Suryaamba Spinning Mills Ltd Management Discussions

GLOBAL ECONOMY AND OUTLOOK

The global economy is gradually recovering from the impact of pandemic and at the same time facing new challenges emerging from Russias invasion of Ukraine. Tightening of monetary policy by most Central Banks is expected to havea positive impact. Despite monetary tightening, inflation is persistent in many key economies and it is anticipated that global inflation will fall from 8.7% last year to 7% this yearand settle at around 5% in the year 2024.

INDIAN ECONOMIC OVERVIEW & OUTLOOK

The Indian Economy continues to show resilience amid Global Uncertainties. Despite significant challenges in the global environment, India was one of the fastest growing economies in the world. Indias overall growth remains robust and is estimated to be 6.9% for the financial year 2022-23. Growth was driven by strong investment activity augmented by the governments capex push and buoyant private consumption.

Structural reforms like the National Infrastructure Pipeline and National Monetization Plan by the Government is expected to further boost infrastructure development. It is paving the path for further development and continues to encourage projects across sectors, including reforms for improving labour laws.

V-shaped economic recovery is due to mega vaccination drive, robust recovery in the services sector and growth in consumption and investment. This is being demonstrated in high frequency indicators such as power demand, rail freight, GST collection etc. Almost all emerging economies are reeling under external shocks, but Indias underlying economic fundamentals are strong and despite the short-term headwinds, the impact on the long-term outlook is expected tobe marginal.

Inflation remained high, averaging around 6.7% in FY 2022-23 but the current-account deficit narrowed in Q3 onthe back of strong growth in service exports and easing global commodity prices.

Dwelling on the outlook for FY2023-24, the Economic Survey2022-23 issued by Ministry of Finance projects that, Indias recovery from the pandemic was relatively quick, and growth in the upcoming year will be supported by solid domestic demand and a pickup in capital investment. It further affirms that aided by healthy financials, incipient signs of a new private sector capital formation cycle are visible and more importantly, compensating for the private sectors caution in capital expenditure, the government raised capital expenditure substantially.

Explaining the economic outlook factoring global rudiments, the slowdown in global growth and economic output coupled with increased uncertainty is likely to dampen global trade growth. Strong domestic demand amidst high commodity prices will raise Indias total import bill and contribute to unfavorable developments in the current account balance. These may be exacerbated by plateauing export growth on account of slackening global demand. Should the current account deficit widen further, the currency may come under depreciation pressure. Also, entrenched inflation may prolong the tightening cycle, and therefore, borrowing costs may stay ‘higher for longer. In such a scenario, global economy may be characterized by low growth in FY24. However, the scenario of subdued global growth presents two silver linings oil prices will stay low, and Indias CAD will be better than currently projected. The overall external situation is expected to remain manageable for India.

Global Textile Industry

The global textile market grew from about $573 billion in 2022 to about US$ 610 billion in 2023 at a compound annual growth rate (CAGR) of 6.6%. The Russia- Ukraine war has led to an increase in commodity prices and supply chain disruptions, causing inflation across goods and services impacting economies across the globe. The textile market is however expected to grow to about US$ 755 billion in 2027 ata CAGR of 5.5%.

The COVID-19 pandemic and the Russia Ukraine war had challenged the textile industry drastically which is nowon a recovery stage. Increasing demand for apparel from the fashion industry coupled with the growth of e-commerce platforms is expected to drive the market growth over the next few years.

The textile industry is an ever-growing market, with key competitors being China, the European Union, the United States, and India. China is the worlds leading producer andexporter of both raw textiles and garments. India is among the top five textile manufacturing country and is responsible for more than 6% of the total textile production, globally. The rapid industrialization in the developed and developing countries and the evolving technology are helping the textile industry to have modern installations which are capable of high-efficient fabric production.

INDIAN TEXTILE INDUSTRY

India is the worlds second-largest producer of textiles and garments. It is also the sixth-largest exporter of textiles spanning apparel, home and technical products. The Indian textile and apparel industry is expected to grow at 10% CAGR from 2019-20 to reach US$ 190 billion by 2025-26. India has a 4% share of the global trade in textiles and apparel. The textiles and apparel industry contribute 2.3% to the countrys GDP, 13% to industrial production and 12% to exports. The textile industry has around 45 million of workers employed inthe textiles sector, including 3.5 million handloom workers. Indias textile and apparel exports (including handicrafts) stood at US$ 44.4 billion in FY22, a 41% increase YoY. Total textile exports are expected to reach US$ 65 billion by FY26.

The Textile and Apparel market is poised to grow, led by boost in demand and the government support in form of attractive schemes such as Production Linked Incentive (PLI), Mega Investment Textile Parks (MITRA) will further drive the way for the US$ 250 billion target. Another step taken by the Ministry of Textiles towards positioning India as a global leader in technical textiles manufacturing is the invitation of Research proposals for Funding for Design, Development and Manufacturing of Machinery, Tools, Equipment, and Testing Instruments under NTTM.

In FY 2022-23, exports of readymade garments cotton including accessories stood at US$ 7.68 billion till January 2023. It is expected to surpass US$ 30 billion by 2027, withan estimated 4.6-4.9% share globally.

India is the 3rd largest exporter of Textiles & Apparel in the world. Indias textiles and clothing industry is one of th e mainstays of the national economy. The share of textile and apparel (T&A) including handicrafts in Indias total merchandise exports stood at a significant 10.5% in 2021-22. India has a share of 4.6% of the global trade in textiles and apparel. Major textile and apparel export destinations for India are USA, EU-27 and UK, accounts for approximately

50% of Indias textiles and apparel exports. The sector holds importance from the employment point of view as well. It provides direct and indirect employment and source of livelihood for millions of people including a large number of women and rural population.

INDUSTRY STRUCTURE AND DEVELOPMENTS

The Indian Textile Industry is one of the largest in the World, enjoying its presence in the entire value chain i.e. cotton, yarn, ber and apparel. India is one of the largest manufacturer and exporter in the world and has a share of 5% of global trade in textiles. The uniqueness of the industry lies in its strength both in the organized and unorganized Sector. The Textile Industry continues to play a dominant role in the economic growth of the country. Its importance is evident from the fact that it is the largest contributor towards employment generation, Industrial Output and Export earnings. The industry is sustaining livelihoods to millions of people in rural and semi urban areas by providing them employment directly and indirectly, including a large number of women and rural population. The sector has perfect alignment with Governments key initiative of Make in India, Skill India, Women Empowerment and Rural Youth Employment. The

Industry is contributing 7% of Industry output in value terms, 2.3% of Indias GDP and contributing 11.4% to the countrys total exports earning. (Source: Annual Report 2020-2021 of Ministry of Textiles.)

The ongoing global slowdown coupled with sharp increase in the prices of raw cotton are posing serious challenges to the Textile Industry. Beside, the increase in the interest rates and re-emergence of COVID-19 has aggravated the problems for the Industry. In case the situation persists for the longer period then earning a reasonable margin will become a challenging task for the Textile Industry. Because of the prevailing Textile scenario, Spinning Mills have already cut down their production in the past few months. Even some mills have closed down their operations for 1-2 days in a week due to prevailing adverse conditions.

The Government is fully conscious of the importance of the Textile Industry and the sector is going to be its key focus area in the new policies being framed so as to achieve the target of USD 5 Trillion economy. The Government has introduced Production Link Incentives Scheme (PLI) for the Textile Industry under which incentives will be provided for setting Textile & Apparel manufacturing in key man -made bre based products. This will give a further push to the Textile Industry.

The Government is also in the process of setting up seven integrated Mega Textile parks in the country to enable Indias Textile Industry to become Globally competitive, attracts large investments and boost employment generation through the creation of world- class infrastructure. The Mega Textile parks will offer an opportunity to create an integrated Textile value chain right from spinning, weaving, processing, dyeing and knitting to garment manufacturing at one location. It is expected that the world class industrial infrastructure will attract big-ticket investments in the sector.

Further, due to unprecedented boost by the Government, the Textile Industry is going to be the biggest bene ciary and will help the country in becoming a Global Textile Hub. Moreover, a number of countries around the world have understood from the COVID-19 calamity that dependence on the one country for its textiles requirements is not a good policy. So, in the changed business scenario they have started looking for alternative production sources other than China. This offers a Golden opportunity to the Industry. Your Management is quite optimistic that Industry with the support of favorable Government Policies and Programs will capitalize on this opportunity to increase its share in Global Textile Markets.

In line with the global trends and to remain competitive, your company continues to modernize, upgrade and expand its capacities so that it remains globally competitive in terms of cost and quality.

OPPORTUNITIES AND THREATS

We would like to inform that presently Indias share in the Global Textile export is just 5% which is minuscule as compared to Chinas share of 37%. The outbreak of second wave of COVID-19 pandemic, trade tension between U.S. and China coupled with geo-political uncertainty because of Russian and Ukraine conflict has severely affected Chinese Textile

Exports. It has provided an opportunity to the Indian Textile industry to grab the space vacated by China in the developed world especially in US and European Union.

Moreover, several countries of the world have realized that dependence on the one country for its textiles requirements is not a good policy. So, in the changed global scenario they have started looking for alternative production sources and has started working on China plus one strategy for the requirement of Textile Products. India should capitalize this opportunity and present itself as a credible alternative. India certainly has an edge to be an alternative manufacturing hub for global players as two major things required to run textile Industry are cotton and skilled work force and they are abundantly available in the country. More and more overseas buyers are looking at India as the next best alternative supplier of textile products and it is expected that more orders will shift to Indian Textile Industry.

The relative success of the Spinning Industry is dependent on the availability of Raw Cotton at reasonable prices. The Raw cotton is the main Raw material (constituting approx. 60% of the total cost) for the manufacture of cotton yarn and it is dependent on the Nature i.e. Good/Bad Monsoon. So availability of raw cotton at reasonable prices is crucial for the spinning Industry. Any significant change in raw cotton prices and Monsoon can affect the performance of the Industry.

This year steep increase in the prices of raw cotton as severally impacted the Textile Industry.

The Textile Industry is also not free from normal business risks and threats. The slowdown in the Global Trade because of the Geo political tension, High prices of raw cotton, low demand coupled with Outbreak of second wave of Covid-19 Pandemic in several countries, has affected exports of textile products. The prevailing situation is still uncertain as the risk of new disrupted COVID-19 variant has the potential to prolong the pandemic and thus causing fresh economic impacts.

Moreover, export continues to face stiff challenges from the small countries like Bangladesh, Sri Lanka and Taiwan etc., who have got the preferred treatment from the countries of European Union and U.S. The above mentioned factors have had and will continue to have a significant bearing on the financial performance of the Industry in the coming period too.

FUTURE OUTLOOK

We are pleased to inform you that the year gone by has been excellent for the Textile Industry. The Indian Textile Exports surpassed the export gures of last year. Indian Textile Industry is one of the key industry of the country and the Government through its policies and initiatives continues to give further push to the industry so that it become global competitive and increase its Global share. The Government has introduced Production Linked Incentive (PLI) Scheme for the Textile Industry which will help in increasing the Textile Exports. The sector needs more support so that it can enhance its competitive advantage in terms of technology upgradation so as to achieve sustained growth in Exports as well as Domestic markets. The Industry on their part is also continuously modernizing and upgrading its Technology to maintain its core competence and convert it into the competitive edge over others.

However, in the current year the risk of slowdown in the world economy has lowered the demand for the Textile Products resulting fall in the International as well as Domestic prices. The high cotton prices coupled with slackness in Global demand are affecting the fortunes of the Textile Industry. Indian cotton yarn exports are likely to witness a decline in

financial year 2023 after robust increase in the previous year. The Future is still not clear. Your management is looking at the future with optimism and expects that with the improvement in the global demand and softening of raw cotton prices in the coming periods, will give a relief to the Textile Industry. We expect that in this challenging period, Government will support the Spinning industry in the form of favorable Textile policies, incentives and other benefits which are of paramount importance for the future growth of the Industry.

RISK AND CONCERNS

No industry is free from normal business risk and concerns. Indian Textile Industry continues to face stiff competition from China, Bangladesh, Taiwan Sri Lanka and other emerging economies. The relative competitiveness of Industry is dependent upon the raw cotton prices, exchange rates and prevalent interest rates regime. The primary raw material for the manufacturing of yarn is cotton which is an agriculture produce. Its supply and quality are subject to forces of nature i.e. Monsoon. Any increase in the prices of raw cotton will make the things dif cult for the Textile Industry resulting weak demand and thin margins. Thus availability of raw cotton at the reasonable prices is crucial for the spinning industry. Any significant change in the raw cotton prices can affect the performance of the Industry.

The high rate of interest is affecting the financial performance of the Textile Industry. The Spinning industry being more capital intensive requires huge funds, long term as well as short term in the form of working capital for its running. The

Government must support the industry by providing cheap finance so that the industry remains financially viable. Though Government has taken some remedial measures in this regard but still a lot more is required so that the Textile Industry could meet the challenges ahead.

Moreover, the ongoing Geopolitical conflict between Russia and Ukraine has affected global trade. The imposition of sanction by the U.S. and European Union on Russia has severally impacted Indias exports to several countries. The Indian Textile Industry which is one of the major foreign exchange earner for the country, is likely to be affected by said sanctions.

Besides, the prevailing weak economic scenario, supply chain disturbance and rise in prices of oil and energy, high infliation has started causing significant disturbance and slow down of the Global economies. The future is still uncertain and no one knows where it lead to us. Thus, the Company consider it a possible concern resulting into a treat to the Industry.

In addition to the above, the other concerns like higher transaction costs, high cost of labour, continuously increasing prices of raw material are posing a risk to the growth of Indian Textile Industry. The Government should extend a helping hand to the existing Textile Units so that they can become globally competitive and contribute towards the growth of the country.