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Updated:24 Nov, 2014, 13:06 PM IST

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Updated:24 Nov, 2014, 13:16 PM IST

DIRECTORS' REPORT & MANAGEMENT DISCUSSION AND ANALYSIS

Dear Shareholders,

Your Directors are pleased to present the Thirty–fifth Annual Report together with the audited accounts of the Company for the financial year ended 31st March, 2014.

Dividend

Considering the loss incurred by the Company, your Directors do not recommend any dividend on equity shares for the year.

Review of Operations

The year 2013–14 witnessed a severe slowdown coming after FY13 which was itself a difficult year for the Indian economy. This downturn continued to affect the polyester industry as well.

The net turnover of the Company for the year 2013–14 declined 17.06% at Rs.3066.62 crores as compared to Rs.3697.25 crores in the previous year. The Company achieved total sale of yarn at Rs.1900.90 crores as compared Rs.1865.60 crores in the previous year. The sales of chips were at Rs.1172.89 crores, a major decline of about 39% compared with the previous year. The sale of fabrics improved marginally from Rs.201.37 crores in the previous year to Rs.215.00 crores in the year 2013–14. The income from export sales for the year declined 6.7% at Rs.398.00 crores as compared to Rs.426.59 crores in the previous year.

Continuous backward integration by PFY producers towards polyester chips production in order to reduce the cost of yarn production has deeply affected the merchant sales of existing polyester chips manufacturers. Your Company being the largest textile–grade polyester chips manufacturer in India, witnessed a steep volume decline of 23.8% CAGR over FY12–14.

The main reasons for higher decline in the Company's chips volumes vis a vis industry can be attributed to: (1) entry of new suppliers of chips; and (2) continuation of disadvantageous taxation policies like: (a) 2% VAT credit reversal for goods sale out of Gujarat utilizing inputs procured within Gujarat (b) Availability of 2% CST exemption on domestic sale outside Gujarat for competitors situated in Silvassa – Daman areas and (c) delay in introduction of GST.

These tax related disadvantages also extend to Company's POY and FDY segments in which the Company was able to maintain its position. These segments were less affected owing to the premium position of the Company's products. In fact, in terms of utilization levels, we were among the highest in the industry. Chips segment, in which margins and differentiation is low, was most affected.

These tax disadvantages are temporary. We further expect removal of VAT credit reversal and introduction of GST in the next 1–2 years time.

Owing to large capacity additions the demand–supply gap worsened across chips and PFY segments in FY13 and FY14 compared even with FY12 which itself was a challenging year. If one includes the capacities of producers who have recently shut capacities, utilisation levels are at around 65%.

Your Company continued to be the leader in draw–warped and draw–twisted yarns in the world. We are India's largest sized–yarn producer and the country's premium seller of fully drawn yarn, the fastest growing segment of the PFY industry.

Our weaving and finishing (dyed and printed fabric) divisions continue to be at the forefront of design innovation in India. The sheer varieties of designs generated are unparalleled in the industry.

In our finished (dyed and/or printed) fabric division we continued to emphasise naturals via the introduction of new cottons, 100% viscose filament, bemberg as well as blended varieties like poly–viscose and poly–cotton fabrics. Various new sized yarn–based saree varieties have been introduced. We have also introduced a host of new embroidery and other value–added varieties especially for party–wear and wedding–wear.

During the year, the Company's 21 MW Thermal Captive Power Plant (CPP) became fully operational at its Jolwa Plant. This reduces dependence on high–cost furnace oil and gas–based power.

Overview of Economy

The global efforts to revive the economy have begun showing results in many countries. As per IMF WEO Outlook

2014, Global economy would grow at 3.6% in 2014 and 3.9% in 2015 up from 3.3% in 2013. Advanced economies are expected to grow at around 2.2 % with United States leading the lot.

Emerging Economies are expected to grow at 5% in 2014 and a little above 5% in the next year from a 4.7% growth in 2013.

Indian Economy is likely to draw strength from the improving global outlook.

India's economic growth stayed below 5 per cent for the second year in a row at 4.7 per cent in 2013–14, lower than the 4.9 per cent projected in advance estimates, pulled down by manufacturing, mining, construction and logistics output. The 2013–14 performance is a shade better than 4.5 per cent growth of 2012–13, a ten year low.

Manufacturing, the biggest constituent of Indian industry, shrank 0.7 per cent in 2013–14 against 1.1 per cent growth in the previous year.

As per IMF projections, the growth of ~5.5% can be expected if conditions like stronger global growth, improving export competitiveness, a positive result of recent policy changes come into play.

The Reserve Bank expects economic growth of between 5 and 6% in the current financial year even as uncertainty over the monsoon clouds the forecast for agriculture.

Industry Scenario

The MMF industry has seen huge capacity addition across the value chain in the last few years envisaging higher demand. However, the demand has not kept pace due to overall depressed economic growth.

The envisaged growth of 6.5–7.0% CAGR in the PFY, PSF and VSF over FY12–17 could not be achieved due to prolonged slowdown in economy. Instead, PFY demand in India remained flat during FY12–14 which is in stark contrast to expectations.

After 2 years of stagnant/negative domestic demand growth the Indian PFY industry witnessed a modest uptick in FY14. This occurred in the face of large capacity expansions. This led to vicious price–competition and historically low utilization levels. To make matter worse, international margins fell as well owing to global oversupply, thus also reducing export margins.

High consumer price inflation and weak rural consumption have squeezed polyester demand, which has now faced a severe slowdown for three consecutive years.

Moreover, India's largest producer of PFY has made a capacity addition of 390,000MT in FY14 which is likely to affect existing smaller PFY players to a large extent, thus, further negatively impacting sales of polyester chips as these PFY players are clients of polyester chips manufacturers.

The Company's situation was made worse by sky–rocketing gas prices that made its once globally–competitive gas–based power plants uncompetitive, compelling it to gradually replace these with coal–based power. Moreover, sales tax exemptions (due to expire in 2017) in Silvassa and Daman along with VAT reversal introduced by the Gujarat government offset the price–premium the Company retains.

In the past 2 years, poor local demand has resulted in increased pressure to export at low margins. Yet, globally the much higher price of cotton has resulted in continued substitution by polyester. Use of polyester in textiles and industrial applications has gone up with enhanced scope of PFY application in automobile sector, home furnishing and upholstery sector, industrial stitching threads, fire retardant yarn and other technical textiles.

Business Outlook

The financial year 2014–15 is expected to start optimistically, with a gross domestic product growth of 5.2 per cent in Q1 FY15 as some of the current macroeconomic numbers bring hope that the recovery for the Indian economy is under way.

The growth in PFY industry which has resumed in FY14 is expected to significantly gain steam in FY15. The CAGR for PFY in India over the next 10 years is projected to be around 8–10 % p.a. Global growth of PFY is also expected to far exceed global GDP growth. Going by the above, it appears that in a couple of years demand growth will catch–up with industry supply and healthy margins will return.

The increased polymerization capacities has forced lower production among chips–based PFY spinners. Supply of chips has also correspondingly been increased. Yet the demand–supply gap will be somewhat narrowed this year and is expected to be improved further in the next few years. Moreover, demand of Polyester chips will be continued from few customized and specialized yarn manufacturers and is expected to grow rapidly from polyester film manufacturers.

Globally, the demand–supply gap is projected to balance out after 2016–17. With no material new expansions expected, global margins are expected to continually improve over the next 3–4 years.

Asia is the largest consumer of PFY contributing about 90% of overall global demand. China and India contribute about 74% and 10% of the global demand respectively.

Middle East was seen slowly moving up in capacity building. Within Asia, it was only China and India that expanded their capacities.

The new government is reform–minded and is expected to improve India's macro indicators.

If the new government focuses on the promised key priorities and executes well, it will spur investment demand, increase consumer confidence and spending, improve productivity and thus growth as well. Its intention to greatly improve the nation's infrastructure and increase competition in coal mining are significant steps in the right direction.

The RBI's policy indicates its willingness to provide impetus to growth by freeing lending resources and also moving towards a more accommodative stance if disinflationary forces bring inflation under control.

The new foreign trade policy is expected to focus on ways to boost India's exports and reduce dependence on imports. India being part of WTO can not only think in terms of its exports promotion without equally supporting imports substitution. Therefore, the focus of the new policy would be to vigorously promote both exports and imports with significantly substantial focus on exports.

Apparel exports are growing strongly owing to the relatively weak rupee. This will have a positive impact on PFY demand. It is widely expected that in future the growth of PFY demand and production will be faster in India than in China which is faced with grave challenges of manpower unavailability and a strong and strengthening currency. India on the other hand is expected to see working–age population grow at the rate of 12 million a year.

Finance and Investment

Your Company realized an aggregate amount of Rs.23.50 crores from the sale of non–core assets during FY13 and FY14. The Company is in the due process of liquidation of other non–core assets.

During the year under review, your Company allotted 1842105 equity shares of Rs.10 each fully paid up at a premium of Rs.28 per share to the promoters / promoter group on exercise of option for conversion of the warrants issued on preferential basis pursuant to the SEBI (ICDR) Regulations 2009. As a result of such allotment, the paid up equity share capital of the Company increased from 38290560 equity shares of Rs.10 each aggregating to Rs.38,29,05,600 to 40132665 equity shares of Rs.10 each aggregating to Rs.40,13,26,650.

Opportunities

As per the World Bank report on Global Economic Prospects (GEP), the growth in India is projected at 5.5 per cent in FY 15, accelerating to 6.3 per cent in 2015–16 and 6.6 per cent in 2016–17. Global economic prospects appear to be improving. This fact, along with an expected rebound in domestic investment and consumption as well as a pick–up in manufacturing activities is likely to help India return from sub–par growth in polyester to trend growth (or even above) in the next year or two.

As per the latest statistic released by the Synthetic and Rayon Textiles Exports Promotion Council (SRTEPC) the export of MMF yarn, fabrics and made–ups registered a phenomenal 25 per cent increase at Rs.31,000 crores in 2013–14, compared to the previous year. The leading markets that contributed heavily to the increased exports this year are UAE, the USA, Turkey, Brazil, Pakistan and Italy.

Interestingly, the export of yarn to Turkey and Brazil has increased by almost 16 per cent and 7 per cent, respectively despite anti–dumping duties on Indian MMF yarn. The MMF fabric export contributed around 30 per cent in the overall export of MMF textiles.

Demand is increasing from developed countries for MMF fabrics. The industry expects that the new government would work to boost the Indian textile sector with its policies.

With global demand–supply gap for PFY and chips expected to shrink over the next few years, export margins and sales are expected to improve as well.

PTA is globally in oversupply but local supplies are tight leading to relatively high PTA prices locally compared to those in China. This situation is expected to change substantially after a large PTA plant to be commissioned end–2014. Then PTA is expected to be oversupplied locally and so the Indian polyester manufacturers can hopefully look forward to globally competitive raw material prices in 2015

The introduction of GST should see a level playing field between your Company and other companies who are exempt from CST. This should further improve margins for your Company.

The Company's industry–leading product portfolio, highly innovative and quality–oriented production processes, and reputation for transparency and ethics all serve to strengthen its position in a competitive market and gain a price premium across its product segments. As business conditions improve, the company will so much better be able to fulfill its potential.

Risk and Concerns

The polyester industry in India has been witnessing head winds due to slack in both domestic and global economies. The industry demand (in quantity) de–grew by 2.4% in FY13 and grew marginally by 4.7% in FY14. On the other hand the industry has experienced enormous capacity growth in this time. Slowdown in the industry and oversupply directly impact your Company's sales and profits.

Rising oil prices could result in higher input prices, in particular PTA, MEG and fuel which will raise polyester prices and reduce demand in cost–sensitive consumer segments.

The Company experiences competition from other low–cost countries like China. Yet, this competition is presently being seen largely in export markets. Textile being a labour intensive industry, rising labour and skilled human resource costs can put pressure on margins

Our transactions with respect to import of raw material and capital goods as well as export of products are denominated in foreign currency, primarily the U.S.dollar and Euro. These transactions are subject to risk arising from fluctuations in exchange rates with reference to countries in which we operate. The Company has a hedging policy for foreign exchange exposure in place so that forex fluctuations do not unduly affect the business.

Credit Rating

During the year under review Credit Analysis & Research Ltd. (CARE), assessing the operational and financial performance of the Company, revised the rating from CARE BB (Double B) to CARE B (Single B) assigned to the long–term facilities of your Company. Further, the Rating Committee of CARE has also reaffirmed 'CARE A4' (A Four) assigned to the short–term facilities of your Company.

Corporate Governance

Your Company continues to be committed to good corporate governance practices. Your Company complies with the standards set out by Clause 49 of the Listing Agreement with the Stock Exchanges.

A separate report on Corporate Governance along with the Auditors' Certificate on compliance with the Corporate Governance as stipulated in Clause 49 forms part of this report.

Directorate

Mr. Sunil S. Sheth, a Director liable to retire by rotation, who does not seek re–election, be not re–appointed a Director of the Company.

In terms of Section 152 of the Companies Act, 2013, Mr. Sanjay S. Shah would retire by rotation at the forthcoming Annual General Meeting and is eligible for re–appointment. Mr. Sanjay S. Shah has offered himself for re–appointment.

In terms of the provisions of Section 149 of the Companies Act, 2013, it is proposed to appoint Mr. Arunchandra N.

Jariwala, Mr. Yatish C. Parekh, Mr. J. P. Shah and Mr. Madanlal

U. Lankapati as independent directors for a period of 5 years with effect from 1st April 2014. The Company has received requisite notice in writing from members proposing the aforesaid directors for appointment as Independent Directors.

The Company has received declarations from all the Independent Directors of the Company confirming that they meet with the criteria of independence as prescribed both under sub–section (6) of Section 149 of the Companies Act, 2013 and under Clause 49 of the Listing Agreement with the Stock Exchanges.

On the recommendations of Nomination and Remuneration Committee, the Board of Directors of the Company at their meeting held on 28th May 2014, subject to the approval of shareholders in the forthcoming General Meeting, approved the appointment and payment of remuneration of Mr. Alok P. Shah as Joint Managing Director of the Company for a term of 3 (three) years effective from 1st November 2014.

The resolution for appointment is proposed to the Members in the Notice of the Annual General Meeting vide item No.5 and the explanatory statement includes the terms of appointment.

The Companies Act, 2013

The Ministry of Corporate Affairs (MCA) vide its Circular dated 4th April 2014 has clarified that the financial statements and documents annexed thereto, auditors report and board's report in respect of financial year that have commenced earlier than 1st April 2014 shall be governed by the provisions of the Companies Act, 1956 and in line with the same, the Company's financial statements, auditors' report and Board's report and attachments thereto have been prepared in accordance with the provisions of the Companies Act, 1956.

Directors' Responsibility Statement

Pursuant to the requirement under Section 217(2AA) of the Companies Act, 1956, with respect to Directors' Responsibility Statement, it is hereby confirmed that:

(i) in the preparation of the Annual Accounts for the year ended 31st March 2014, the applicable accounting standards, read with requirements set out under Schedule VI to the Companies Act, 1956, have been followed and there are no material departures from the same;

(ii) the Directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at 31st March 2014 and of the loss of the Company for the year ended on that date;

(iii) the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and

(iv) the Directors have prepared the annual accounts of the Company on a 'going concern' basis.

Auditors

Messrs Natvarlal Vepari & Co., Chartered Accountants, Statutory Auditors of the Company, hold office till the conclusion of the ensuing Annual General Meeting and are eligible for re–appointment. The Company has received a confirmation from them to the effect that their re–appointment, if made, would be within the prescribed limits under Section 141(3)(g) of the Companies Act, 2013 and the provisions of the Companies (Audit and Auditors) Rules, 2014 and that they are not disqualified for re–appointment.

Since Messrs Natvarlal Vepari & Co., Chartered Accountants, have been functioning as the auditors of the Company for more than 10 years, in accordance with the aforesaid rules, the Audit Committee and the Board of Directors have recommended the re–appointment of auditors for a maximum period of three consecutive years, subject to ratification of their appointment at every AGM.

The Notes on Financial Statements referred to in the Auditors' Report are self–explanatory and do not call for any further comments.

Cost Auditors

In accordance with Section 141 of the Companies Act, 2013 and subject to the approval of the Central Government, the Audit Committee has recommended and the Board of Directors had appointed M/s Manubhai & Associates, Cost Accountant, Surat being eligible and having sought re–appointment, as Cost Auditors of the Company, to carry out the cost audit of the products manufactured by the Company during the financial year 2014–15.

Internal Control Systems

Your Company has proper and adequate systems of internal control. Regular Internal Audits and Checks are carried out and the management also constantly reviews the internal control systems and procedures to ensure orderly and efficient conduct of the Business. Periodically, the systems are reviewed and aligned to the needs of the organization. This is an ongoing exercise. Implementation of ERP on the Oracle based platform has improved controls, created analytical tools and enhanced the decision making process. The internal auditors periodically interact with the Audit Committee of the Board of Directors of the Company to discuss various internal controls / internal audit issues.

Fixed Deposits

During the year the Company has not accepted any fixed deposits from the public. There are no fixed deposits outstanding with the Company as on 31st March 2014.

Human Resources and Industrial Relations

Good human resource management plays a key role in company performance. The employee relations during the year have remained cordial and satisfactory. Attracting and retaining dedicated and skilled human resource, offering them a conducive work environment and excellent career development opportunities are currently prime HR priorities.

The Company maintains a transparent work culture that offers equal opportunities of growth to all employees. While emphasis is laid on recruiting best accessible talent at all levels all the time, the Company takes due care of keeping its talent pool skilled and updated by proving adequate on–the–job training to its employees. The Company strongly believes that its growth and sustainability is closely aligned to those of its human capital.

Environment and Safety

The Company is conscious of the importance of environmentally clean and safe operations. The Company's policy requires the conduct of all operations in such manner so as to ensure high safety levels, compliance of statutory and industrial requirement for environment protection and conservation of natural resources to the extent possible.

Investor Education and Protection Fund

Pursuant to the provisions of section 205A(5) and 205C of the Companies Act, 1956 an amount of Rs. 11,44,610/–, which pertains to the dividend for the year 2005–06, and remained unpaid or unclaimed for a period of 7 years from the date of declaration, has been transferred by the Company to the Investor Education & Protection Fund.

Reward, Recognition & Quality Systems Certification

During the year, the Company's CP Division got certified OSHAS 18001 : 2007 by Bureau Veritas. Our quality, health and safety processes are now continuously monitored, assessed and improved to meet internationally recognized standards. Each raw–material and product is tested extensively and all manufacturing processes are continually optimized with a strong commitment to energy efficiency, occupational health, environmental responsibility and safety.

Your Company achieved the status of "Trading House" awarded by the Office of Joint Director General of Foreign Trade, Ministry of Commerce & Industry, Government of India on achieving the required Export targets.

The Company's Vareli Plant enjoys the unique distinction of being the first in polyester weaving industry to achieve ISO 9002:1994 certification by Bureau Veritas Quality International (BVQI). The processes certified are Draw–Warping and Texturizing, Twisting, Sizing, Warping and Weaving. The scope of audit includes "Manufacture of Woven Greige Fabrics and Processed Yarns".

The manufacturing of Texturized, Flat Polyester Filament, Polyester Partially Oriented Yarn (POY) and Fully Drawn Yarn (FDY) at Jolva are also ISO 9001:2000 certified by BVQI.

Energy, Technology and Foreign Exchange

Additional information on conservation of energy, technology absorption, foreign exchange earnings and outgo as required, to be disclosed in terms of Section 217(1) (e) of the Companies Act, 1956, read with the Companies (Disclosure of Particulars in the Report of the Directors) Rules, 1988 is annexed herewith and forms part of this report.

Particulars of Employees

In terms of the provisions of Section 217(2A) of the Companies Act, 1956, read with Rule 2 of the Companies (Particulars of Employees) Rules of 1975, as amended, names and other particulars of the employees are set out in the annexure to the Directors Report.

Having regard to the provisions of Section 219(1)(b)(iv) of the said Act, the Annual Report excluding the aforesaid information is being sent to the members of the Company. Any member interested in obtaining such particulars may write to the Company Secretary of the Company.

The aforesaid Annexure is also available for inspection of Members at the Registered Office of the Company, 21 days before the Annual General Meeting and up to the date of the ensuing Annual General Meeting during business hours on working days.

Insurance

The properties and insurable assets and interests of your Company, like building, plant and machinery and stocks, among others, are adequately insured.

Cash Flow Analysis

The Cash Flow Statement for the year under reference in terms of clause 32 of the Listing Agreement with the stock exchanges forms part of the Annual Report.

Corporate Social Responsibility

During the year under review, your Company continued various economic activities combined with the fulfillment of its social responsibilities for the communities it operates in and undertook various initiatives in the area of welfare, environment conservation, education, health and empowerment, across its operations.

Cautionary Statement

Statements in this report on Management's Discussion and Analysis describing the Company's objectives, projections, estimates and expectations may be "forward looking statement" within the meaning of applicable laws and regulations. These statements are based on certain assumptions and expectation of future events. Actual results might differ materially from those either expressed or implied.

Acknowledgement

The Directors wish to place on record their appreciation for the continued support and co–operation extended to your Company by Banks, Financial Institutions, Customers, Suppliers, Government Authorities, Regulatory authorities and other stakeholders. Your Directors are thankful to the esteemed shareholders for their continued support and the confidence reposed in the Company and its Management.

Your Directors also acknowledge the support extended by all the employees for their dedicated service.

For and on behalf of the Board

Praful A. Shah

Chairman & Managing Director

Surat, 28th May, 2014.