Suryalakshmi Cotton Mills Ltd Management Discussions.

Indian Economy Overview

India continued to remain one of the fastest growing major economies in the world in FY19. With investment picking up and consumption remaining strong, the country posted a robust GDP of 6.8% during the year. Domestic demand also strengthened as the benefits of structural reforms such as the Goods and Services Tax (GST) harmonisation and bank recapitalisation took effect. Economic activities also continued to recover backed by the strong domestic demand. However, the economy also suffered from various headwinds such as rising global volatility, externalities from trade disputes, and investment rerouting.

The effects of these shocks were offset by the strong macroeconomic fundamentals and policy changes (including amendments to the policy/code related to insolvency and bankruptcy, bank recapitalization, and foreign direct investment). With these policies in place, the economy is anticipated to grow by 7.5% in FY20 receiving boost from sustained rise in consumption and a gradual revival in investments, especially with a greater focus on infrastructure development. Further, continued implementation of structural and financial sector reforms with efforts to reduce public debt will remain essential to secure the economys growth prospects. In the near term, continued fiscal consolidation will result in reduction of Indias elevated public debt. This will further be supported by strengthening Goods & Services Tax compliance and further reducing subsidies. (Source: World Bank, IMF)

Indian Textile Industry

India is the worlds second-largest exporter of textiles and apparels, with an enormous raw material and manufacturing base. The textile sector plays a dynamic role in the Indian economy through its significant contribution to GDP, manufacturing output, employment generation and export earnings. It contributes about 7% to industry output, 2% to the GDP and 15% to the countrys total exports earnings. The textile and apparel industry is broadly classified into two sections viz. yarn & fibre and processed fabrics & apparels. (Source: Citi India, IBEF) At an overall level, India is a cost-competitive manufacturing base for all types of products across the textile value chain. Although, the lending rates in India are higher than in China and Vietnam, with special government support available for the sector, the effective cost of capital becomes comparable. Indias labor cost is much more economical than Chinas and comparable to southeast Asian counties of Vietnam and Cambodia. In terms of power cost, India is competitively positioned against most of the competing nations except Ethiopia where power cost is extremely low. The Textile Ministry of India has allotted an investment of Rs.690 crore for setting up 21 readymade garment manufacturing units in seven states for development and modernization of Indian textile sector as on August 2018. According to the Union Budget 2018-19 the government had set aside Rs.30 crore for the scheme of Integrated Textile Parks, under which there are 47 ongoing projects. The Indian government has increased the basic custom duty to 20% from 10% on 501 textile products, to advance the "Make in India" movement. The GOI has effected several reforms including Amended Technology Up-gradation Fund Scheme (A-TUFS) to create an employment opportunity for approx. 35 lakh people and enable investments worth Rs.95,000 crore by 2022.

(Source: Citi, Wazir Advisors, HomeTextile Views)

The future of Indian textile industry is yet to recover from the ill-effects of demonetisation and stabilisation of GST. The sector is in need of reforms that will get it back to its growth levels in the pre-demonetisation era. Encouraging reforms will also help the country to be competitive as compared to players from China and boost the production across several products in the entire value chain of textile. The Indian textile sector is projected to depict a stable growth backed by firm input prices, healthy capacity utilization and steady domestic demand. Indias apparel exports is projected to remain suppressed for FY 2018-2019, accelerating at firm pace of 1-2%, as a result of changeover in the taxation regime and liquidity challenges for the apparel sector. (Source: Crimson Publishers, IBEF)

Indian Denim Industry

India is one of the leading denim fabric manufacturers in the world, with a manufacturing capacity of about 1,500 mmpa. The denim market in India is tilled towards mens segment with 85% contribution coming from it. While womens denim segment contributes 9% to the market share and kids segment the rest 6%. Its interesting to see that Tier 1 & Tier 2 cities alone account for almost half of the total denim market at a share of 49%. The combined market share of urban and rural areas contribute to 51%. The denim fabric production is mainly concentrated in the western and northern parts of the country comprising more than 45% contribution coming from Gujarat itself, where Ahmedabad is the central production hub. The denim apparel production activities are scattered around Delhi, Mumbai, Bangalore and Ahmedabad. In the domestic market, knitted wear still tops the charts, while in international market, high stretch and comfort stretch, vintage and subtle look denims with flexible wash options are more in trend. In the recent times, the concept of recycled denim is also picking up strongly. With the rise in social media platforms and fashion exhibitions, India is fast catching up with the global trends.

(Source: Technopak Advisors, Economic Times)

Growth Prospects

The denim sector is regarded as the most progressive sector in todays textile industry due to following growth prospects:

Variations: Denim has a lot of variations apart from manufacturing jeans. There is an increasing demand amongst Indian customers for denim shirts, dresses, denim bags jackets etc.

Purpose: Nowadays denim serves almost all purposes. It has a lot of diversified color ranges and it can be used as a formal wear or a casual wear. This flexibility makes an economic sense to buy denim apparels more.

Convenience: Denim most importantly has a low maintenance cost and easy availability.

• Changes in Tastes and Preferences: Consumers especially women use denim as their daily wear, thereby increasing the demand for the product exponentially.

Organised Retail Sector and E-Commerce: Demand for denims has accelerated due to the rapid increase in number of shopping malls and online shopping portals.

• Prices: The prices of denim apparels depend on a variety of factors such as the quality of material, texture, comfort, cut and wash. There is a wide range of prices, from extremely cheap jeans for daily wear to luxury expensive denims. (Source: Textile Magazine)

Market Trends

The denim market in India has been flourishing with invention of more styles, colors and some innovative trends. Some of the key trends are:

• In India most of the denim manufacturers concentrate on the domestic markets as the value realization remains higher in the domestic market than in export markets.

• Recently the industry has observed entrance of new denim fabric manufacturers which is projected to make denim market more competitive due to increasing price trend in the coming years.

• Cotton is the sole choice of fabric for denim apparel production. Nowadays polyester is being used as weft threads in blended denim fabrics.

• The demand for stretch denim is growing rapidly in the Indian market due to its comfort and fit features.

• Color constraint is no longer a barrier. Indian youth has started accepting denim in different colors apart from the traditional blue jeans.(Source: Technopak Advisors)

However, post GST the denim industry has partially closed down and operating around at 60-70% of the capacity due to sluggish demand and excess capacity in the industry. This has led to a very competitive situation in export markets, where the margins have taken a beating. The negative impact of these developments is being felt across the industry.

Company Overview

About Us

Suryalakshmi Cotton Mills Ltd (SCML) is a vertically integrated denim player, which is engaged in manufacture of cotton yarn, denim fabrics and denim garments. Innovation, quality and consistency are the major solutions, which has led Suryalakshmi to be the worlds trusted denim supplier with speed and dexterity. The Company employs the right strategy to become the lowest cost producer by leveraging integration and manufacturing efficiency. Suryalakshmi works towards delivering products that meet international standards and stay ahead of the fashion curve with every passing year to meet their customer expectations.

Core Competences Customer Mix

Suryalakshmi is among Indias largest Original Denim Manufacturers (ODM) partner to Global and Indian brands namely, Pantaloons, Spykar, Wrangler etc. It has also collaborated with leading denim designers from Europe to cater rapidly changing fashion requirements.

Key Partners

Suryalakshmi is the key vendor for VF Corporation in USA & India and the largest supplier to Walmart. It is also one of the largest vendors for the European business of NEXT & MATALAN (UK Brands). Besides, the Company is a core supplier of Levis requirement for its Levis brand.

Design Approach

The design approach of the Company is primarily based on the recent fashion trend and customer tastes and preferences. This has driven SCML to manufacture innovative denim apparels with unique style, texture, material and finish. This in turn has helped the organization to channelize their product development efforts towards consumer preferences.

Just in Time Inventory Approach

Backed by the Just in Time inventory approach, the forward and backward integrated facilities of the Company have helped in producing premium and specialized denim styles with revertible production turnarounds to create a brisk denim supply chain.

Value added products

At Suryalakshmi, customers needs have always been the focal point. It focuses on development of high-margin qualitative products according to the changing tastes and preferences of the customers. The Company manufactures value added denim fabrics and fancy polyesters which has driven the organization to create a competitive edge. This has enabled the Company to conglomerate with global multinationals.

Technology

The Company initiates yarn manufacturing with the help of its state-of-the-art technology and world class machinery from top-notch global suppliers. This has led Suryalakshmi to keep pace with the changing market trends and fashion curve. With the help of cutting edge design and latest spinning technology the Company has created the finest yarn, premium quality denims for leading global brands.

Market Presence

Suryalakshmi has a long standing track record of operations in the Indian denim and spinning segments with established business channels in both domestic and export markets. The Company has an evolving fashion sense and product intelligence which helps it to compete in the global market. The Company has partnered with over 25 international fashion brands namely JC Penny, Vero Moda, Myntra, Walmart etc. in 31 countries across the globe. This has helped the Company to create a competitive edge both in the domestic and international denim market.

Integration

Suryalakshmi offers premium designs of denim apparels to its customers with the help of its integrated state of the art manufacturing facilities. Through an integrated system of tools, techniques and training process, the Company has successfully achieved the highest quality parameters in denim fabric manufacturing in the most versatile manner. The garment engineering approach of the Company has prompted the Company to associate and work with the top 20 global fashion and retail brands.

Accreditations

The manufacturing facilities of SCML are monitored on a regular basis to check global quality standards. Regular audits and verification by independent bodies have given confirmation to the quality standards, ISO norms, laws and regulatory requirements.

The quality certifications of SCML can be elaborated as under:

• ISO 14001:2004 Certification*

• ISO 9001:2008 Certification*

• Oeko-Tex Certification.

• Better Cotton Initiative.

• Supplier Ethical Data Exchange (SEDEX)

• Sedex members Ethical Trade Audit (SMETA)

*Annual Surveillance audit in progress

Product Portfolio Yarn

The spinning operations at Suryalakshmi are backed by innovative advanced machineries such as Amsler Slub from Switzerland, Core Spun and Eli Twist from Germany. The Company has specialization in manufacturing of high cotton, polyester and blended yarns, which are utilised for exporting as well as for their own denim business prospects.

Manufacturing Capacity

Suryalakshmi possesses an ultramodern spinning unit for manufacture of polyster cotton and synthetic yarn. The unit is located at Amangallu, R.R. district in Telangana. Also, the Company produces value-added and fancy yarns such as Ring, Open End, Core Spun, Slub and Compact yarns at its plant located in Amravati (Maharashtra). These yarns are specially used for denim fabric manufacturing. The capacity of spinning division is 86352 spindles.

Denim

Suryalakshmi is engaged in manufacture of diversified range of denims with different cuts, designs and finishes as per the global fashion curve. This has led the organization to be one of the top five leading denim suppliers across the globe.

Manufacturing capacity

Being a market leader for over five decades, Suryalakshmi focuses on the quality of denims produced. The fabrics are manufactured at its manufacturing facility located at Ramtek (Maharashtra) and works at an installed capacity of 40 mn metres of denim per annum. The Companys diverse range of denim fabrics comprises Mercerized Denims, Coated Denims, Normal finish, Cotton / Polyester, Colour Denims, and Mill washed Denim. With this, the Company offers light fabrics that are breathable and airy as well as a variety of denim blends that are meant to retain the shape and durability.

Product Mix

Fashion and style continues to change rapidly with every passing year. With these changing aspirations, the in house R&D team of the Company is committed to deliver premium quality denim products to its diversified client base. Suryalakshmi has created over 3000 high quality denim variants with quick production turnarounds. Further, partnership with the top international global denim brands such as Pepe Jeans, Spykar, Adidas etc. provides Suryalakshmi a competitive edge in the global denim market. A niche collection of fabrics in terms of texture, wash, colour, shades are researched and manufactured every year. This has helped the Company strengthen its relations with its partners. The Company has recently introduced an array of unique shades and performance oriented denim fabrics such as Cool Max, Bual Core, Bamboo, Tencel Rayon, Viscose and others to its portfolio. The new dobby design in denims has been a great hit amongst the global customers.

Summer and Winter Collections

Suryalakshmi has a large customer base across the globe. The skilled designing team of the organization benchmarks the global fashion market to cater the design needs of diversified global customers. Inputs from customers, brands and suppliers are also collected and their ideas implemented in the design of new products. Further value addition is done to the garments in terms of finishing, fiber blends, functional denims like coolmax, toughmax, anti-microbial, moisture management fabrics, etc. The in-house R&D team has enhanced in-depth market research and global fashion prospects that have changed into trend setting ideas and concepts resulted in production-ready denims.

Garments

As an integrated ODM, Suryalakshmi manufactures value added denim garments in varied styles, colours and finishes. The Company is a leading supplier of high street retailers, fashion houses and reputed designers across the globe for childrens wear, womens wear and mens wear.

Suryalakshmi works with a production capacity of 7000 garment pieces per day. The garment manufactured, undergo stringent quality checks at every step of production. The Company possesses an outstanding laundry and drying process facilities which has enabled the Company to create wide variety of denim fabric finishes such as hand scrapping, laser etching, resin finish, whiskers, chevrons, tie and dye, ozone finishes etc.

Material developments on the human resources/ industrial relations front

There were no material developments in the Human Resource area. The industrial relations were generally found satisfactory but for an agitation in the Denim Unit at Ramtek, which resulted in a lock out. The issues are expected to be resolved soon. The Company constantly reviews its manpower requirements and has a dedicated and well-equipped department to take care of the same. The total number of employed by the Company is 3873

Operations

During the year under review, the Company registered a marginal decline in the turnover at Rs.742 crores. The adversities that affected the denim industry continue to plague the industry this year as well. This year, the Company was additionally affected by the agitation of the workers in Denim Division, Ramtek from February, 2019, leading to declaration of lock out by the Company.

The cumulative effect of these factors has been the loss of around Rs.8.44 crores. The performance of spinning division was relatively better because of an improved realization. There has been no improvement in the viability of the power plant.

The denim exports have been slightly better, though the margins are under pressure due to intense competition.

Financial highlights

Table below provides a summary of the financial parameters along with key ratios affecting the Company.

(Rs. in lakhs)
Particulars FY 2019 FY 2018 YoY growth (%)
Revenue from operations 74177.82 76058.53 (2.5)
EBITDA 4885.21 7056.97 (30.8)
PAT (843.83) 515.05 (264)
Key Ratios
Debt equity Ratio* 0.46 0.51 (9.8)
Interest coverage Ratio 1.46 1.87 (21.9)
Current Ratio 1.13 1.16 (2.60)

*(Long Term)

(Rs. in lakhs)
Particulars FY 2019 FY 2018 YoY growth (%)
Debtors Turnover 85 74 (14.9)
Inventory Turnover 74 84 11.9
Operating Profit Margin 6.53 9.24 (29.30)
Net Profit Margin (1.13) 0.67 (269)
Return on Net worth (3.1) 1.8 (272)

Reasons for variation in excess of 25%

The Companys denim plant has been under strike / lockout for nearly 2 months in FY 2018-19. The denim industry plagued as it is by excess capacity and sluggish demand in the domestic market, suffered due to impacted margins. This led to very severe competition in export markets driving down the margins. Power plant continues to be unviable on account of very high cross subsidy rates. The cumulative effect of all these factors led to the negative variations.

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.