Arvind Ltd Management Discussions

ECONOMIC OVERVIEW

Global economy

The year 2024 ended with concerted efforts by central banks worldwide to taper inflation and the business and investment world waited in anticipation of interest rate cuts. While inflation is edging down from multi-decade highs, with intermittent upticks, interest rate cut is not expected in a hurry.

Indian economy

Indias economy witnessed remarkable growth in the financial year 2023-24, expanding by ~7.3%. However, Indian textile exports experienced a decline for the second consecutive year in 2023-24, mainly attributed to the geopolitical tensions casting a shadow on the global trade. However, there is a silver lining; the textile industry is optimistic about the demand recovery for their products in FY 2024-25. Firstly, the domestic market continues to witness steady demand growth. Secondly, the large retailers in the overseas market are expected to start restocking inventory ahead of the season, leading to a gradual recovery in exports.

On the input cost side, cotton prices in India have eased from their highs and are expected to remain range-bound due to expected higher production in India. However, appreciation of the USD and adverse climate impact on cotton crops in the United States (US) and other cotton-producing countries will negate the possible price deflation. However, challenges continue to persist and the prices of crude oil and derived products will be essential to watch.

On the logistics front, we believe that the fear of significant increase in cost is behind us and shipping rates are cooling off from the highs in February 2024. The disruption expected in terms of availability of containers, delay in routes is adjusted as part of the trade. De-escalation in the Middle East conflict will further help normalise the situation.

Indian textile and apparel industry

As per the International Textile Manufacturers Federation (ITMF), the textile sector has seen subdued demand since June 2022 due to persistent global inflation and lingering possibilities of a recession. Inflation has affected consumers and manufacturers alike with manufacturers and suppliers having to pay much more across their supply chains, from the cost of freight to wage increases for their workers. This has put textile manufacturers in a difficult situation. The Indian textiles market is expected to be worth more than USD 209 billion by 2029.

In the first 11 months of FY 2023-24; Indian textile exports shrank 4.2% (y-o-y) [USD 30.96 from 32.33] due to adverse economic conditions in major destinations like the European Union (EU), the U.S and West Asian nations. Exports of readymade garments (RMG) fell to USD 13.05 billion from USD 14.73 billion, while yarn exports fell to USD 4.47 billion from USD 4.23 billion.

In the Interim Budget for FY 2024-25; the Govt of India. announced extension of the Rebate of State & National Taxes & Levies (RoSCTL) scheme for 2 years (till the end of March 2026) which is a welcome step for long-term trade planning. Another positive announcement is the reduction of excise duty from 12% to 10% for all capital goods when there has been a slowdown in the investment of knitwear export sector. The total budget allocation increased by 27.6%, led by the allocation of 600 crores for Cotton Corporation of India towards the cotton MSP operations. The allocation of funds for textile-centric schemes like RoDTEP and RoSCTL has been moderately increased by 10% and 5.8%, respectively. Additionally, funding for the Amended Technology Upgradation Fund Scheme (ATUFS) has been raised from 1,956 crores to 2,300 crores.

The Government of India (GOI) issued a notification effectively rescinding the 10% import duty on cotton with a staple length above 32 millimetres (mm) as of February 20. This revocation eliminates the previous import duty, which comprised a 5% basic customs duty and a 5% tax. The reduction in duty is expected to facilitate increased imports of high-value cotton, which is used in the manufacturing of premium cotton textiles and apparel for this season, as well as to meet medium-term requirements.

Work is currently under progress for the schemes announced like: Integrated Textile Parks (SITP), Mega Integrated Textile Region and Apparel (MITRA), Park scheme to attract private equity in the sector, and PM Mitra Scheme Government. The PM Mitra Park Scheme under which the government plans to invest over 70,000 crores to set up mega textile parks will provide a massive fillip to the textile sector and help India transform from only a traditional textile industry to an MMF (man-made fibre) and technical textile hub in the world. The government recently approved an investment of 4,455 crores under this scheme for the creation of seven mega textile parks that would streamline multiple verticals from spinning, weaving and dyeing to printing and garment manufacturing. The government has come up with several export promotion policies for the textile sector as well. It has also allowed 100% FDI in the sector under the automatic route. The government aims to achieve a 3-5x time increase in the export of technical textiles worth USD 10 billion over the next three years. Further, a Production-linked Incentive (PLI) Scheme worth 10,683 crores (USD 1.44 billion) for manmade fibre and technical textiles over a five-year period will also boost the sector. The capex spending on transportation and logistics sectors by the government has increased to 10 lakh crores in the recent budget. This spending which is roughly about 3% of our GDP will have a ripple effect on multiple industries including the textile sector which could benefit from a smooth and sustainable infrastructure model. The textiles and apparel sector supported by the governments structural and productivity-related policy interventions and fuelled by a rising domestic demand seems well poised to prosper exponentially.

Opportunities and Threats

Opportunities

• Favourable government initiatives such as the National Technical Textiles Mission (NTTM), 100% FDI in the sector, SAMARTH- Scheme for Capacity Building in the Textile Sector, etc. for the development of the textile industry.

• Extension of the scheme for Rebate of State and Central Taxes and Levies (RoSCTL) till March 31, 2026, for the export of apparel, garments and made-ups with the same rates would benefit textile companies.

• The ‘China plus one diversification policy will benefit Indian manufacturers. As global retailers are looking for an alternate supply base, India has emerged as an attractive option for manufacturing and exports of textiles and apparels.

• The growth of the technical textile market will create lucrative opportunities.

• The rapid growth of the retail sector and E-commerce will boost the growth of the textile and apparel industry.

• Rising disposable incomes will stimulate domestic demand.

• The growing popularity of ‘fast fashion products will contribute to the growth of the textile and apparel industry.

Threats

• Being a labour-intensive sector, the shortage of skilled workforce may impact the operations and result in inability to complete orders.

• Competition in the global market, especially from the textile and garment industries in Bangladesh and China.

• Subdued demand for textile and apparel exports as consumer confidence is lower in the key markets.

• Compliance issues with the environmental norms and regulations.

Company performance

FY 2023-24 started on a challenging note for businesses as interest rate tightening resulted in a sharp decline in consumer demand. Additionally, for the apparel markets, the summer and fall of 2023 were marked by high inventory levels created by preponed buying in the previous quarters. As the year passed, consumer demand held surprisingly steady, and inventories got cleared. This resulted in a clear resumption of wholesale buying starting in Q3 of the fiscal year.

For Arvind Limited, H1 was challenging as demand in the core textile businesses remained muted. Denim volumes remained soft, while woven volumes remained healthy throughout the year. Garment volumes remained subdued as key customer programmes kept postponing inventory addition/ fresh buying until the holiday season was over. Our key global customers resumed buying in H2 which was reflected in improved volumes in Q4, especially in Garments and Denims.

FY 2023-24 also saw price realisations coming down sharply following the softening of input raw materials, and logistics prices. While the lag effect gave a one-time positive boost to margins during mid-year, price deflation masked the underlying volume growth, especially in the case of AMD.

AMD continued to deliver 20%+ volume growth as promised through most quarters. The Human Protection and Composites businesses delivered 20% and 26% growth in top-line. The industrial cluster was challenged by muted demand from some of its key accounts. On an aggregate basis, AMD delivered a healthy 14% revenue growth despite sharp reductions in price realisations.

During FY 2023-24, the Company continued expanding its renewable energy capacity, as the 24 MW hybrid solar-wind installation went live. We have plans to further augment this capacity and take the share of renewable power from 47% to near 90% levels. Also, during the year, a global Centre of Excellence for water and wastewater solutions was inaugurated - this is an ambitious project with co-investment from one of our large customers. Similarly, we have customer collaboration in other areas of sustainability going on - e.g. in using Biomass for boilers to produce steam, as well as farming projects to enable better cotton production.

Financial Performance

FY 2023-24 depicts all-round performance.

(Rs. in Crores)

Particulars	For the Year Ended
	March 31, 2024		March 31, 2023
	Amount	% of Sales	Amount	% of Sales
Revenue from Operations	7,738		8,382
Other Income	41		45
Total Revenue	7,779		8,427
Cost of Material Consumed	3,476	45%	4,011	48%
Purchase of Stock in Trade	237	3%	390	5%
Change in Inventory	-34	0%	70	1%
Project Expenses	122	2%	89	1%
Employee Cost	964	12%	868	10%
Other Expenses	2,128	28%	2,155	26%
EBIDTA	886	11%	845	10%
EBIDTA w/o Other Income	845	11%	800	10%
Depreciation	266		253
Finance Cost	159		164
Share of Profit/(loss) of Joint venture	-0		1
Profit Before Exception Items and Tax	461	6%	428
Exceptional Item	2		59
Profit before Tax	463	6%	487	6%
Tax	111		71
Profit after Tax	353	5%	417	5%
Minority Interest	16		9
Profit from Discontinuing Operations	-		-4
Net Profit	337	4%	405	5%

Textile businesses delivered a mixed bag of performance. While Knits Fabric and Garments volumes showed steady growth, Denim & Woven fabric volumes declined as our key customers deferred buying and reduced the lot/drop sizes to manage their inventory more sharply. Fabric Price realisation stabilised after a continuous fall for 5 quarters.

Human Protection revenues were driven by higher wallet shares in key accounts, increased traction in the Middle East and healthy growth in the Defence business. Composite volumes jumped sharply driven by large global project orders. Mass Transportation factory went live in Q4 FY 2023-24. Industrial business had seen softer demand through Q3 and is now seeing a bounce-back.

During the year, Arvind Limited commissioned a biomass-based boiler at Naroda which will reduce emissions by 50,000 tCO2 a year and enable the plant to operate coal free. Arvind Limited also launched GWICA (Global Water Innovation Centre for Action) which shall provide an opensource platform that brings together expertise and audience through showcasing physical models and simulations, demonstrations, seminars and events, and hosting technology visits.

Results review

For the full year, consolidated revenues of the company stood at 7,738 crores which was lower by 8% compared to last year. EBITDA margins (before other income) increased around 6% levels ( 845 crores as compared to 800 crores in FY23). Profit Before Tax and exceptional items from continuing operations stood at 461 crores, which was higher than 428 crores last year. Profit after tax and exceptional items stood at a robust 337 crores.

Revenues

Overall revenues de-grew by 8% and stood at 7,738 crores. Textile revenues were lower by ~14% and reached 5,803 crores. Garments volumes showed a steady growth of 1%. Denim & Woven fabric volumes showed a reduction of 12% and 3% respectively. Advanced Materials steadily delivered strong performance through the quarters as its full year revenues grew by 14% and closed the year at 1,428 crores.

Cost of Goods Sold:

For the Textile businesses, cotton prices have remained stable. Dyes and Chemicals, especially those linked to freight also started to soften in the second half of the financial year. For AMD as well, prices of specialty yarns, glass rovings, resin systems and chemicals started on a high note and came down as the year progressed and stabilised.

Operating Margin:

On a full year basis, the EBITDA margins stood at 10.9%, with an increase of 138 basis points compared to 9.5% in FY23. In absolute terms, EBITDA stood at 845 crores compared to 800 crores in the previous year.

Finance Cost: Interest outgo for the year stood at 159 crores compared to 164 crores for the previous year.

Depreciation: Depreciation for the year stood at 266 crores, which was slightly higher than 253 crores in the previous year.

Profit Before Taxes: PBT for the full year stood at 463 crores, compared to 487 crores in FY23.

Net Profit: Profit after taxes, exceptional items and discounting operations stood at 337 crores for FY24, as compared to 405 crores for FY23. The PAT is lower as there was a positive impact of tax in FY23 as we switched over to lower tax regime ( 39 crores).

Working Capital: NWC as of March 31, 2024 stood at 1,454 crores which was equivalent to 5.3 turns of FY24 revenues, this fell from 6.3 turns of FY23 revenues and stood at 1,324 crores as of March 31, 2023.

Debt: Our Net Debt at the end of FY24 stood at 1,250 crores which was lower by 77 crores as compared to the close of the previous financial year. This debt reduction was a realised by continuing a tight operating and financial discipline and limiting the capital expenditure to necessary limits.

Key financial ratios

(Rs. in Crores)

S. No.	Particulars	2023-24	2022-23	Change (%)
1	Debtors Turnover Ratio	7.60	8.08	-5.9%
2	Inventory Turnover Ratio	4.26	4.35	-2.0%
3	Current Ratio	1.73	1.74	-0.7%
4	Debt Equity Ratio	0.37	0.42	-10.8%
5	Interest Coverage Ratio	3.9	3.6	8.1%
6	Net Profit Margin	4.4%	4.9%	-10.6%
7	Operating Profit Margin	8.0%	7.1%	13.6%
8	Return on Net Worth	9.7%	11.1%	-12.6%

Debt to Equity ratios show significant improvement as a result of debt repayment of 77 crores during the financial year. Operating profit margin improved on account of higher volumes, efficiency improvement and operating leverage. However, return on net worth reduced due to decrease in profit after tax mainly on account of volume reduction in Denim & woven segment and price deflation resulting in lower revenue. Further more, there was a positive impact of tax in FY23 as the company switched over to lower tax regime.

Segment-wise or product-wise performance

Woven

Due to cautious market amidst uncertain demand, Woven segment revenues was lower by 10% from 2,792 crores in FY23 to 2,518 crores in FY24. Volumes de-grew from 126.7 million metres to 122.5 million metres [64% export] in FY24.

Large domestic brands and retailers continued to account for a large portion of Woven volumes. Woven volumes also got boosted by fabric sales through wholesalers, direct-to-retail and The Arvind Stores. Together these retail-oriented businesses recorded 34%+ revenue growth over the Q4 FY24 y-o-y basis.

Average price realisation for Woven products climbed up to 207 per metre by Q1 and reduced gradually to close the Q4 FY24 at 200 per metre.

Denim

During the financial year, the Denim fabrics business clocked 1,257 crores against 1,586 crores in the previous year. In terms of volumes, the full year tally stood at 48 million metres compared to 55 million metres in FY2023.

The proportion of exports reached 58%. Multiple factors are driving this decrease in Denim volumes. The cyclical trend of consumer behaviour is driving towards more formal and nondenim leisure wear. Denim is also transitioning from fast fashion to longer-lasting assets, as people gear up for tougher economic times. Some of the large customer programmes are also reduced/ postponed to avoid any inventory build-up in their supply chains. Given Arvinds vertical strategy, this has also impacted garmenting volumes adversely, however, this trend has started reversing from Q4.

Price realisation for Denim followed the overall trend of rising through Q2 and then started declining steadily in tandem with lower raw material costs. Price realisation for Q4 of Denim is 245 per metre.

Garment

While volume remained same, Revenues from garmenting part of our textiles business declined from 1,695 crores in FY23 to 1,595 crores in FY24, this is on account of lower demand for denim products and lower realisation.

Overall garmenting volumes for full garments (not counting the small SMV essential products) stood at 32M pieces across our facilities located in Karnataka, Ranchi and Ahmedabad area. This was flat in comparison to FY23 volumes for the corresponding scope.

Advanced Materials

FY24 marked another year of continuing growth in the Advanced Materials Division (AMD) business. Revenue from the segment stood at 1,428 crores which was 14% higher than 1,250 crores clocked for FY23. All three clusters of AMD - namely, Human Protection, Industrials and Composites delivered healthy growth.

Human Protection revenues driven by higher wallet shares in key accounts, increased traction in Middle East and healthy growth in Defence business. Composites volumes jumped sharply driven by large global project orders. Mass Transportation factory went live in Q4 FY24. Industrials business had seen softer demand through Q3, now seeing bounce-back.

Outlook

Despite near-term uncertainties, we remain optimistic about the medium term and intend to continue investing in our growth engines. We incurred 262 crores in capex and we plan to spend about 400 crores to 450 crores in FY25. The investments will go in capacity increases in AMD & Garments and product differentiation and maintenance in Fabrics apart from investment in renewable energy to take the share of renewable power from current around 47% to close to 90%. The Capex will be funded mostly from internal accruals.

With a standout performance in Q4 of FY24, and reasonably good order book position, we hope to achieve a double-digit growth in revenue for FY25, maintain or marginally improve the margins and improve ROCE. Demand in Textiles segment will vary by market. While domestic markets are expected to improve, US volumes may see modest growth or remain flat. Demand from Europe and UK is expected to remain muted. Things will change for better in case India is able to sign any free trade agreement with any of the key geographies. We expect to grow our traditional textile business at a more secular rate aligned to Indias GDP, while the AMD business is expected to grow at 20%+ CAGR.

Risks and Concerns

The Company has a robust Enterprise Risk Management framework for timely and effective identification, assessment, and mitigation of key business and operational risks. The key risks and their corresponding mitigation measures are described below:

• Raw material risk:

The volatility in prices of raw materials such as cotton, specialty fibres and yarns, glass roving, specialty chemicals, and resins increases the input costs which adversely impacts the Companys profitability. Further, many raw materials used in AMD correlates with crude oil prices and volatility in crude oil prices may weaken AMD margins.

The Company monitors price fluctuations and follows inventory management and responsive procurement policy to ensure timely procurement of raw materials at competitive prices. It also engages in contracts with clients and tries to pass on variations in the prices of raw materials to them to protect margins.

• Economic risk:

The geopolitical turmoil, global economic slowdown, high inflation and the threat of a looming recession in key markets like the US and Europe have led to a slowdown in the export market. Demand compression could reduce the Companys export business.

The macroeconomic environment in the US/EU markets has started to improve though the export demand continues to remain uncertain. However, the domestic market will continue to provide sizeable business opportunities for the Company.

• Exchange rate volatility risk:

Since a significant portion of the Companys revenue is in foreign currency and a major part of the costs are in Indian Rupees, any movement in currency rates would impact the Companys performance.

Exposures on foreign currency sales are managed through the Companys hedging policy, which is reviewed periodically to ensure that the results from fluctuating currency exchange rates are appropriately managed. The Company strives to achieve asset liability offset of foreign currency exposures and only the net position is hedged. The Company also uses forward contracts and foreign exchange options towards hedging risk resulting from changes and fluctuations in foreign currency exchange rates.

• Logistics risk:

The ongoing Russia-Ukraine war has adversely impacted the global supply chain network. Since majority of the Companys business is export-oriented and depends on the supply chain for exporting final products, any kind of disruptions in the supply chain, rising container shipping costs, availability and delays pose severe challenges for the business. Further, inadequate and inefficient logistics in India lead to delays and high costs of logistics.

The Company has strengthened its supply chain network and developed strong relationships with suppliers and vendors for smooth operations.

• Risk of continuing losses in few subsidiaries:

Some of the Companys subsidiaries are yet to become profitable, while others have not demonstrated consistent year-on-year improvements in their bottom lines. Their subdued performance has negatively impacted the Companys overall consolidated profits.

To address this, the Company has devised a plan to rationalise capital allocation among the underperforming subsidiaries. This strategy is expected to enhance profitability and returns at the consolidated entity level.

• Disaster risk:

The Company is susceptible to disasters and crises such as pandemics, earthquakes, geopolitical instability, fire hazards, etc. which may cause operational disruptions, shutdowns or production cuts, project delays, supply chain hurdles, and increased construction costs.

The Company prioritises the safety of its stakeholder community and ensures business survival during unpredictable crises. It has a well-designed safety management policy that eliminates/reduces the risk of workplace incidents. Its proper implementation and updation enable effective prevention besides equipping the employees to handle unforeseen incidents. To reduce exposure to fire-related hazards, it has placed pressurised fire protection and related systems at strategic locations to deal with fire-related incidents.

• Technology risk:

There is a constant requirement for technology upgradation and regular R&D to enhance efficiency and productivity. Failure to use the latest and sustainable technologies to cater to the changing requirements of the global market may lead to loss of business.

The Company gives utmost importance to technology and proactively invests in R&D, modern and sustainable technologies, machinery and equipment for improving the manufacturing process, and quality and strengthening its product portfolio to cater to emerging market trends.

While the medium-term future looks more certain than ever, the near-term headwinds persist on multiple counts. We are in the middle of two volatile geopolitical conflicts, multiple geographies undergoing election season, interest rates fatigue continues to be high adding to deflationary pressure resulting in oscillating consumer demand. While the global trade showed resilience in past twelve month, we will continue to be watchful of the said risks to take possible timely mitigating action.

Human resources / Industrial relations

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 in nurturing

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. The Companys employee strength stood at 31,174 as on March 31, 2024. Further, industry relations remained peaceful and harmonious during the year.

Internal control systems and their adequacy

The Company maintains an efficient internal control system commensurate with the size, nature and complexity of its business. The internal control system is responsible for addressing the evolving risks in the business, reliability of financial information, timely reporting of operational and financial transactions, safeguarding of assets and stringent adherence to the applicable laws and regulations. The internal auditors of the Company are responsible for regular monitoring and review of these controls. The Audit Committee periodically reviews the audit reports and ensures correction of any variance, as may be required. Key observations are communicated to the management who undertakes prompt corrective actions.