Nahar Industrial Enterprises Ltd Management Discussions

Overview of economy

Over the past three years the global economy has faced a series of shocks; the Covid-19 pandemic, the Russia-Ukraine conflict, a high inflationary scenario, increase in commodity prices and a significant hike in policy interest rates by central banks. Even though the effect of the pandemic has receded, the World Bank projected slowdown in the global economy amidst the prolonged Russia-Ukraine war. The outlook for the global economy took a positive turn in the first half of 2023 as inflationary pressures began to ease but ongoing geopolitical tensions and domestic challenges in key markets are slowing any return to sustained growth. As per latest estimates from the International Monetary Fund, global growth will bottom out at 3% in 2023 as compared to 3.5% in 2022. The overall outlook of the global economy remains uncertain.

As the global economy slows down, the developing countries are also facing its effects. A shortfall of international liquidity has already turned unforeseen shocks into a vicious financial cycle in some countries. The International Monetary Funds latest estimates projected a growth rate of 6.1% for Indian Economy in 2023. It is expected that India would able to maintain its position as a favourable contributor to the global economic expansion despite the global headwinds. According to the RBI, Indias real GDP will grow by 6.5% during 2023-24. The growth will be mainly driven by private consumption, rural demand, capital expenditure in public spending, and moderation in commodity prices.

Industry structure/ Development (Textiles)

The Indian Textile & Apparel (T & A) industry is diverse, encompassing a wide range of textiles, including apparel, home textiles, technical textiles and traditional handloom textiles. The Indian Textile industry is known for its textile products and is one of the largest textile producers and exporters in the world. Indias textiles and Apparel industry is one of the mainstays of the national economy. The Indian textile industry has a significant contribution to Indias GDP. It is one of the largest employers in the country, generating jobs across the entire value chain, from cotton farming and spinning to weaving, dyeing, printing, and garment manufacturing. The sector has perfect alignment with Governments key initiatives of Make in India, Skill India, Women Empowerment and Rural Youth Employment.

India is the 3rd largest exporter of Textiles & Apparel in the world. India has a share of 4.6% of the global trade in textiles and apparel. The sector holds importance from the employment point of view as well. It provides direct and indirect employment and source of livelihood for millions of people including a large number of women and rural population. The textile industry has around 45 million of workers employed in the textiles sector. Indias textiles and clothing industry is one of the mainstays of the national economy (Source: Annual Report 2022-23, Ministry of Textiles, Government of India). The Indian textile industry has strength across the entire value chain from natural to man-made fiber to apparel to home furnishings. Its share in the nations GDP is 6% and in exports is 13%. The sector is the second largest employer after agriculture. (Source: Ministry of Textile report)

In keeping with goal of making Indias development inclusive and participative, the Governments central focus has been on increasing textile manufacturing by building the best-in-class manufacturing infrastructure, up gradation of technology fostering innovation, enhancing skills and traditional strengths in the textile sector. Government is implementing various policy initiatives and schemes for supporting the development of textile sector. These schemes and initiatives promote technology up-gradation, creation of infrastructure and skill development in the textile sector which would create a conducive environment and provide enabling conditions for textile manufacturing in the country and help in boosting the textile sector.

Management perception of concerns/ Threat/Risks

Indias textile industry was successfully recovering from the after effects of Covid-19 pandemic but unfortunately hit multiple roadblocks in the last financial year. The Textile sector has seen weak demand since June 2022 due to persistent global inflation and lingering possibilities of a recession. Inflation has affected consumers and industry alike. The textile industry is highly sensitive to global economic conditions and can be significantly impacted by global demand and pricing. Due to global economic slowdown and weak demand of textile products in both global and domestic market, most companies in the textile sector have cut down production and operating at low capacity. Further consumers prioritises other essential items in the face of inflation resultantly the major global retailers have been left with high levels of inventory.

The concerns around the textile industry have much to do with the cyclical nature of its business. Margins are exposed to volatility in raw material prices and competition. In the last year, Cotton prices in India shot up to unprecedented levels which couldnt be absorbed in finished goods prices, which affected the performance of the Textile Industry at large. Cotton is one of the most important cash crops and accounts for around 21% of the total global fibre production. In the raw material consumption basket of the Indian textile industry, the proportion of cotton is around 60%. The consumption of cotton is approximately 316 lakh bales (170 kg each) per year. India occupies first position in the world in cotton acreage with around 119.10 lakh hectares under cotton cultivation which is around 36% of the world area of 326.36 lakh hectares. Approximately 62% of Indias Cotton is produced on rain-fed areas and 38% on irrigated lands. During 2021-22, Indias productivity was around 445 kg/ha. India has emerged one of the largest producers, consumers and exporters of cotton in the World (Source Annual Report 2022-23, Ministry of Textiles, Government of India).

The largely water-intensive nature of the cotton crop, extensive use of fertilizers and pesticides and genetic modification have posed a significant environmental challenge as far as cotton cultivation is concerned. The industry is of the view that making farmers aware of healthier cotton practices and improving farming techniques can be the key to turning around the prevailing scenario. Better farming practices would lead to a better yield of cotton produce which would further help improve global demand for Indian textiles.

Besides increased raw material prices, profitability are also susceptible to forex fluctuation risks, Interest rates on bank loans and labour costs. The industry is sensitive to economic conditions and factors such as consumer demand, disposable income levels and demographic trends. The biggest threat to cotton products is competition from other low-cost man-made fibres. Consumers are shifting their focus from Cotton fibres to manmade fibres i.e. synthetic, polyester etc. which are available at lower prices. This is also putting pressure on margin.

Evaluation of business risk and managing the risk has always been an ongoing process in your Company. Your Company has a risk management framework to identify, monitor and minimise risks. The Board has a policy to oversee the risk mitigation which includes identification, assessment, monitoring and reporting of risks.

Opportunities and outlook

The entire textile value chain did well in FY 2022 but faced a challenging time in FY 2023. In the current financial year also the textile industry is facing a tough time because of slowdown in the world economy, high cotton prices coupled with weak demand of Textile products. The Government of India is implementing various policy initiatives and schemes for further development of textile sector. The increased outlay of funds to textile-centric schemes like Remission of Duties or Taxes on Export Products Scheme (RoDTEP), Rebate of State and Central Taxes and Levies (RoSCTL) and the Amended Technology Up gradation Fund Scheme (ATUFS) further underlines the governments focus on textiles. The government has introduced various schemes such as the Scheme for Integrated Textile Parks (SITP) and Mega Integrated Textile Region and Apparel (MITRA) Park scheme to attract private investment in the sector. The PM Mitra (Mega Integrated Textile Region and Apparel) Park Scheme under which the government plans to set up seven mega textile parks in the country, which will help India to transform from only a traditional textile industry to a MMF (man-made fibre) and technical textile hub in the world. This could help return of textile orders because of the planned integrated textile value chain including spinning, weaving and processing at a single location which would significantly help to boost the sector. 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.

China plus one policy, Economic collapse /volatility in Sri Lanka, Myanmar, Bangladesh and Pakistan has played out in favour of India as the world has started looking at India as reliable partner for their requirement.

Free Trade Agreement (FTA) with Australia, Comprehensive Economic Partnership Agreement (CEPA) with UAE and expected favourable trade agreements with UK / Europe present an opportunity for textile manufacturers to expand into new market. Rising demand for low cost, sustainable and eco-friendly products presents an opportunity for textile manufacturers to develop new products. After the phasing out of export quotas in 2005 Indias export performance has been below expectations. India has a meagre share of 4.6% of the global trade in textiles and apparel. The rapid growth of the retail sector and E-commerce will boost the growth of the textile and apparel industry. Rising disposable income will stimulate domestic demand.

The major factors that shaped the world economy in 2022 seem to continue in 2023 giving challenges to policymakers. Once demand for textile products recover and sustain it will boost the textile industry and economy. We expect that in this challenging period, Government will support the Textile industry in the form of favorable Textile policies, incentives and other benefits which are of paramount importance for the future growth of the Industry. Despite the slowdown in the textile sector globally, the Indian textile and apparel industry is expected to grow at 10% CAGR from 2019-20 to reach US$ 190 billion by 2025-26. The Indian apparel market stood at US$ 40 billion in 2020 and is expected to reach US$ 135 billion by 2025. Total textile exports are expected to reach US$ 65 billion by FY26. (Source report Confederation of Indian Industry CII). The Free Trade Agreements (FTAs), the Production Linked Incentive (PLI) scheme and the setting up of mega textile parks will further support the sector. The future of the Indian textiles industry looks promising in long term. Your management is looking at the future of the textile industry with optimism.

Industry Structure/Development (Sugar)

Indian sugar industry is characterized by the coexistence of private, cooperative and public sector. India is the second largest producer of sugar in the world after Brazil and is also the largest consumer of sugar. Sugarcane is one of the most financially rewarding cash crops in India and its cultivation plays a vital role towards socio-economic development of farmers through income and employment generations. The sugar sector in India also enhances the livelihoods of approximately 50 million sugarcane farmers, creates direct employment opportunities for around 5,00,000 workers and finely fits into the Aatma Nirbhar Bharat mission of the Government. Sugarcane is the primary raw material for sugar production in India. India has among the largest global areas under sugarcane cultivation. In India, sugarcane is produced majorly in nine states. Uttar Pradesh, Maharashtra and Karnataka are the top sugarcane producing states in India. Indias sugar industry operates both in the organized and unorganized sectors.

Government of India (GOI) is continuing the monthly release mechanism for sugar which was reintroduced from January 2019. From the last couple of years India has produced more sugar than the domestic requirement. India is now structurally sugar surplus country and is also exporting sugar to other countries. With a view to ensure sufficient availability of sugar for domestic consumption at a reasonable price, Directorate General of Foreign Trade (DGFT), Ministry of Commerce has amended export policy in respect of sugar and covered it under restricted category. Further, Department of Food and Public Distribution (DFPD) allocated an export quota of 60 LMT to sugar mills for sugar season 2022-23 w.e.f. 01.11.2022 along with the guidelines for the export of sugar.

Management perception of Risk/ Concern/Threat

Sugar Industry is more vulnerable to government policies being regulated by Central and State Governments that influence the cost of production. Though the sugar cane procurement price has been increased in the past two seasons but the minimum selling price of Sugar which was fixed in Feb 2019 has not been increased. Any further increase in Fair & Remunerative Price for sugarcane for the sugar season 2023-24 will have impact on the financials of the company if the minimum selling price of sugar is not proportionately raised. The mismatch between sugar and sugarcane prices in the absence of Price Stabilisation Fund advocated by CACP creates periodical pressures, more particularly during industry downturn. In view of fragmented capacity and high input costs, Indian sugar industry suffers un-competitiveness in the global market. As a result, Sugar exports generally rely on Government support measures.

Sugar business is historically cyclical in nature. Markets tend to over react to demand-supply disequilibrium, causing volatile change in sugar pricing. Sugar industry is criticized on two ways. Firstly its end product i.e. Sugar is criticized as a health hazard secondly the raw material is condemned as water guzzler. The management periodically reviews to identify the major business risks as applicable to the company and works out their mitigation strategy.

Opportunities and Outlook

India has emerged as the most populous country in 2023. This population growth have demand for food, fuel and power sectors, among others, where sugarcane is an essential resource. India has a low per capita consumption of sugar with growing income. Sugar is the most preferred among other alternatives, across all age groups, due to its affordability and easy availability.

Demand for cane and sugar is increasing in India because of their extensive use in applications like fuel, food and beverages, bakery, confectionery and others.

The entire sugar value chain, including sugarcane procurement prices, monthly sugar distribution, annual export quotas, and ethanol prices, is closely regulated by the Government as an essential commodity. It expected that for SS 2023-24 India would have manageable inventory levels of sugar. While sugar production would in all probability be higher than domestic demand. Government should be able to tackle the emerging surplus and have the option of balancing with export and ethanol together.

Segment wise/Financial/Operational performance

The company operates in two segments i.e. Textile and Sugar. Please refer Directors Report on the performance review.

Highlights of the companys Financial/operational performance

Internal Control System and their Adequacy

The company is having adequate internal financial control systems and procedures which commensurate with the size of the company. The Company is having internal audit department which ensures optimal utilization and protection of companys resources. The Internal Auditors monitor and evaluate the efficiency and adequacy of internal control systems in the Company, its compliance with operating systems, accounting procedures and also ensures that the internal control systems are properly followed by all concerned departments of the company. Significant audit observations and corrective actions taken thereon are presented to the Audit committee of the Board.

Material Development in Human resources/ Industrial Relation Front

The company is of firm belief that human resources are the driving force that propels a company towards progress and success and the company is committed to the development of its people. Your company is committed towards building a safe work place with underling safe work practice. The total employees strength was 7304 as on 31.03.2023. The industrial relations were cordial and satisfactory.

Cautionary Statement

Though the statement and view expressed in the said report are on the basis of certain assumptions and best judgment but actual results could differ from whatever is stated in the report. Important factors that could make a difference to the Companys operation include global demand-supply conditions, finished goods prices, raw material cost and availability, changes in government regulations and tax structure, economic development within India and the Countries with which the Company has business. 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.