Suryalata Spinning Mills Ltd Management Discussions.

Organisation Overview

Suryalata Spinning Mills Limited is one of the largest producers of Synthetic blended Yarns. The company produce 100% PSF, 100% VSF, Melange, P/V blended yarns with counts ranging from 12s to 60s. The company is having two manufacturing units on Kalwakurthy and Urukondapet — Jadcherla Road, only an hour away from the Hyderabad International Airport and the distance between the units is 5 Kms. The Company had completed its Modernization cum Expansion project at Kalwakurthy Unit in the month of March, 2019 and thereby total installed capacity increased from 93,264 spindles to 1,15,248 spindles. Both the manufacturing units are reached to almost equivalent spindle capacities i.e Urukondapet unit has an installed capacity of 56,976 spindles and Kalwakurthy unit has an installed capacity of 58,272 spindles. The units are maintaining standard operational system and certification of "ISO 9001:2015".

Economy Scenario:

India emerged as the sixth largest country in the world and retained its position as the fastest growing trillion-dollar economy. However, after growing 7.2% in FY2017-18, the country attracted more foreign inflows. India witnessed a 23 notch jump to reach the 77th position in the World Banks Ease of Doing Business rankings. The commencement of the US-China trade war opened a new opportunity for India. Inflation was pegged at 2.6% on an annual basis, one of the lowest in years and below the RBIs medium term target of 4%. The Rupee rebounded after touching a low of Rs.74.45 to a dollar to close the financial year at Rs.69.44. The growth of Indias manufacturing sector to 8.3% from 5.7% in 2017-18 reflected a rebound from transitory shocks due to the currency exchange initiative and implementation of the GST, with strengthening investments and robust private consumption. India is expected to at 7.3% in FY 2019-20 benefitting from ongoing structural reforms.

Indian Textile/ Synthetic Industry:

The Indian Textile Industry holds a dominant position and maintaining its uniqueness and strength in both organized and unorganized sector. The size of the domestic textile industry US$ 150 billion in FY 2018 is expected to reach US$ 223 billion by FY 2021 on the back of a growing population, incomes, aspirations and urbanization. This is the second largest sector providing employment over 45 million people directly and 60 million people indirectly. The textile industry has two broad segments. First, the unorganized sector consists of handloom, handicrafts and sericulture, which are operated on a small scale and through traditional tools and methods. The second is the organized sector consisting of spinning, apparel and garments segment which apply modern machinery and techniques such as economies of scale.

Apart from abundant availability of raw materials such as cotton, wool, silk and jute, India enjoys a comparative advantage in terms of skilled manpower and its production

costs are more competitive compared to major textile producers in other countries.

Indian synthetic fiber yarns production grow to 5,680 million kilograms in FY18 from 4,712 million kilogram in FY11 at CAGR of 2.69%. The product of this industry includes polyester staple fiber, acrylic staple fiber and polypropylene staple fiber. The import of India synthetic fiber industry showed a mixed trend over the last five years. Further, the export of India synthetic fiber industry had grown by 50% during the same period. India is major exporting country as far as textile sector is concerned and not dependent on import.

Global Economy:

Global economy grew 3.7% in 2018 compared to 3.8% in 2017, largely on account of the failure of Brexit negotiations, tightened financial conditions, geopolitical tension and higher crude oil costs. Global growth is estimated at 3.5% in 2019 and 3.6% in 2020 on account of a sustained weakening in advanced economies.

Global apparel consumption was pegged at US$ 1.8 trillion accounting for 2-3% of the Global GDP in 2017, the EU and the US accounted for 41% of the market share while India and China accounted for 16% of the market share while being home to 36% of the population. Apparel consumption is forecast to grow at a CAGR of 4% to reach US$ 2.6 trillion by 2025. It is expected that the market growth rate of developed countries could slow whereas large emerging economies such as China and India would drive growth. (Source: Wazir Advisors,FICCI).

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.

The Textile Ministry ear marked Rs. 690 cr for setting up 21 ready made garment manufacturing units in seven states for the development and modernization of the Indian Textile Sector.

The Goods and Service Tax Council doubled the threshold limit of textiles players from Rs. 2.0 million to Rs.4.0 million from April 2019.

The Union Ministry of Textiles and Energy Efficiency Services Limited launched a technology up-gradation scheme called SAATHI for reviving the power loom sector.

The Government allocated Rs.2,163 cr for ROSL (Rebate of State Levies) which is expected to benefit exporters of made-ups and apparels.

Under the Union Budget 2018-19, Rs. 2,300 cr was allocated for the TUF Scheme. It is expected to create employment for 3.5 million people and enable investments worth Rs.950 billion by 2022.

The reduced income tax rate of 25% extended from Rs. 250 cr to Rs.400 cr for the reported turn over, will immensely benefit the micro, small and medium enterprises.

The Central Government proposed to contribute 12% of the wages of new employees in EPF for all the sectors for next 3 years and this is expected to boost hiring in the apparel segment and extend fixed term employment.

The Government of India has implemented several export promotion measures such as:

• Specified technical textile products are covered under Focus Product Scheme. Under this scheme, exports of these products are entitled for duty credit scrip equivalent to 2 per cent of freight on board (FOB) value of exports.

• Under the Market Access Initiative (MAI) Scheme, financial assistance is provided for export promotion activities on focus countries and focus product countries.

• Under the Market Development Assistance (MDA) Scheme, financial assistance is provided for a range of export promotion activities implemented by Textiles Export Promotion Councils.

Opportunities & Threats:

Suryalata holding on hand opportunities to strengthen its position with

a) Availability advanced technology equipment

b) Experienced management team with exposure in textile industry.

c) Good reputation in the market due to quality and timely supplies.

d) Emphasis on quality of product nurtured across the company.

e) The company has established strong presence in the market for several years.

f) The business model is simple & needs minimum marketing requirement.

g) India has rich resources of raw materials of textile industry. It is one of the largest producers of cotton in the world and is also rich in resources of fibers like polyester, silk, viscose etc,.

The Company estimates the Threats to Synthetic Industry such as

a) Over specialization in cotton and significant changes in raw cotton prices effects to the synthetic spinning industry.

b) Processing is the weakest link in the Indian textile value chain, adversely affecting its ability to compete in exports.

c) High power costs and long export lead times are eroding Indias export competitiveness across the textile chain.

d) Currency fluctuations are highly affecting the synthetic spinning industry.

e) Profitability undermined by volatile raw material prices and rising wages

f) Fierce competition weighing on margins and further stressed by e-commerce activities

g) Changing consumer behavior (e.g. fast fashion) forcing T&C to become more flexible

Risks and Concerns:

Risks are integral part of the growth of a business. However, the Company frames the effective risk management which helps to mitigate the risks effectively and ensures business sustainability. Effective risk management comprises the,

i) Standard policy to pass the cost increases with its premium quality positioning.

ii) Consciously following with the up-keep of equipment and implementing the cost control methods,

iii) Strengthen and widen the customer base with quality products and timely supplies.

iv) Change into high count patterns which support high contributions and reduce the pressure on liquation of more volumes.

Internal Control Systems and their Adequacy:

The Company has a well established framework of internal controls in all areas of its operations, including suitable monitoring procedures and competent personnel. In addition to statutory audit, the financial controls of the Company at various locations are reviewed by the Internal Auditors, who report their findings to the Audit Committee of the Board. The Audit Committee is headed by an Independent Director and this ensures independence of functions and transparency of the process of supervision. The Committee meets to review the progress of the internal audit initiatives, significant audit observations and planning and implementation of follow-up action required. The Company conducts its business with integrity and high standard of ethical behavior and in compliance with the laws and regulations that govern its business.

Review of Financial & Operational performance:

The Net turnover of your Company for the Financial Year 2018—19 was Rs. 39,111 Lakhs in comparison to Rs.33,412 Lakhs in the previous year. The production during the year was 25,152 MTS in comparison to 23,401 MTS in previous year.

Your Company has earned a Profit Before Tax of Rs. 2,322 Lakhs in comparison to Rs. 1,240 Lakhs in the previous year. The Company earned a profit after tax of Rs. 1,423 Lakhs in comparison to Rs.789 Lakhs in the previous year in spite of losses incurred by the Indian Textile Industries across the board.

Key Financial Ratios:

Debtors / Turnover Current year - 7.98 % (previous year 7.36%) Increased due to more sales in the month of March, 2019.
Inventory/ Turnover Current year - 5.76 % (previous year 5.13%) Marginal increase due to increase of work in process and inputs for increased capacities.
Interest Coverage Ratio Current year — 4.55 (previous year 2.89) Increased due to capitalization of interest on New borrowings for Project done.
Debt / Equity Ratio Current year — 1.48 (previous year 1.07) Increased due to New borrowings for the Project of modernization cum expansion.
Operating Profit Margin Current year — 8.58% (previous year 5.88%) Increased with better Operations, cost controls and increased volumes.
Net Profit Margin Current year — 3.66% (previous year 2.37%) Increased with better Operations, cost controls and increased volumes.
Return on Net worth Current year — 12.42% (previous year 7.80%) Increased with better Operations, cost controls and increased volumes.

Human Resource Developments / Industrial Relations:

There were no material developments in the Human resources. The industrial relations were generally found satisfactory.

The Company firmly believes that Human Resource Development strategies and practices will continue to provide a sustained competitive advantage and will continuously work towards nurturing and enhancing a competitively superior position in terms of human capital, people processes and employees behavior.

During the period under review, the total number of people employed by the Company is 1,462 in addition to indirect employment created.

Corporate Social Responsibility

The company formulated CSR policy to touch and transform peoples lives by promoting health care, education including special education among children and employment opportunities for women, providing malnutrition, sanitation and drinking water, animal welfare etc,.

During the year Suryalata has taken up initiative to educate Vedic students thru Vedic vidyalayam and animal welfare by maintaining Goshala etc.

Outlook:

Synthetic Yarn products are the most preferred yarns in the textile industry due to its unique features like lower

price and availability at uniform throughout the year. The future for the synthetic textile industry looks promising, buoyed by both strong domestic consumption as well as export demand in segments of apparel, home furnishing, automotive, filtration, personal care and hygiene applications.

Further, Government support to speed up the release of input tax credits, providing export incentive schemes, supporting with PF contributions to new workers, reduction in ESI contributions helps for cost reduction, training supports with stipend reimbursement etc mitigate to protect the textile industry to some extent.

Considering all these initiatives and supports, the company focuses to strengthen the financial position and to increase the volumes from the expanded capacities.

Cautionary Statement:

The statement and views expressed by the management in the above said report are on the basis of best judgment but the actual results might differ from whatever stated in the report. The Company takes no responsibility for any consequence of decisions made based on such statements and holds no obligation to update these in future. Readers are cautioned not to place undue reliance on these forward looking statements.