Pranavaditya Spinning Mills Ltd Management Discussions.

Industry Structure and Development

The Spinning industry, which is highly capital intensive, marks the beginning of cotton textiles and apparel value chain. There has been over capacity in Indian spinning sector but the production has not increased with the same pace. Production of cotton yarn in India has increased from 3079 million kg in 2009-10 to 4059 million kg in 2017-18 while its consumption has marginally increased during the same period. Thus, there is a surplus production of 27% over domestic consumption of cotton yarn in the country in 2017-18. The same trend continues for FY 2018-19 as well. Therefore, for the sustainability and financial viability of the spinning industry, exports of cotton yarn are of very much importance.

However, in value terms, Indias exports of cotton yarn declined by 25% from US$ 4,570 mn. in 2013-14 to US$ 3,443 mn. in 2017-18. This is mainly because of the duty disadvantage faced by the Indian exporters in major markets. China which is the largest importer of cotton yarn has shifted from India to Vietnam/Indonesia.

Cotton yield has considerably decreased during the last 3 years at a CAGR of almost 8.50% from 568 kgs per hectare in 2016-17 to 476 kgs per hectare, estimated, in 2018-19. Due to fluctuations in both, area and yield of cotton in India, cotton production is also fluctuating. The total cotton production for 2018-19 was around ~330 lakh bales, against 365 Lakh bales in 2017-18 due to crop damage in Maharashtra and Gujarat. Domestic consumption was around at 316 Lakh bales in 2018-19 vis-a-vis 324 Lakh bales in the previous year. Exports of cotton from India has increased at a CAGR of almost 6% from 58.21 Lakh bales of 170 kgs each in 2016-17 to 65 Lakh bales of 170 kgs each in 2018-19 and imports of cotton have declined during the same period.

Domestic cotton prices have witnessed sharp volatility and increase from the start of the season, rising initially, coming down around January 2019 and firming up from March 2019 once again. Cotton yarn prices did not correspond positively, resulting in pressure on spinners margins.

Operational and Financial Performance

With the increase in input cost, low cotton production, reduced demand from China, the spinning industry has been struggling to meet both ends, leading to shutting down of capacities all over India. No new investments in spinning capacities have been taking place and modernisation has not happened due to withdrawal of subsidy under ATUFS by Central Government, notwithstanding that some State Governments still persist with support to this industry. Your Company is also facing stiff competition from co-operative spinners due to leverage of power subsidy granted by the Government. Under these circumstances, sustenance has been possible only with integrated mills and units with lean cost structure.

Despite the above challenging background, your Company has been able to improve production and productivity to stay ahead of competition. During FY 2018-19, the FOB value of exports remained stable at र 3515.48 Lakhs as compared to र 3563.97 Lakhs in previous year. Revenue from operations increased from र 7137.04 Lakhs to र 8226.07 Lakhs in FY 2018-19 registering growth of around 15% over previous year. Despite tight control on overheads, disparity between cotton costs and yarn prices, increase in power and other input cost has impacted the profitability and liquidity. However, the same was partially offset by better plant utilization and higher production. Hence, your Company was able to narrow down the net loss to र 65.61 Lakhs for the year ended 31st March, 2019 as compared to net loss of र 163.76 Lakhs in previous year. The change in Return on Net Worth of the Company was insignificant.

Your Company continues to remain a debt free Company. There are no significant changes in Financial Ratios i.e. change of 25% or more as compared to the immediately previous financial year of the Company.

Opportunities, Threats, Risks and Concerns

The declining cotton yield leading to low cotton production is putting pressure on the domestic spinning industry in terms of low availability of cotton fibre as well as high cotton prices which are further increasing due to its high MSP. With the hike in minimum support price for cotton, the acreage cultivation and production is likely to get boost from the farming community. The condition of the spinning industry is dependent on the vagaries of cotton fibre production in the country. The acreage, output, rainfall and minimum support prices always have bearing on the fortunes of the industry from time to time. Adequate availability of cotton at right price is very much crucial for spinning companies.

Apart from high and volatile raw material/cotton cost, some of the challenges faced by spinning industry include high power cost, overcapacity in industry, duty challenges in export market & absence of export incentives, surplus production and low consumption, decline in export of cotton yarn, contamination, high moisture content, high manufacturing cost due to high interest rate and power tariff, pending TUFS claims and low labour productivity.

The cotton yarn prices do not increase on the same line as cotton, as demand for cotton yarn is always over shadowed by higher supply. Changes in cotton price in India are not in sync with change in international cotton prices. The rise in international trade and the consequent integration of domestic cotton markets with global markets expose the domestic stakeholders to international price fluctuations and the risks resulting from them. Demand from domestic and international markets has been upbeat and it is expected that the prices of cotton yarn would correct soon to sustain the operations.

Chinas reduced imports of cotton yarn from India is continuing and the trend is expected to continue in near future thus overall yarn demand is projected to remain lower. China, the largest importer of cotton yarn, has replaced India with Vietnam and Indonesia, as they have duty-free access. Further, Indian exports of cotton yarn are subject to a 4% duty in the EU, while Vietnam and Indonesia have a 3.2% tariff and least developed countries (LDCs) get duty-free access. Therefore such favoured policy to some of the Asian countries and LDCs has made Indian market uncompetitive.

Outlook

The operating margins of Indian cotton yarn spinners may shrink by 100-150 basis points in fiscal 2019-20 owing to lower cotton output, rising cotton prices and moderating demand. Indias cotton production is expected to drop by over 5% in Cotton Season (CS) 2018-19 due to low water availability and inadequate monsoon in key cotton producing states and lower yields due to increase in incidents of pest attacks. Lower cotton production is expected to shrink Indias cotton stock to a 2 year low of 1.2 months by end of CS 2019, leading to firming up cotton prices toर 128-140 per kg this fiscal, marking a rise of 7-8% over 2018-19. Global cotton prices are expected to remain steady. Overall cotton yarn demand is expected to grow at slower pace of 4.5% in 2019-20. Growth in exports is also expected to be slower at 9-10% in this fiscal year, amidst trade tensions between US and China and commissioning of yarn capacities in Vietnam.

Segment

Your Company is mainly engaged in the manufacturing of yarn and operates in a single segment i.e. Textiles.

Internal control systems and their adequacy

Your Company maintains adequate internal control system and procedures commensurate with its size and nature of operations. The internal control systems are designed to provide a reasonable assurance over reliability in financial reporting, ensure appropriate authorization of transactions, safeguarding the assets of the Company and prevent misuse/ losses and legal compliances.

The internal control system includes a well-defined delegation of authority and a comprehensive Management Information System coupled with quarterly reviews of operational and financial performance, a well-structured budgeting process and internal audit. The internal audit reports are periodically reviewed by the management and the Audit Committee and necessary improvements are undertaken, if required.

Compliance with Indian Accounting Standards (Ind-AS)

In the preparation of the financial statements, the Company has followed the Indian Accounting Standards (Ind-AS) notified by Ministry of Corporate Affairs from time to time. The significant accounting policies which are consistently applied have been set out in the Notes to the Financial Statements.

Environment Protection, Health and Safety

Environment Protection, Health and Safety continue to receive highest priority in all operational and functional areas. Adequate safety measures are undertaken at plant for prevention of any untoward incidents. Various processes required for pollution control and environmental protection are strictly adhered to.

Human Resources

Industrial relations remained cordial during the period under review. Your Company believes and acknowledges competitive advantage of dedicated workforce.

As on March 31, 2019, your Company has employed 179 permanent employees out of which 41 are permanent staff and 138 are permanent workers.

For and on behalf of Board of Directors
S. K. Agrawal
Date : 8th May, 2019 Chairman
Place : Mumbai DIN: 00400892