S P Apparels Ltd Management Discussions

GLOBAL ECONOMY AND OUTLOOK

The global industry displayed remarkable adaptability and resilience in the face of numerous challenges in 2023. Despite supply chain disruptions stemming from the pandemic and exacerbated by the conflict between Russia and Ukraine, the industrial sector managed to sustain growth. This period was marked by significant volatility in global energy and food supplies, leading to elevated inflation rates, which are now anticipated to decline in FY24-25.

Advanced economies saw eased fiscal policies in 2023, but tighter stances are expected in 2024 to address rising debt levels, likely slowing near-term growth. Conversely, emerging market and developing economies experienced a stable fiscal position despite lower economic output compared to pre-pandemic levels. Trade growth, although projected to be 3.3% in 2024 and 3.6% in 2025, remains below historical averages due to ongoing trade distortions and geopolitical fragmentation.

According to the IMF?s World Economic Outlook, global growth is forecasted to sustain at 3.2% in 2025, with inflation rates declining progressively. The industrial sector has benefited from favourable supply-side dynamics and monetary tightening by central banks, aiding in a faster-than-expected reduction in inflation. Despite prolonged geopolitical conflicts and disruptions in critical shipping routes, such as the Red Sea, major manufacturing hubs like Bangladesh are poised for economic upswing, driven by robust demand and rising exports.

INDIAN ECONOMIC OVERVIEW & OUTLOOK

India?s industrial sector has demonstrated impressive growth, pushing the country ahead of the UK to become the world?s fifth-largest economy in FY23. According to the International Monetary Fund (IMF), India is expected to become the third- largest economy within the next five years. This growth is driven by strong domestic demand, substantial investment flows, and ongoing government spending.

In FY2023-24, India?s economy and financial system remained strong due to solid macroeconomic fundamentals, moderating inflation, and a stronger position in global trade. The GDP growth rate of 10.1% in Q3FY24 highlights significant economic expansion. Despite challenges like geopolitical tensions and fluctuating foreign direct investment trends, India continues to thrive due to its stability efforts and structural reforms. The IMF projects growth rates of 6.8% in 2024 and 6.5% in 2025, supported by high demand and increased government spending on infrastructure. The Union Budget FY24-25 has increased capital expenditure by 11.1% to Rs. 11 Lakh Crore, further promoting infrastructure development.

Additionally, the Remission of Duties and Taxes on Exported Products (RoDTEP) Scheme, with a substantial budget allocation of Rs. 15,070 crores and a 10% increase planned for FY24-25, aims to enhance India?s global competitiveness and boost exports. The first half of FY24 saw significant contributions from the industrial and services sectors, with the manufacturing sector growing faster than services. The Reserve Bank of India?s proactive monetary policy actions and commitment to price stability have also positively impacted economic growth.

TEXTILES

Global Textile Industry

In recent years, the global apparel market has experienced significant growth, with a projected compound annual growth rate (CAGR) of 8%. The market is expected to reach $656 billion in CY2024, up from $655.7 billion in CY2023. This expansion is driven by strong economic growth in emerging nations, increased foreign direct investments, higher demand for synthetic fibres, and technological advancements. The global textiles and apparel trade is also set to grow, projected to reach $1,284 billion in CY2028 from $942 billion in CY2022, with a CAGR of 5.5%. Emerging economies like Vietnam and Bangladesh are expected to see robust CAGRs of 4.2% and 7.7% from CY2023 to CY2028, respectively, highlighting their growing importance in the global apparel market.

China led the textile exports in 2021 with a 31% market share, followed by Bangladesh with a 5% share. However, rising production costs in China have reduced its export share, benefiting countries like Bangladesh and Vietnam, which are now catering to buyers seeking supply base diversification. The industry also saw the EU?s announcement to produce, distribute, and consume textiles and apparel sustainably by 2030. Brands and manufacturers must align with this vision to remain competitive.

Market trends indicate subdued demand for textiles and apparel due to inflation and recessionary trends in markets such as the US and EU. This situation has created opportunities to shift the supply chain geography away from China towards smaller exporters.

Indian Textile Industry

As of 2023, the Indian Textile and Apparel (T&A) Industry was valued at USD 165 billion, with a market composition of 76% domestic and 24% export. India stands as the second-largest producer and the largest exporter of textiles and garments globally. The domestic T&A industry registered a growth of 7% and is projected to grow at a rate of 10%. The export market has achieved a 4% CAGR since 2010 and is expected to grow at 10% until 2031. Notably, in the first half of 2022, exports nearly reached an all-time high before experiencing a significant decline in the latter half of the year. As of FY24, Indian T&A exports amounted to USD 28.72 billion.

Additionally, India has entered Free Trade Agreements (FTAs) with the UAE, Australia, and Canada. The industry employs 45 million people, making it the second-largest employer after agriculture.

The Indian T&A industry benefits from several competitive advantages. There is robust demand in the market, with projections indicating continued growth. India enjoys a comparative advantage in skilled manpower and production costs relative to other textile-exporting nations. During April- June FY24, exports for 247 technical textile items stood at USD 715.48 million. The industry receives significant support from regulatory policies, including the allowance of 100% FDI in textiles. Investment in the industry has been on the rise. In June 2023, the government approved R&D projects worth USD 7.4 million in the textile sector. The introduction of the Amended Technology Upgradation Fund Scheme, a credit- linked subsidy scheme, aims to encourage investment in the T&A industry, thereby increasing private equity investments and employment opportunities

APPAREL & RETAIL Global Industry

In recent years, the global apparel market has witnessed significant growth and is anticipated to continue expanding at a compound annual growth rate (CAGR) of 8%. This growth is driven by robust economic development in developing countries, a surge in foreign direct investments, increased demand for synthetic fibres and advancements in technology. The global textiles and apparel trade is projected to reach $1,284 billion in CY2028, rising from $942 billion in CY2022, with a CAGR of 5.5%.

Furthermore, companies setting up manufacturing facilities

closer to consumer markets is contributing to shorter lead times, reducing transportation costs and enhancing supply chain transparency. Additionally, growing emphasis on trade practices among countries which are political and economic allies, aimed at mitigating geopolitical risks. These trends emphasise flexibility and adaptability in modern manufacturing, fuelling growth in the apparel market. Source: IBEF report on Textile Industry

Indian Market

The Indian apparel retail sector is poised for significant growth by 2027, with its value projected to increase to $89,219 million by 48.7% from 2022. This growth is anticipated to occur at a compound annual growth rate of 8.3% from 2022 to 2027. A key factor driving this expansion is the escalating presence of international brands and retailers, which are entering the Indian market through various collaborations. International apparel giants like Hugo Boss, Diesel and Kanz have already started their operations in India. This trend along with India?s strong exports of garments and textiles, fuelled by a surge in disposable incomes and growing consumer demand for sustainable and ethical fashion, is laying the groundwork for a thriving apparel industry in India.

Additionally, India?s apparel market benefits from a comparative advantage in terms of skilled manpower and lower production costs compared to other major textile producing countries, making India an attractive hub for both production and retail in the apparel industry.

Source: IBEF report on Textile Industry

COMPANY OVERVIEW

S.P. Apparels Ltd is a prominent manufacturer and exporter of knitted garments, shaping the future through sustainable practices. With the large network of factories, the Company provides a robust platform for sourcing, manufacturing and supply chain management with a market growth headed by children and kids wear. Additionally, the company manufactures menswear garments in India under the "Crocodile" brand.

EMPLOYEE WELFARE

SPAL is committed to promoting employee well-being, learning and diversity. We recognise that happy and healthy

employees are more productive and engaged. We continue to support their personal and professional growth by offering upskilling opportunities and prioritising employee happiness and well-being. We encourage employees to think outside the box, take calculated risks, and continuously adapt to changing market conditions. An entrepreneurial model in the workplace leads to increased competitiveness, growth and success for the company and its employees. By nurturing an entrepreneurial culture, we are empowering our employees to take ownership of their work and drive performance to new levels. Through a focus on innovation, our employees are well positioned to deliver exceptional value to our customers and contribute to the Company?s continued success.

RISKS AND CONCERNS

Raw Materials Risks:

India is one of the largest producers of cotton yarn in the world. The margins of the Indian textile industry are impacted by the fluctuations in cotton prices. In 2023-24 margins improved because of gain in cotton price movement, although average realization may decline due to deflation in raw material cost.

Inflation risk:

India has seen variable inflation trends historically. While fluctuations in inflation rates can present challenges in forecasting and managing our costs, they also encourage us to enhance our financial strategies and cost management practices. If there is a surge in the cost of raw material or a rise in employee benefit payments due to inflation, we are capable of mitigating the impact. Our goal is to minimize the impact on our customers and maintain the integrity of our business operations.

Safety risk:

Ensuring a safe and healthy working environment for everyone is vital for boosting productivity and nurturing organisational development. We at SPAL equip the workplace with the necessary safety equipment and keep all the machinery in good working order through regular maintenance and safety inspections.

Finance and credit risk:

We evaluate and manage credit risk continuosly. To mitigate credit risk, we diligently track the creditworthiness of debtors through internal systems that are configured to define credit limits of customers.

Exchange risk:

S.P. Apparels faces exposure to foreign exchange rate fluctuations as considerable portion of its revenue is from other countries. To mitigate the risks associated with foreign exchange fluctuations that affect our commercial dealings and recognized foreign currency assets and liabilities, we strategically employ forward contracts and engage in hedging activities as needed. Additionally, we have a skilled team of professionals for managing forex concerns, ensuring that our approach to foreign exchange risk is both effective and informed.

Regulatory Changes:

Adjustments to regulations and government incentives present opportunities for the company to adapt and innovate, potentially enhancing its business and profitability. The Indian government has historically supported the textile sector with incentives such as RoSCTL and EPCG fostering production and export growth. While these incentives may evolve, the company is poised to leverage its operational strength to maintain and improve its market position.

FINANCIAL PERFORMANCE:

Performance on a Standalone basis:

In FY 2023-24 your company has recorded a total revenue of Rs. 9,639.8 Mn as against Rs. 9,623.2 Mn in FY 202223. EBITDA stood as Rs.1,838.7 Mn as against Rs. 1,716.4

Mn in the previous year. PAT was Rs. 1,037.6 Mn as against Rs 918.1 Mn in FY 2022-23. EPS for FY 2023-24 was Rs. 41.3 as against Rs. 36.0 in the previous year.

Performance on a consolidated basis:

In FY 2023-24 your company has recorded a total revenue of Rs.11,036.7 Mn as against Rs. 11,008.9 Mn in FY 2022-23. EBITDA stood as Rs. 1,740.9 Mn as against Rs. 1,655.3 Mn in the previous year. PAT was Rs. 896.2 Mn as against Rs. 825.1 Mn in FY 2022-23. EPS for FY 2023-24 was Rs. 35.7 as against Rs. 32.3 in the previous year.

Internal control system and adequacy

The company?s internal control systems for financial reporting are robust and are commensurate with its size and its industry sectors. These systems ensure efficiency and productivity at all levels, while safeguarding your company?s assets. Stringent procedures are in place to ensure high accuracy in recording and providing consistent financial and operational support. Business operations are closely monitored by the internal team and the Management. The Board is promptly notified in case of any deviations. To ensure seamless growth, risk identification & assessment and mitigation strategies are designed and continuously recalibrated on the basis of these findings.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT:

During the year under review, industrial relations at our plant locations remained harmonious. Your Company emphasizes on the safety of people working in its premises. Structured safety meetings were held and safety programs were organized for them throughout the year.

KEY RATIOS

As per provisions of SEBI Listing Regulations, 2015, (Explanations for significant change i.e. change of 25% or more as compared to the Immediate previous financial year calculated on standalone basis) are given below:

Key Financial Ratios	2023-24	2022-23	% of change	Explanation for the change
Debtors Turnover	15.00	18.03	-17.04 %	All the ratios have improved due to good performance and better financial management.
Inventory Turnover	1.53	1.43	6.99%
Current Ratio	2.26	1.68	34.52%
Interest Coverage Ratio	11.35	8.83	28.54%
Debt Equity Ratio	0.16	0.28	-42.86%
Operating Profit Margin (%)	0.16	0.15	6.67%
Net Profit Margin (%)	0.11	0.10	10.00%o