Valson Industries Ltd Management Discussions.

Economy Overview:

Textile is a flexible material formed using various processes including weaving, knitting, crocheting, or felting. These materials find application for manufacturing a broad range of conventional as well as advanced finished goods used for bedding, kitchen, upholstery, construction, transportation, handbags, protective, medical, fashion, apparel, and clothing accessories.

The textile industry comprises establishments that manufacture fiber, yarn, threads, carpets, rugs, linens and other textile products. This industry also comprises establishments engaged in processing fiber, yarn and fabric to produce finished products.

Major players in the global textile market are involved in product innovation to retain their positions and maintain a competitive edge in the market. For instance, several vendors are launching new heating technology to keep clothes warm during winter through infrared heat absorption. Similarly, the development of post-consumer cotton waste jeans that use waste cotton but ensure the garments quality and strength are being developed. Therefore, such innovations are expected to drive the global textile market during the forecast period.

As per Technavio, the innovations in textile industry will have a positive impact on the market and contribute to its growth significantly over the forecast period. This global textile market 2019-2023 research report also analyzes other important trends and market drivers that will affect market growth over 2019-2023.

This market research report segments the global textile market by product (natural fibers, polyesters, nylon, and others), by application(fashion, technical, household, others) and geographical regions (APAC, North America, Europe, and South America, and MEA). The Textile Sector in India ranks next to Agriculture. Textile is one of Indias oldest industries and has a formidable presence in the national economy in as much as it contributes to about 14 per cent of manufacturing value-addition, accounts for around one-third of our gross export earnings and provides gainful employment to millions of people. The textile industry occupies a unique place in our country. One of the earliest to come into existence in India, it accounts for 14% of the total Industrial production, contributes to nearly 30% of the total exports and is the second largest employment generator after agriculture.

Textile Industry is providing one of the most basic needs of people and the holds importance; maintaining sustained growth for improving quality of life. It has a unique position as a self-reliant industry, from the production of raw materials to the delivery of finished products, with substantial value-addition at each stage of processing; it is a major contribution to the countrys economy.

This paper deals with structure, growth and size of the Indian textile industry, role of textile industry in economy, key advantages of the industry, textile industry export and global scenario and strength, weakness, opportunities and treats of the Indian textile industry. The Indian textiles industry is extremely varied, with the hand-spun and hand-woven textiles sectors at one end of the spectrum, while the capital intensive sophisticated mills sector at the other end of the spectrum. The decentralised power looms/ hosiery and knitting sector form the largest component of the textiles sector. The close linkage of the textile industry to agriculture (for raw materials such as cotton) and the ancient culture and traditions of the country in terms of textiles make the Indian textiles sector unique in comparison to the industries of other countries. The Indian textile industry has the capacity to produce a wide variety of products suitable to different market segments, both within India and across the world.

Textile and apparel exports from India are expected to increase to US$ 82 billion by 2021. Exports of textiles and apparels from India reached US$ 31.65 billion in FY19*. Manmade garments remain the largest contributor to total textile and apparel exports from India. The Indian textiles industry, currently estimated at around US$ 150 billion, is expected to reach US$ 250 billion by 2019. Indias textiles industry contributed seven per cent of the industry output (in value terms) of India in 2017-18.It contributed two per cent to the GDP of India and employs more than 45 million people in 2017-18.The sector contributed 15 per cent to the export earnings of India in 2017-18.

Indias exports are expected to reach $32.38 billion in March, the highest in any month so far, on account of healthy growth in sectors such as pharmaceuticals, Commerce and Industry Minister Suresh Prabhu said on Wednesday. He said exports will cross the $331-billion mark in the year 2018-19. He said for the "first time", India has crossed $19- billion mark in pharma exports this fiscal.

The Commerce Ministry will release the trade data on April 15. Prabhu said the countrys exports were declining for a long time, but now "this year, we would have record exports". The figures in 2018-19 will be the highest ever at a time when there is a worst scenario in the world trade front, he said. Outbound shipments are growing because of concerted efforts by the Ministry in the last one year, the Minister said. "We created a matrix between every product and every geography. Secondly, we had done series of road shows," Prabhu said adding export potential was tapped in regions such as Africa and Latin America. The Ministry also held several meetings with the line ministries, including food, agri, pharma and IT Ministry, to resolve issues hindering exports. Indias exports grew 8.85 per cent to $298.47 billion during April-February 2018-19.

The production of raw cotton in India is estimated to have reached 36.1 million bales in FY19. Some of the major investments in the Indian textiles industry are as follows:

The textiles sector has witnessed a spurt in investment during the last five years. The industry (including dyed and printed) attracted Foreign Direct Investment (FDI) worth US$ 3.09 billion during April 2000 to December 2018. Some of the major investments in the Indian textiles industry are as follows:

• In May 2018, textiles sector recorded investments worth Rs 27,000 crore (US$ 4.19 billion) since June 2017.

• The Government of India announced a Special Package to boost exports by US$ 31 billion, create one crore job opportunities and attract investments worth Rs 800.00 billion (US$ 11.93 billion) during 2018-2020. As of August 2018, it generated additional investments worth Rs 253.45 billion (US$ 3.78 billion) and exports worth Rs 57.28 billion (US$ 854.42 million).

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.

Initiatives taken by Government of India are:

• The Directorate General of Foreign Trade (DGFT) has revised rates for incentives under the Merchandise Exports from India Scheme (MEIS) for two subsectors of Textiles Industry - Readymade garments and Made ups - from 2 per cent to 4 per cent.

• As of August 2018, the Government of India has increased the basic custom duty to 20 per cent from 10 per cent on 501 textile products, to boost Make in India and indigenous production.

• The Government of India announced a Special Package to boost exports by US$ 31 billion, create one crore job opportunity and attract investments worth Rs 80,000 crore (US$ 11.93 billion) during 2018-2020. As of August 2018 it generated additional investments worth Rs 25,345 crore (US$ 3.78 billion) and exports worth Rs 57.28 billion (US$ 854.42 million).

• The Government of India has taken several measures including Amended Technology Up- gradation Fund Scheme (A-TUFS), scheme is estimated to create employment for 35 lakh people and enable investments worth Rs 95,000 crore (US$ 14.17 billion) by 2022.

Integrated Wool Development Programme (IWDP) approved by Government of India to provide support to the wool sector starting from wool rearer to end consumer which aims to enhance the quality and increase the production during 2017-18 and 2019-20.

The Cabinet Committee on Economic Affairs (CCEA), Government of India has approved a new skill development scheme named ‘Scheme for Capacity Building in Textile Sector (SCBTS) with an outlay of Rs 1,300 crore (US$ 202.9 million) from 2017-18 to 2019-20.

Outlook:

India Ratings has maintained a stable outlook for the textile sector for 2019-20 following strong domestic demand, waning impact of the disruptions due to GST and demonetisation and rising exports aided by a weak rupee. Textile companies are likely to improve cash-flow from operations in FY20, as their working capital would stabilise as challenges related to demonetisation and the GST subside. The sector is likely to continue deleveraging gradually in FY20 in view of strong annual growth generation and some moderation in the debt level. Liquidity of the majority of players in the sector is likely to remain adequate, alongwith an improvement in operational cash generation, backed by steady raw material costs and strong demand from end-user segments.

The domestic and global stock-to-use ratios will remain under pressure during cotton year 2018-19. Global cotton production is likely to decline in cotton year 2018-19 owing to a low acreage and adverse weather conditions in key cotton-growing nations. Meanwhile,

Indias textile exporters are likely to continue to benefit from improved cost competitiveness due to a weak rupee, which would drive volume growth.

The future for the Indian textile industry looks promising, buoyed by both strong domestic consumption as well as export demand. With consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade with the entry of several international players like Marks & Spencer, Guess and Next into the Indian market.

High economic growth has resulted in higher disposable income. This has led to rise in demand for products creating a huge domestic market.

High economic growth has resulted in higher disposable income. This has led to rise in demand for products creating a huge domestic market. The domestic market for apparel and lifestyle products, currently estimated at US$ 85 billion, is expected to reach US$ 160 billion by 2025.

Risks and concerns:

There are some areas of concerns, which need to be stated here. Along-with recovery, the textile industry is also facing increase in input prices in sync with the global trends and appreciating rupee. In our view, there is need for an integrated approach to be adopted for the development of the textile and clothing industry in the country. Such an approach is required to ward off any such situation where the strengths of one segment of the textile industry is being undermined for passing temporary relief to another segment of the industry leading to permanent damage to the complete textile value chain. In our views, if any segment suffers from some systemic disadvantages affecting its global competitiveness, it should be overcome through suitable incentives mechanism without affecting any other segment of the industry.

Companys Business

The company has established its brand name "VALSON" in polyester texturised yarn since 1983. Today we are one of the leading manufacturers of Polyester Texturised & Twisted Yarn and Processors of Cotton, Polyester and other Fancy yarns in India with Customers having diverse uses its end-users comprise players from the shirting, suitings, label, upholstery, hosiery, furnishings, automative and ready-made garments industries etc. Quality Products and Services has been our top most priority and after continuous research, we have ventured into the dyeing of various qualities of yarns. We have more than 65000 shades in our data bank.

The Company is into manufacturing and exporter of Polyester Dyed Yarn and processors of Cotton and other fancy yarn. It has activities like Texturising, Twisting, Coning and Dyeing Plants to produce Quality Polyester Texturised Twisted Yarn and other fancy yarn. The Manufacturing process is as under: The basic raw material used for texturising is Partially Oriented Yarn popularly known as POY. It is fragile, weak, delicate and easily breakable. POY does not have any purposeful use as it lacks the stability, strength, and therefore it cannot be directly used for weaving or knitting.

The term texturising means the production of a permanent crimp in the initially straight fiberor filament yarn. It increases the bulk and improves the elasticity of yarn. This activity fully draws POY yarn to comply with the market requirement and therefore it is different commercial commodity. The POY after the texturising process is known as "Weft Yarn". The twisted crimp yarn is hard, strong and not easily breakable. It gives the yarn a feel of natural like cotton or wool.

The "Weft Yarn" is further twisted for the purpose of imparting the required strength, which is necessary to withstand the high speed run on looms for the purpose of weaving. The twisted yarn is known in commercial parlance as "Warp Yarn".

The Texturised and twisted yarn is properly washed and thereafter is dyed under quality parameters to get Colour Strength, Tone, Dispersion and Sublimation fastness.

The Dyed Yarn is wound around standard size cones before they are packed for dispatch.

The Company has established its brand as reputed manufacturer of quality, polyester dyed yarn and processors of cotton and other fancy yarn. It has been supplying its products through the network of agents in market. There are about 10 to 15 major agents spread over in Maharashtra, Delhi, Punjab, Northern and Southern India.

There scope of activity of agents will also include the following: -

1) To book the orders and to render various incidental services including the monitoring of the follow up of the same.

2) To obtain the general market information and acquaint the Company from time to time.

3) To receive the payment and statutory forms for and on behalf of the Company in respect of direct invoice raised on the customers for supply of material delivered as per their instruction at anywhere in India.

The Company is exploring new avenues to increase the export base and has chalked out strategic growth plan for the potential market in Middle East, U K, Egypt, Russia and other European markets.

We are getting incentives like duty drawback for export of our goods and have covered our products under MEIS Scheme declared by Ministry of Commerce as an additional incentive to increase the export and capture global market.

Opportunities:

The biggest growth opportunity for the textile industry arises from the changed global scenario of quota free business environment. Valson Industries Limited has already grabbed the opportunity and is rapidly growing in the huge domestic and export market. Indias strong performance and growth in the textiles sector is aided by several key advantages that the country enjoys, in terms of easy availability of labour and material, large market demand, presence of supporting industries and supporting policy initiatives from the government.

Threats:

Along with the opportunity that the quota free regime offers, there lies the threat of stiff global competition which indirectly would result in price pressure. Indian textile exporters are facing stiff competition and they lack policy and labour law reforms. But the Company through its quality production competes well with other players in this sector.

Segment wise performance:

The Companys business activity falls within a single business segment viz. ‘Yarns and the sales substantially being in the domestic market, the financial statements are reflectiveof the information required by Accounting Standard 108 "Segment Reporting", notified under the Companies (Indian Accounting Standards) Rules, 2015.

Human Resources:

Valson recognizes that nurturing and developing human resources by recruiting the best talent is vital to the long term success of the company. Employees are provided with continues opportunities for active learning and development which are viewed as the key drivers of our growth and thereby contributing to the success of the Company. The remuneration structure is linked directly with performance and reward.

The Company acknowledges that human resources are its biggest asset and hence who have been nurtured and strengthened over the years.

Insurance:

Valson Industries Limited has insured its assets and operations against all insurable risks including fire, earthquake, flood, and etc. as part of its overall risk management strategies.

Safety, Health and Environment

At Valson, safety is considered a high priority and all efforts are made to ensure safe working environment for employees. All probable incidents are analyzed and corrective actions are taken. Employees are trained in safe practices to be followed at work places at all the times.

Environmental Preservation:

Quality of human life is the most important factor to sustain life and this could be achieved through preservation of natural environment. The Companys R & D Department continues to develop new shades in an environmentally sustainable manner. The Company always consumes eco-friendly dyes, colours and chemicals. The Company has also installed an Effluent Treatment plant for proper treatment of waste water. Your companys strength lies in consistent quality consciousness and eco-friendly awareness

Material developments in Human Resources / Industrial Relations:

The company has always considered human resources as the driving force for progress and success and they are the main assets of the company. Management is of the firm belief that the growth of the company is due to the continuous contribution from its manpower. The company has the required number of skilled and semi-skilled persons and it constantly tries to improve their quality and productivity and provides a congenial working environment for them. The company is committed for continual improvement in all aspects of social standard, business and employees welfare to grow as an ethical business. We believe that harmony amongst employees, employer and business leads to socio economic improvement. The industrial relations continued to be extremely cordial during the year.

Internal control systems and their adequacy:

The Company has adequate system of internal controls to ensure that all the assets are safeguarded and are productive, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. Necessary checks and controls are in place to ensure that transactions are properly verified, adequately authorized, correctly recorded and properly reported. The scope and authority of the Internal Audit (IA) function is defined in the

Internal Audit Charter.

The Internal Audit department carried out audits in different areas of your Companys operations. Post audit reviews were carried out to ensure that audit recommendations were implemented and they monitors and evaluates the efficacy and adequacy of internal control system in the Company, its compliance with operating systems, accounting procedures and policies at all locations of the Company. Based on the report of internal audit function, process owners undertake corrective action in their respective areas and observations and corrective therebystrengthenthecontrols.Significant actions thereon are presented quarterly and yearly reports to the chairman of Audit Committee of the Board to maintain its objectivity and independence.

The Audit Committee reviewed the audit program and findings of the Internal Audit department and the Company when needed takes corrective actions.

Discussion on financial performance with respect to operational performance:

FY 2018-19 proves a challenging year to the company; the financial performance has affected mainly due to global uncertainties and disturbances in many parts of the world and frequent fluctuations in crude price and dollar prices and major decrease in the trend of export textile market:

Performance review of the company (Important ratios):

Year Ended March 2019 2018
Operating Profit 6.04% 7.12%
Net Profit after Tax 2.11% 2.42%
Return of Net worth (RONW) 6.93% 7.76%
Debt / Equity Ratio 0.3 0.3
Current Ratio 1.3 1.3
Inventory Turnover Ratio 15.1 18.9
Interest Coverage 8.1 15.0
Debtors Period (in Days) 29.8 29.9

1. There is increase of 6.66% in terms of Revenue from operations (Rs. 10482.39 Lakhs) compared to last year (Rs. 9892.46 Lakhs).

2. There is decline in growth of 7.7% in Texturising production (4347 MT) compared to last year (4711 MT).

3. There is decline in growth of 10.61% in Twisting production (2333 MT) compared to last year (2610 MT).

4. There is a marginal decline in growth of 3.9% in Sales (4896 MT) compared to last year (5096 MT).

5. The Operating Profit (PBOIDT) before other income and Interest and Depreciation and Tax decreased by 8.8% Rs. 584.56 Lakhs as compared to last year amount of (Rs. 635.99 Lakhs).

6. The Net after Tax decreased by 7.50% Rs. 221.16 Lakhs as compared to last year (Rs. 237.65 Lakhs).

7. RONW as compared to FY2017-18, FY2018-19 RONW is lower by 10.70%, mainly due to the decrease in profit (i.e. increase in cost of production purely change and frequent fluctuation in crude price).

8. Change in Interest coverage ratio is due to the impact of higher interest cost resulting from increased borrowings by way of term loan for the need base expansion.

The Company shall direct all its efforts and resources towards a strong and healthy shareholders wealth creation.

For and on behalf of the Board of Directors
Place: Mumbai (Mr. Suresh N. Mutreja)
Date: May 30, 2019 Chairman & Managing Director