SEL Manufacturing Company Ltd Management Discussions.

Against weak global growth, expansion in Indian economy was noteworthy. Despite some decline in growth due to slowdown in manufacturing and demonetization earlier, India remained one of the fastest growing major economy. Considering Indias growth is primarily driven by Government spending and private consumption, latter of which got impacted by demonetisation, strong growth numbers provided a lot of comfort on the strength of the economy. Not only growth but Indian economy did well on other macro-economic parameters also. Crude price rose again after remaining weak for last couple of years. However, in spite of higher crude prices, inflation remained under control.

The Companys performance has been adversely hit due to financial constraints, high debt and high input costs and non optimization of production capabilities. Our activities are of importance to the social and economic environment of the communities in which we operate. Helping to bring positive benefits to such communities not only improves their state of well-being but also facilitates the smooth running of our operations.

(a) Industry Structure and Development

The textile industry is one of the largest industry of modern I ndia. It is closely linked with the agricultural and rural economy. Indias textile industry since its beginning continues to be predominantly cotton based with about 65 percent of fabric consumption in the country being accounted for by cotton. The structure of the textile industry is extremely complex with the modern, sophisticated and highly mechanised mill sector which apply modern machinery and techniques such as economies of scale, on the one hand and the handspinning and handweaving (handloom), sericulture sector on the other. The potential of the textile and clothing industries to contribute to long-run growth and development will depend not only on the attributes (desirable or otherwise) of the investors, but also on the quality and effectiveness of government policies and institutions in developing countries to build on this investment.

The Textile & Clothing Industries are very important for a handful of countries, in terms of trade, GDP and employment and have contributed significantly in several other countries. These industries provide opportunities for export diversification and expansion of manufactured exports for low-income countries that can exploit their labour cost advantages and fill emerging niches and meet buyer demands. There are also dynamic effects of Textile & clothing industries and these dynamic effects are greater, the more linkages have been built up between the garment industry and local textile suppliers.

The Company:

The Company is vertically integrated multi-product textile company, manufacturing various kinds of Knitted Garments, Terry Towels, Fabric and various kind of Yarn with production facilities located at various locations in I ndia.

Your company continue to hold 99% stake in the partnership firm namely M/s SE Exports. SEL Textiles Ltd. is the wholly owned Subsidiary of the Company. SEL Textiles Ltd. is engaged in the business of textiles and the Company has two spinning unit(s) one at Neemrana (Rajasthan) and one at Hansi, Hissar (Haryana) and a terry towel unit at Nawa Sheher Punjab, Spinning unit at Vill Punjava-Lambi, Tehsil Malout, Dist Sri Muktsar Sahib (Punjab). Further SEL Textiles Ltd., has a subsidiary company i.e. M/s Silverline Corporation Ltd.. SEL Aviation Pvt. Ltd., subsidiary of the company is in the business of Aviation services.

(b) Companys Performance

During the year under review, your company has achieved Revenue from Operations of Rs. 98927.71 lacs as compared to Rs. 171287.12 lacs in the previous year. After deducting Expenses and Exceptional Items there was Loss of Rs. 166720.40 lacs as compared to Loss of Rs. 85438.28 lacs during the previous year. After providing for taxes and other adjustments, the current year loss stood at Rs. 222179.94 lacs as compared to loss of Rs. 55755.39 lacs during the previous year.

Product wise Performance:

A Snapshot of major product wise performance and its comparison with the previous fiscal is tabulated below:-

Product 2017-18 2016-17
(Rs. in Lacs) (Rs. in Lacs)
Yarn 45686.40 101774.00
Terry Towel 29289.85 39033.07
Knitted Fabric/ Cloth 8817.51 8964.02

During F.Y 2017-18, Sales got decreased due to Financial constraints and non attainment of optimum capabilities. The Company is functioning in only one Reportable Segment i.e. Textiles, hence Segment Reporting is not applicable.

Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating officer (COO), in deciding how to allocate resources and assessing performance.

(c ) Dividend

On account of current losses, no dividend has been declared for the financial year 2017-18.

(d) Outlook: Opportunity, Threats, Risks & Concerns

The fundamental strength of Indian textile industry is its strong production base with wide range of fibers/yarns. These are natural fibers such as cotton, jute, silk and wool and synthetic/man-made fibers like polyester, viscose, nylon and acrylic. In producer-driven value chains, large, usually transnational, manufacturers play the central roles in coordinating production networks. Textile industry is capital and technology-intensive comparable with automobiles, aircraft, computers, semiconductors and heavy machinery industry. Buyer-driven value chains are those in which large retailers, marketers and branded manufacturers play the pivotal roles in setting up decentralized production networks in a variety of exporting countries, typically located in developing countries. This pattern of trade-led industrialization has become common in labor intensive, consumer-goods industries such as garments, footwear, toys, handicrafts and consumer electronics. Large manufacturers control the producer-driven value chains at the point of production, while marketers and merchandisers exercise the main leverage in buyer-driven value chains at the design and retail stages. Apparel is an ideal industry for examining the dynamics of buyer-driven value chains. The relative ease of setting up clothing companies, coupled with the prevalence of developed-country protectionism in this sector, has led to an unparalleled diversity of garment exporters in the third world. Apparel is an ideal industry for examining the dynamics of buyer-driven value chains. The major growth drivers of the global apparel market will be the developing economies, mainly China and India. This growth also boosts the purchasing power and propel the demand for the textile products.

Challenges: The Indian textile industry is highly fragmented and is being dominated by the unorganized sector and small and medium industries. The changing government policies at the state and central government levels are posing major challenges to the textile industry. The tax structure GST (Goods and Service Tax) make the garments expensive. Another important thereat is raising interest rates and labor wages and workers salaries. The Indian textile industry has its own limitations such as accesses to latest technology and failures to meet global standards in the highly competitive export market. There is fierce competition from China, Bangladesh and Sri Lanka in the low price garment market. In the global market tariff and non-tariff barriers coupled with quota is posing major challenge to the Indian textile Industry. The environmental and social issues and personal safety norms are also some of the challenges for the textile industry in India.

Our principal operating strategies are to:

\We are trying to focus on cost cutting strategies, development of new markets and maintain the quality of our products to satisfy and exceed the expectations of the market and look forward to a better market sentiment for textiles.

Threats, risks and concerns:

There are certain regular risks and concerns that surface in the business. Our primary raw material is cotton, which we source from the domestic market. Cotton is an agricultural product and its supply and quality are subject to forces of nature. Any material shortage or interruption in the domestic supply or deterioration in the quality of cotton due to natural causes or other factors could result in increased production costs, which we may not successfully be able to pass on to customers, which in turn would have an material adverse effect on our business. There can be no assurance that the price levels of cotton will remain favorable. Any increase in cotton prices would have a material adverse effect on our business.

Power and Fuel are major manufacturing costs while producing textiles. Any increase in these costs has a negative impact on the profits of the company. Over the past year, tariff prices for power have been increasing. The Companys captive power plant uses helps to mitigate some of the power cost risk.

Advancement in technology may require us to make additional capital expenditure for upgrading our manufacturing facilities. However, the Companys diversified product profile, quality approach, value-added segments, manufacturing flexibility, modern technology & strong marketing network has equipped the company well to meet competitors.

Further, the Company followed an aggressive growth path and had considerably grown its balance sheet, including debt. Due to the industry situation in general viz. slowdown and company specific issues such as growing debt, delayed realization of debtors, working capital shortfall, delay in project completion and cash flow mismatch, which had adversely affected the liquidity position of the company, the company was facing financial problems and finding difficulty in servicing its debt obligation. Therefore, it approached the lenders for restructuring its debts under Corporate Debt Restructuring (CDR) mechanism. The Companys proposal for restructuring of its debts was approved by Corporate Debt Restructuring Cell ("CDR Cell") vides Letter of Approval (LOA) dt. 30.06.2014. However, the credit facilities envisaged and sanctioned under CDR package were not released by the lenders to the Company, which resulted in sub-optimum utilization of manufacturing facilities. Due to non-disbursement of funds the Company could not complete one of its spinning projects where substantial amount was already incurred. All this has led to adverse financial performance and erosion in net worth of the Company. Also the company has been facing cash flow mismatch and is not able to serve debt obligations as per the terms of CDR package sanctioned earlier. Due to financial constraints, the company has also started job work operations in some of its spinning plants.

Since, the Company was finding it difficult to serve its debt obligations, the Company has requested its lenders for a second/deep restructuring of its debts. Considering the state of art manufacturing facilities of the Company, most modernized technology, skilled labor force, professional management and inherent viability of the Company, the lenders had in-principle agreed for second/deep restructuring of the debts. Pending discussions with the lenders, State Bank of India in its capacity as financial creditor has filed a petition on 12th October, 2017 under "Insolvency and Bankruptcy Code, 2016" (IBC) with Honble National Company Law Tribunal, Chandigarh Bench (NCLT). On 11th April, 2018, the NCLT vide its order of even date admitted the said petition and Corporate Insolvency Resolution Process (CIRP) has been initiated. Mr. Navneet Kumar Gupta having Registration No.IBBI/IPA-001/IP- P00001/2016-17/10009 was appointed as Interim Resolution Professional (IRP) vide order dt. 25th April, 2018 and the affairs, business and assets are being managed by the Interim Resolution Professional (IRP). The Company has preferred an appeal against the admission of petition and appointment of IRP with National Company Law Appellate Tribunal (NCLAT).

The Corporate Insolvency Resolution Process (CIRP) has since been kept in abeyance vide order dt. 22nd June, 2018 of Honble High Court of Punjab & Haryana. Accordingly, the Company has prepared these financial statements on the basis of going concern assumption

Due to non disbursement of credit facilities the Company had suffered operational losses as well as capital losses.Therefore, the Company has presented before the Adjudicating Authority counter claim & claim of set off against the banks.

Further, the majority of secured lenders have stopped charging interest on borrowings, since the accounts of the Company have been categorized as Non Performing Asset. Further the Corporate Insolvency Resolution Process had been initiated under "Insolvency and Bankruptcy Code, 2016". In view of the above, the Company has stopped providing interest accrued and unpaid effective 1st April, 2016 in its books.

(e) Internal Control System and their adequacy

Your company has adequate internal control systems commensurate with its size and nature of business to ensure efficient utilization and protection of assets, compliance with statutes and proper recording of all transactions. The internal control and audit function covers all the plants, divisions for safeguard of the Companys assets and for their protection against loss from unauthorized use or disposition. The internal audit department performs internal audit periodically to ascertain their adequacy and effectiveness of other controls in the organization. Most of the Companys critical functions such as operations, supply chain, finance & accounts and human resources are linked through implementation of Enterprise Resource Planning, (ERP)/Systems, Applications, and Products in Data Processing (SAP). This has enabled the Company to reduce its time in various critical areas. This has also helped the Company to reduce its costs of operations, reduction in wastages and enhanced overall cost efficiency.

(f) Human Resources:

Textile Industry is highly labour intensive in nature. Our human resource policies are targeted at creating a motivated work force. Our efforts in building a conducive work atmosphere have helped us in having lower attrition rates. The Company has established various training centers for up-gradation of worker skills. We believe in an environment which gives todays diverse, multi-generational and mobile workforce the confidence to realise their potential and provide world class solutions to the customers. As on 31.03.2018 the Company has 8436 number of employees on rolls of the company.

Cautionary Statement:

Statements in Management discussion and analysis report with regard to projections, estimates and expectations have been made in good faith. Many unforeseen factors may come into play and affect the actual results, which could be different from what the management envisages in terms of performance and outlook. Market data and product information contained in this report have been based on information gathered from various published and unpublished reports and their accuracy, reliability and completeness cannot be assured.

The management of the Company reserves the right to re-visit any of the predictive statement to decide the best course of action for the maximization of the shareholders value apart from meeting social and human obligations.