Financial year 2017-2018 was a particularly difficult one for the company. While thetop line grew the bottom line saw a sharp de-growth during the year. There were severalinternal as well as external developments which affected the company's performance thisyear.
While GST is a positive development for the country in the long term it created a lotof challenges for us in its first year. When launched on July 1st 2017 the taximposed on yarn was 18% whilst fabric manufacturers had tax of 5% without Input Tax creditleading to sharp accumulation of GST in the balance sheets of these companies and creatinga shortage of liquidity and demand in the market. The tax on yarn was later revised to 12%however the issue continued to persist. This led to a decline of as high as 35% (Source:Economic Times July 1st 2018) in fabric production in markets such as Surat which iswhere we as a company have a lot of exposure when it comes to Nylon. It was only after ayear in this financial year 2018-2019 that input tax credit was finally allowed and wehope to see the positive impact of this development on liquidity and demand during thelatter half of this year. Moreover GST brought along with it the discontinuance of taxincentives that the company enjoyed earlier delays in refund of credits in case ofexports further impacting the bottom-line as well as liquidity.
Besides GST the Nylon segment was also impacted by extreme volatility in raw materialprices during the year as well as a sharp influx of new capacity in the segment leading toa situation of increasing raw material prices and decreasing finished goods pricescompressing the overall margin over raw material. To add to all of that anti dumpingduties which had protected the industry from external overcapacity was discontinuedduring the year opening up imports from China Taiwan and Korea. Within a year's timeNylon segment has moved from contributing significantly to the P&L to dragging thebottom line. Finally a sharp increase in power tariffs has led to a cost increase acrossvarious products in the Rakholi plant.
Despite the headwinds the company continued on its transformation journey that it hadbegun in 2015. There were a lot of positive developments that took place during theyear. Some of the key highlights include:
1. The Palghar plant as well as the Rakholi plant has an entirely new senior managementstructure in place capable of managing the complexities that business from newinternational customers will bring. The team consists of professionals who bring with thema fresh global perspective and experience of several years having worked in the industrynot just in India but also companies outside of India.
The sales and business development team is now complete. We have created 6 newverticals during the last year. There are exciting possibilities of new products as wellas new customers in each of these verticals.
The business has started to form relationships with several new global multi-nationalcustomers across segments. It is heartening to see how we have ramped up production with afew important customers and have started to occupy a strategic position in their sourcingstrategy. Sampling has been initiated with a vast array of customers and over a period oftime investment in sampling and product development will likely start paying richdividends.
4. While we are nowhere close to our ultimate goal good progress has been made inestablishing systems across the company. The product development process control andproduction planning department - functions which did not exist in the company until threeyears back are now established. This is an extremely important step in transitioning froma commodity make-to-stock company to a specialized make-to-order company working in closecoordination with the customer.
5. Several new products such as Silque Comfeel Novacore and Sorenyl have beencommercialized this year and have started garnering bulk commercial orders fromcustomers.
At the same time there are a lot of challenges stands even today. Strategicnon-commodity customers demand higher quality & more consistency in products. As wetry to widen our base of customers we will simultaneously need to further upgrade ourcapability. The same quality that was acceptable to commodity product customers is notacceptable in exports. This has led to a higher amount of downgrades and leftovergeneration. While this is a challenge that we need to overcome it also presents us withan opportunity to improve profitability. There are a few other levers to improve ourprofitability:
1. We have been grappling with low utilizations in the Palghar plant. Theearlier challenge was bringing orders but we seem to have overcome that issue. The keychallenge now is to de-bottleneck upstream processes and ensure we get full throughputfrom the plant. Increasing our volumes by just 20% can increase profitability by more than60%. Similarly there is a potential to increase throughput by upto 10% in the textilesbusiness. While the operating leverage might not be as high it will nonethelesscontribute disproportionately to the bottom line.
2. Product Mix change in Textiles - while we do have the overhang of losing a goodshare of business to a large customer due to them backward integrating the businessdevelopment efforts should slowly lead to us getting better margin business overtime inlieu of breakeven or negative margin products
3. The BCF capacity expansion should add to volumes and profitabilitytowards the latter end of the year.
4. Finally there are various cost reduction initiatives that we have takenup including but not limited to reducing cost of utilities such as steam as well asdevelopment of new suppliers.
Asa company we have faced a lot of headwinds together in the past two years. Much ofthe heavy lifting has been done during this period but we might still have some pain aheadof us. At the end of this phase however we would have laid the foundations of ournext chapter of growth which will this time be driven not by market dynamics but by newproducts new segments and a newer business model of an intimate relationship withstrategic customers. What we are trying has not been done before and as a result theremight be missteps along the way.
On a final note I would also like to take this opportunity to once again thank all themembers of the AYM family for their continuous dedication and relentless efforts in theface of all these challenges committing to this difficult journey. The externalenvironment has not made our journey any easier but I believe it is our collectivepatience and persistence that will ultimately see us through.