Suryalakshmi Cotton Mills Ltd Management Discussions.

Indian economic overview

After registering a GDP growth of >7% for the third successive year in 2016-17, the Indian economy headed for slower growth (estimated 6.6%) in 2017-18, as indicated by the first advance estimates released by CSO. This was lower than the range (6.5 to 6.75%) projected based on recent developments. Nevertheless, GDP growth averaged 7.3% for the period between 2014-15 and 2017-18, the highest among major economies. This growth was accompanied by lower inflation, improved current account balance and reduction in the fiscal deficit-to-GDP ratio. In addition to GST introduction, the year was marked by significant steps towards resolution of problems associated with NPA and FDI liberalisation, among others. Export growth strengthened in 2017-18; foreign exchange reserves grew to US$ 414 billion as on 12th January 2018; average crude oil prices rose ~14% (mid-January 2018) vis--vis 2016-17. Going by recent trends, the average crude oil prices could be in the vicinity of US$ 56-57 per barrel and rise 10-15% in 2018-19. Some of these factors could dampen GDP growth in 2018 though with global growth likely to moderately improve in 2018, expectations of a greater stability in GST, likely recovery in investment levels, and ongoing structural reforms, among others, could support higher growth. (Source: Economic Survey 2017-18) Various reforms taken by the Government of India have led to increase in Indias ranking in the World Banks Ease of Doing Business Index from 130 in 2017 to 100 in 2018.

Indian textile industry

India has presence across the entire textile supply chain which includes spinning, weaving, knitting, processing and garmenting. The size of the domestic textile industry is ~US$150bn and contributes ~4% to Indias GDP and constitutes ~13% of the countrys export earnings. It is the second largest employer after agriculture, employing over 45 million people directly and 60 million people indirectly. Out of the total size, Indias export share stands at ~US$36.66bn and has emerged as the third largest exporter of textiles and apparels in the World after China (37%) and EU (25%) with an overall market share of ~5%. The domestic textile and apparel industry in India has shown promise over last decade and is expected to to reach a market size of US$ 250 billion by

2023 from $ 150 billion in 2016. Textile and apparel exports from India are expected to increase to $82 billion by 2021 from $ 36.66 billion in 2016. Key drivers to this growth would be increasing investments along with policy support by the government (Technology Upgradation Fund Scheme – TUFS, 100% foreign direct investment - FDI), rise in disposable income, better penetration in smaller cities and rapid urbanization. India is expected to have a market share of 15-20% of the global textile and apparel trade from the present 5%. The domestic market is also expected to grow at 12% p.a. or higher. Indias contribution to the home textile industry is at ~11% behind China with 35% share.

Overview of Denim industry

The denim market is undergoing a paradigm shift, unseen since the rise and fall of premium denim in the 2000s. The combination of consumer demand for new denim styles coupled with shifting market trends sets the stage for a new playing field.With newness in cut, fabric, and finish; denim is popping up as a key must-have fashion item. Trendalytics intelligence indicates that denim supply and demand is imbalanced as the breadthof style availability currently falls short of directional consumer demand signals. Today, style-centric search queries outpace branded search,creating new opportunities for brand discovery, while making brand experience more important than ever.

Two macro shifts have created the perfect environment for fast fashion to challenge the establishment. First, we are at a tipping point in the lifecycle of premium denim brands,

Fast Fashion vs Premium Product Assortment whose search volume has been gradually cut in half since the peak of the premium market in 2012.** Second, consumers are increasingly trend-centric instead of brand-centric. Brand cachet no longer holds the same sway it did during the heyday of premium. Instead, recycled fits from the 80s and 90s, like mom jeans, and distressed finishes, frayed and embroidered, are dominating our social feeds.

The market size of Indian Denim Wear was estimated to be H20,205 crore in 2016. The market is now projected to grow at a CAGR of 14.5 per cent and reach H39,651 crore by 2021, and H77,999 croremarket by 2026. The mens denim segment comprises 84 per cent of the market while the womens denim segment and kids denim segment comprise 10 per cent and 6 per cent respectively.

Company overview

Suryalakshmi Cotton Mills Limited (SCML) has emerged as a leading integrated manufacturer of finest yarn, premium denim fabric and garments, while continuing our operations in India for the last five decades. Driven by our operational excellence and value-addedquality products, the Company is the most preferred ODM (original denim manufacturer) for the popular brands across the world. This has allowed us to acquire a dominant market share across the mid and premium denim segment.

Integration

The Company delivers innovative designs to the customers, with help of our integrated modern state-of-the-art manufacturing facilities. One of the reasons behind our competitive advantage has been our presence across the entire value chain, right from yarn manufacturing to production of finished garments. We understand and evaluate the changing trends and stay ahead of the curve by predicting the future trends.

Accreditations

Our committed manufacturing operations have earned us quite a number of global certifications across important areas including quality, environment, health & safety, as well as ethical values.

• Best Exporter of the Region VIA-SOLAR Vidarbha Udyog Gaurav Awards 2017, by Vidarbha Industries Associations, Nagpur, Maharashtra

• ISO 14001:2004 Certification

• ISO 9001:2008 Certification

• Oeko-Tex Certification

• Better Cotton Initiative

• Supplier Ethical Data Exchange (SEDEX)

Business Segment Overview

Manufacturing Capacity

The company has state-of-the-art manufacturing facilities in Telangana and Maharashtra. These manufacturing facilities, through ultramodern spinning units, helps the company to produce cotton and synthetic yarn which are accepted globally for their high quality. Over the year, Suryalakshmi has not just focused on increasing its manufacturing capacity but it has also expanded its product portfolio with value-added yarns, thus augmenting the companys captive need for niche products. The average life of spindles is 12 years. Thus, the spindles not only produce optimum result but also enusers that the company operates in accordance with Uster standards, the global spinning benchmark.

Technology

The company has always taken steps towards investing in cutting-edge technologies acquired from some of the most respected global suppliers, thus allowing the company to deliver some of the best quality products across its value chain. The company had 44% of manufacturing assets as on 31st March 2018, which is less than 10 years old. This preference for investing in best technology resulted in the manufacture of innovative value-added products that helped the company to retain customers and take its brand ahead. It has also helped the company to ensure customer satisfaction and business sustainability.

Market presence

The company believes textile industry to be a capital and labour intensive industry. Thus, in such a business success is derived from the ability to maximize off take, making it possible to cover fixed costs more effectively. Over the years, Suryalakshmi has expanded not just domestically but also globally. Today the Company is associated with some of the top brands of the industry like Lee, Wrangler, Levis, JC penncry and Walmart among others.

Overview

Suryalakshmi brings with itself treasure of sectoral knowledge spread across more than two decades. This has enabled the Company to have a well-established place in the global denim industry, and be one of the most preferred denim suppliers across globe that is capable of meeting all required standards. The denim business segment of the company delivers its products to some of the top international brands like Wrangler, Lee, Levis and Pepe Jeans, among others. The company has always given adequate focus towards quality, innovative designs and development of value added products in oreder to meet the requirements of dynamic fashion world. This innovative strategy taken by the company has helped it to earn the status of a preferred supplier for a long period of time.

Manufacturing

The company has always concentrated on even the minutest detail which has helped it to emerge as a market leader not just in India but also across the world. This has also allowed Suryalakshmi to make its present felt in an ever changing and competitive textile market. The company has manufacturing facility in Ramtek, Maharashtra that is updated with latest technology and machines and has an installed capacity of 40 million metres per annum, among one of the highest in the industry.

Product mix

Fashion and apparel industry is a dynamic one where the lifecycle of a fashion product is getting shorter day by day, and thus the survival of a company depends on number of products in the product portfolio. Suryalakshmi has a motto to keep its customers "satisfied", with this the company provides them a wide range of top-quality products to choose from. The state-of-the-art manufacturing facilities of the company ensures it to deliver a wide range of denim fabrics. The company continuously engages with international teams to keep itself updated with latest technological and fashion trends. With the aim to strengthen its relationships, the company frequently engages itself in research and development of niche fabrics, in terms of textures, washes, colours and shades.

Summer and winter collections

Suryalakshmi has successfully set up a fashion team which studies the ongoing trends in fashion industry all over the world. This has allowed the company to be a global company that is preferred by top international brands. The result of this approach is seen by the companys ability to launch attractive spring-summer and autumn-winter collections every year. This initiative has helped the company emerge as an relevant and important partner instead of just another manufacturing supplier for its niche portfolio of global partners.

Garments

Over the years, at Suryalakshmi an uncompromising emphasis has been laid down on building association with some of the leading readymade garment brands across the globe. This association with top players has not only helped the company to progress as a quality conscious player, but has also allowed it to become one of the leading Original Denim Manufacturer (ODM) suppliers of high-quality garments to some of the renowned names in Denim industry of the world. The company has a well-established presence across the value chain of the fashion wear segments, ranging from menswear, women wear to kids wear.

Suryalakshmi has always focused on product development supported by its associations along with insights from fashion experts from all around the globe. The company has a capacity of 7000 garments per day which allows it to be the hand behind top players in domestic and global denim garment industry.

DISCUSSION ON FINANCIAL PERFORMANCE

Operations

During the year under review, we recorded a strong revenue from operation of H764 Crores, despite various challenges faced by us. We experienced a growth of 7.38% and 10% in the revenue of spinning business segment and garment segment respectively. During the year, we experienced an increase in trade receivables by 35.44% which further helped us to increase our current assets by 17.26%. A rise in our total expenditure led to a decrease in our PAT to H515.05 lakhs.

The denim industry is currently plagued by excess capacity adversely affecting the volumes and margins. The power division continued to be affected by the problem of high cross subsidy rates in Maharashtra. Realisations in yarn division have been generally stagnant, while in the case of denim fabric, sales were severely impacted in the domestic market. In export, sales volumes have improved, but the realization has been much lower on account of intense competition. In addition, the raw material rates have been higher. As a result of all these adverse factors, the operations have been badly affected, limiting the net profit after tax to H515 lakhs.

Internal Control Systems and their Adequacy

The Company has an adequate internal control system in place, commensurate with the size and complexity of the organisation. A comprehensive review of all internal control systems have been carried out to take care of the Companys expanding size and resulting needs. The IT support systems have also been upgraded for the same. A system of internal audit to meet the statutory requirement as well as to ensure proper implementation of management and accounting controls is in place. The Audit Committee periodically reviews the adequacy of the internal audit functions.

Cautionary statement

Readers are advised to kindly note that the above discussion contains statements about risks, concerns, opportunities, among others, which are valid only at the time of making the statements. A variety of factors known or unknown, expected or otherwise may influence the financial results. These statements are not expected to be updated or revised to take care of any changes in the underlying presumptions. Readers may therefore appreciate the context in which these statements are made before making use of the same.