Sarla Performance Fibers Ltd Management Discussions

Global Economy: The Year Under Review

In 2023, the global economy encountered significant challenges, mainly driven by inflationary pressures fuelled by fluctuating commodity prices and persistent geopolitical tensions disrupting supply chains. These obstacles were further compounded by a notable uptick in interest rates, marking the most substantial surge in four decades, consequently dampening global growth from 3.5% in 2022 to 3.2% in 2023. The ongoing conflict between Russia and Ukraine posed a significant to the European Unions economic prospects, while escalating geopolitical tensions in the Middle East and disruptions along the Red Sea route heightened concerns over rising logistics costs, energy prices, and commodity price fluctuations, thereby increasing the risk of supply disruptions and presenting downward pressures on the global economy.

Despite these challenges, efforts to control inflation gained traction, and economic growth stayed strong, reducing the likelihood of a severe downturn and maintaining a positive outlook for global growth.

Furthermore, concerted efforts to address supply chain bottlenecks, combined with more accommodative monetary policies, contributed to a moderation in the global inflation rate of 8.8% from its peak 6.8% in 2023. Emerging markets such as India, Mexico, and Vietnam experienced robust growth and attracted increased foreign capital inflows. Notably, the U.S. economy staged a robust recovery, with GDP growth rebounding from 1.9% in 2022 to 2.5% in 2023. Similarly, despite economic shocks, the European Union managed to avoid recessionary territory.

Near-term Outlook threat Looking ahead, the global economy is expected to remain resilient in 2024. The IMF forecasts a growth rate of 3.1% in 2024, with a slight increase to 3.2% in 2025. With higher interest rates and persistent core inflation posing potential risks, ongoing geopolitical conflicts could disrupt the supply chains further. Nonetheless, analysts anticipate global headline inflation to decrease to 5.8% in 2024 and 4.4% in 2025. The Asia-Pacific region is projected to be the fastest-growing region, driven by strong domestic demand in East Asia and India. Overall, while potential risks remain, steady growth trends suggest a balanced outlook for global economic expansion.

Outlook on India

Amidst a sluggish global economy, India has maintained its status as one of the worlds fastest-growing economies. This growth is primarily fueled by robust domestic consumption and reduced dependency on foreign imports. Government initiatives have bolstered domestic demand, while increased investments in manufacturing and infrastructure have effectively tackled supply chain challenges. India remains the fifth-largest economy, with an increasingly favorable investment climate and growing consumer confidence. aims to enhance capital investment and reduce the budget deficit, as outlined in the Interim Budget lays the groundwork for the vision of a Developed India by 2047.

Despite facing repeated shocks in food prices, CPI inflation 5.1% in January 2024 from 5.7% in December 2023.

The RBI has opted to maintain the policy repo rate at

6.5% and has upheld the CPI inflation forecast at 5.4% for the fiscal year 2023-24. Additionally, data from the Index of Industrial Production (IIP) indicates a growth of 6.1% in Indias industrial output during the first three quarters of fiscal year 2023-24, marking an improvement from 5.5% in the corresponding period of the previous year. Notably, the manufacturing sector has exhibited a higher growth rate of 5.6%.

As per IMF forecasts, the Indian economy is projected to grow by 6.8% in 2024-25. While facing potential risks such as geopolitical tensions and global market volatility, which

India is well-equipped to navigate these challenges. Its strategic geopolitical position positions it to benefitfrom supply chain diversification global competitiveness and boosting exports. India aims to ascend as a global hasbeen economic adownwardtrend,decreasing to powerhouse, targeting the third-largest economy status by 2030.

Global Textile Market

The global textile market is poised for robust growth, expected to rise from $638 billion in 2023 to $690 billion in 2024, reflecting 8.1%. Projections indicate continued expansion to $903 billion by 2028, at a projected CAGR of 7.0%. Growth and in recent years has been propelled by factors such as population growth, increasing demand for man-made fibres, government support for the textile sector, robust economic growth in emerging markets, and regulations curbing plastic use. Key players such as China, the European Union, the United States, and India dominate the market, with China leading in production and exports. Simultaneously, the global fashion e-commerce sector is experiencing rapid expansion, set to grow from $821 billion in 2023 to $906 billion in 2024, at a year-on-year growth of 10.3%. This trend is expected to continue, with the market forecast to reach $1,357 billion by 2028, supported by a CAGR of 10.6%. The proliferation of internet and smartphone usage is facilitating this growth by enabling broader access to fashion e-commerce.

Online platforms for textile goods are gaining popularity, responding to increasing apparel demand across different age groups.

Despite these positive trends, the global market faced significant challenges in 2023, particularly in the United

States and Europe.a year-on-year growth Factors such as low of consumer confidence, inventory surpluses, higher-than-expected inflation, supply chain disruptions, geopolitical tensions, and Chinas economic reopening contributed to a cautious business environment. Consequently, global brands and retailers adopted careful strategies, focusing on smaller purchases and reacting to secondary demand signals to navigate uncertainties in the market.

Outlook

Looking ahead, the global textile industry is expected to navigate uncertainties and capitalise on emerging opportunities in a recovering global economy. Toward the end of the fiscal year, the global textile market exhibits signs of recovery, marked by decreased inventory buildup in supply chains, easing inflationary pressures in key markets, and increased consumer. These confidence factors are expected to drive industry growth throughout 2024, with a noticeable recovery anticipated in the latter half of 2024. Moreover, raw material prices have notably corrected from their peak levels and are expected to stabilise at the current level.

The Indian Textile and Apparel Industry

The Indian textile industry holds a prominent position in the global market, contributing significantly to countrys economy. It accounts for approximately 2.3% of Indias GDP, 13% of industrial production, and 12% of export earnings. Indian textile industry contribution to GDP is expected to double by 2030. It serves as a crucial driver of employment, employing approximately

35 million people and ranking as the second-largest employer in India. Projections indicate robust growth, with the market expected to expand at a 10% CAGR from US$ 197 billion in 2023 to US$ 350 billion by 2030. India ranks as the worlds third-largest exporter of textiles and apparel, with exports set to reach US$ 100 billion by 2030 from US$ 34.43 billion in 2023.

The Indian textile industry spans the entire value chain from fibers to apparel, encompassing traditional handloom, handicrafts, and modern textile products.

There is a growing emphasis on sustainability practices and the adoption of vegan materials, supported by the expanding distribution channels of e-commerce platforms for premium textiles and apparel.

Furthermore, by embracing innovative strategies, leveraging technological advancements, facilitating retail expansion, employing sustainable practices, and enhancing employee engagement, the Indian fashion and lifestyle industry is positioned for dynamic growth. This shift towards more durable products mirrors increasing consumer awareness of the environmental impacts associated with fast fashion.

Despite a strong future outlook, the Indian textile industry faced adverse economic conditions in 2023. Factors such as lower consumer sentiment, higher inflation, inventory buildup in the supply chain, fluctuating cotton prices, diminishing demand, and under-utilisation of capacity were exacerbated by the Red Sea crisis. Additionally, the industry was impacted by the dumping of imported fabrics and garments from China and Bangladesh.

Looking ahead, the Indian textile industry is poised to recover in 2024. This recovery is expected to be driven by consistent improvements in domestic demand, a gradual recovery in exports, and stabilisation of raw material prices. These factors indicate a positive trajectory for growth in the coming year.

The global yarn, fiber, and thread market is poised for growth, with projections indicating an increase from $112.7 billion in 2023 to $120.8 billion in 2024, reflecting a CAGR of 7.2%. This growth is driven by factors such as emerging markets, urbanisation, rising demand for man-made fibers, government initiatives, higher disposable incomes, and technological advancements. However, the industry faces challenges from geopolitical issues, high inventory levels, commodity price volatility, decreased consumer confidence, and supply chain disruptions. Despite these obstacles, the market is expected to reach $154.1 billion by 2027, achieving a CAGR of 6.3%. This growth will be fueled by population increase, urbanisation, e-commerce, sportswear demand, the expansion of organised retail, and social media influence. Nevertheless, constraints on free trade, competition, and cotton shortages could hinder progress.

The Asia-Pacific region dominates the global yarn, fiber, and thread market, holding approximately 65% of the market share. This is followed by Europe with around 15%, North America with about 10%, and other regions making up the rest. The Asia-Pacific regions dominance is attributed to its vast production capacity and cost advantages. Europe and North America are significant players due to their advanced technology and high-quality production standards.

Latin America and the Middle East & Africa are emerging markets with increasing potential.

Indian yarn market

In Indias yarn industry, which plays a crucial role in its textile sector, the total yarn production reached 5,185 million kilograms in FY2023. In FY2024, total yarn exports experienced a growth of 5.1%, rising from $16.5 billion in FY2023 to $17.3 billion. Cotton yarn exports typically contribute around 25-35% of Indias cotton yarn production. Despite recent challenges, the industry is poised for expansion. Despite facing price and margin pressures, a combination of reduced borrowing and strategic investments is expected to enhance financial stability. Indias yarn sector exhibits versatility and efficiency, catering to diverse applications. With over 1,943 yarn spinning mills, the country produces various yarn types, including combed, non-spun, carded, compact, fancy, and melange yarn. Production encompasses a wide range of yarn counts, from fine 200 to coarse 2, depending on the material. Indian yarn spinners have embraced advanced technologies like compact spinning and integrated tools such as splicers, auto-coners, and electric cleaners, giving them a competitive advantage and driving the popularity of Indian yarn in global markets. China emerges as a major importer of Indian yarn. The Indian yarn sector holds substantial untapped potential. With proactive government support, including reduced import duties, central excise duty cuts, tax adjustments, and strategic investments, the sector is poised to lead the global market. This support positions India to emerge as a dominant player in the international yarn market.

Man Made Fiber (MMF) Overview and Outlook

The global textile sector is experiencing a significant transformation fueled by shifting fashion trends and constraints in the growth of natural fibers. As of 2023, the MMFs market was valued at approximately $73.3 billion, with forecasts suggesting potential growth to about $105.9 billion by 2030. MMFs are broadly categorised as synthetic and cellulosic fibers, derived from crude oil and cellulosic fibersoriginating from wood pulp. Currently, MMFs represent 75% of global fiber consumption, with a notable emphasis on polyester, a leading and expanding synthetic fiber. Nylon is also emerging as a strong contender due to its strength and flexibility.

The industry heavily relies on MMFs for their adaptability and performance characteristics. This expansion is primarily driven by demand across diverse sectors such as automotive, construction, apparel, industry, and medicine. Technological advancements further enhance the durability and versatility of MMFs, making them applicable in a wide range of industries. Their usage is on the rise in textiles and apparel, thanks to features like wrinkle resistance, colorfastness, durability, and ease of maintenance.

India Man Made Fiber Industry:

Indias Man-Made Fiber (MMF) sector is undergoing rapid expansion, establishing itself as the second-largest global producer of cellulose fiber/yarn and syntheticfiber. Polyester dominates the market with approximately 77.5%, while viscose accounts for around 16.5%. This sector contributes 14% to Indias textile exports, positioning India as the sixth-largest exporter of MMF textiles globally. The surge in MMF demand is propelled by variouswithsynthetic fibers factors including nonwovens, technical textiles, growing health consciousness, increasing brand awareness, and evolving fashion trends, particularly in technical and medical textiles. Despite this growth,

Indias per capita consumption of MMF remains lower compared to the world average of 11.2 and North Americas consumption of 36.9, indicating significant potential for consumption growth in the domestic market.

Government policies like the Production Linked

Incentive (PLI) and the Remission of Duties and Taxes on Exported Products (RoDTEP) schemes are driving forces. 100% foreign direct investment (FDI) and Free Trade Agreements (FTAs) contribute to sustained growth. A significant sustainability trend is using recycled bottles in polyester production, addressing environmental concerns and meeting eco-friendly demand. With government support, strategic initiatives, and sustainability practices, Indias MMF market is promising. Multifaceted growth drivers, responsiveness to trends, and sustainable innovations position the sector for positive and enduring growth.

Government Initiatives:

The Indian government is dedicated to fostering and enhancing the growth of the textile industry within the country through various initiatives. These encompass a broad spectrum of areas, including trade agreements, encouraging foreign direct investment, providing incentives for manufacturing and exporting specific textile products, and implementing schemes focused on enhancing technical textiles, infrastructure, and energy efficiency. Heres a summary of the key points:

Production-Linked Incentive (PLI) Program:

The government is providing incentives for the production and export of specific textile products made from synthetic fibers, with a dedicated fund of INR 10,683 crore (USD 1.44 billion) to enhance competitiveness and scale.

Rebate of State and Central Taxes and Levies (RoSCTL): The scheme offers rebates on Central and State taxes for exporters of garments and made-up products, aiming to enhance the international competitiveness of the textile sector. It has been extended until March 31, 2024.

Free Trade Agreements:

India is actively engaged in bilateral trade negotiations with partner countries to improve export capacity, with tariff-free access to Japan and agreements with Australia. Negotiations for FTAs are ongoing with the EU, UK, Canada, Israel, and others.

Foreign Direct Investment (FDI) Policy:

The liberalised FDI policy allows up to 100% FDI through the automatic route, resulting in significant investments of USD 1522.23 million between 2017 and 2022.

Mega Integrated Textile Region and Apparel (MITRA)

Parks Scheme: The government is establishing Pradhan

Mantri MITRA Parks to enhance global competitiveness, attract investments, and generate employment.

Scheme for Integrated Textiles Parks (SITP):

This initiative is designed to facilitate the creation of state-of-the-art infrastructure facilities for the establishment of textile units.

National Technical Textiles Mission:

A mission for four years (FY 2021 to FY 2024) focuses on integrating technical textiles across various sectors with an allocation of INR 14.8 billion.

Textiles Technology Development Scheme (TTDS):

Planned to replace TUFS, this scheme aims to develop comprehensive manufacturing capabilities and advanced technology adoption with an investment of INR 16,635 crore over five years.

SAATHI Initiative:

A collaborative effort with the Ministry of Power to provide energy-efficient equipment to power loom units, supported by a fund of INR 1,000 crore for technical textiles research and development.

Utilizing Strong Manufacturing Infrastructure and Advanced Capabilities:

Sarla operates state-of-the-art manufacturing facilities in

Silvassa, Vapi, and Dadra, boasting a three-decade legacy. Their expertise in producing a variety of synthetic yarns is evident in their diverse product range, encompassing polyester and nylon textured yarns, twisted yarns, dyed yarns, covered yarns, high-tenacity yarns, and specialised sewing threads tailored for specific applications. Notably,

Sarla stands out as a unique producer of pure nylon and the sole Indian manufacturer of Nylon 66. In a competitive synthetic yarn market, Sarla distinguishes itself as a well-organised entity with a strong customer base and vertically integrated nylon manufacturing capabilities.

They specialise in custom orders, handling volumes ranging from hundreds to thousands of kilograms. The company has recently invested INR 100 crore over five years in upgrading equipment, resulting in significant new capacity and enhanced infrastructure.

Implementation of SAP has greatly improved overall efficiency, providing valuable insights from business data in a user-friendly format. Detailed data on machine breakdowns, spare parts, and replacements enable evaluation of machine-level profitability. This strategic approach has led to minimised yarn breakage, increased machine speed, consistent quality, higher productivity, and improved uptime. Sarlas expansion strategy is carefully aligned with substantial order visibility, ensuring operational efficiency and strategic growth. Their commitment to innovation, efficiency, and strategic expansion underscores their prominent position in the textile industry.

Expansion of Value-Added Product Offerings:

Sarla initially operated in the commoditised yarn manufacturing sector, predominantly serving the apparel industry. Over time, the company strategically pivoted towards producing high tenacity nylon and polyester yarns, along with other specialty yarns catering to sectors such as sportswear, military gear, and specialised sewing threads. Approximately 50% of their current product portfolio comprises these value-added offerings, reflecting Sarlas dedication to meeting evolving industry demands with durable, high-performance yarn solutions.

Sarla is leveraging its newly launched operations for

Budget Allocation:

The FY 2024-25 budget reflects support for the textile industry, totaling INR 4,392.9 crore, demonstrating a modest rise of 2.5% from the previous years budget.

Industry Growth Roadmap: The government is currently deliberating on the roadmap to attain the ambitious target of reaching $ 250 billion in textiles production and $ 100 billion in exports by 2030. manufacturing high tenacity nylon (6 and 6.6) flat and twisted yarns introduced last year. This strategic move is designed to transition revenue composition towards value-added products and enhance profit margins. The full benefits from this expansion are anticipated to materialise in FY2025 as the production capacity ramps up. Expanded capacities for nylon 66 and nylon 6 underline Sarlas commitment to meeting rising product demand. Last year, nylon yarn contributed about 40% of the companys production volume, which is expected to reach approximately 60% within the next few years, thereby enhancing operational efficiency. Leveraging their strong brand reputation, Sarla expects swift utilisation of full capacity, resulting in increased sales volumes, higher realisations, and improved margins.

Diversification:

The Indian market is witnessing a notable shift in consumer behavior, characterised by a preference for enhanced lifestyles and a willingness to invest in premium products. This trend has significantly benefited Sarla, with the Indian market contributing 42.8% of their revenue in the past fiscal year. Projected revenues from India are expected to reach 55%-60% of total revenues in the next couple of years, highlighting substantial growth prospects in this market.

Indias young demographic, with a median age of approximately 28, indicates a robust economic potential among its active population. This demographic advantage is driving increased demand for premium clothing, athleisure wear, and frequent wardrobe updates, creating a conducive environment for consumer product growth. Sarlas role as a leading manufacturer of elastic, socks, and sewing threads further reinforces its position as a key supplier for innerwear applications. In response, Sarla plans to direct their value-added yarns towards the Indian market, capitalizing on evolving consumer preferences. As part of their growth strategy, Sarla aims to expand their Indian operations by adding more sales personnel in coming years, enhancing market penetration and driving an anticipated 15-20% annual sales growth in India, securing a 10% share of the overall sales landscape. Additionally, the company anticipates a 4-5% improvement in operating margins in the India business due to the increase in sales.

Product Diversification Across Industries:

The growing preference for synthetic fibers over natural alternatives is attributed to their versatility, strength, durability, consistency, availability, and ease of maintenance. Synthetic fibers tailored to various industries and applications, including sportswear, medical textiles, and outdoor gear. Nylon and polyester have become indispensable materials due to attributes such as stretchability and robustness. The integration of specialised treatments and finishes further enhances their qualities.

Nylon is gaining prominence for its durability, quality enhancements, and desirable properties, including superior moisture absorption compared to polyester. It offers advantages in moisture management and maintains color vibrancy and structural integrity through repeated laundering, making it ideal for applications such as baby wear. High tenacity polyester yarns contribute to product longevity, finding uses in automotive safety equipment, footwear, and more. Polyester stretch yarns are preferred in sportswear and socks for their softness, warmth, moisture-wicking properties, and durability. Sarla is capitalizing on the expanding medical industry by leveraging nylons properties in medical textiles, implants, catheters, and orthopedics, contributing to innovative healthcare solutions and enhanced patient care.

Despite its potential, Indias per capita consumption of synthetic fibers remains below the global average, with nylon holding a smaller market share. However, Sarlas introduction of domestic marketing initiatives for nylon has shown promising results, indicating potential for market growth. Factors such as rising incomes, improved living standards, and a growing millennial population are expected to drive demand for synthetic yarns like nylon in India, increasing the companys market share and overall demand.

Steady Growth in Global Export Business:

Despite challenges posed by geopolitical tensions, supply chain disruption, higher inflation, negative consumer sentiment, and industry inventory buildup, Sarla has demonstrated resilience and sustainable performance in international markets. Export sales remain a significant revenue stream, growing from 51.6% in FY23 to 57.7% in FY24. Sarla is recognised as a trusted supplier to prestigious global brands, either directly or through intermediaries. The company actively pursues new market opportunities, leveraging its reputation for reliability, consistent quality, and competitive pricing strategies.

Sarlas brand is esteemed for its reliability, predictable outcomes, and pricing strategies aligned with the value offered by its products. They maintain a presence in 60 countries, with their clientele base growing from 283 in FY23 to 336 in FY24, ensuring diversified sales distribution and reduces client concentration risk, preventing dependency on any single market. Participation in international events and exhibitions plays a pivotal role in enhancing Sarlas global visibility andshowcasingtheirproductinnovationandcapabilities. These platforms facilitate stronger brand recognition and broader market reach, reinforcing Sarlas position in the global marketplace. Nylon 66, designated as a high-value niche product exclusively for export, exemplifies their premium market positioning and contributes to higher revenue realisation.

Building Lasting Customer Relationships through a offer unique properties

Client-Centric Approach:

Sarla not only supplies products but also collaborates with customers to enhance their market presence and integrate into their long-term supply chains. This collaborative approach has fostered strong customer loyalty, with the company retaining 100% of its customer base and enjoying repeat orders from 90% of current clients. The slogan "Once a Sarla customer, always a Sarla customer" underscores the enduring partnerships forged through trust and mutual reliability. Sarlas technology-intensive products seamlessly integrate with customer operations, solidifying their reputation as a dependable supplier committed to meeting evolving customer needs. Technical marketing and proactive engagement distinguish Sarlas customer relations strategy, emphasizing product value rather than solely commercial aspects. Regular dialogues centered on product performance and mutual growth strategies demonstrate Sarlas dedication to supporting customer success. This approach goes beyond transactional relationships, reinforcing Sarlas role as a valued partner in customer growth journeys. By prioritizing customer enterprises and delivering significant operational value, Sarla has earned trust and established a reputation for reliability and collaboration.

Sound Financial Management Ensures Long-Term Stability:

In the capital-intensive textile industry, Sarla has demonstrated remarkable financial management, maintaining a surplus of net cash and achieving a robust 20%+ operating margin. Strategic debt and equity management practices have facilitated incremental growth while ensuring financial stability. Sarla has maintained a healthy debt-equity ratio of 0.24x in this financial year. Our companys performance metrics align with our unique positioning as Untextile. By prudently utilising debt and equity for capital expenditure funding, we have strengthened our competitive edge and established a low-risk foundation for scalable growth. Our approach in managing working capital management is equally commendable. This commitment to maintaining liquidity and optimizing resources further contributes to our financial resilience.