Visaka Industries Ltd Management Discussions.

Global economic overview

The 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. (Source: World Economic Outlook).

Global economic growth over six years

Year 2015 2016 2017(E) 2018(E) 2019 (P) 2020 (P)
Real GDP growth (%) 3.2 3.1 3.8 3.7 3.5 3.6

[Source: World Economic Outlook, January 2019] E: Estimated; P: Projected

Indian economic overview

India emerged as the sixth-largest and retained its position as the fastest-growing trillion-dollar economy.

However, after growing 7.2% in 2017-18, the Indian economy slowed down to 7% in FY2018-19. In 2018, the country attracted more foreign inflows worth ~US$ 38 billion, higher than Chinas US$ 32 billion. 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 (including food and energy prices) 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 (the currency exchange initiative and implementation of the GST), with strengthening investments and robust private consumption. India is expected to grow at 7.3% in FY2019-20, benefiting from ongoing structural reforms. (Source: CSO, Fitch, Economic Times, Business Standard, IBEF, Business Today, India Today, IMF)

Global construction and building products industry

Overview

The business of Visaka Industries is influenced by the performance of the construction and building product sectors.

The growth in construction was notable in first half of 2018 before easing in the latter part of the year, notably in China and the US. The global construction industry was driven by increasing demand in the advanced economies. The Asia Pacific accounted for the largest share of the global construction industry.

Outlook

The global construction and infrastructure industry is being influenced by automation, digitisation and use of advanced materials. The global construction industry is expected to expand by 3.6% till 2022. In real value terms, measured at constant 2017 prices and US dollar exchange rates, global construction output is forecast to rise to US$12.7 trillion in 2022, up from US$10.6 trillion in 2017. (Source: Reuters, CIC)

Indian construction and building materials industry

Overview

Indias construction sector was valued at ~US$126 billion and is expected to become the third-largest in the world by 2025. The infrastructure and construction sector accounted for the second-largest share in terms of FDI inflows.

The Indian construction industry is fragmented and comprises a number of unorganised players. The nations construction sector is being catalysed by growth in the real estate and urban development sectors on the back of growing industrialisation and commercialisation on the one hand and increased homebuilding on the other. (Source: Invest India, Maier Vidorno, Business Wire, KPMG)

Outlook

Indias construction industry is expected to record a CAGR of 15.7% to reach US$738.5 billion by 2022.

The residential segment grew at a CAGR of 11.7% between 2013 and 2017 in terms of value and this growth rate is expected to increase to 18.3% by 2022 on account of the incremental demand coming in from the affordable hou sing segment. (Source: Hindu Business Line, Business Wire, Accommodation Times)

Growth drivers

Road construction: The highway network in the country is expected to cover 50,000 kilometres by 2019.

All villages in India will be connected through a road network by 2019 under the Pradhan Mantri Gram Sadak Yojana. Growth in the countrys road network is expected to accelerate homebuilding and the offtake of home-building products.

Real estate revival: Indias real estate sector is expected to reach a market size of US$180 billion by 2020 and US$1 trillion by 2030 from US$ 120 billion in 2017, accounting for 13% of the countrys GDP by 2025.

Office spaces: Services sectors such as IT and ITeS, retail, consulting and e-commerce registered high demand for office space, driving real estate sector growth in India. At present, Indias Grade-A office real estate stands at a massive 530 million square feet and this is likely to surpass 700 million square feet by 2022.

Urban development: ~40% of Indias population would be urbanised by 2030 compared to ~32% today. Within Indias urban clusters, initiatives such as Housing for All and Smart Cities will drive growth, driven by the Central Governments flagship PMAY scheme that aims to build 20 million urban homes and 30 million rural houses by 2022.

Urbanisation and nuclearization: >34% of Indias current population lives in urban areas, rising by 3% since 2011. While large urban agglomerations (population of >50 lac) have remained mostly constant since 2005, smaller clusters have risen significantly (from 34 to 50 clusters with populations of 10-50 lac).

Indias urban population is expected to increase to 814 million by 2050, resulting in a corresponding increase in housing needs.

Population growth: India is the second-most populous country in the world, adding ~ 15 million people to its population each year, enhancing requirement for infrastructure. (Source: DIPP, RBI Handbook of Statistics on Indian Economy, PIB, Union Budget 2018-19, FICCI).

SWOT analysis of the construction and building materials industry

Strengths

• Robust demand from commercial and private sector housing

• Increased governmental investment in national infrastructure

• Abundant availability of raw materials

• Accessibility to affordable labour

• Increased inflow of FDI into India

Weaknesses

• High logistics costs between service providers and customers

• Dearth of skilled labourers

• High competition

• Lack of well-defined operating procedures

Opportunities

• Stable growth of the private housing sector

• Opportunities in public-private partnership projects

• Increasing disposable incomes

• Easy loan availability

• Numerous employment opportunities

• Lower rural inflation

Threats

• Safety issues

• Natural calamities

Indian cement asbestos products sector

As per Census 2011, ~54% rural Indians used thatched roof/tiles that are kuccha and need periodic replacement. Asbestos cement roofing is the most long-lasting and affordable roofing option for rural Indians.

Cement asbestos products have been used for roofing for more than 80 years on account of their being weather-proof and corrosion-resistant. These sheets are cost-effective, easy- to-install, strong and durable, ideal for warehouses, factories, low-cost housing and any roofing application.

A periodic increase in the minimum support price announced by the Central Government for agricultural produce could strengthen rural consumption, entailing an increasing demand for homes (and roofing products).

Following the successful rollout of the GST and imposition of favourable tax rates, asbestos cement roofing demand is expected to grow over the long-term. (Source: ACPMA, Valorem Advisors)

SWOT analysis of the cement asbestos products industry

Strengths

• Low-cost

• Low-maintenance

• Long-lasting

• Fire and water-resistant

• Rust-proof

Weaknesses

• Highly fragmented

• Low-value commodity

Opportunities

• Increasing demand for housing

• Increased governmental thrust upon low-cost housing

• Improvement in economic conditions in rural India

• Improved competitiveness following tax reduction from 28% to 18%

Threats

• Lack of sectoral entry barriers

Fibre cement boards (FCBs) and panels (V-Next products)

Overview

The fibre cement boards market in India has almost doubled in the last few years owing to the increasing demand for modern quick-to-install building materials.

—1.53 crore houses were constructed under PMAY in the last five years. The Central Government aims to build next-gen physical and social infrastructure in preparation for a US$10 trillion economy.

During the last five years, the fibre cement boards and panels segment has grown at a CAGR of 18% compared to 10% for the overall industry. The reduction in GST rates promises to bridge the cost gap, accelerating a transition from the unorganised to the organised and branded segment when it comes to consumption. (Source: IIFL)

Outlook

Fibre cement boards and panels are becoming popular due to increasing health-consciousness and the rising cost of wood or wooden products. Besides, these boards are eco-friendly and their application promotes a chemical-free hygienic environment. The other major drivers of their use comprise the need for speed, preference for dry construction, relative difficulty in accessing sand and water at construction sites and a dearth of skilled masons, among others. The Indian Government intends to invest US$ 1.3 trillion in building homes over the next few years, brightening prospects for the building materials sector. (Source: Mordor Intelligence)

Union Budget incentives for the sector

• Individuals earning <H5 lac will get a full tax rebate; for those investing in specified governmental saving schemes, the tax exemption could extend to H6.5 lac, catalysing demand for affordable housing.

• The deduction under Section 54 with regards to capital gains was amended to provide exemption for two houses (instead of one). A notional tax earlier levied on the second self-occupied property was removed.

• The infrastructure and construction sectors received concessions during the Interim Budget with RS.19,000 crore being sanctioned for rural development.

• Under-construction properties attracted a GST of 12%, with no GST charged on ready apartments.

(Source: The Hindu, Provident Housing, Fortune, Liases Foras, DNA)

Solar rooftops

Overview

Indias rooftop solar capacity rose to about 3.4 gigawatts in 2018, at a y-o-y growth rate of 75% with most of the demand coming from commercial and industrial buildings.

Rooftop solar panels offer certain advantages over large solar plants as no land and additional transmission capacity is required. Additionally, it saves transmission and distribution losses, which are currently pegged at ~30%.

The Solar Energy Commission of Indias 10-gigawatt grid- connected rooftop solar photovoltaic system scheme for governmental buildings has been a catalyst for the solar energy movement.

(Source: Bridge to India, Bloomberg, I Am Renew)

Outlook

The nations rooftop solar panels market is expected to grow at a robust pace over the next few years backed by farsighted governmental initiatives. India has set itself a target to achieve 100 gigawatts in capacity through grid-connected solar energy, out of which 40 gigawatts are estimated to come through rooftop solar installations by 2022. (Source: Bloomberg)

Visakas positioning

Visakas building products business manufactures three products - cement asbestos, fibre cement boards (V-Boards and V-Panels) and ATUM.

Cement asbestos sheets: There was a 7.6% growth in revenues from H677 crore in FY2017-18 to H728 crore in FY2018-19. The segment contributed 65% to the overall revenues of the Company. The Company expected to grow ~5% in FY20.

Fibre cement boards and panels (V-Next products):

The Company became the largest producer of fibre cement boards in the country in FY2018-19 accounting for 32% of the sectoral capacity. Segmental revenues grew by 17% to reach RS.177 crore during the year. The Company is expected to grow in double-digits in FY20 because of enhanced demand and commissioning of the Jhajjar plant, which shall increase production volumes.

ATUM: Visaka started commercial manufacture of the product in FY2018-19. The one-of-a-kind solar rooftop has huge potential and is expected to gain traction in the market over the near future as the Company undertakes more promotional activities.

Global textiles and apparel industry

Overview

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. (Source: Wazir Advisors)

Outlook

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: Business Research Company, Boston Consulting Group, Wazir Advisors, FICCI)

Indian textiles and apparel industry

Overview

Indias textile market size was projected to reach US$ 223 billion by 2021 from US$ 150 billion in November 2017. Indias textile and apparel exports stood at US$ 39.2 billion in FY18 projected at US$ 13 billion in FY2019 and is expected to increase to US$ 82 billion by 2021. The Indian apparel market is growing at a CAGR of 8%, the fastest among the top-ten countries in terms of market size and is expected to reach US$ 97 billion by 2025.

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. (Source: IBEF, PwC, Ministry of Textiles, Make in India, Technopak, Aranca Research, National Bureau of Statistics, Images Group

Outlook

The Indian textile industry is set to grow buoyed by increasing domestic consumption and export demand. The sector is expected to reach US$ 226 billion by FY2023 on the back of a growing population, incomes, aspirations and urbanisation. The organised apparel segment is expected to grow at a CAGR of >13% over a 10-year period. (Source: IBEF, Department of Industrial Policy and Promotion)

Man-made yarns

Production of yarns grew to 5,680 million kilograms in FY18 from 4,712 million kilograms in FY11 at a CAGR of 2.69%. Cotton yarn accounted for the largest share of the total yarn production and in FY18, the segments share amounted to 71.52%. Domestic demand for cotton yarn is rising as consumption from end-user industries is picking up. Besides, prices of man-made fibres, such as polyester staple fibres and polyester filament yarns being linked to crude oil are spiraling due to rising prices and rupee depreciation. The increase in prices of man-made fibres has outpaced that of cotton.

Under the GST regime cotton fibres, yarns and fabrics are for the first time being taxed at a uniform rate of 5%. Synthetic fibres and yarns were initially taxed at 18%, but thereafter the rates were reduced to 12% in October 2018. (Source: Outlook, Citi India)

Production of yarn (million kilograms)

Year Production
FY13 4,867
FY14 5,309
FY15 5,488
FY16 5,665
FY17 5,667
FY18 5,676
FY19*(April - September 2018) 2,947

Indian government initiatives

GST: The Goods and Services Tax Council doubled the threshold limit of textile players from RS.2 million to RS.4million from April 2019.

Technology Upgradation Fund Scheme: Under the Union Budget 2018-19, RS.2,300 crore (US$ 355.27 million) was allocated for this scheme. It is expected to create employment for 3.5 million people and enable investments worth H950 billion (US$ 14.17 billion) by 2022.

National Textile Policy 2000: This is expected to employ 35 million people by attracting foreign investments and also focuses on establishing a modern apparel garment manufacturing centre in every North Eastern state for which the Central Government has invested US$ 3.27 million.

FDI: 100%-FDI was allowed in the textile sector through the automatic route.

SAATHI: The Union Ministry of Textiles and Energy Efficiency Services Limited launched a technology upgradation scheme called SAATHI (Sustainable and Accelerated Adoption of Efficient Textile Technologies to Help Small Industries) for reviving the power loom sector in India.

Capacity building: The Cabinet Committee on Economic Affairs approved the Scheme for Capacity Building in Textile Sector with an outlay of RS.1,300 crore from 2017-18 to 201920, comprising placement-oriented skilling programmes. Under SAMARTH, RS.1,300 crore was approved for providing employment-oriented training to 10 lac individuals by March 2020.

Textile incentives: The Textile Ministry earmarked H690 crore for setting up 21 readymade garment manufacturing units in seven states for the development and modernisation of the Indian textile sector.

Exports: The Government of India announced a special package worth US$ 31 billion to boost exports, create one crore job opportunities and attract investments worth H800 billion (US$ 11.93 billion) between 2018 and 2020.

(Source: IBEF, Business Standard)

Budgetary allocations for the sector

• Under Union Budget 2018-19, the Government of India allocated ~Rs.7,148 crore (US$ 1 billion) towards the textile industry.

• RS.2,300 crore (US$ 355.27 million) was allocated for the Technology Upgradation Fund Scheme.

• The allocation for ROSL (Rebate of State Levies) stood at RS.2,163.85 crore (US$ 334.24 million), which is expected to benefit exporters of made-ups and apparels.

• The Central Government proposed to contribute 12% of new employees wages towards EPF over three years and this is expected to boost hiring in the apparel segment and extend fixed-term employment.

(Source: Union Budget 2018-19)

Visakas standpoint

Visaka manufactures niche, value-added cotton touch air- jet spun polyester yarns and its products have the highest margins in the synthetic yarns industry. Segmental revenues increased from RS.169 crore in FY2017-18 to RS.219 crore in FY2018-19, registering a growth of 30%. The segment is expected to perform better in FY20 led by changing market trends.

Financial overview

The Companys revenues grew by 13% to reach RS.1,127 crore in 2018-19 following an improvement in sales volumes. EBIDTA stood at RS.155.7 crore compared to RS.154.7 crore in the previous year. Interest cost increased to RS.19.9 crore in 2018-19 compared to RS.18.3 crore in the previous year. The Company reported a post-tax profit of H67.41 crore in 2018-19 compared to a post-tax profit of H66.55 crore in the previous year. Consequently, the Company proposed a dividend of H7 per equity share worth RS.10 (fully paid-up).

Key ratios

Particulars 2018-19 2017-18
EBIDTA/Turnover (%) 13.82 15.51
EBIDTA/Net interest ratio 7.8 8.5
Debt-equity ratio 0.57 0.63
Return on equity (%) 13.49 14.93
Book value per share (H) 315 281
Earnings per share (H) 42.45 41.91

Internal financial control systems and their adequacy

The Companys internal audit system is continuously monitored and updated to ensure that assets are safeguarded, established regulations are complied with and pending issues are addressed promptly. The audit committee reviews reports presented by the internal auditors on a regular basis. The committee makes note of the audit observations and takes corrective actions, if necessary. It maintains constant dialogue with statutory and internal auditors to ensure that internal control systems are operating effectively. Based on its evaluation (as provided under Section 177 of the Companies Act, 2013 and Clause 18 of SEBI Listing Regulations), the Audit Committee has concluded that as of March 31, 2019, the Internal Financial Controls were adequate and operating effectively.

M/s. Price Waterhouse & Co Chartered Accountants LLP, the Statutory Auditors of the Company audited the financial statements included in this Annual Report and issued a report on the internal controls over financial reporting (as defined in Section 143 of the Companies Act, 2013).

Human resources and industrial relations

The Company believes that the quality of the employees is the key to its success and is committed to equip them with skills, enabling them to seamlessly evolve with ongoing technological advancements.

During the year, the Company organised training programmes in different areas such as technical skills, behavioural skills, business excellence, general management, advanced management, leadership skills, customer orientation, safety, values and code of conduct. The Companys employee strength stood at 2,022 as on 31st March 2019.

Details of significant changes (i.e. changes amounting to >25% compared to the previous financial year) in key financial ratios, along with detailed explanations therefor, including:

Particulars 2018-19
Debtors Turnover 50 days
Inventory Turnover 88 days
Interest Coverage Ratio 7.8
Current Ratio 1.5
Debt Equity Ratio 0.57
Operating Profit Margin (%) 13.82
Net Profit Margin (%) 5.98

During the year under the review return on net worth stood at 13.49% compared to 14.93% during the previous year. The reduction was due to a pressure on margins and expansion of the Jhajjar unit.

Cautionary statement

This statements made in this section describes the Companys objectives, projections, expectations and estimations, which may be forward-looking statements, within the meaning of applicable laws and regulations.