FY19. China emerged as the largest granite importer in FY20, followed by the UK and the US. Indias total export to US in 2019 stood at US$ 149.5 million compared to US$ 145.4 million, an increase of just 2.82%. In 2019, granite production in India also declined due to the closure of several processing units.

Quartz surface overview

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. Quartz surfaces are produced by Pokarna using Bretonstone technology by combining pure natural quartz, resin and other raw materials that are extraordinarily hard and resilient. These characteristics combine to create an ideal surface for kitchen countertops, bathrooms and other interior vertical applications.

Demand for quartz surface has grown due to its improved aesthetic appeal, durability, stain and scratch resistance, heat tolerance, and antimicrobial properties compared to other natural stones. The visual appearance of quartz surface has improved from a monochromatic surface to a surface that imitates natural stone patterns.

Quartz surface products are primarily used as worktops in kitchens and bath and also in certain vertical applications both in residential and commercial interior space. As a result, growth of this sector is heavily dependent on new construction, renovation and remodeling.

In May 2019, a U.S. producer petitioned the U.S. Department of Commerce (USDOC) and the U.S. International Trade Commission (USITC) to investigate alleged dumping by and subsidies to Indian quartz surface producers and to levy countervailing duty (CVD) and anti-dumping duty (ADD) against quartz surfaces imports from India. PESL was selected by the USDOC as a "mandatory respondent" to both ADD and CVD investigations and as a result, PESL received unique company specific rates. Final ADD and CVD determinations were announced by the USDOC on 27th April,2020, while the USITC issued an afirmative determination of injury on 28th May,2020. As a result, ADD and CVD determined on quartz surface from PESL are:

Final Dumping Rate Final Subsidy Rate
2018-19
ADD Cash Deposit CVD Cash Deposit
2.67% 0.33% 2.34% 2.34%

The CVD and ADD rates are subject to further adjustment through administrative reviews to be completed by the USDOC and appeals available to PESL.

PESL categorically deny the U.S. allegations and strongly disagree with the current ADD and CVD determinations made by the USDOC.

The countertop market overview

A countertop is a raised platform with a fiat surface, and is used in kitchens, bathrooms, laboratories, and other spaces. Also known as worktops, kitchen benches, or bench-tops, engineered stone countertops are made with the following material:

• Engineered quartz

• Engineered marble

• Polymer concrete

Over the last couple of years, the global countertop market has grown rapidly owing to its demand in residential as well as commercial buildings.

Countertops have evolved from being basic platforms made of concrete to multi-purpose platforms that can be fitted over cabinets or other furniture. Owing to its expansive utility, the global market for countertops is projected to earn voluminous revenues in the years to come.

Boosted by these favourable factors, the global countertop market is expected to reach USD 42.1 billion by 2024, exhibiting a CAGR of 6%, from USD 31.4 billion in 2019. In terms of volume, the demand for countertops in the US market is likely to grow at a CAGR of 2.8% to touch 932 million square feet by 2024, from 810.4 million square feet in 2019. The demand for engineered stone countertops is also expected to rise 6.9% per year, to touch 230 million square feet by 2024.

Factors that are likely to drive growth of the engineered stone countertop market are:

• Rise in average share of area for kitchens and bathrooms in new housing

• Growing investments in home renovation

• Rising preference for costly, high-end countertop materials such as natural and engineered stone

• Shifting demand from traditional laminate products

• Growing preference for aesthetically appealing alternatives to laminate

• Growing consumer preference for surfaces similar to natural stone

Engineered stone accounted for the second largest share (32%) of the overall countertop market in 2019. Aided by strong volume growth and increasing average prices, it is expected to lead the countertop market by 2024.

Countertop Demand* (Expected CAGR growth for the period 2019 to 2024)

9.1

The demand for kitchen countertop constitutes the highest share of total countertop demand and it is likely grow at a CAGR of 6.3% to reach a market size of USD 25.6 billion by 2024, from USD 18.9 billion in 2019. Rising popularity of engineered countertops in the bathroom vanity market proved to be a major impetus for the quartz countertop industry and it is likely to drive growth in the near future. In terms of price, from $39 per square feet, it is expected to rise to $45 per square feet, growing at a CAGR of 2.9%.

Impact of the Covid-19 pandemic outbreak on the countertop industry outlook in US

The Covid-19 pandemic in the first quarter of 2020 and the subsequent lockdown had halted economic activities for more than 50 days. This has seriously impacted business across the world. Organizations experienced unprecedented disruptions, hampering production and distribution significantly. Industries across the board were impacted due to the Covid-19 crisis. While some displayed stronger defences, others have struggled to adapt to a ‘new normal. The uncertain business environment affected the countertop industry as well.

Housing sales plummeted since the Covid-19 outbreak and renovations have been stalled indefinitely. According to the National Association of Realtors (NAR), price of homes are expected to rise by 1.1% only and sales are anticipated to drop by 15% in 2020. Moreover, building and construction companies have reported widespread project delays, postponements and cancellations. All these are likely to have a negative impact on the countertop market as well.

According to the National Kitchen & Bath Association (NKBA), the kitchen and bath industry is likely to contract considerably in 2020 and expects the industry to witness decline of 13.7% in sales during 2020, down notably from the expected growth rate of more than 10.8% reported by NKBA in Q4 2019. A global economic recession coupled with an uncertain future tends to be the gravest challenge for the industry at the moment. Further, lockdowns imposed on account of the global pandemic is likely to impact retail sales in Q2 2020, which is expected to decline nearly 50%.

Growth of the countertop industry in US

The bathroom accessories market is poised to grow to USD 5.63 billion between 2020 and 2024, progressing at a CAGR of over 5%. Growing awareness about hygiene has encouraged consumers to invest more in various bathroom accessories and this is likely to drive the growth of this segment, which in turn is expected to augur well for the countertop industry.

Outlook for Granite & Quartz Surface

According to Freedonias Global Countertops 2019 Report, demand in the global market for countertops is estimated at nearly 500 million meters square in 2020 and is expected to reach 540 million meters square by 2023 with a growth rate of 2.6% per annum during this period. This forecast takes into account many factors such as increasing income leading to increased construction, home repairs demand; increased government budget for renovation projects that use surface materials; and the increased demand for non-residential projects such as hotels, schools, hospitals, etc., especially in the Asia Pacific. The report suggests that there is a strong shift from the use of traditional materials such as laminated wood, synthetic resin, natural stone to quartz surface products because of their durability and versatile design. Therefore, in surface materials, quartz surface is forecasted to have the fastest growth rate in the near future. Our outlook for FY 21 remains cautious for both granite and quartz surface business due to the spread of COVID-19 pandemic and its potential impact on the global economy.

Indian textile and apparel industry overview

Contributing nearly 2.3% to the Indian GDP, the Indian textile and apparel industry is the second-largest employer in the country providing employment to approximately 45 million people. Valued at around US$ 139 billion in FY19, the Indian textile and apparel industry is likely to grow to US$ 220 billion by 2025-26, growing at a CAGR of 12%. One of the oldest industries in the Indian economy, the Indian textile and apparel industry accounts for 13% of industrial production, and 12% of the countrys export earnings.

Today, India is the worlds second largest exporter of textiles and apparel. However, FY20 was a challenging year for the Indian textile and apparel industry. Textile and clothing exports in FY20 stood at US$ 33.8 billion compared to US$ 35.9 billion in FY19, a 6% drop from a year ago period. Apparel exports too fell 4% to US$ 15.4 billion, from US$ 16.1 billion in 2018-19. Exports dropped almost 35% in March, in comparison to the same period last year.

Impact of Covid-19 on the Indian textile and apparel industry

Along with other sectors, the Covid-19 pandemic has also severely affected Indias textile and apparel sector. Owing to massive disruptions in production and supply chains, demand remains subdued in the domestic as well as international markets. According to industry experts, revenues of Indian apparel companies are likely to fall by at least 10%-15% in FY21.

Challenges ahead

- With demand falling by more than 40%, rampant cancellation of manufacturing orders resulted in huge financial risks and excessive stockpiles for manufacturers.

- In the absence of fresh export orders and effective measures for economic revival, many garment producers will either be forced to shut shop or in_ict stringent cost-cutting measures, including layo_s, which in turn is likely to interrupt production.

- In the wake of the Coronavirus pandemic, millions of migrant labourers were compelled to _ee from cities to villages. Lack of skilled labour is therefore, expected to emerge as a growing problem for manufacturing units.

- The sector has been grappling with profitability issues due to a sharp decline in yarn exports and cheaper imports. The closures due to the recent pandemic further aggravated the situation.

- With more than two months of lockdown, the textile and apparel manufacturers are now facing issues with the longevity of various machinery, as prolonged closures tend to reduce the efficiency of several equipment used in the manufacturing process.

Factors to aid growth of Indian textile and apparel industry

Many countries around the world have been harbouring an anti-China sentiment, post the Covid-19 outbreak. It is likely to compel them to look for alternate sources of production. The textile and apparel industry in India showcases strengths across the value chain, with capacities to produce and deliver _bre, yarn, fabric and apparel. Contributing nearly 4% to the global textile market, the Indian textiles and apparel industry presents itself as a credible alternative for textile and apparel export. Further, the cost of production in India is lower in comparison to countries like China.

Owing to the low cost of production and a changing mindset, the Indian textile industry has the opportunity to overtake the market share of China, especially in the European Union and the United States, comprising around 60% of the global export market.

Growth drivers for the Indian textile industry

• Abundant raw material

• Presence across the textile value chain

• Competitive manufacturing costs

• Availability of skilled manpower

• Large and growing domestic market

• Rising per capita income, higher disposable incomes and preferences for brands

• Growing organized retail landscape & popularity of E-Commerce

• Increased focus on technical textiles due to growth of end-user industries

Government support for the Indian textile and apparel industry – Union Budget 2020-21

The Indian government in its latest budget has set aside ~H 3,515 crore (US$ 502.93 million) for the Ministry of Textiles and H 80 crore (US$ 11.45 million) for Integrated Textile Parks.

Further, the Ministry of Textiles has allocated H 690 crore (US$ 106.58 million) for setting up 21 readymade garment manufacturing units in seven states, for the development and modernization of the Indian textile sector.

National Technical Textiles Mission has been proposed from 2020-21 to 2023-24, at an estimated outlay of H 1,480 crore (US$ 211.76 million).

The National Handloom Development Programme received H 388.21 crore (US$ 55.55 million) and the Integrated Processing Development Scheme was offered H 50 crore (US$ 7.15 million) in the Union Budget 2020-21.

100% Foreign Direct Investment has been allowed in the Indian Textile sector. Moreover, free trade with ASEAN has been allowed to boost exports.

Outlook

The fundamental strength of the Indian textile industry lies in its strong production base. The organized textile industry in India is characterized by the use of capital-intensive technology for mass production of textile and utilizes varied processes like spinning, weaving, processing, and apparel manufacturing.

But, the Covid-19 outbreak proved to be a hurdle for the Indian textile and apparel industry. The domestic apparel sector witnessed significant turbulence and the 2020 Spring-Summer season sufiered a major setback. On the supply side, lockdowns have disrupted production. However, in the long run, with access to skilled manpower and a good market for textiles, the industry can compete in the global market and rapidly scale its market share globally.

Although, the short-term outlook for the textile industry isnt positive, in the long run, as the global economy continues to recover and the effects of the pandemic fade, the future of the Indian textile industry looks promising.

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 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 Business Strategy provides a consistent vision for the Company and focuses employees on key priorities. This strategy is cascaded down through the Company with an emphasis on certain key points:

• Optimizing the Companys position as the high quality and innovative producer by delivering exceptional value to customers

• Treating employees fairly to retain the best

• Driving innovation in every aspects of the business

• Taking reasonable and well considered risks to grow the business

We believe that Pokarna Engineered Stone Limited (PESL) has leading-edge technology and proprietary processes that offers competitive advantages due to its ability to create a differentiated product line consisting of one of the industrys broadest offerings of designs and finishes. We also believe, PESL is building the worlds most technologically advanced quartz surfaces facility and through this state-of-the-art facility, we would be developing more sophisticated designs mimicking luxury marble, quartzite and other exotic natural stone looks to distinguish our products in the market place and improve our margins.

Financial performance

The information provided in this section relate to the consolidated financial results pertaining to the year ended 31st March 2020. The financial statements of the Company and its subsidiaries have been prepared in accordance with the Indian Accounting standards (Ind AS), prescribed under Section 133 of the Companies Act, 2013, read with the Companies (Indian Accounting Standards) Rules as amended from time to time. The table below provides an overview of key financial parameters.

Particulars 2019-20 2018-19 YoY Change (in %)
Consolidated Revenue 393.91 462.22 -14.78%
Consolidated EBITDA 136.08 152.15 -10.56%
Consolidated PAT 70.73 80.68 -12.33%
Net Worth 338.70 270.46 +25.23%

 

Particulars 2019-20 2018-19 YoY Change (in %) Reason for Change
Debtors Turnover (Days) 49 44 11 No significant change
Inventory Turnover (Days) 277 151 83% Increased due to decline in turnover
Interest Coverage Ratio -0.37 2.71 -114% Decreased due to negative EBIT
Current ratio 1.01 0.99 2% No significant change
Debt equity ratio 0.42 0.40 5% No significant change
Operating profit Margin (%) -0.03 0.11 -127%
EBITDA Margin ( % ) 13% 21% -38% Decreased due to decline in turnover and
Net Profit Margin (%) -6% 5% -220% negative margins
Return on Net Worth (%) -4% 5% -180%

Risk management at Pokarna

The quarrying industry is exposed to numerous external and internal challenges. Pokarnas comprehensive risk management framework focuses on promptly identifying potential risks, assessing its material impact and aims to mitigate its effects to minimize losses.

Risk Concern Mitigant
Operational Risk 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). 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.
Quarry development Risk 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. 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.
Production and sales risk 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 mitigate these risks by having approved business plans and targets while working within strict working capital controls and robust budgeting and cost control processes.
Risk Concern Mitigant
Environmental risks and hazards. 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. 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.
Breaches in information/ IT security Like many other organisations, our reliance on computers and network technology is increasing. Any cyber security breach could have an impact on business operations. 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
Community relations 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 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.
Currency exchange rate fluctuations 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. 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.
Operational turnaround of apparel business Losses of the apparel division impact overall profitability of the Company. We plan to mitigate this risk by focusing rigorously on improving performance of this business and become operationally positive.
Financial 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. 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.
Trade credit Trade arrangements with certain customers include the provision of short-term trade. The Company is therefore exposed to the credit risk for a portion of its sales. We mitigate this risk through assessment of individual customer credit limits and tight credit monitoring with ageing of balances outstanding.
Trade Restrictions 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 plan to mitigate this risk by diversifying into other markets and strengthening our position in non-US markets where we are already present.
People 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.

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

Human resource comprises a vital asset for the manufacturing and quarrying sector, owing to the limited availability of skilled manpower in the industry. Pokarna, one of the most established brands in the industry, focused on creating a strong team equipped to address a diverse range of competencies. Further, the Company adopted best practices and created Standard Operating Procedure (SOP) for most functions to enable operational efficiency and consistency across processes. During the recent COVID-19 outbreak, Pokarna took proactive measures to effectively communicate with its employees and stakeholders and adopted necessary precautions to ensure complete safety and security of its people.

The Company strives to build a transparent and conducive work environment for its employees with an aim to enable holistic development. The Company also recognizes the importance of a favourable work-life balance for the creation of a motivated and committed workforce. Therefore, it allows employees exposure to varied job-specific roles and allows access to multiple skill development activities to sustain a progressive and inclusive work culture.

Cautionary Statement

Certain statements in this report concerning future prospects may be forward-looking statements which involve a number of underlying identified / non identified risks and uncertainties that could cause actual results to differ materially. In addition to the foregoing changes in the macro-environment, global pandemic like COVID-19 may pose an unforeseen, unprecedented, unascertainable and constantly evolving risk(s), inter-alia, to the Company and the environment in which it operates. The results of these assumptions made, relying on available internal and external information, are the basis for determining certain facts and figures stated in the report. Since the factors underlying these assumptions are subject to change over time, the estimates on which they are based, are also subject to change accordingly. These forward-looking statements represent only the Companys current intentions, beliefs or expectations, and any forward-looking statement speaks only as of the date on which it was made. The Company assumes no obligation to revise or update any forward-looking statements, whether as a result of new information, future events, or otherwise.