Sumeet Industries Ltd Management Discussions.

GLOBAL ECONOMY

Globally, economic recovery gathered momentum with FY 2017-18 across developed and emerging markets with favourable financial conditions and firming commodity prices. Many developed economies witnessed recovery in investments and domestic demand. According to the International Monetary Fund (IMF), annual global GDP growth is expected to have expanded by 3.8% in 2017 and global merchandise trade volume expanded to 4.9%, during the same time period. The improvements were driven by revival of global demand, especially capital spending. On the inflation front, both advanced and emerging economies witnessed a controlled increase primarily due to the rise in crude oil prices. Tax policy reforms in the US is likely to have a positive impact on its economy as experts project a higher rate of growth in FY 2018-19. During the same period Asian economies are expected to grow at 6.5%. The Latin American economies are predicted to advance at 2.9% in FY 2018-19 on the back of strengthening commodity prices. While the economies of the Middle East and North Africa (MENA) are expected to accelerate owing to stronger oil prices. Amongst the larger economies, China witnessed a gradual slowdown in the economic activity but continued to grow in line with expectations. World GDP growth as estimated by the IMF touched 3.8% in 2017, the highest since 2011.

Crude oil prices increased in 201, despite a further rebound in American rig counts and growing efficiency gains in shale oil production. In 2017, oil prices recovered in June and hovered US$60 per barrel. Metal prices rose sharply, on the back of Chinas strong demand-supply restrictions. Agricultural commodity prices, which stabilised in 2017, are anticipated to make only marginal gains in 2018 as global stocks remain at multi-year highs.

Global Economic growth in the past five years

Year 2014 2015 2016 2017(E) 2018(F) 2019 (F)
Real GDP Growth (%) 3.5 3.2 3.1 3.7 3.9 3.0

Source : World Economic Outlook, January 2018 (E : Estimated , F : Forecasted)

INDIAN ECONOMY

In terms of economic performance in the year under consideration, India stood tall amongst its global peers and continues to have a significant growth promise in the future. During the year under review, there were several structural reforms implemented in the country including the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code amongst others. These structural initiatives are important for enhancing the countrys future competitiveness.

With an improving business ecosystem, stable macroeconomic indicators and a liberal FDI regime foreign capital inflow has provided impetus to the domestic economy. According to World Banks Global Economic Prospects report, Indias GDP is expected to rise to 7.4% in FY 2018-19 and 7.8% in FY 2019-20.

KEY GOVERNMENT INITIATIVES

Bank recapitalisation scheme: The Central Government announced a capital infusion of Rs. 2.1 lakh Crores in public sector banks. The measure entailed a budgetary allocation of Rs. 76,000 Crores by the Central Government, while the remaining amount is to be raised by the sale of recapitalisation bonds. (Source: KPMG)

• Expanding road network : To boost Indias road infrastructure and jobs, the Indian Government announced a Rs. 6.9 lakh Crores investment outlay to construct 83,677 kilometres of road network over five years. The ambitious programme is expected to generate 14.2 crore person-day jobs for the country. (Source: KPMG)

• Improving business ecosystem : The country was ranked at the 100th position in the World Banks Ease of Doing Business Index in 2018, registering an improvement of 30 places. The jump was a result of the Central Governments pro-reform agenda, comprising the passing of the Insolvency and Bankruptcy Code, simplification of the tax computation and merging of applications for PAN and TAN. In addition, Aadhaar-based identification could help overcome regulatory challenges. (Source: KPMG)

• Goods and Services Tax : The Government of India overhauled the indirect tax regime and launched the GST in July 2017 to create a unified market. Under this regime, various goods and services are to be taxed as per five slabs (28%, 18%, 12%, 5% and zero tax). To reduce the short term inflation resulting from the introduction of the GST, the GST Council cut tax rates on more than 250 goods and services by moving them to lower tax slabs. Post-GST implementation, Indias tax net expanded, reflected in a 50% increase in unique indirect taxpayers. (Source: KPMG)

GLOBAL TRADE SCENARIO

World merchandise trade volume grew to 4.7% in 2017, from 1.8% in 2016, led by rising import demand across geographies, particularly Asia. Given strong global economic performance and supportive government policies, growth in the volume of world merchandise trade is forecast to remain strong in 2018 and 2019, after exhibiting the largest increase in six years in 2017. Global merchandise trade volume is forecast to grow 4.4% in 2018, driven by increased investment and fiscal expansion.

2016 2017 2018(P ) 2019 ( P )
Growth in Volume of world merchandise trade 1.8 4.7 4.4 4.0

P : Projections (Source: World trade organisation (WTO))

DOMESTIC INDUSTRY SCENARIO

Indias textile industry is currently estimated at around USD 150 billion and is likely to reach USD 250 billion by 2022. Its overall textile exports during FY 2017-18 stood at USD 37.74 billion (Source: IBEF). It is further expected to grow at a CAGR of 13.58% (E) between 2009 and 2019. The sector has witnessed a spurt of investment during the last few years and attracted Foreign Direct Investment (FDI) worth USD 2.82 billion between April 2000 and December 2017. Besides, government initiatives like allowing 100% FDI under the automatic route is likely to bolster the segment further (Source: IBEF).

INDIAN TEXTILE INDUSTRY

Textile plays a major role in the Indian economy. It contributes 14% to industrial production and 4% to GDP. With over 45 million people, the industry is one of the largest sources of employment generation in the country.

The size of Indias textile market, as of July 2017, was around US$ 150 billion. It is expected to touch US$ 250 billion by the year 2019, growing at a CaGr of 13.58% between 2009- 2019E.

Exports have been a core feature of Indias textile sector. The Indian textiles export market, estimated at $18 billion,is expected to grow at a CAGR of 4% compared to the global CAGR of 3% over 2016-26.

The fundamental strength of the textile industry is its strong production base of wide range of fibre and yarns from natural fibres like cotton, jute, silk and wool to synthetic and manmade fibres such as polyester, viscose, nylon and acrylic. The challenge here is the fluctuation in prices of the raw materials like wool and increase in oil prices which increase the input costs.

INDIAN POLYESTER INDUSTRY

The global demand for polyester fibres was dominated by polyester yarn in 2017. Polyester sector witnessed healthy recovery during the year as compared to the challenging market environment in the previous year. Integrated Polyester chain margins were on an uptrend throughout the year.

FY. 2017-18 polyester demand growth remained moderate, with PET (+5%), Polyester Filament Yarn (+4%) and Polyester Staple Fibre (-3%) y-o-y. Domestic cotton prices largely remained stable y-o-y owing to tight availability, which was favourable for polyester blending.

Polyester markets remain subdued due to introduction of GST regime in the first half of the year, resulting in weaker demand and low operating rates. Demand revived post stabilisation of the GST regime, but there was a sharp increase in imports due to higher GST rates on domestic production. Higher tax rates across the polyester chain also resulted in the shutdowns of textile units. Domestic markets were also impacted by the increase in imports of fabrics after the implementation of GST as almost all categories of imports increased compared to pre-GST levels.

Moreover, Polyester industry has been witnessing a gradual shift in the value chain. Now, the Polyester industry dynamics has shifted to ‘melt to PTY compared to earlier ‘melt to POY as most of the PTY producers have backward integrated to POY. Margins for the year improved across the polyester and intermediaries business, leading to a 5 year high chain margin across the polyester chain.

RAW MATERIAL SCENARIO

PURIFIED TEREPHTHALIC ACID (PTA):

The PTA price varied between US$ 613 pmt to US$ 773 pmt. The increase was due to shutting down of inefficient PTA capacities in China and elsewhere, as well as good performance by the downstream polyester industry. Tightening of the PTA market also resulted in increase in the average PTA-PX Delta to US$ 89 pmt. From about US$ 68 pmt. in FY 2016-17.

MONO ETHYLENE GLYCOL (MEG) :

The MEG price varied between US$ 718 pmt. to US$ 1021 pmt. The MEG-Ethylene Delta increased to US$ 209 pmt. from US$ 83 pmt. in FY 2016-17. Significant increase in price of MEG as well as MEG Ethylene Delta took place, due to tightness in the MEG market (led by shutdowns at plants in the Middle East and elsewhere) as well as speculative tendencies in China.

BUSINESS OVERVIEW

The company has shown mixed performance the year under review due to business re-engineering work undertaken in the previous year , diversification in product portfolio in value added products. During first half of the financial year 2016-17 operational performance was badly effected due to GST implication and resulting companys earning for the year 2017-18 was also effected to an extent.

It has been able to restrain its position in the industry due to proactive planning, efficient use of resources, capitalizing on emerging opportunity and striving on cutting edge technology.

Our teams remain guided by our corporate values while exploring avenues to drive profitable growth . We intend to continue our investments , with a focus on the most strategic options to reinforce our products both in domestic and international markets.

The company is enhancing its capacity by focusing on speciality and value added yarns with the simple objective of catering to a wide customer spectrum.

The companys manufacturing unit have a locational advantages being situated in the Surat area. Its location gives its proximity to both raw material suppliers as well as end users. The production capacity of the plant is as under :

Name of the product Production capacity per day (in Mt ) Capacity under expansion per day ( in Mt)
C.P. Plant 288 -
POY 128 -
FDY 147 -
Texturizing Yarn 15 -
Carpet Yarn 12.5 -
Recycled Chips 7 -

RESULTS REVIEW

Turnover : Sumeet Industries Limited has achieved a turnover (Standalone) of Rs. 107081.71 Lacs in the year 2017-18 as against Rs. 130180.80 Lacs during the previous year. Decrease in sales was effected being introduction of GST in the month of July, 2017.

Other Income : Other income consisting receipt of Dividend, Discounts and Interest on Fixed Deposits & others. Other income for the year 2017-18 is amounting of Rs.952.60 Lacs against Rs. 729.50 Lacs in the previous year. Other income were marginally increased.

Consumption of Raw material : Consumption of raw material increased from Rs. 62262.40 Lacs to Rs. 71364.85 Lacs due to increase in cost prices of raw materials .The prices of our basic raw materials mainly i.e. PTA and MEG are petroleum products and are closely linked with crude oil prices. Prices of Crude oil has increased steadily during the year.

Employee Cost : Employees cost were increased from Rs. 1667.55 Lacs to Rs. 2236.87 Lacs. This increase is mainly due to higher increments given to employees and new recruitment of employees in POY /FDY and Texturized Yarn division.

Interest Cost : Interest cost were marginally increased from Rs. 4822.47 Lacs to Rs. 4917.79 Lacs due to enhanced working capital.

The Company has delivered mixed performance despite considerable headwinds and made good progress in strengthening the established business segments through high value products .

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

The companys well defined organizational structure, documented policy guidelines, defined authority matrix and internal controls ensure efficiency of operations, compliance with internal policies & applicable laws and regulations and optimal use of companys resources, safeguard of all assets, proper authorization and recording of transactions and compliances with applicable laws.

The Companys internal control policies are in line with its size and nature of operations and they provide assurance that all assets are safeguarded, transactions are authorised, recorded and reported properly following all applicable statutes, General Accepted Accounting Principles, Companys Code of Conduct and Corporate Policies.

The Company uses Enterprise Resource Planning (ERP) supported by in-built controls that ensures reliable and timely financial reporting. Well-established & robust internal audit processes, both at the Corporate and the Business levels, continuously monitor the adequacy and effectiveness of the Internal Controls and status of compliance with operating systems, internal policies and regulatory requirements. All Internal Audit findings and financial and audit control systems are periodically reviewed by the Audit Committee of the Board of Directors which provides strategic guidance on Internal Controls. The review of reports, statements, reconciliation and other information required by the management are well documented in application system to provide reasonable assurance regarding effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations. Additional modules in ERP like Production planning, Costing, Quality management has added additional advantages in improving product costing. The Company also has a robust & comprehensive framework of Control Self-Assessment which continuously verifies compliance with laid down policies & procedures and help plug control gaps.

ENERGY CONSERVATION

The Conservation of energy in all the possible areas is undertaken as an important means of achieving cost reduction. Saving in electricity, fuel and power consumption receive due attention of the management on a continuous basis. Various measures have been taken to reduce fuel consumption, reducing leakages, improving power factor optimizing process controls etc. resulting in energy savings.

ENERGY COST

The company has been sourcing power through open access which is comparatively cheaper than Gujarat Electricity Boards power. The company has also set up two nos. of 4.8 MW F.O. based captive Genset Power Plant to further reducing its power cost.

OPPORTUNITIES AND STRENGTH

We believe polyester is the fiber of the future, finding varied applications across home furnishing, apparel industry, automotive industry, sportswear market, technical textiles etc. Global economic recovery is also accelerating coupled with rising per capita income, expanding middle class, continuing urbanization witnessing high growth opportunities. Rural market is also playing important role in the economy which offers a major opportunity growth in the Polyester Industries.

Our product mix spread over six important Polyester products: Pet chips, POY, FDY, Dope Dyed Yarn, Texturised yarn & Carpet Yarn. We will keep opportunity of further backward and forward integration cum expansion program to lead to the company to a new high. The company is continuing putting its thrust on reengineering of its existing operations and carry on balancing investment in modification of existing equipments and some fresh investments in energy conservation schemes and sourcing of cheap electricity power.

Sumeet Industrys Edge

• Over two decades of prominence in the polyester field.

• One of cost - efficient polyester manufacturers

• Wider value added range of products

• Increasing global footprints across major markets

• Locational advantages being situated at Surat

• Professionally managed company THREAT, RISKS AND CONCERNS

The objective of risk management frame work is to identify events that may affect the company, and manage risk in order to provide reasonable assurance regarding achieving the companys objective. The company is operating in an environment that is becoming more and more competitive. The company seeks to ensure that the risks if undertakes are commensurate with returns. Successful risk management implies not avoidance of risk, but anticipation of the same, and formulation and implementation of relevant mitigation strategies.

a) RISK AGAINST FIRE, FLOOD AND ACCIDENTS

Risk against fire, flood, accident, health related problems and accidents of workforce are common risks attached to the working of any plant/company. Management has taken reasonable steps to counter the risk.

The company has taken Comprehensive All Risk Insurance Policy, which covers companys assets against all risks. Accidents due to human failure are being tackled through the continuous training to our technical and other staffs and through regular monitoring and supervision. All the employees of the company are also insured under Group Insurance Policy of Life Insurance Corp. of India.

b) ECONOMIC RISK

Domestic sales contribute to a major part of the revenue of the company so, the factors that may adversely affect the Indian economy and in turn companys business includes rising in interest rate, deprecation of rupees, inflation, change in tax structure, fiscal and monetary policies, scarcity of credits, global trade slowdown etc. Over capacity in the POY and Chips industry can also affect margins.

Polyester has emerged as a fibre of the nation and is being extensively used in apparel, automotive, home furnishing, industrial textile and sportswear sectors. Burgeoning population, rapid urbanization, rising disposable income and growing middle-class population will drive the polyester demand in future.

India remained the fastest growing major economy in the world, after surpassing China last year. Gross Domestic Product growth rate was 7.1% for FY 2016-17, supported by strong consumption growth and government spending. The growth in India is primarily consumption driven with the increase in per capita income and to some extent by the capital expenditure undertaken by the government. India is witnessing improving macroeconomic fundamentals-moderating inflation, stabilising currency and improving consumer demand.

c) COMPETITION RISK

We face competition from existing players and potential entrants in the Indian textile industry. The Indian textile industry is highly competitive both in the Pet Chips segment and in the POY/ FDY segment. Our company is in medium size as compared to the market leaders like Reliance Industries Limited. Domestic production is dominated by few organized players who have integrated facilities and large economies of scale and the unorganized sector is virtually absent.

The company has a well defined TQM system of control points, comprehensive budgetary controls and review system to monitor its operations to remain cost competitive than its peer group. The company also widened the value added product portfolio to address a broader client base.

Our product mix spread over six important Polyester products: Pet chips, POY, FDY, Dope Dyed, Texturised yarn and Carpet Yarn. We will keep opportunity of further backward and forward integration cum expansion program to lead to the company to a new high. The company is continuing putting its thrust on re-engineering of its existing operations.

Creating value for customers, meeting their ever-increasing expectations and responsibility towards the environment sets the foundation for the company to invest its resources to create new and enriched products, services and solutions, which not only provide enhanced benefits to the consumer but also reduce the negative impact on the environment.

d) STRATEGIC RISK

Strategic plans for the companys business take in to account likely risks in the industrial environment from competition, changing customer needs, obsolescence and technological changes. Obsolescence of technology may affect the production process. The annual plans that are drawn up consider the risks that are likely to impact the companys objectives in that year and the counter-measures put in place.

Project execution is largely dependent upon timely delivery by the equipment suppliers, project management skills, civil works etc. Any delay in project implementation will impact revenue and profit for that period. The company strives to adopt a ‘ de-risking strategy in its operation while making growth investments. Appropriate structures have been put in place to proactively monitor and manage risk.

The company procures its raw material locally driving costs down. Alternatives sourcing of raw materials and stores spares has helped the company to optimise cost of raw materials.

e) PRICE RISK

Crude oil and Petroleum products are globally traded commodities and therefore, the prices are influenced by the international market forces of demand- supply and other geo political uncertainties etc. The price of raw material and finished goods move in tandem with international prices, which in turn, have correlation with the prices of petrochemical products.

The prices of raw material, mainly PTA and MEG which are by products of the crude oil. Falling of crude oil prices in the international market has affected the carrying cost of inventory. To mitigate the risk, the Company is now procuring imported raw material on spot basis or under short terms contracts instead of long term contracts, and is maintaining minimum inventory to reduce losses in the event of further fall in crude oil prices in the international market being the situation is uncertain.

f) LIQUIDITY RISK

Liquidity risk (i.e., the risk of not being able to fulfil current or future payment obligations because of unavailability of adequate cash) is efficiently managed by the company. The company is exposed to varies financial risk emanated from foreign currency exchange risk from export of products, import of raw materials and capital goods and servicing of foreign currency debt.

We follow a conservative foreign exchange risk management policy to minimise or eliminate the risks associated with operating activities. Sufficient current assets are held to meet all of the Companys shortterm payment obligations as and when they fall due, thereby ensuring solvency at all times. Payment obligations result both from operating cash flows and from changes in current financial liabilities which are included in liquidity planning. Maintaining an equilibrium between exports receipts and import payments create a natural hedge.

g) MARKET RISK

Market risks relate to the possibility that the fair value or future cash flows of a financial instrument could fluctuate due to variations in market prices. Market risks include currency risk and interest-rate risk.

The company also converting its working capital in to fund/non-fund based facilities, borrowing under ECB/FCCB schemes and appropriate hedging strategies has undertaken to minimize interest and interest rate risk and currency risk for deprecation of rupees against dollor.

The volatility witnessed in the global markets has reiterated the need for robust forex management systems and prudent investment practices. All forex exposures are hedged immediately upon the occurrence of an exposure. The company uses forward contracts to hedge both its imports and exports and continues to maintain the philosophy of protecting cash flows. Exports of the company also act as a natural hedge against adverse foreign currency fluctuation.

h) TECHNOLOGY RISK

Obsolescence of technology may affect the production process and technical support from original equipment manufacturers. The Company monitors such issues and makes investment in technology upgradation on regular basis to ensure stablity. This, in turn, helps the Company to stay at par with the global practices. The Company also does process re-engineering and improvisation to enhance efficiency and also helps in optimisation.

The company has restrained its position in the industry due to proactive planning, efficient use of resources, capitalising on emerging opportunity, striving on cutting edge technology and re-engineering of its existing operations by adding more value added and speciality products. The company has a strong technology back up helps in maintaining the quality.

WASTE MANAGEMENT

We have adopted various methods and practices for solid and hazardous waste management. Solid waste like polymers are sold to authorized parties for re-use. Fibre waste are used as captive material through waste re-cycling plant set up by the company. The company has setup a state of art an ETP plant for treating polluted water of the plant. Hazardous wastes are handled through registered recyclers, who are authorized by the concerned Pollution Control Boards.

SAFETY, HEALTH AND ENVIRONMENT CONTROLS (EHS)

I n keeping with the environment-conscious tenor of the times, your company has taken effective steps in creating an aesthetic, environment-friendly industrial habitat in its factory units, mobilizing support and generating interest among staffs and labours for maintaining hygienic and green surroundings. Being providing continual efforts and stress on fire and safety, no major incident was noted in the year 2014-15.

Safeguarding the health and safety of our people is integral to our commitment to remain a responsible organisation. Our employees are rigorously trained with advanced safety and security standards to minimise hazards and ensure high performance. No fire or other incidence of such nature took place in the reporting year. To achieve the environment, health & safety visions, various objectives have been set forth. These are as follows :-

- Compliance with environment, health & safety laws and regular assessment of the compliance of operations against the requirement.

- Ensuring safety related practices to enable employees and others to eliminate work related injury and illness.

- There is a welldefined Emergency management plan to tackle any major emergency inside and outside plant premises.

- First Aid training camps organized.

- State-of-the-art fire and safety installations to meet emergencies within the company, as well as near by areas.

- Training and counseling of employees, contractors, sub-contractors and transporters to ensure effects of environment, health and safety.

- Training and motivating employees to understand their EHS responsibilities and to participate actively in EHS program.

- Imparting fire fighting training to personnel and mock drills to ensure safety preparedness.

- Toilets and drinking water facility provided and they are being regularly inspected for cleanness.

- Proactive measures to increase usage of recycled water.

- To abide by all statutory compliance as per Factories Act,1948.

HUMAN RESOURCES

The company firmly believes that success of any organization largely depends upon availability of human assets within the organization as it is one of the most valuable assets because revenue and profit growth cannot take place without the right equality of people. To that effect, company has taken a series of measures that ensures that the most appropriate people are recruited in to the organization. a) RECRUITMENT POLICY

The Company has been able to attract a team of dedicated professionals with appropriate expertise and experience, leaders who are passionate, eager to learn and succeed.

Recruitment based on merit by following well defined and systematic selection procedures eliminating discrimination, sustain motivated and quality work force through appropriate and fair performance evaluation to retain the best talent.

Various training programs, with internal and external experts are organized regularly for skill up gradation. The sincere efforts of the employees have resulted in major administrative expense savings.

b) PERFORMANCE APPRAISAL SYSTEM

A competency based performance appraisal system has been devised and implemented the same across the organization. The best performers get recognized and rewarded by the management with the objective of motivating them for further improved performance. Employees are promoted to higher positions on the basis of their performance, attitude and potential to motivate them for further improvement in their work.

c) PERSONNEL TRAINING

The company from time to time fosters a culture of training, people development and meritocracy to ensure that the maximum efficiencies are derived from its human capital. The newly recruited employees under go a comprehensive induction program. The employees underwent both functional/ technical and behavioral training that would eventually result in improved productivity. Safety training is given on regular basis to all employees including temporary employees.

d) LABOUR RELATIONS

On the labour front, during the year, there were no incidents of labour unrest or stoppage of work on account of labour issues and relationship with them continues to be cordial. To increase team spirit inter department tournaments are organized and various festivals are celebrated in the company.

STATUTORY COMPLIANCE

The Whole-time Directors and CFO makes a declaration at each Board Meeting regarding the compliance with the provisions of various statutes, after obtaining confirmation from all the units of the Company. The Company Secretary ensures compliance accordance to SEBI regulations and provisions of the Listing Agreement.

CORPORATE SOCIAL SERVICE

The company is committed to its corporate social responsibility and undertakes various programs that are sustainable and relevant to local needs. The Company works for sustainable development by achieving excellence in its key functional areas including safety, business operations, process management, business results, climate change, carbon footprint reduction, energy and water management, community development, customer promise and engagement, governance and compliance, human capital, and innovation under its CSR program.

The Company contributes to the development of its community near the plant at Karanj (Kim) Village as well as through employee volunteerism as a part of its Corporate Social Responsibility in the areas of education, training, health care and self-employment.

CAUTIONARY STATEMENT

Statement in the Management Discussion and Analysis (MDA) describing the companys objectives, projections, estimates, 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. Several factors could make significant impact on the companys operation. These include geo political uncertainties affecting demand and supply and Government regulations, tax laws and other factors such as litigations and industrial relations.

Identified as having been approved by the Board of Directors of Sumeet Industries Limited.

Anil Kumar Jain

Company Secretary

Surat 22nd June, 2018