H P Cotton Tex Management Discussions


OVERVIEW

The objective of this report is to convey the Managements perspective on the external environment and textile industry, as well as the Companys strategy, operating and financial performance, material developments in human resources and industrial relations, risks and opportunities, and internal control systems and their adequacy during the Financial Year 2022-23.

ECONOMY REVIEW

Global Economy & Outlook

The global economy is facing turbulent times and is packed with high uncertainty owing to the impact of various events that have occurred over the past three years, most notably the COVID-19 pandemic and Russias invasion of Ukraine. In FY 2022-23, the pent-up demand, lingering supply disruptions, and commodity price spike has spurred inflation, elevating it to a multi-decade high across several economies. To curb the impact and keep the inflation expectations anchored, leading central banks are aggressively tightening their monetary policies.

The unexpected failures of two specialised regional banks in the United States towards the mid of March 2023, coupled with the loss of confidence in Credit Suisse, a bank of global significance, have stirred-up the financial markets. Resultantly, bank depositors and investors are reevaluating the safety of their holdings and shifting away from institutions and investments perceived as vulnerable.

The baseline forecast is for growth to fall from 3.4 percent in 2022 to 2.8 percent in 2023, before settling at 3.0 percent in 2024. Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 percent in 2023 with advanced economy growth falling below 1 percent. Global headline inflation in the baseline is set to fall from 8.7 percent in 2022 to 7.0 percent in 2023 on the back of lower commodity prices but underlying (core) inflation is likely to decline more slowly. Inflations return to target is unlikely before 2025 in most cases. (Source: IMF – World Economic Outlook – April 2023).

Indian Economy & Outlook

As higher prices and rising borrowing costs weighed on private consumption, Indias economic growth in early 2023 declined as compared to its ten-year growth rate prior to the pandemic. However, after contracting in the second half of 2022, manufacturing rebounded in 2023. The investment growth remained buoyant as the government ramped up capital expenditure and the private investments also experienced a surge, supported by increasing corporate profits. Unemployment declined to 6.8 percent in the first quarter of 2023, the lowest since the onset of the COVID-19 pandemic, and labour force participation increased. Indias headline consumer price inflation also returned within the Central Banks 2-6 percent tolerance band.

In FY 2023-24, Indias economic growth is expected to slow down further to 6.3 percent. The slowdown is attributed to private consumption being constrained by high inflation and rising borrowing costs, while the government consumption is impacted by fiscal consolidation. The growth is projected to pick up slightly through FY 2025-26 as inflation declines towards the mid-tolerance range and reforms begin to pay off. India will remain the fastest-growing economy (in terms of both aggregate and per capita GDP). (Source: World Bank – Growth Economic Prospects – June 2023)

INDUSTRY REVIEW

Global Textile Industry

The global textile market grew from USD 573.22 Billion in 2022 to USD 610.91 Billion in 2023, at a Compound Annual Growth Rate (CAGR) of 6.6%. Slow growth is attributed to the Russia-Ukraine war, which disrupted the global economic recovery from the COVID-19 pandemic, at least in the short term. The war has instituted a multi-faceted impact, including economic sanctions on multiple countries, a surge in commodity prices, and supply chain disruptions, causing inflation across goods and services and affecting many markets across the globe.

The textile market is expected to grow to USD 755.38 Billion by 2027 at a CAGR of 5.5%.

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 USD 106 Billion in 2019-20 to reach USD 190 Billion by 2025-26.

Indias share in the global textiles and apparel trade is 4%. The textiles and apparel industry contributes 2.3% to the countrys GDP, 13% to industrial production and 12% to exports. It employs around 45 Million workers in the textiles sector, including 3.5 Million handloom workers. Indias textile and apparel exports (including handicrafts) stood at USD 44.4 Billion in FY 2022-23, reporting a 41% increase YoY.

BUSINESS REVIEW

H.P. Cotton Textile Mills Limited

The Company operates in only one segment i.e. manufacturing of Threads. The Company deals in production of two types of thread i.e. Sewing Threads and Hosiery Yarn.

Production

During FY 2022-23, the production of Sewing Threads decreased by 44% over the previous year, to stand at 8,74,095 kg as compared to the previous years level of 15,60,918 kg. The Company has not produced Hosiery Yarn during the year under review.

(Rs. in Lacs)

Financial Year

Sewing Thread

Hosiery Yarn

Total

2022-23

8,74,095

Nil

8,74,095

2021-22

15,60,918

Nil

15,60,918

2020-21

12,72,954

4,674

12,77,628

Sales

During FY 2022-23, the sale of Sewing Threads decreased by 37.53% over the previous year and stood at Rs. 7,727.60 Lacs as compared to Rs. 12,371.28 Lacs in FY 2021-22. No Hosiery Yarn was sold by the Company during FY 2022-23 due to captive consumption.

(Rs. in Lacs)

Financial

Domestic

Export

Total

Year

Sewing Thread

Hosiery Yarn

Sewing Thread

Hosiery Yarn

2022-23

1,007.30

-

6,720.30

-

7,727.60

2021-22

1,152.20

-

11,219.08

-

12,371.28

2020-21

490.63

39.90

8,556.42

-

9,086.95

HP MMF Textiles Limited (HP MMF)

HP MMF is a wholly-owned subsidiary company of H.P. Cotton Textile Mills Limited. The Company is yet to commence its operations.

RISKS AND CONCERNS

The Textile industry as well as the Company are undergoing a significant transformation, resulting in heightening of risks related to strategic choices and execution, in addition to the traditional operational, financial, regulatory, and compliance-related risks. The business objectives of the Company are articulated as a set of specific near-term goals, and long-term strategic goals in a corporate scorecard. These goals cover the dimensions of consistent financial performance, market penetration, operational excellence, cost optimisation initiatives, attracting and retaining talent, and long-term sustainability of the organisation. A detailed Risk Management Policy lays down the framework of Risk Management within the Company.

RISK MANAGEMENT PROCESSES

Risk Identification

Mechanisms for identification of risks include periodical risk surveys across the Company, industry benchmarking, periodic assessments of the business environment, incident analysis, findings of internal audits, etc.

Risk Description

The identified risks are structured across the following categories: Name of Risk, Scope of Risk, Nature of Risk, Quantification of Risk, Risk Tolerance/Appetite, Risk Treatment and Control Mechanism, Potential Action for Improvement, and Strategy and Policy Development.

Risk Assessment

Risk assessment is the process of risk prioritisation or profiling. The likelihood and impact of risk events have been assessed for the purpose of analysing their criticality. The likelihood of occurrence of risk is rated based on the number of past incidents in the industry, future trends, or research available. Risk may be evaluated based on whether they are internal or external, controllable or non-controllable, and inherent or residual.

Risk Treatment – Mitigation

Treatment of risk is the process of selecting and implementing measures to mitigate risks. Risk control actions are prioritize as per their potential to benefit the organisation. Risk treatment includes risk control/mitigation and extends to risk avoidance, risk transfer (insurance), risk financing, risk absorption, etc.

OPPORTUNITIES AND THREATS

The textile industry seems to be headed towards a positive and steady growth phase, after a period of turbulence and uncertainty. The buoyant mood stems from a series of measures taken by the Union Government to revive the fortunes of the textile industry coupled with relief from the Covid-19 pandemic. Measures ranging from PLI scheme to providing an impetus to the technical textiles, the launch of mega textile parks and signing of FTAs and MoUs with many countries, etc. will spur demand for the Indian Market. With an added advantage of high-quality standards and globally renowned accreditations, the Company is confident of harnessing the unfolding opportunities and growing steadily.

Currently, the volatility in cotton prices and the global recession, resulting from the ongoing Russia-Ukraine conflict, pose the biggest threat to the industry. This is leading to escalated pricing of finished goods. Consumers are therefore shifting their focus from cotton to man-made fibers. Further, increase in prices of other commodities such as coal, dyes and chemicals are also making the textile industry non-competitive.

HUMAN RESOURCES

Considering employees as one of the most valued stakeholders and nurturing an employee-centric culture has been the key differentiator for HP Cotton. The Company is committed to cultivating a professional environment that empowers its people and helps them to grow in their careers. To remain competitive, improving employee productivity is of utmost importance to the organisation. The Company constantly strives to strengthen its manpower in alignment with the business needs and continues to engage them through various employee engagement activities. The number of permanent employees on the Companys rolls as on 31 March 2023 stood at 1,215.

FINANCIAL REVIEW

On a standalone basis, the Companys total income for FY 2022-23 declined by 36%, as compared to the previous year. The total expenditure, including depreciation for FY 2022-23, went down by 16%, and EBITDA declined by 160.44% as compared to FY 2021-22. The Profit After Tax for FY 2022-23 declined by 356.43% as compared to the previous year.

On a consolidated basis, the total income for FY 2022-23 was Rs. 8,605.57 Lacs and the Loss after Tax attributable to shareholders and non-controlling interests stood at Rs. 1,807.22 Lacs.

KEY FINANCIAL RATIOS

S.No.

Key Ratios

Units

FY 2023

FY 2022

YOY percent

1.

Debtors Turnover Ratio

Times

7.52

8.61

(12.66) %

2.

Creditors Turnover Ratio

Times

1.95

2.31

(22.31) %

3.

Inventory Turnover Ratio

Times

1.42

1.81

(21.55) %

4.

Net Capital Turnover Ratio

Times

-16.55

43.26

(138.26) %

5.

Current Ratio

Times

0.79

1.05

(24.76) %

6.

Interest Coverage Ratio

Times

-2.25

6.05

(137.19) %

7.

Debt Service Coverage Ratio

Times

-1.77

5.38

(132.90) %

8.

Debt-Equity Ratio

Times

3.1

1.12

176.79 %

9.

Operating Profit Margin

%

-13.74

10.10

(236.04) %

10.

Net Profit Margin

%

-21.5

5.33

(503.38) %

11.

Return on Net Worth

%

-82.58

26.54

(411.15) %

12.

Return on Investment

%

-10.5

8.88

(218.24) %

1) Net Capital Turnover Ratio: Decreased primarily on account of loss incurred in current year

2) Interest Coverage Ratio: Decreased primarily on account of loss incurred in current year

3) Debt Service Coverage Ratio: Decreased primarily on account of loss incurred in current year

4) Debt-Equity Ratio: Increased primarily on account of decrease in shareholders equity and increase in debt during the year

5) Operating Profit Margin: Decreased primarily on account of loss incurred in current year

6) Net Profit Margin: Decreased primarily on account of loss incurred in current year

7) Return on Net Worth: Decreased primarily on account of loss incurred in current year

8) Return on Investment: Decreased primarily on account of loss incurred in current year

INTERNAL CONTROLS AND THEIR ADEQUACY

The Company maintains adequate and effective Internal Control Systems commensurate with its size and complexity. It believes that these systems provide, among other things, a reasonable assurance that transactions are executed with management authorisation. It also ensures that they are recorded in all material respects to permit preparation of financial statements, in conformity with established accounting principles, along with the assets of the Company being adequately safeguarded against significant loss or misuse. An independent Internal Audit function is an important element of the Companys Internal Control System. This is supplemented through an extensive internal audit program and periodic review by the management and the Audit Committee of the Board.

CAUTIONARY STATEMENT

Statements in the Management Discussion & Analysis Report describing the 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. Important factors that could make a difference to the Companys operations includes, among others, economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws, and other statutes and incidental factors.