SPL Industries Ltd Management Discussions.

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

Indias textiles sector is one of the oldest industries in Indian economy dating back several centuries. Indias textile and apparel exports stood at US$ 38.70 billion in FY19 and is expected to increase to US$ 82.00 billion by 2021 from US$ 22.95 billion in FY20 (up to November 2019).

The Indian textiles industry is extremely varied, with the hand-spun and hand-woven textiles sectors at one end of the spectrum, while the capitalintensive sophisticated mills sector at the other end of the spectrum. The decentralized power looms/ hosiery and knitting sector form the largest component of the textiles sector. The close linkage of the textile industry to agriculture (for raw materials such as cotton) and the ancient culture and traditions of the country in terms of textiles make the Indian textiles sector unique in comparison to the industries of other countries. The Indian textile industry has the capacity to produce a wide variety of products suitable to different market segments, both within India and across the world.

Market Size

In fact, it is the biggest employment generator after agriculture. It provides direct employment to 4.5 crore people and another 6 crores in allied sectors. Furthermore, India is the second-largest manufacturer of textiles and clothing in the world. India is also the second- largest exporter of textiles and apparel. In fact, it has a share of 5% in global trade.

Investment

The textiles sector has witnessed a spurt in investment during the last five years. The industry (including dyed and printed) attracted Foreign Direct Investment (FDI) worth US$ 3.41 billion from April 2000 to December 2019.

COVID-19 Impact

The textile and clothing industry employees over 105 million people. It earns around the US $40 billion forexes, apart from substantial revenue under GST and other taxes. The Indian textile industry has taken a major hit due to COVID-19. This is because most of the Indian yarn exports are to China. The agency assumes that Indias exports will be substantially hit till FY 2021. In fact, it has already reduced by more than 40% until January 2020 due to the US-China trade war.

The majority of downstream players had to incur inventory losses due to the ongoing geopolitical tensions in crude oil. This further lead to the prices declining by more than 40% month on month in March 2020.

The fabric industry registered a marginal improvement in exports in during the year. This was coupled with lower raw material costs and increased export demand from Bangladesh and other countries. Indian ready-made garments players have been hoping of a revival in demand and shift of orders from China since the start of a pandemic. However, with the spread of corona virus in Europe, demand and orders have been reduced from major retailers. Due to the pandemic impact on consumer behavior and habits, "online-sales" are expected to witness a significant surge, even after the industry recovers.

Government Initiatives

The Indian government has come up with a number of export promotion policies for the textiles sector. It has also allowed 100 per cent FDI in the Indian textiles sector under the automatic route.

Initiatives taken by Government of India are:

• Under Union Budget 2020-21, a National Technical Textiles Mission is proposed for a period from 2020-21 to 2023-24 at an estimated outlay of Rs 1,480 crore (US$ 211.76 million).

• In 2020, New Textiles Policy 2020 is expected to be released by the Ministry of Textiles.

• CCEA approved mandatory packaging of food grains and sugar in jute material for the Jute Year 2019-20.

• In September 2019, textile exports witnessed an increase of 6.2 per cent post GST as compared to period pre-GST.

• The Directorate General of Foreign Trade (DGFT) has revised rates for incentives under the Merchandise Exports from India Scheme (MEIS) for two subsectors of Textiles Industry - Readymade garments and Made ups - from two per cent to four per cent.

• As of August 2018, the Government of India has increased the basic custom duty to 20 per cent from 10 per cent on 501 textile products, to boost Make in India and indigenous production.

• The Government of India announced a Special Package to boost exports by US$ 31 billion, create one crore job opportunity and attract investments worth Rs 80,000 crore (US$ 11.93 billion) during 2018-2020. As of August 2018, it generated additional investments worth Rs 25,345 crore (US$ 3.78 billion) and exports worth Rs 57.28 billion (US$ 854. 42 million).

• The Government of India has taken several measures including Amended Technology Up-gradation Fund Scheme (A-TUFS), scheme is estimated to create employment for 35 lakh people and enable investments worth Rs 95,000 crore (US$ 14.17 billion) by 2022.

• Integrated Wool Development Programme (IWDP) approved by Government of India to provide support to the wool sector starting from wool rearer to end consumer which aims to enhance the quality and increase the production during 2017-18 and 2019-20.

• The Cabinet Committee on Economic Affairs (CCEA), Government of India has approved a new skill development scheme named Scheme for Capacity Building in Textile Sector (SCBTS) with an outlay of Rs 1,300 crore (US$ 202.9 million) from 2017-18 to 2019-20. As of August 2019, 16 states have signed pacts with the Ministry of Textiles to partner with it for skilling about four lakh workers under the scheme.

Road Ahead

• The future for the Indian textile industry looks promising, a short term impact due to COVID-19 Pandemic will be faced by the textile industry in India also but it is expected to gain field soon with rise in domestic consumption as well as export demand. With consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade with the entry of several international players like Marks & Spencer, Guess and Next into the Indian market. It is expected that the same trend will continue to follow in the coming years.

References: Ministry of Textiles, Indian Textile Journal, Department of Industrial Policy and Promotion, Press Information Bureau

Hits and Misses

Hits

• India retains the position of 5th largest exporter of textile and apparel in 2019-20.

• India is the second-largest manufacturer of textiles and clothing in the world.

• India is also the second-largest exporter of textiles and apparel. In fact, it has a share of 5% in global trade.

• India has a presence of entire textile value chain from fibre to fashion.

• India is quickly emerging as a leader in supply of medical-textile as the industry has scaled up manufacturing PPE Kits and face masks and exporting the kits globally.

• India is among the top cotton producing countries with a share of 25% in global cotton production

• India is the largest producer of cotton yarn in the world.

• Average wages are 50-60% lower than in developed countries.

• Design and fashion sense ensure Indian players are well placed to strengthen business with global retailers.

Misses

• The sector largely has small-scale units and is labour intensive.

• Low cotton yield as compared other major cotton producing countries like China

• Volatility in the Cotton prices.

• High and increasing domestic prices of Staple Fibre restricts the growth of downstream segments in the Textile Value Chain.

• Inverted duty structure on Manmade Fibre based textiles, leading to accumulation of input-tax credit

• Higher production cost as compared to competing countries like Bangladesh, Vietnam etc.

• Declining exports of cotton yarn and apparel

• Absence of scheme for refund of center and state taxes and levies on yarn and fabric exports

• Duty structure favors import of apparel than of raw cloth than could have been turned into value-added garments.

• Indian exporters have duty disadvantage in comparison with its competitors like Bangladesh, Sri Lanka, Vietnam etc. which reduces the competitiveness of Indian textile and apparel exports in international market

Opportunities and Threats

Opportunities

• Rich heritage of the presence of entire textile value chain.

• Expected growth in consumer market in per capita spending and consumption

• Company & top management focus shifting to branded, value added garments.

• Basic infrastructure to grow at very high rates

• Listed and well recognized in stock markets - huge opportunity for multiplying wealth as branded garments enjoy high P/E multiples today. Threats

• More dependence on cotton

• Fluctuating and declining cotton production

• Declining margins of the spinning industry (decreasing gap between cotton yarn and cotton prices)

• Low level of productivity in garment sector

• Banks tightening norms and increasing rates

• High debt levels

• Negligible growth of Textiles & Clothing industry

• Current management pool getting old, less aggressive & hungry

Internal Control System

The Company has an Internal Control System, commensurate with the size, scale and complexity of its operations. The internal Audit functions reports to the Chairman of the Audit Committee and to Chairman and Managing Director of the Company.

The Internal Audit monitors and evaluates the efficiency and adequacy of internal control systems in the company. Its compliances with operating systems, accounting procedure and policies at all locations of the Company.

Human Resources Development

"An organization is only as good as the people within" is an axiom, which the company understands and appreciates deeply. The Company continues to emphasize on its commitment to acquiring, developing and enhancing its human resources.

Recruitment and retention of intellectual capital is a key management exercise. The Companys human capital constitutes a diverse pool of knowledge, a judicious mix of youth, imaginations, risk - taking ability and seasoned experience.

The Company follows a continuous performance appraisal system to ensure the employees are dynamically being trained and appraised about improvement areas and performance gaps. Further the management maintains an open-door policy, to ensure free flow communication with all levels.

Cautionary Statements

Statements made in this report forming part of the disclosure related to Management, Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be forward-looking statements within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could influence the Companys operations include economic developments within the country, demand and supply conditions in the industry, input prices, changes in government regulations, tax laws, and other factors such as litigation and industrial relations.

Acknowledgement

The Directors of the Company wish to express their appreciation for the continued co-operation of the Central and State Governments, bankers, financial institutions, customers, dealers and suppliers and all the valuable assistance received from the shareholders. The Directors also wish to thank all the employees of the Company for their contribution, support and continued cooperation throughout the year.