S P Apparels Ltd Management Discussions.

COMPANY OVERVIEW

SPAL is a specialized player in the highly challenging infant & children wear knitted garment industry in India. We provide end-to-end garment manufacturing services from the design to the manufacture of garments including body suits, sleep suits, tops and bottoms through our integrated manufacturing facilities.

SPAL is the preferred vendor for knitted garments for infants and children to reputed international brands and retailers. SPAL is also c sub-licensee to manufacture, distribute and market adult menswear products in India under the brand Crocodile.

All of our 28 manufacturing facilities are located within Tamil Nadu leading to significant economies of scale. Our upgraded technology systems including Eton conveyor production system (automated sewing assembly line and workflow control), ASRS (Advanced semi-automated storage and retrieval system) for efficient warehouse / inventory management and Orgatex software system for automation of dyeing related processes enables us to service better our customers in a timely manner.

We have two Subsidiaries, Crocodile Products Private Limited ("CPPL") and S.P. Apparels (UK) (p) Limited ("SPUK"). CPPL, which is a joint venture between our Company and Crocodile International Pte. Ltd. ("CIPL").

INDUSTRY OUTLOOK

Apparel is one of the fastest evolving segments in global trade. The developed economies such as United States, European Union and Japan among others are the major consuming countries. Apparel manufacturing has moved from the developed countries to the developing ones, especially in Asia. Textiles sector is one of the oldest industries in Indian economy and today one of the largest contributors to Indias exports and second largest employer after Agriculture.

Domestic- focused

A large population base, rising disposable incomes, and increasing share of organised retail present significant growth opportunities for the domestic garmenting and retailing industry in the long term. However, the extent of growth for the domestic companies will be partly determined by their competitiveness vis-a-vis the international suppliers and the level of imports in the country. Although on a low base, apparel imports have risen by more than 50% in the current year, highlighting a potential threat to the domestic industry. However, large garment manufactures would continue to benefit from the economies of scale in a fragmented industry, which would also enable them to cater to the organised apparel sector, resulting in better realisations. Also, strong apparel brands would be in a better position to achieve growth in a fragmented industry and command premium pricing.

Export - focused

While India has a large fibre base, tie share of Indian garment exports has remained low at 3-4% in the global apparel trade. Going forward, steps taken by the Government of India to address the concerns on the continuance of export subsidy schemes, will remain crucial for the Indian apparel exporters to capitalise on revived global apparel trade and loss of market share by China. Besides, the full implementation of the CP TPP as well as developments on the EVFTA will remain key determinants of the opportunities likely to be available to the Indian apparel exporters in the global market. Also, competitiveness of the Indian apparel exporters will remain contingent upon the mnupmflnt in foreign pxrhnngp rntes Nnnpthplpss, hpnpfits under thf* Cpntrnl srhfmf*s or wpII ns several state textile policies, relaxed labour norms, and sharing of the Employee Provident Fund (EPF) burden as introduced under the textile policy, augur well for the competitiveness of the Indian apparel exporters.

GLOBAL APPAREL TRADE

The global apparel trade expanded for the second consecutive year in CY2018 with YoY growth of about 3%, following a 2% growth in CY2017 in USS terms and contractions reported earlier in CY2015 and CY2016. However, given the decline in two out of the last five years, the trade value in CY2018 stood only 2% higher than the level seen in CY2013. The positive trend during the last two years has been led by the strong recovery in apparel imports by the EU, which accounts for two-fifth of the global apparel trade (including the trade within EU) and reported a growth of 5.8% and 3.9% in apparel imports in CY2018 and CY2017 respectively, following a muted growth of 1.9% in CY2016.-Unlike the EU, apparel imports by the US remain muted with a 2% growth in CY2018, though the trend has improved during the past two years.

China - the worlds largest apparel manufacturer and exporter, has been challenged by rising production costs In recent years. As a result, its apparel exports are now considerably lower, than the peak level witnessed in CY2014. Although China managed to arrest the pace of decline in its apparel exports in CY2018, expanding global opparel trade resulted in a continued decline in its market share. Bangladesh, Vietnam and India remain the key gainers of the market released by China. Bangladeshs growth continues to be supported by the availability of low cost labour and competitive advantage in the form of lower import duties provided by some of the world s largest apparel importing countries. Bangladesh has been the key beneficiary of Chinas declining share in the EU. Vietnam, the third largest apparel exporter, on the other hand, has maintained growth in its stronghold market of the US. While Bangladesh hasnt been able to grow in Vietnams key target market i.e. the US in the last few years, Vietnam continues to grow at a healthy pace in Bangladeshs key target market of EU also.-In this context, signing of the proposed EU-Vietnam Free Trade Agreement (EVFTA) and full enforcement of the Comprehensive and Progressive Trans Pacific Partnership (CP TPP) would further strengthen Vietnams positioning in the global appareltrade

INDIAS APPAREL EXPORTS

After a double-digit de-growth for four consecutive quarters, Indias apparel exports stabilised during Q3 FY2019, reporting a 14% YoY growth to USS 3.6 billion. The growth is, however, mainly explained by a low base effect considering that India had reported a 19% YoY decline in apparel exports during Q3 FY2018 following a downward revision in export incentives after the transition to the GST regime. Thus, even after a recovery, Indias apparel exports in Q3 FY2019 remained lower than the average quarterly exports during the past five years. Further, FY2019 is expected to be the fourth consecutive weak year for Indias apparel exports with a 4 - 5% de-growth (vis-a-vis 6.5% de-growth in 10M FY2019), following the 4% de-growth in FY2018 and modest growth rates of 1% and 3% in FY2016 and FY2017 respectively.

Besides intense competitive pressures from nations having a cost advantage over India and an inexplicable decline in exports to the UAE, concerns arising from the USs allegations against certain export subsidy schemes in India, seem to be constraining the overall momentum of the apparel export sector of India: Going forward, steps taken by the Government to address these concerns, besides impending developments In the international trade including the CP TPP and the EU-Vietnam FTA, remain crucial for the sector participants. Moreover, the movement in Indian currency vis-a-vis currencies of competing nations too will determine the relative competitiveness of the Indian players. This is particularly critical considering the cost advantages in terms of lower labor and financing cost that some of these nations enjoy.

FINANCIAL PERFORMANCE OF INDIAN APPAREL MANUFACTURERS

The export-based companies, which has presence in the niche and value-added product segments, together with access to an established client base has helped to maintain revenue growth, despite the increasing competitive pressures from peer nations. This, together with a revival in domestic demand, post transitory pressures of demonetisation and GST, particularly in metros and tier-1 markets where the larger listed playeS are predominantly present, translated into a healthy growth during the current financial year. Besides, favourable currency movement and healthy growth in revenues facilitated an improvement in margins in the recent quarters, given the operating leverage inherent in the operation

FINANCE REVIEW ON STANDALONE BASIS

Our company had recorded total revenue for FY 2018 - 19 of Rs 7,815.56 Mns as against Rs 6,444.65 Mns of last FY 2017 - 18 which is a growth of 21.27%. EBITDA for the FY 2018 - 19 recorded Rs 1340.60 Mns as against Rs 1,202.87 Mns for the FY 2017 - 18 which grew by 11.45%. PAT for the FY 2018 - 19 recorded Rs 697.71 Mns as against Rs 420.12 Mns which grew by 66.07%. EPS for the FY 2018 - 19 recorded at Rs 27.25 as against Rs 16.69 for the previous year.

ON CONSOLIDATED BASIS

Our company had recorded total revenue for FY 2018 - 19 of Rs 8,298.16 Mns as against Rs 6,787.97 Mns of last FY 2017 - 18 which is a growth of 22.24%. EBITDA for the FY 2018 - 19 recorded Rs 1,372.77 Mns as against Rs 1,221.97 Mns for the FY 2017 - 18 which grew by 12.34%. PAT for the FY 2018 - 19 recorded Rs 733.71 Mns as against Rs 478.15 Mns which grew by 53.45%. EPS for the FY 2018 - 19 recorded at Rs 28.66 as against Rs 19 for the previous year.

GOVERNMENT SCHEMES AND INCENTIVES FOR EXPORTS PROMOTION

1. Technology Upgradation Fund Scheme (TUFS): Over the past few years, the government has been supportive of infusing new technology into the apparel manufacturing sector, various schemes have been made and improved continuously to assist all the apparel manufacturers. One among them was Technology Upgradation Fund Scheme, which has been modified several times to improve its ease of adoption by businesses. The most recent amendment was named as Amended Technology Upgradation Fund Scheme (ATUFS), which supports the modernisation and up-gradation of the industry. The scheme would facilitate augmenting of investment, productivity, quality, employment, exports along with Import substitution in the textile Industry. The implementation period is from January 2016 to march 2022. Under ATUFS, there is a provision of one-time capital subsidy for eligible benchmarked machinery at the rate of 15% for garmenting and technical textiles segments with a cap of Rs. 30 crore and at the rate of 10% for weaving, processing, jute, silk and handloom segments with a cap of Rs. 20 crore. The Ministry of Textiles notified the Scheme for Production and Employment Linked Support for Garmenting Units - SPELSGU under ATUFS to incentivise production and employment generation in the garmenting sector by way cf additional incentive of 10% on achievement of the projected production and employment generation as stated by the respective unit in the Detailed Project Report

2. Schemes for Integrated Textiles Parks (SITP): The primary objective of the scheme is to provide the industry with State of the art world-class infrastructure facilities for setting up their textile and apparels units. The scheme would facilitate textile units to meet international environmental and social standards and it targets Industrial clusters/locations with high growth potential, which require strategic interventions by way of providing world-class infrastructure support. The Government of India supports under the scheme by the way of grant or equity limited to 40% of the project cost subject to a ceiling of Rs. 40 crores to cover cost of common infrastructure and buildings for production/support activities.

3. Pradhan Mantri Rojgar Protsahan Yojana (PMRPY): This is a scheme to incentivise employers registered with the Employees Provident Fund Organisation (EPFO) for job creation by the Government by paying the full contribution of employers to the Employee Pension Scheme (EPS) and Employees Provident Fund (EPF) in respect of new employees having a new Universal Account Number (tiAN).This sohf*mp hns n dunl hpnpfit. whprp, on the* nnp hand, thp pmplnypr is inopntivispd for increasing the employment base of workers in the establishment, and on the other hand, a large number of workers will find jobs in such establishments. A direct benefit is that these workers will have access to social security benefits of the organized sector. The Scheme will be in operation for a period of 3 years and the Government of India will continue to pay the full contribution to be made by tie employer for 3 years. The terminal date for registration of beneficiaries through an establishment under the PMRPY is March 31,2019.

4. National Apprenticeship Promotion Schomc (NAPS): The main objective of the scheme is to promote apprenticeship training and to increase the engagement of apprentices. The apprenticeship training provides for an industry-led, practice-oriented, effective and efficient mode of formal training and as such strengthening of apprenticeship training. The scheme has 2 components, one is sharing of about 25% of prescribed stipend s jbject to a maximum of Rs. 1,500/- per month per apprentice to all apprentices with the employers and another one is sharing of cost of basic training with Basic Training Providers (BTP).

5. Merchandise Exports from India Scheme (MEIS):

The scheme rewards for export of notified goods to notified markets under MEIS are payable as percentage of realised FOB value (in free foreign exchange). For most of the apparel products being exported to the United States, Europe, Japan and other traditional markets, the reward rate is about 4% of the FOB value.

6. Duty Drawback on Exports: The Government of India provides duty drcwback for exports of both woven and knit apparel. The duty drawback rate on apparel is about 2%.

7. Rebate of State and Central Levies Taxes (RoSCTL):

Government of India gives garment exporters refunds against all the levies they shell out at the state level. In the recent amendment. Government has extended the benefit of the scheme by way of reimbursing all un-remitted input taxes paid at central level also. Thus, in unabridged the new scheme gives rebate for all embedded state and central taxes and levies to enhance the competitiveness of apparels and made-ups exports from India. The scheme will help to boost shipments from the labour-intensive segment. The scheme is in line with the principle of zero rating of export items. Under the scheme the incentive for garment exporters will be approximately 5.00 % of the FOB value.

RISKS AND THREATS

1. Increasing Cost of Raw Materials:

Cotton, the key row material for textile and apparel production, has become costlier by more than 6 percent due to lower output last year While prices of both cotton and yarn have increased, fabric prices remained stable which will impact margins of textile companies.

2.Currcney Fluctuations:

Currency fluctuation is among the factors that make exports competitive. The Indian apparel industry depends hugely on the Tmport-expart trade. India imports a huge quantity of fabrics from Chino each year and the sinking rupee would bring in a wave of impact A depreciating rupee has direct impact on costlier imparts,

3. High cost of Labour:

Lack of skil led labor because of lack of technology up gradation leads to lower productivity and higher lead-time, thus resulting in higher cost of production In addition, attrition and absenteeism in the labor workforcealsoaffects the garment manulacturing industry.

4. Competition from neighbouring Countries:

Indias competitiveness in the global apparel trade is challenged by lack of scale in garment manufacturing, seasonality (manufacture only certain product categories), inadequate capability in the synthetic value chain, limited number of preferential trade agreements, etc.

China has retained its top ranking and is far ahead of its competitors with major share of international apparel trade. China, Bangladesh, Vietnam. Sri Lanka, Cambodia, Indonesia ancf India are the key exporters of Garments. The opportunities for sourcing orders rs reduced due to trade agreements and preferential status enjoyed by other competing Countries.

5. Withdrawal of Gouernment Grants:

Government Grants and subsidies for exports and imports are always subject to risk. Withdrawal of subsidies by theGovernment will have a negative impact on the bottom lineof the Company,

Internal Control

The Company has a proper and adequate internal control system to ensure that all assets are safeguarded and protected against loss from unauthorised use or disposition and those transactions are authorised, recorded and reported correctly. The internal control is exercised through documented policies, guidelines and procedures. It is supplemented by an extensive program of internal audits conducted by in house trained personnel. The audit observations and corrective action taken thereon are periodically reviewed by the audit committee to ensure effectiveness of the internal control system. The internal control is designed to ensure that the financial and other records are reliable for preparing financial statements and other data, and for maintaining accountability of persons.

Cautionary Statement

This document contains statements about expected future events, financial and operating results of

S.P.Apparels Limited, which are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that the actual results may differ from the forward looking statements mentioned in the Annual Report. Readers are cautioned not to place undue reliance on forward-looking statements.