zodiac clothing company ltd share price Management discussions

1. OVERVIEW:

The financial year 2022-23 was a mixed bag for the global economy: on the one hand, economic growth sustained reasonably well as pent-up demand, strong household balance sheets and low unemployment kept consumption steady. On the other, the world experienced significant challenges such as the war in Ukraine, persistent inflation, supply chain disruptions, sustained rate hikes by central banks, bank failures in the US and Europe, etc. As per the IMFs World Economic Outlook (WEO) released in April 2023, global growth for 2023 at 2.8% is likely to be followed by the medium-term growth plateauing at 3%. Efforts by central banks across the world are targeting a reduction of headline inflation from 7.3% to 4.7% in 2023 among Advanced Economies (AEs) and from 9.8% to 8.6% among Emerging Market and Developing Economies (EMDEs). Within this group, growth in Emerging & Developing Asia is projected to accelerate meaningfully.

Going forward, Central banks continue to face a challenging tradeoff between restoring price stability and maintaining growth in an environment of heightened uncertainty.

As per the initial estimates by the National Statistical Office, Indias GDP is expected to grow between 6% to 7% in 2023-24 as it continues to recover from the pandemic-related disruptions, depending on the trajectory of economic and political developments globally. Going forward, growth may moderate, as the external sector remains vulnerable to continued global liquidity tightening and may offset potential strong domestic demand growth. Notwithstanding, the IMF projects that India will remain the fastest-growing major economy in the world.

Indias overall exports during FY 2022-23 grew at 13.84% to USD 770.18 billion, with Merchandise exports growing at 6.03% to USD 447.46 billion and Services exports growing at 26.79% to USD 322.72 billion. The Indian government has set an ambitious target of hitting USD 2 trillion annually in exports by 2030, aided by growth in value added manufactured products and services. To this end, commendably, the government is undertaking a slew of measures, including the promoting of Make in India, Production Linked Incentives (PLI) scheme, modifying foreign trade policy, extending Emergency Credit Linked Guarantee Scheme, etc. These policies, coupled with the global drive to reduce the dependence of supply chains on China ("China plus one strategy") are expected to aid the growth of the manufacturing sector.

2. INDUSTRY STRUCTURE AND DEVELOPMENT:

The size of the Global clothing market declined from US$1.58 trillion in 2019 to US$1.4 trillion in 2020 before recovering to US$1.55 trillion in 2021 and to 1.74 trillion in 2023. It is projected to reach US$ 1.84 trillion in 2025.

India is among the worlds largest producers of Textiles and Clothing. The domestic clothing & textile industry in India contributes approx. 2% to the countrys GDP and 7% of industry output in value terms. It is a sector of national importance from an employment standpoint as it provides

direct and indirect gender-sensitive employment for millions of people. However, with increasing competition, changing consumer preferences, and technological disruptions, the industry faces both opportunities and challenges.

India shipped clothing worth $14.8 billion in 2022, with US being the top market accounting for ~36% of Indias exports at $5.3 billion with EU and UK continuing to be the other major textile and clothing export destinations for India, together accounting for ~50% of exports.

The overall clothing segment size in FY 2020 was estimated to be USD 67 bn. The market is projected to grow and reach USD 107 bn by FY 2025, driven by higher discretionary spend, better access and availability of products, increasing urbanization and digitization in India, and recovery globally.

India has recently signed Free Trade Agreements (FTAs) with UAE and Australia which are large markets for textile and clothing. India also has trade agreements with Japan and South Korea that have not been harvested to potential. India must pursue the opportunities these markets offer. The FTAs under negotiation with key markets like the EU, UK, Canada and the agreement under discussion with the US would offer significant growth if and when they are finalized, bearing in mind that China is ceding ground.

3. (A) OPPORTUNITIES

The global Textile and Clothing trade has gone through a lot of turbulence in the last decade. Despite challenges, the trade has continued to grow over the years. Global trade accounted for US$871 billion in 2021 growing at 3.2% CAGR since 2010. Categorical break-up of the trade shows that clothing has the largest share of 57% constituting US$494 billion. Despite several headwinds in global trade, the long-term scenario remains positive as economies are expected to rebound once the challenges are contained. The global Textile and Clothing trade is expected to reach US$1200 billion by 2030 growing at 3.6% CAGR.

The clothing industry in India has despite hiccups, seen steady but modest growth over the years, and with the right strategies in place, could gain lost ground in 2023 and beyond. The industry can take advantage of several opportunities that will contribute to its growth and success. The industry is expected to benefit from extension of the scheme for Rebate of State and Central Taxes and Levies (RoSCTL) till March 31, 2024.

With the changing global geopolitical scenario, buyers are seeking to de-risk their sourcing footprint by reducing their dependence on a single country, namely China, which has been the dominant supplier of textiles and clothing over the past decades. While China will continue to play a significant role in the trade dynamics, buyers are now looking at other options across categories. India stands to gain from this shift, which presents a huge opportunity.

The consumption categories such as fashion and clothing, food and FMCG, and beauty and personal care are expected to have a higher share in Indias online retail pie

by 2025, according to a report by the Boston Consulting Group and Matrix Partners. The pandemic is estimated to have accelerated digital penetration, and e-commerce is expected to reach a total of 350 to 400 million online shoppers, spending $150 billion by 2025. Consequently, e-commerce is another opportunity that cannot be ignored. With more consumers turning to online shopping, it is imperative that clothing companies establish a strong digital presence. At 25%, the fashion and clothing category is expected to have the highest share of estimated overall online retail spends.

Furthermore, as global fashion trends continue to evolve, there is an increased demand for sustainable and eco- friendly clothing, guiding the direction in which Indian manufacturers need to strengthen their offerings. ZODIAC has been a pioneer in sustainability among players in the industry. Our manufacturing plants are GOTS certified for organic cotton. The companys facilities are carefully engineered to minimise water consumption and further carries out rain-water harvesting, making us water positive. Our manufacturing plants comply with norms for zero discharge of hazardous chemicals into the environment. Custom designed and built equipment reduces our energy usage and carbon footprint, helping us score 100/100 for energy conservation on the HIGG Index. Further, our head office is a LEED Gold certified building.

Domestically, factors like education, urbanization, nuclear families, influence of social media, disposable incomes should continue to drive increased consumption, even as greater fashion and brand consciousness drive consumer up-trading.

The company is confident that its in-house manufacturing and robust distribution chain will ensure adequate supply to meet increased demand and lead to growth in our branded business.

(B) THREATS:

The clothing industry in India has been facing many challenges in recent years. As we look ahead to 2024, some threats that could impact the sector include rising production and delivery costs, and greater competition from new domestic entrants (e-commerce and bespoke offerings) as well as international brands. Indias clothing industry is facing an acute blockage of funds in GST refunds to exporters, as well as to domestic players. The business-friendly government is strongly urged to resolve the situation, which is impeding growth. The rising cost of funds is another major threat.

Changing trends and consumer preferences will also require companies to be agile and adaptable in their approach. Established brands must find ways to remain relevant in the face of disruption by newer entrants.

High inflationary conditions and recessionary trends in key markets of US and EU had kept the textile and clothing demand subdued in 2022, especially the latter half. Volume growth in most of the markets remained in negative to nil zone, with market size increase happening due to higher prices.

The year 2022 was marked with unprecedented raw material price volatility. The daily Cotlook index reported highest value of 173 in May (highest value in more than a decade), which then almost halved down to 89 in November. Manmade fibre price variation during the year also remained high, although not as sharp as cotton. This volatility could present a threat in the future as well.

China continued to lose its share in global clothing exports because of rising cost of manufacturing, focusing on the demand within China and geopolitical shifts outlined above. Bangladesh, Cambodia and Vietnam have emerged as the highest gainers of Chinas lost share, which rightfully belonged to India, by successfully negotiating favourable tariff for import of their clothing. India needs to neutralise the tariff disadvantage post haste.

In March 2022, the European Commission published "EU Strategy for Sustainable and Circular Textiles" with a vision to produce, distribute and consume textile and clothing products sustainably by 2030. The alignment with this legislation will be important for manufacturers and brands alike, to keep up and stay competitive. The path to compliance will present a major challenge.

Overall, it is crucial for players in the Indian clothing industry to stay alert and proactive in addressing the challenge. By doing so, they can ensure their continued success and growth even amidst uncertain times.

4. SEGMENT / PRODUCT WISE PERFORMANCE:

The Company is exclusively engaged in the business of clothing and clothing accessories and in the context of the Indian Accounting Standard (Ind AS 108) constitutes one single operating segment. The Companys three segment leading brands Zodiac, Zod and z3 are well established and cater to diverse customer needs.

The geographical segment is identified and given below:

Year Ended 31^st March, 2023 - On a Consolidated Basis

(Unit: R lakhs)

Particulars	India	Rest of the World	Total
Segment Revenue (Net)	6190.09	11290.78	17480.87
Carrying Cost of Segment Non Current Asset	12854.82	699.50	13554.32

5. OUTLOOK:

The global economy is gradually recovering from the impact of pandemic and simultaneously faces new challenges discussed above. Despite monetary tightening, inflation is persistent in many key economies and it is anticipated that global headline inflation will remain elevated, albeit fall from present levels. Inflation is unlikely to return to target levels before 2025 in most cases leading to an expectation

that rates will remain high until inflation is in check. The increasing cost of funds and blockage of funds in GST refunds is a major concern.

Despite facing formidable challenges, India stands tall and steadfast and has emerged as a beacon of resilience in the global economy, thanks to the proactive steps taken by our government. The IMFs bi-annual report observed that Indias headline retail inflation is expected to ease from

6.7 per cent in the previous year to 4.9 per cent in 2023-

24. This is a clear indication of Indias economic strength.

The IMF also praised Indias efforts in leveraging digitalization to overcome the challenges posed by the pandemic, which have not only helped the country weather the storm but also created new opportunities for growth and employment.

In this turbulent global economic environment, India has experienced macroeconomic and financial stability. This is attributable to sound macroeconomic policies and the innate resilience of the economy which have fortified it against recurring global shocks.

With monetary tightening, the US dollar has appreciated against several currencies, including the rupee. However, the rupee has been one of the better-performing currencies worldwide, but the modest depreciation it underwent (taken together with higher commodity prices) may have added to the domestic inflationary pressures besides widening the Current Account Deficit (CAD).

In anticipation of growing demand and to mitigate the challenge of higher trade barriers in India the Company is working to commission a new production facility in Bangladesh and expects to commence production by the end of the calendar year.

6. RISKS AND CONCERNS:

The Company has identified key risks to include fluctuation in raw material prices, weak demand, increased global and local competition, currency fluctuations and sales channel disruptions. In addition, regulatory risks include changes in taxation regime, government policies with respect to textiles and clothing, pollution control, industrial relations issues & failure to comply with regulatory provisions. Rising interest rates and unwarranted blockage of funds in GST refunds are another significant risk. A Company- wide awareness of risk management policies and practices is being inculcated to mitigate the adverse effect of foreseeable risks on the operating results.

7. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

The Companys internal control systems, which are supplemented by an exhaustive internal audit (by an independent audit firm reporting directly to the Audit Committee), which is regularly subjected to in-depth involvement of the management. Internal Audit covers the various functions, processes and other activities, including own retail operations of the Company. Transactions are authorised, recorded and reported accurately and subjected to audit as well. The system of internal controls also ensures

that all assets are safeguarded, insured and protected against loss. The internal control systems are designed to ensure that the financial statements are prepared based on reliable information. The reports presented by internal auditors are reviewed by the audit committee on a routine basis. The committee makes note of the audit observations and takes corrective actions, if necessary. The committee maintains constant dialogue with statutory and internal auditors to make sure that internal control systems are operating effectively.

8. COMPANYS FINANCIAL PERFORMANCE:

(R in lakhs)

	2022 - 23	2021 - 22
Total Revenue from Operations (Net)	16,900	12,824
PROFIT/(LOSS) BEFORE TAXATION	1,516	(884)
Provision for Taxation:
Current Tax	-	113
Deferred tax Charge/(Credit)	(64)	(23)
Tax in respect of earlier years	1	14
PROFIT/(LOSS) AFTER TAXATION	1,579	(988)
Other Comprehensive Income / (Loss)	420	580
Total Comprehensive Income / (Loss) for the year	1,999	(408)

Operational Revenue & Profits:

EBIDTA decreased in March, 2021 due to the continuing impact of the pandemic. In March, 2022 EBIDTA improved due to partial opening of markets after pandemic and decreased in March, 2023 due to continued challenges arising out of the volatile macro economic environment, supply chain disruptions and geopolitical unrest. Despite this the Company remained focused on executing its strategic roadmap, reducing expenses and building on the foundations that we have laid to spur our future growth.

We are opening 16 new stores which will become functional by 1^st week of November, 2023 and a further 16 stores will become operational by 1^st week of January, 2024, funded by existing liquidity.

We observe very healthy demand for our products through Digital Marketing, and in this direction, have engaged an internationally recognised entity to assist in improving sales through this channel substantially.

Internationally, we expect our revenue to further improve after the commencement of manufacturing activities at our Bangladesh unit (expected before the end of the calendar year).

All this should result in increased EBIDTA, going forward.

During the Year:

The Company is in compliance with the Code of Conduct for Prevention of Insider Trading formulated in terms of provisions of SEBI (Prohibition of Insider Trading) Regulations, 2015, as amended from time to time.

During the year 9 new Stores were opened (25 unviable stores closed - a net decrease 16 stores) with 86 stores at the end of the year.

9. HUMAN RESOURCES DEVELOPMENT / INDUSTRIAL RELATIONS:

The Company recognizes the need of continuous growth and development of its employees to meet the challenges posed by a rapidly growing consumer facing organization, besides fulfilling their own career path objectives. Consequently, the role of Human Resources continues to remain vital and strategic to the Company.

The Company considers its employees as the most important asset and integral to its competitive position. It has a well-designed HR policy that promotes a conducive work environment, inclusive growth, equal opportunities and competitiveness and aligns employees goals with the organisations growth vision. Its human resource division plays a crucial role to build a strong and talented workforce. It provides opportunities for professional and personal development and implements comprehensive employee engagement and development programmes to enhance the productivity and skills of its employees.

Most importantly, it places great emphasis on eliminating all forms of discrimination in terms of employment and professional activities (gender, age, race, political affiliation, religion, among others). It pays special attention to professional equality, gender equality, the employment of seniors and young people, the employment of people with disabilities.

Talent and culture are among the key building blocks in shaping us into a resilient and sustainable organization. We will continue to focus on defined strategic areas to leverage the potential of our human capital. As of 31^st March, 2023, the Companys strength stood at 1161 employees.

10. STANDALONE KEY FINANCIAL RATIOS:

Particulars	As at March 31, 2023	As at March 31, 2022	Explanation of Y-O-Y variance higher than 25%
Debtors Turnover Ratio	9.39	6.89	The Change in ratio compared to previous year is due to increase in sales and decline in Trade receivables.
Inventory Turnover Ratio	1.10	0.79	The Change in ratio compared to previous year is due to increase in sale and focus of management on reducing the inventory levels.
Interest Coverage Ratio	5.77	2.53	The change is due to increase in EBITDA compared to previous year.

Current Ratio	1.92	1.36	The Change in ratio compared to previous year is due to increase in Current assets and decrease in Current liabilities.
Debt Equity Ratio	0.25	0.33	-
Operating Profit Margin	55.64%	55.73 %	-
Net Profit Margin	8.95 %	(6.15)%	The Change in ratio compared to previous year is due to increase in profit for the year.
Return on Net Worth	16.00%	7.00%	The change is due to increase in EBITDA compared to previous year.

11. CAUTIONARY STATEMENT:

Statements in the report on Management Discussion and Analysis describing the Companys objectives, expectations or predictions may be forward looking statements within the meaning of applicable security laws or regulations. These statements are based on certain assumptions and expectations of future events. Actual results could, however, differ materially from those express or implied. Important factors that could make a difference to the Companys operation include global demand-supply conditions, finished goods prices, raw materials cost and availability, changes in Government regulations and tax structure, economic development within India and the countries with which the Company has business contacts and other factors such as litigation and industrial relations in India, trade agreements, especially with the EU and the US.

The Company assumes no responsibility in respect of forward looking statements herein, which may undergo changes in future on the basis of subsequent developments, Information or events.