Pranavaditya Spinning Mills Ltd Management Discussions.

Industry Structure and Development

The Spinning Industry, which is highly capital intensive, marks the initial stage of cotton textiles and apparel value chain. For the sustainability and financial viability of the spinning industry, exports of cotton yarn are of very much importance. There has been over capacity of ~ 30%. in the Indian spinning sector. Cotton yarn output in India has remained in the range of 4.1 - 4.2 million tonnes during FY 2017 to FY 2019 and further decreased by 4% to 3.4 million tonnes during first 10 months of FY 2019-20. The demand for cotton yarn both in domestic and international markets was very weak during FY 2019-20. There was sharp decline of ~ 23% in cotton yarn export from India from April 2019 to January 2020, with a drastic fall of ~ 42% to China.

The cotton production has declined by 15.3% to 5.3 million tonnes in Cotton Season (CS) 2018-19 due to unfavourable monsoon and pink bollworm attack in Maharashtra and Gujarat. However, during the CS 2019-20, starting from 1st October, 2019, cotton output in India is estimated to grow by ~13.6%. Domestic consumption of cotton was around 331 lakh bales in 2019-20 vis a vis 316 lakh bales in the previous year.

Domestic cotton prices have decreased as compared to cotton prices in FY 2018-19. This was mainly due to fall in international cotton prices and weak export scenario. Cotton prices slumped to its lowest, in recent times, in the month of October 2019, thereafter remained stable till January 2020 and again declined due to outbreak of COVID-19 Pandemic. The cotton prices were volatile and ruled higher as compared to yarn price. Cotton yarn prices did not correspond positively, resulting in pressure on spinners margins.

Operational and Financial Performance

FY 2019-20 was yet another year of major challenges for spinning industry and the Company. Many cotton spinning companies could not sustain due to multiple headwinds over the years and were shut down. During the year under review, the demand for cotton yarn in domestic and export markets was sluggish and there was sharp decline in cotton yarn exports from India. The cotton prices, though lower as compared to FY 2018-19, were still higher and volatile as compared to yarn prices. A weak demand, declining cost competitiveness and huge disparity between cotton and yarn prices have impacted the business of the Company. At the end of the year FY 2019-20, the outbreak of COVID-19 aggravated the challenges of spinning industry. It is pretty evident that it is going to be very difficult for standalone spinning mills to sustain themselves, unless they are truly modernized and are managed efficiently and cost effectively.

Due to abovementioned external factors, the operational and financial performance of your Company was adversely affected. During FY 2019-20, Revenue from operations declined by around 15% from 8,226.07 Lakhs in FY 20-18-19 to 6,941.13 Lakhs in FY 2019-20. The FOB value of exports also declined to from 3515.48 lakhs as compared to 3,190.51 lakhs in previous year. Fall in revenue, disparity between cotton and yarn prices and weak demand for cotton yarn led to a higher net loss of 268.25 Lakhs for the year ended 31st March 2020 as compared to net loss of 65.61 lakhs in previous year.

As regards ratios for the year ended 31st March 2020, the debt equity ratio and interest coverage ratio are not applicable as the Company does not have any debts/borrowings. There were significant changes i. e. (change of 25% or more) as compared to the Financial Year ended 31st March, 2019 in the Debtors Turnover ratio due to reduction in receivables. Further, there was more than 25% change in Operating Profit margin, Net Profit margin (%) and Return on Net Worth (%),due to reduced Turnover and less margins in comparison to the year ended 31st March, 2019.

IMPACT OF COVID-19

The manufacturing plant of the Company at Kolhapur was temporarily closed from March, 23, 2020 in order to contain the spread of COVID-19 pandemic as per Central/ State Government directions. Thereafter, as per the directions received from State Government/ Local Authorities, partial manufacturing operations were resumed from May 6, 2020.

Due to temporary stoppage of operations, sales for the year 2019-20 were impacted to the extent of around 150 lakhs, thereby increasing the inventory. The immediate impact of the lockdown was the slump in demand for our products and

consequently, declining prices. The Company has no short term or long term borrowings. However, thin operating margins are expected to exert adverse pressure on Companys liquidity.

The Company has taken all steps to comply with government directions and guidelines to contain spread of COVID-19 viz. social distancing norms, wearing of face masks, regular sanitisation of premises, thermal screening before entering workplace, appropriate training to workmen and staff and other precautionary measures required to be taken in the prevailing situation to ensure the health, safety of workers and staff at workplace.

Opportunities, Threats, Risks and Concerns

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 mills.

Some of the threats faced by spinning industry include high minimum support price, disparity between cotton and yarn price, overcapacity in industry, duty challenges in export market & inadequate export incentives, weak demand of cotton yarn, fibre contamination and high moisture content, high manufacturing costs due to high capital cost and power tariff, lack of modernization incentives under TUFS and low labour productivity.

The Cotton yarn prices do not move in tandem with that of cotton, as demand for cotton yarn is always over shadowed by higher supply. Cotton prices in India do not move in sync with international cotton prices, which makes hedging difficult. 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 therefrom. For Companys business, cotton is the key raw material/ commodity and the company is exposed to price variation in cotton. The Company has in place Commodity Risk Management Policy. The Company regularly monitors cotton prices and take appropriate decisions to minimize the risks. As regards foreign exchange risks, the Company evaluates foreign exchange rate exposure arising from these transactions and take appropriate steps to mitigate such exposure and to minimize the impact of volatility in foreign exchange fluctuations on the earnings.

Chinas reduced imports of cotton yarn from India are 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. The Indian cotton spinning industry, which is already facing various problems, is now confronted with yet another challenge in the form of COVID-19 pandemic. Following shutdown of manufacturing units and weak downstream demand in both domestic and export markets the cotton yarn industry is staring at extremely challenging time this year. In the medium to long-term, it is expected that some demand from the US and the EU markets may shift gradually from China to other major garment manufacturers viz. Vietnam, Bangladesh, India and Cambodia.

Industry Outlook

Due to the Covid-19 pandemic, the performance of domestic cotton spinning sector in the FY 2020-21 is likely to be at multi-year lows. The operating income of cotton spinners is expected to decline by 15-20% on a YoY basis owing to demand disruptions and pressure on realisations. The yarn production for FY 2020-21 would remain muted, with lack of visibility on wholesale demand resulting in fall of Indias cotton yarn exports by 18-20%. Demand for the downstream products viz. fabrics, apparels and home textiles, has been affected due to COVID-19 and lockdowns. Yarn, being an intermediate product, is likely to face a ripple effect of the contraction in demand in the downstream segments. Further, there might be reduction in production volumes because of weak demand and declined cost competitiveness. With expectations of a slow paced and elongated recovery, sluggish end-consumer demand and chocked liquidity, post lockdowns, severe pressures on the overall performance of the domestic spinning companies and a loss of business to the tune of US$2.5-3 billion in FY 2020-21 is also expected. Going forward the overall spinning and textile scenario will depend on how the situation evolves in the domestic and international markets and faster return to normalcy will enable the industry to curtail the damages.

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 taken at plant for prevention of any untoward incidents. Various processes required for pollution control and environmental protection are strictly adhered to. Your Company is ensuring utmost safety of employees by adhering to the safeguard measures in COVID-19 situation such as usage of masks/ gloves, regular temperature screening, conducting sanitization in premises, maintaining social distancing, etc.

Cautionary Statement

The statement in the “Management Discussion and Analysis Report describe Companys objectives, projects, estimates and expenditure which may be “forward-looking statement within the meaning of the applicable laws and regulations. The actual results could differ materially from those expressed or implied, depending upon the economic and climatic conditions, government policies, taxation and other incidental factors.

Human Resources

Industrial relations remained cordial during the period under review. Your Company believes and acknowledges competitive advantage of dedicated workforce. As on 31st March, 2020, your Company has employed 169 permanent employees out of which 40 are permanent staff and 129 are permanent workers.

For and on behalf of Board of Directors
S. K. Agrawal
Chairman
Date : 9th June, 2020 DIN:00400892
Place : Mumbai