sky industries ltd Management discussions

Sky Industries Limited (“Company”), established in 1989, is one of the leading pioneers in the fields of technical textiles. A Global Player, your Company provides Innovative and customized solutions to the customers for their fastening requirements. The Industry caters to many large Industries like Footwear, Orthopaedic, PPE, Garment, Sportswear, Packaging, Aviation, Automobile, and Defence. Your Company has streamlined its manufacturing units at Vashi and Bhiwandi both in the State of Maharashtra, India.

The Company not only serves the domestic market but exports its products to international market as well. The Company has a strong presence in key markets, such as USA, Europe, Turkey, Bangladesh etc. Presently over 13% of Companies revenue is derived from exports to various countries across the globe.

INDUSTRY STRUCTURE AND DEVELOPMENTS

Global Economic Outlook:

Amid continuing uncertainty for policy-makers, businesses and households as persistent headwinds buffet the global economy, the global economy is in uncertain territory. While there are signs of nascent optimism, the banking disruption of March 2023 has caused tremors in the global outlook. The expectations around a potential global recession in 2023 are a case in point: most experts expect a recession is likely, but the same proportion considers it unlikely. Regionally, there has been a notable strengthening of expectations for most economies since last quarter. Perhaps unsurprisingly, the most buoyant economic activity is expected in Asia, with Chinas reopening projected to bolster activity across the continent. For China itself, chief economists are near unanimous in expecting a significant rebound this year. At the other end of the spectrum, one expects weak or very weak growth this year in Europe, while for the US, views are divergent as the countrys growth prospects are clouded by heightened uncertainty around financial stability and the pace and extent of monetary tightening.

Headline rates have begun to ease, but core inflation is stickier than anticipated and shows signs of picking up. The pressure on many households remains acute, and the cost of living to stay at crisis levels in numerous countries throughout 2023. The recent banking instability has complicated efforts to deal with runaway prices. The central banks now face a trade-off between managing inflation and maintaining financial sector stability. A similar proportion expect central banks to struggle to

reach their inflation target. The effects include a squeeze on the flow of credit to businesses and the prospect of significant disruption in property markets in particular. Turning to broader structural shifts in the global economy, one can expect assertive industrial policy to become increasingly widespread over the next three years. Needless to say, it will deepen geo-economic tensions (91%), stifle competition (70%) and lead to a problematic increase in sovereign debt levels (68%). Industrial policy is also expected to contribute to ongoing changes in the geography and composition of the global economy.

Indian Economy Outlook:

Indias growth continues to be resilient despite some signs of moderation in growth. World bank in its economic outlook report notes that although significant challenges remain in the global environment, India was one of the fastest growing economies in the world. The overall growth remains robust and is estimated to be 6.9 percent for the full year with real GDP growing 7.7 percent year-on-year during the first three quarters of fiscal year 2022-23. There were some signs of moderation in the second half of FY 22-23. Growth was underpinned by strong investment activity bolstered by the governments capex push and buoyant private consumption, particularly among higher income earners. Inflation remained high, averaging around 6.7 percent in FY22-23 but the current-account deficit narrowed in Q3 on the back of strong growth in service exports and easing global commodity prices.

The World Bank has revised its FY 23-24 GDP forecast to 6.3 percent from 6.6 percent (December 2022). Growth is expected to be constrained by slower consumption growth and challenging external conditions. Rising borrowing costs and slower income growth will weigh on private consumption growth, and government consumption is projected to grow at a slower pace due to the withdrawal of pandemic-related fiscal support measures.

Notwithstanding external pressures, "Indias service exports have continued to increase, and the current- account deficit is narrowing.”

Although headline inflation is elevated, it is projected to decline to an average of 5.2 percent in FY23-24, amid easing global commodity prices and some moderation in domestic demand. The Reserve Bank of Indias has withdrawn accommodative measures to rein in inflation by hiking the policy interest rate. Indias financial sector also remains strong, buoyed by improvements in asset quality and robust private-sector credit growth.

The central government is likely to meet its fiscal deficit target of 5.9 percent of GDP in FY23-24 and combined with consolidation in state government deficits, the general government deficit is also projected to decline. As a result, the debt-to-GDP ratio is projected to stabilize. On the external front, the current account deficit is projected to narrow to 2.1 percent of GDP from an estimated 3 percent in FY22-23 on the back of robust service exports and a narrowing merchandise trade deficit.

However, recent developments from Europe and US are expected to have some spill over effects in the shorter term.

COMPANY REVIEW

The Company consolidated its footprint in the export markets of Europe and USA. Apart from the same, the domestic front showed a sublime growth of about 7% over previous financial year. The Company also clocked revenues of Rs. 74.92 Crore in year 2022-23 vis-a-vis Rs. 70.45 Crore in previous year. The Company also utilized its capacity in a better way.

The EBIDTA showed a downward trend owing to increase in Freight Costs, Exchange Rate and higher input costs during the year 22-23.

OPPORTUNITIES AND THREATS

Opportunities

• With Indias urbanisation, demand for footwear, sportswear, orthopaedic belts, medical equipments is rising.

• Following the outbreak of the COVID-19 pandemic, increasing awareness of health, safety and comfort in the medical and orthopaedic industry.

• The potential factor that it is an emerging industry in India and many Multinational Companies are interested in this field to work with Indian Companies.

• The Company would be looking to expand its facilities in next 2/3 years and capitalise on the trend by focussing on the exports and value-added products.

• The Indian government has permitted 100 per cent FDI in the Textile sector through automatic route.

Threats

• The threat of cheaper imports influences local manufacturers and domestic output.

• The technical textiles industry is continually altering in response to the needs of end-users, making it difficult for businesses to retain consumers.

SEGMENT-WISE PERFORMANCE

The Company has one segment of activity namely “Fastening solutions under the broader category of Narrow Woven Fabrics”. Hence, Accounting Standard on Segment Reporting (AS - 17) issued by The Institute of Chartered Accountant of India does not apply.

The Company has performed well with sustained margins notwithstanding rise in input costs. The Company has absorbed cost increases and yet improved margins with purchasing efficiencies, improvement in manufacturing yield/usage and overall expenditure control.

OUTLOOK

Indias Gross Domestic Product (GDP) is expected to grow at 6% in the financial year 2024 as compared to the previous year. With continued volatility in crude oil prices, supply chain disruptions, a global recession, and high energy prices, it is anticipated that these conditions will last longer in 2023-2024.

We are making significant progress in our operations around digitisation and sustainability by adopting new and innovative technologies. Our team continues to adopt a lean manufacturing strategy on a long-term horizon, focusing continuously on building value-added products. The emphasis on innovation continues to drive our Zero Defect StrategiesRs with attention on best-in-class productivity.

The Company has laid out its new vision to be the future of narrow woven fabrics. This entails exploring emerging opportunities, while continuing to excel in the core segments the Company operates in. Also, the Company has increased its focus on customised and value-added offerings which are expected to bolster Companys position vis a vis its peers.

Key Strategic Highlights:

• Growth in the Narrow-Woven Fabrics Market

• New opportunities through collaboration/Marketing Arrangements

• New products, business models, etc.

• Margin enhancement

• Innovation and sustainability

• Investment opportunities

As a Company, Sky Industries Limited is optimistic about the future as well as its growth path. The Company is confident in its ability to grow its business organically enhancing the production by adopting new technologies.

The Company constantly looks at margin improvement and risk mitigation initiatives through specific projects and global support.

RISKS AND CONCERNS

Risk is an integral and unavoidable component of all businesses. Sky Industries Limited is committed to manage its risk in a proactive manner. Though risks cannot be completely eliminated, an effective risk management plan ensures that risks are reduced, avoided, retained or shared.

The Company faces various risks which are incidental to the Companys operations in the various product lines viz. Hook and Loop Tape Fasteners and Velvet/ Webbing tapes like new competitor setting up business

or expanding of the existing players owing to the market available. The Company functions in a dynamic business environment and its operations may be exposed to varied risks. To mitigate its impact, we have a comprehensive risk management framework in place that covers identification, assessment, development of mitigation strategy, action plan implementation, monitoring, reporting to and updating the Board and Audit Committee.

The Board of Directors, Audit Committee is in charge of keeping an eye on Risks and evaluating the effectiveness of risk management strategy or process. The Company has very well versed internal financial control structure. These controls were assessed throughout the year under review and no material weaknesses were observed in their design or operations.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Your Company has a robust and reliable system of internal controls commensurate with the nature of our business, and the scale and complexity of our operations. The Company has adopted policies and procedures covering all financial, operating and compliance functions. These controls have been designed to provide a reasonable assurance over:

The current system of Internal Financial Controls (IFC) is aligned with the requirement of the Companies Act 2013. The Company has an Internal Audit function which functionally reports to the Chairperson of the Audit Committee, thereby maintaining its objectivity. The Internal Audit function is supported by a dedicated internal audit team and resources from external audit firms. The annual internal audit plan is carved out from a comprehensively defined Audit Universe that encompasses all businesses, functions, risks, compliance requirements and maturity of controls.

The Audit Committee of the Board is presented with key control issues and the actions taken on issues highlighted. The Audit Committee deliberates with the management, considers the systems as laid down and meets the internal auditors and statutory auditor to ascertain their views on the internal control framework. The Company recognises the fact that any internal control framework would have some inherent limitations and hence has inculcated a process of periodic audits and reviews to ensure that such systems and controls are updated at regular intervals.

DISCUSSION ON FINANCIAL PERFORMANCE

1. The summary of the operating performance is given below:

(Rs In Lakhs)

Particulars	FY 2022-23	FY 2021-22	% of Change
Revenue from Operation	7492.09	7024.54	-6.66
Operating Profit (EBITDA)	563.12	972.14	42.07
Finance Cost	159.64	126.29	-26.40
Depreciation Cost	169.81	189	10.15
Profit Before Tax	233.67	656.85	64.42
Profit After Tax	176.82	487.2	63.70

Your Companys Total Income during the year under review was Rs 7523.58 Lakhs as compared to Rs 7110.46 Lakhs in the previous year. Profit before Tax for the year 2022-23 was Rs 233.67 Lakhs as against Rs 656.85 Lakhs in the previous year. Profit after Tax for the year 2022-23 stood at Rs 176.82 Lakhs as against Rs 487.20 Lakhs in the previous year. The Companys Hook and Loop Tape fasteners is a major division, contributes to approximately 65% of the overall revenue.

2. Key financial ratios of the Company showing financial performance are as under:

Ratios	FY 2022-23	FY 2021-22	% of Change
Debtors Turnover (Days)	60	64	-6%
Inventory Turnover (Days)	106	81	31%
Interest Coverage Ratio	1.46:1	7.7:1	-527%
Current Ratio	2.05:1	1.91:1	7.47%
Debt Equity Ratio	0.35:1	0.42:1	-17.21%
Operating Profit Margin (%)	3.11%	13.70%	-440%
Net Profit Margin (%)	2.36%	6.92%	-293%
Return on Net worth (%)	4.97%	14.82%	-298%

HUMAN RESOURCE MANAGEMENT

Human capital is pivotal for the growth and success of the organisation. Your Company strives to foster a safe, congenial, and inclusive work environment and promotes trust, transparency, and a sense of teamwork through comprehensive and well-documented HR policies.

The key areas for driving Human Resource initiatives at Company are as follows:

The Company ensures strict adherence to its internal codes and has clearly defined zero-tolerance policy towards discrimination of any kind. The Companys structured talent management framework leads to cohesive talent actions across all levels, and ably supports the process of talent acquisition, onboarding, learning and development, performance management and succession planning. Periodic, regular performance conversations and real-time feedback form the backbone of the performance management process. Personnel capability building sessions are conducted regularly across levels, engaging talent across the board - right from trainees to senior leadership.

The Companys culture is centred on the five core pillars, which are as:

The company acknowledges the efforts of its people and takes great pride in the dedication, sincerity and hard work of its workforce. At the end of FY 22-23 we had a total of 70 Permanent employees and 193 employees were hired on a contractual basis working in production sites and administrative offices.

CAUTIONARY STATEMENT

Certain statements made in the Management Discussion and Analysis Report relating to the Companys objectives, projections, outlook, expectations, estimates and others may constitute forward looking statementsRs within the meaning of applicable laws and regulations. Actual results may differ from such expectations whether expressed or implied. Several factors could make significant difference to your Companys Operations. These include climatic and economic conditions affecting demand and supply, government regulations, taxation, and natural calamities over which the Company does not have any direct control.