R&B Denims Ltd Management Discussions.

DISCLAIMER

Statements in the Directors’ Report & Management Discussion and Analysis describing the Company’s objectives, projections, estimates, expectations or predictions may be "forward-looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make difference to the Company’s operations include raw material availability and its prices, cyclical demand and pricing in the Company’s principle markets, changes in Government regulations, tax regimes, economic developments within India and the countries in which the Company conducts business and other ancillary factors.

OPERATIONS

As per the latest GDP growth estimates, India’s economic growth is 6.8 per cent which was previously estimated 7.2 per cent, the shortfall of 0.4 per cent in growth is due to demonetization took place in 2016-17. Particularly, performance of industry sector was excellent in the last year, and your company has maintained and is stable at the same position in the current year also. The performance of your Company is highly encouraging. Your Company has closed the financial year 2016-17 with 27.39% growth in sales which shown a remarkable growth compared to the previous year. Your Company has achieved the growth across all business segments.

OUTLOOK

1. INDIAN MARKET

Denim is now considered a staple product not only in the major metropolitan cities of India, but also in the Tier II and III cities. There is increasing acceptability of denim amongst all strata of the Indian society. However, the top 10 towns that account for less than 10% of Indian population account for almost 50% of domestic denim consumption. With almost 35% of sales from the organised sector and 40% from the branded segment, the denim trend is expected to penetrate the market further and register significant growth in the near future.

Denim is of the most promising category in India’s apparel market. The Indian denim industry has shown continual growth over the years and currently the country boasts of a denim manufacturing capacity of around 1.2 billion meters per annum which is expected to increase to 2.0 billion meters in next three to four years owing to the huge demand for the fabric. India’s share in the overall denim manufacturing capacities is around 10%. For a majority of the Indian youth, denim is not just a casual wear, but more of a fashion statement. Almost 85% of the market is dominated by men, with 10% contribution from the female segment and the kids segment contributing about 5% of the market. Despite the impressive statistics, the Indian denim manufacturing industry contributes 5% to the global scenario, reflecting the overall performance of the textiles industry. However, according to industry experts, denim is the only segment in the Indian textile industry that has the potential to grow manifold.

Dramatic change in the entire denim fashion came in the last few years, when a new set of specialized yarns were introduced.

Denim fabric production in India is concentrated in the western and a northern part of the country with more than 45 percent contribution coming from Gujarat which is the production hub. Denim apparel production in India remains a fragmented industry where only 20-30 percent of denim apparel is manufactured in the organized units.

2. Future Prospects

The Government has introduced the Amended Technology Up-gradation Fund Scheme to give a further boost for technology investment in the textile industry. The TUFS targets employment generation, exports, conversion of existing looms to better quality technology looms and improved quality of processing industry.

However, there are several challenges ahead for the Textile industry for enhancing its competitive strength and global positioning in terms of inflexible labour laws, poor infrastructure, high transportation cost, scarcity of trained manpower, high energy costs which will have to be addressed to sustain the growth momentum of the Industry.

Irrespective of a handful of unfavourable conditions, the future appears bright for the Indian textile industry, which is set for strong growth, buoyed by strong domestic consumption. Further, the growing Indian economy and rising disposable income will render a strong tailwind to the textile sector.

SWOT ANALYSIS OF DENIM INDUSTRY:

1. Strengths

• Existence of sufficient productive capacity

• Managements with professional and business background

• Existence of qualified technical personnel

• Easy availability of raw materials

• Large domestic market

• Abundant availability of excellent quality cotton suitable for denim

2. Weaknesses

• Non availability cost efficient skilled labour

• Cost based market set up

• Not ready for diversification of products

3. Opportunities

• Growing domestic and international demands

• Indian market is most reliable and efficient market for US, Europe & UK Buyers

• Product mix and product diversification

4. Threats

• Entry of multinational in domestic markets

• Demand supply mismatch, resulting into oversupply position in Domestic Market

• Stiff competition from other Asian countries such as China, Indonesia, Thailand,

Bangladesh and Pakistan

• Fast changing fashion and fabric demands

REVIEW OF OPERATIONS

Your directors report that during the year under review your company has posted higher income of Rs. 2,055,328.92 (in thousands) in the current year as compared to Rs. 1,626,462.13 (in thousands) in the corresponding previous year. During the current year your company has shown a negative trend in profit of Rs. 4,794.31 (in thousands) as against to the net Profit of Rs. 13,924.59 (in thousands) in the corresponding previous year. This is mainly because of share in loss of newly constituted partnership firm to the extent of Rs. 27,822.80 (Rs. in thousands) (because of depreciation).

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has an Internal Control System, commensurate with the size, scale and complexity of its operations. To maintain its objectivity and independence, the Internal Audit function reports to the Chairman of the Audit Committee of the Board.

The Internal Audit Department monitors and evaluates the efficacy and adequacy of internal control system in the Company, its compliance with operating systems, accounting procedures and policies at all locations of the Company including the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial disclosure. Based on the report of internal audit function, process owners undertake corrective action in their respective areas and thereby strengthen the controls.

RISK AND CONCERNS

The Company is exposed to risks from market fluctuations of foreign exchange, interest rates and commodity prices and other business risks.

1. Foreign Exchange Risk

Your Company’s policy is to hedge its long-term foreign exchange risk as well as short-term exposures within the defined parameters

2. Interest Rate Risk

Your Company is exposed to interest rate fluctuations on its Rupee denominated borrowings. It uses a judicious mix of fixed and floating rate debts within the stipulated parameters. The Company continuously monitors its interest rate exposures and whenever required, uses derivative instruments to minimize interest rate risk and interest costs. In view of the continuous risk mitigating strategy adopted by the Company, it does not perceive interest rate risk as having any material impact on its profitability, at any point of time.

3. Commodity Price Risk

The Company is exposed to the risk of price fluctuation on raw materials as well as finished goods in all its products. The Company proactively manages these risks in inputs through purchase contract or forward booking for cotton, its main raw material and inventory management. The Company’s reputation for quality and the existence of a strong marketing network mitigates the impact of price risks on finished goods.

4. Other Business Risks

Apart from the risk on account of interest rate, foreign exchange and regulatory changes, the business of the company is exposed to certain operating business risks, which are managed by regular monitoring and corrective actions.

FINANCIAL PERFORMANCE AND OPERATIONAL PERFORMANCE

The company has reported total revenue of Rs. 2,055,328.92 (Rs. in Thousands) as compared to previous year Rs. 1,626,462.13 (Rs. in Thousands) and PBT stood at 4400.51 (Rs. in Thousands) as compared to previous year Rs. 21,057.89 (Rs. in Thousands). The Increase in sales was led by volume of growth in domestic and export market.

COSTS-DENIM BUSINESS

During the year 2017, the economy witnessed an upward movement in the overall cost structure and the Company continued to focus on cost improvements through its excellent programs.

1. Cost of materials consumed

Cost of materials consumed accounted for 83.78% of total income from operations (78.75% in 2016). Cost of material consumed increased by 37.53% in 2017 over 2016. Whereas amount of Yarn consumption were decreased by 29.27% in 2017 as compared to 2016 and amount of Coal/Lignite consumption were decreased by 2.10% in 2017 as compared to 2016. Amount of Color/Chemical consumption were decreased by 8.04% in 2017 over 2016 and amount of stores/packing materials consumption were decreased by 54.19% in 2017 as compared to 2016. The cost of material is hiked mainly due to consumption of grey in the current year.

2. Power & Fuel

The power and fuel (electricity Expenses) spent was Rs. 72,885.71 (in thousands) which constitutes 3.60% of the total income from operations of the company.

3. Other Expenditure

Other expenditure (exclusion of Manufacturing Expenditure) constitutes 1.13% of total income from operations of the Company. The increase in other expenditure (exclusion of Manufacturing Expenditure) was only 8.60% in 2017 over 2016.

SUSTAINABLE DEVELOPMENT

Sustainability has been deeply embedded into the Company’s business and has become an integral part of its decision making process while considering social, economic and environmental dimensions. During the year 2016-17, a Sustainable Development was developed with a focus on the following areas:

1. Water Emissions

• Our Company is a member of Gujarat Eco-Textile Park (GETP) since 2014, The Park helps us to reduce water pollution. The Company has also implemented various measures across all its operations to control fugitive emissions.

2. Air Emissions

• Initiatives were taken to reduce air pollution causes due to production processes. Company has taken license from Gujarat Pollution Control Board (GPCB). The officer’s of the board often comes on a surprise visit to our factory and verify the level of air pollution. The samples are tested by GPCB in their own laboratory and report is issued to us. The Company has also installed Air Receiver in weaving department to reduce and have control on Air Emissions.

HEALTH & SAFETY

Health & Safety (H&S) remains the Company’s top priority. Our company is equipped with proper first aid facilities, Medical facilities and stretchers. The shift supervisors have been trained in basic life support techniques.

With regard to safety, two key areas of focus identified were Facility Management for the employees and Equipment, Tools & Material Management. The Facility Management initiative was implemented to ensure adequate welfare facilities for employees such as washrooms with bathing facilities, rest rooms, proper availability of drinking water etc. The Equipment, Tools & Material Management program ensured that the tools used by employees were safe and the company provides earplugs, helmet, nose & face mask, hand gloves, safety shoes to protect its employees. The process of screening of employees was made more stringent to ensure that the employees were aligned with the Company’s objectives.

HUMAN RESOURCES

Many initiatives have been taken to support business through organizational efficiency, process change support, and various employees’ engagement programs, which have helped the Organization, achieve higher productivity levels. A significant effort has also been undertaken to develop leadership as well as technical/functional capabilities in order to meet future talent requirement.

The Company’s HR processes such as hiring and on boarding, fair transparent performance evaluation and talent management process, and market aligned policies have been seen as at good level practices in the Industry.

1. Employees of Choice:

The Company has positioned itself as one of the best companies to work for. Employees have option to work with the world class technologies and have flexibility to pursue different functions. Employees are encouraged to express their views and are empowered to work independently. Employees are given the opportunity to learn through various small projects, which make them look at initiatives from different perspectives and thus provide them with a platform to become result oriented. This has helped greatly in overall development of the employee and has significantly arrested the attrition rate.

2. Leadership Development:

As a part of leadership development, talented employees have been seconded to the senior leadership team to mentor them and prepare them for the next higher role. Apart from this, a large number of senior, middle and other employees are sent for leadership programs or are assigned to small independent projects, which are planned for identified talent.

3. Industrial Relation:

The Company shares relevant business information with the union in order to enlighten them and make them sensitive towards business requirements. This has helped to build a healthy relationship and resolve issue through mutual dialogue. There has been no dispute between the management and workers during the year.

4. Individual Development Planning:

This is an annual process tied to business planning and the budget cycle, whereby the management in our organization establishes training goals and plans for employees of the organization.