Rajapalayam Mills Ltd Management Discussions.

TRADE CONDITIONS

• COTTON

In India, the plantation of cotton crop has increased to 123 Lakh hectares in the cotton year 2017-18 (October to September) as against 103 Lakh hectares in the same period of last year. In spite of increase in acreage, the cotton prices have not come down due to pest attack and erratic monsoon rains. The quality of the cotton was also not good during the initial cotton season. Most of the area in Maharashtra and Gujarat have been hit badly by the pink bollworm attack and the cotton arrivals had been slowed down during peak cotton arrival season. The imported cotton provided no respite as the international cotton prices of all the varieties have continued to move upward. The increase in raw material prices has heavily impacted the manufacturing competitiveness of Indian Spinning Mills in the global market.

The price of comber noils, which is the raw material for Open End Spinning has also increased steeply due to more exports of noils from India. Because of this, the cost of cotton consumption has increased during the financial year 2017-18.

• YARN PRODUCTION

The Company is now focusing on production of customized, fine/super fine yarn to get better contribution as compared coarser/medium fine counts produced during the last financial year 2016-17. Due to this, the production volume has decreased to 151.92 Lakhs Kgs. during the financial year 2017-18 as against 157.39 Lakhs Kgs. of the last financial year.

• SALE OF YARN

The sale volume has decreased in line with production during the financial year 2017-18 and it was 155.89 Lakh Kgs. as compared to 159.04 Lakh Kgs. of last financial year. However, the sale value of yarn has increased from Rs.398.14 Crores (FY 2016-17) to Rs.417.60 Crores (FY 2017-18).

Indias spinning sector had witnessed challenges on multiple fronts during the FY 2017-18. The implementation of GST in India with effect from 01-07-2017 had affected offtake of yarn during the first quarter of the financial year as many of the customers focused on inventory clearance prior to GST. Post implementation of GST, the Government has reduced the export incentives to yarn as well as fabric and garments. On the other hand, imports of textiles and clothing from other Countries into India have consistently increased by 20%. This has negatively affected the domestic yarn manufacturers as the consumption of yarn by fabric/garment manufacturers has come down sharply. This apart, cotton yarn exports have been under pressure on account of decline in demand from China. Out of total yarn exports from India, China accounted for more than 40% till last year, which has been reduced to 17% during FY 2017-18.

Due to subdued export demand and sluggishness in domestic market for yarn, the Company was not able to increase the yarn prices in line with the increase in raw material cost. These factors have affected the profitability of the Company for the financial year 2017-18. The Companys focus on value addition, procuring superior quality of cotton, reducing the production of commodity counts and replacing the same with customized yarn counts has helped to mitigate the impact to some extent. The Company is able to attract more customers from overseas market and continues to have a good demand from export market on account of supply of superior and consistent quality of yarn. The investments made in value added machineries during the past years have given the ability to the Company to customize its products in line with the requirements of its customers.

• POWER COST

During the financial year 2017-18, the Company was able to consume electricity from its own wind power to the extent of 71% of total power requirement as compared to 68% consumed from wind mills during the last year. Because of this, the power cost has reduced to Rs.3,093.93 Lakhs during the financial year 2017-18 from Rs.3,192.05 Lakhs of last financial year 2016-17.

• FINANCE COST

The Finance cost during the financial year 2017-18 has reduced to Rs.1,752.58 Lakhs from Rs.2,142.79 Lakhs a decline of 18% mainly due to initiatives taken by the Company to reduce the cost of borrowings and repayment of Term Loans.

In spite of increased cotton cost and labour costs, the strategic decision taken by the Company to make investments in value added machines has helped to sustain the volume of sales in export/corporate customers and protected the margin.

EXPORTS

On the export front, the Company has made export of Cotton Yarn (including merchant exports) for a value of Rs.113.66 Crores during the financial year as against Rs.121.93 Crores of the previous year. In addition to our regular International Market, we have established our presence in Turkey/Portugal also where our quality is well appreciated and started to get regular orders from these segments.

Your Directors are thankful to M/s. Mitsubishi Corporation, M/s. Doko Spinning Co. Ltd., and M/s. Unitika Ltd., Japan for their continued support and efforts for promotion of exports to Japan.

MODERNISATION/EXPANSION

As a part of continuous thrust on modernization and expansion programme, the Company has invested about Rs.21.82 Crores for investment in textile machinery & equipments like, latest Auto Coners, Quality Control Equipments, Ring Frames etc.,

PROSPECTS FOR THE CURRENT YEAR

The BT cotton, which brought white gold revolution to India, has been recently witnessing the incidents of bollworm attack. Due to uncertainty between US and China over trade tariffs, China may import more Indian cotton during the next cotton season. Hence the cotton prices are likely to remain firm on account of a tight supply situation and robust export demand. The Company has well defined system for monitoring demand and supply of required quality of cotton and also the price movements in domestic and international markets. With the Companys expertise in judicial purchase of cotton, it will be able to procure high quality cotton with reasonable price.

The rising of textile imports due to the removal of countervailing duty and special additional duty post implementation of Goods and Services Tax (GST) is a matter of concern for Indian Textile Industry. Although these duties have been replaced by Integrated Tax under GST regime, the importer can take credit of Integrated Tax which made the textile imports cheaper and posing a threat to domestic manufacturers.

The Companys efforts to increase the customer base across the globe for supply of value added super fine counts has started yielding the results. The Company is concentrating on modernizing the machineries to further improve quality and cost effective production. Thrust is being given for producing value added counts like Melange yarn, Mercerized yarn, Core Spun yarn etc, which is expected to fetch higher margin in the forthcoming years. With the flexibility to produce value added super fine counts, the Company will continue to make efforts in expanding the marketing activities across the globe to increase the profitability.

FABRIC PROJECT

The Company is selling premium yarn qualities to leading woven fabric manufacturers in India and abroad. Most of the customers are outsourcing their fabric requirements beyond their in-house capacity. Such customers are ready to buy yarn dyed greige fabric from our Company if it establishes a weaving unit. Hence it is proposed to establish a Yarn Dyed Weaving Unit at a cost of Rs.265 Crores which will have the capacity of 120 Looms to produce 10 Million meters of fabrics per annum. The Company has applied a term loan for this project under Amended Technology Fund Scheme of Government of India. It is expected to commence the commercial production during the 1st quarter of financial year 2019-20.

WIND MILL

The Company has wind mills with installed capacity of 35.15 MW for its captive power consumption. The wind farm has generated 682.74 Lakhs Kwh as compared to 683.56 Lakhs Kwh of the previous year. There was a good wind velocity supported by good evacuation by Tamil Nadu Generation and Distribution Corporation (TANGEDCO) during the financial year 2017-18. All the Units generated by wind mills were adjusted for captive consumption at our Mills in Tamil Nadu. The income during the year from the Wind Mill Division was Rs.45.52 Crores as against Rs.45.62 Crores of previous year.

ASSOCIATE COMPANY

During the year 2017-18, the Company has acquired Shares of M/s. Ramco Windfarms Limited and as per Ind AS-28, the Board has considered M/s. Ramco Windfarms Limited as its Associate Company.

The Company has 7 Associate Companies, viz., M/s. The Ramco Cements Limited, M/s. Ramco Industries Limited, M/s. Ramco Systems Limited, M/s.The Ramaraju Surgical Cotton Mills Limited, M/s. Sri Vishnu Shankar Mill Limited, M/s. Ontime Industrial Services Limited and M/s. Ramco Windfarms Limited.

In accordance with Rule 5 of Companies (Accounts) Rules, 2014, a statement containing the salient features of the financial statements of the Companys Associates is attached in Form AOC-1 as Annexure-I.

INTERNAL FINANCIAL CONTROLS

In accordance with Section 134(5)(e) of the Companies Act, 2013, the Company has Internal Financial Controls Policy by means of Policies and Procedures commensurate with the size & nature of its operations and pertaining to financial reporting. In accordance with Rule 8(5)(viii) of Companies (Accounts) Rules, 2014, it is hereby confirmed that the Internal Financial Controls are adequate with reference to the financial statements. ERP System developed by Ramco Systems Limited has been installed for online monitoring of all functions and management information reports are being used to have better internal control system and to take decisions in time.

VIGIL MECHANISM/WHISTLE BLOWER POLICY

In accordance with Section 177(9) and (10) of the Companies Act, 2013 and Regulation 22 of SEBI (LODR) Regulations, 2015 the Company has established a Vigil Mechanism and has a Whistle Blower Policy. The policy is available at the Companys website.

INDUSTRIAL RELATIONS AND PERSONNEL

The Company has 3,028 employees as on 31-03-2018. Industrial relations with employees remained cordial during the year. Human Resources Development activities received considerable focus. The emphasis was on imparting training and development of the skill-set of the employees to enable them to face the challenges in the work environment.

RELATED PARTY TRANSACTION

Prior approval/Omnibus approval is obtained from the Audit Committee for all related party transactions and the transactions are periodically placed before the Audit Committee for its approval. No transaction with the related party is material in nature, in accordance with Companys "Related Party Transaction Policy" and Regulation 23 of SEBI (LODR) Regulations, 2015. In accordance with Indian Accounting Standard-24 (Related Party Disclosure), the details of transactions with the related parties are set out in Note No:46 of disclosures forming part of Financial Statements.

As required under Regulation 46(2)(g) of SEBI (LODR) Regulations, 2015, The Companys Related Party Transaction Policy is disclosed in the Companys website and its web link is http://www.rajapalayammills.co.in/pdf/related-party-transaction-policy.pdf

RISK MANAGEMENT POLICY

Pursuant to Section 134(3)(n) of the Companies Act, 2013 and Regulation 17(9) of SEBI (LODR) Regulations, 2015, the Company has developed and implemented a Risk Management Policy. The Policy envisages identification of risk and procedures for assessment and minimization of risk thereof.

On behalf of the Board of Directors,
For RAJAPALAYAM MILLS LIMITED,
RAJAPALAIYAM, P.R. VENKETRAMA RAJA
29th May, 2018. CHAIRMAN