priyadarshini ltd Management discussions

PRIYADARSHINI SPINNING MILLS LIMITED ANNUAL REPORT 2010-2011 MANAGEMENT DISCUSSION AND ANALYSIS TEXTILE INDUSTRY: Textiles and clothing constitutes the largest manufacturing industry in the country accounting for 4 per cent of GDP, 14 per cent of industrial production and around 12 per cent of the countrys total exports. The industry directly provides employment to 35 million workers and provides indirect employment to another 47 million workers. 2010-11 was a good year for the sector in terms of turnover, sales, profit and growth in investments. The spinning sector has invested over Rs. 40,000 crore in modernization and capacity expansion and its current installed capacity has risen from 38 million spindles in 2001 to 45 million spindles in 2011,i.e., within a 10 year period. The government has been encouraging yarn exports and the domestic consumers never had short supply of yarn. Almost all the global leading players in textiles and clothing manufacturing in countries like European Union, USA, far-east countries including Japan, Bangladesh, have been depending on Indian cotton yarn over decades. When the cotton prices became highly volatile and speculative during the last year, the yarn price increased steeply though it never matched the abnormal increase in cotton price. Because of persistent demand of value added segments, the government fixed a cap of 720 million kg for exports during the year 2010-11 as against industry demand for 1100 million kg, brought controls on yarn exports and suspended exports for almost three months (Jan-Mar. 2011). In the process, the Indian spinners lost their credibility in the international market as a reliable supplier and lost very valuable customers with whom they had over two decades of business relationship. In addition, the government also withdrew all export benefits including the DEPB/DBK. The demand for cotton yarn domestically declined substantially and the closure of nearly 1000 dyeing units in Tamil Nadu due to pollution issue (by the High Court) added fuel to the situation. All this resulted in accumulation of stock with Spinning Mills. As on 31st March 2011, the closing stock exceeded 300 million kgs and by May it exceeded 500 million kgs due to sudden glut in the international and domestic markets. THE IMPACT OF COTTON POLICY During the year 2010-11, the world witnessed a global shortage of cotton as it was assessed by International Cotton Advisory Committee (ICAC) that the crop of raw cotton will be lower by 10%. The international prices of cotton increased from US $ 0.84 per pound in October, 2010 to a record level of US $ 2.30 per pound in April, 2011, within a period of 6 months, which was unprecedented and a record price in cotton history. The cotton price in India moved in tandem with the world market and also increased from Rs.35,000/- per candy to Rs. 62,500/- per candy during the same period. The premature announcement of cotton exports and lower stock use ratio made cotton prices highly volatile. OUTLOOK ON OPPORTUNITIES RISK AND CONCERN The Fundamental growth drivers of Indian Economy remain strong despite the economic turmoil in the world. There would be growing opportunities in the international market as well as domestic market. The consumption is growing in response to growing per capita income, population and strong retail push. With regards to textile industry, there are significant opportunities in the domestic market as more consumers are buying readymade garments and also consumption of the cloth per capita continues to increase due to growth in the economy which is adding to the purchasing power of the Consumers. Macro economic factors including rupee appreciation increase in interest rates are the major risk factors presently for the textile industry. If there is an appreciation of rupee, then the competitiveness of industry vs. other countries will decrease. Since the products would be diverted to the domestic market, the price realization will decrease even though there is growth in the domestic consumption. Increase in interest rates will affect the profitability. Since the industry is capital intensive. ADEQUACY OF INTERNAL CONTROLS: The Company has a proper and adequate system of internal controls to ensure that all assets are safeguarded, and protected against loss from unauthorized use of disposition, and that transactions are authorized, recorded, and reported correctly. The internal control system is supplemented by an extensive programme of internal audits, review by management and documented policies, guidelines and procedures. The internal control system is designed to ensure that the financial and other records are liable for preparing financial statements and other data and for maintaining accountability of assets. The audit Committee comprising independent Directors will review the internal control system on quarterly basis.