MANAGEMENT DISCUSSION AND ANALYSIS REPORT The Management of Steel Authority of India Limited (SAIL) brsents its Analysis Report covering the performance and outlook of the Company. A. INDUSTRY STRUCTURE & DEVELOPMENTS World Economic Environment The Global economy is estimated to have grown at 3.4% in 2014 (IMF, WEO update April, 2015) - a growth similar to that in 2013. The projected growth rate for World economy for 2015 is 3.5%, based on a growth of 2.4% in the advanced economies and 4.3% in the emerging and developing economies. The improvement in anticipated growth is on account of the optimistic outlook for advanced economies. The decline in crude oil prices which is likely to lead to a higher purchasing power in advanced economies is likely to boost Global growth for next two years or so by its positive impact on the oil importers. The growth in emerging markets and developing economies is projected to be lower, primarily reflecting weaker prospects for some large emerging market economies and oil- exporting countries. Amongst the advanced economies, US is expected to exceed 3% growth in 2015, while the other economies - specifically Japan - are expected to pick up, sustained by a weaker Yen and lower oil prices. The projected growth for Euro Zone and Japan for 2015 is 1.5% and 1.0% respectively. The overall growth for emerging and developing economies for 2015 is projected to be slightly lower by 0.3% than that in 2014, and rise only in 2016 to 4.7%. The growth prospects for emerging and developing economies have been impacted by lower anticipated growth in China, especially as its investment growth declined in Q-4 of 2014. For Russia the outlook continues to look weak under the impact of low oil prices and continued geopolitical tensions. For the oil and commodity exporters in the developing countries, the recovery in growth would be delayed as the impact of lower commodity prices is likely to dent their medium term growth. IMF has forecast a growth of 6.8% for China for 2015 which will further drop to 6.3% in 2016. World Steel Scenario World crude steel production reached 1,665 million tonnes for the year 2014, marginally up by 1% compared to 2013. The growth was moderate in Asia and North America, while it was flat in Europe, largely on account of a negative growth of 2.8% in CIS countries. Annual production for Asia was 1,161 million tonnes of crude steel in 2014 (including 29 million tonnes from Middle East), an increase of 1.5% compared to 2013. In 2014, Asia continues to dominate the world steel with a 70% share in the total crude steel production output. China's crude steel production remained flat with 1% growth. With 823 million tonnes steel production, China's share of World crude steel production was almost 50% in 2014. South Korea's crude steel production was 71 million tonne, a big jump of 7.5% compared to 2013. The European Union recorded a minor recovery of 1.7% compared to 2013, producing 169 million tonnes of crude steel in 2014. Post Global financial crisis, Gross Domestic Product (GDP) growth for a majority of the World economies has shifted to a lower growth trajectory as compared to br-crisis levels. At the same time, the steel industry's perennial concern, overcapacity, has intensified due to economic slowdown in China, the largest steel consumer and accounting for almost half of Global steel consumption. Led by sluggish steel demand in China, the total Global steel consumption is expected to slow down with only 0.5% growth in 2015. Indian Economic Environment The Indian Economy has been on the recovery path with GDP growth estimated at 7.3% for fiscal 2014-15, CPI inflation is at a low level of around 5% and fiscal deficit is around 4% of the GDP. Macro-economic stability has been restored and conditions have been created for durable higher economic growth in the coming years. The year has witnessed key policy reforms, aimed at aiding growth revival and overcoming the structural constraints in the economy. The advance estimates by Central Statistical Organisation, GoI, indicate that industrial growth has reversed the trend. Provisionally estimated growth of 6.1 per cent in 2014-15 indicates an emphatic improvement from 2.4 per cent and 4.5 per cent growth during 2012-13 and 2013-14 respectively. An impetus on investment in infrastructure will also act in the same direction. For the Index of Industrial Production (IIP), 2014-15, the growth in the 'Mining', 'Manufacturing' and 'Electricity' sectors has been estimated to be at 1.4%, 2.3% and 8.4% respectively, which is higher than that observed in the same period last year. In terms of use-based classification, basic goods and capital goods witnessed marked improvement in growth during 2014-15. While the growth in intermediate goods remained sluggish, the consumer goods contracted in April-March 2014-15, particularly due to contraction in consumer durables sector. IMF, in its latest outlook (April, 2015) has indicated that India's growth trajectory will benefit from the Government's commitment to reforms. Favourable situation on account of the reduced international prices of oil, benign inflationary outlook which could provide room to RBI for easing the monetary policy and the industry gradually gaining momentum point towards improved prospects for growth in 2015-16. Indian Steel Scenario India continues to hold its position as the 3rd largest steel making nation in the World in the current calendar year. During the year 2014-15, domestic crude steel production was 88.1 million tonnes, registering a growth of around 7.9% over the brvious year. Further, finished steel production registered a growth of 3.3% during 2014-15. Due to adverse Global conditions, there has been a large inflow of imports, which surged by more than 70% in 2014-15, while overall domestic consumption registered a growth of 3.1% only. In case of carbon steel, the consumption growth remained almost flat at 0.5%. This has also manifested in a series of price cuts for the domestic steel industry during the year, leading to a squeeze on margins earned by steel producers. With the Government's focus on manufacturing and industry coupled with spending on infrastructure (roads, rail and ports etc.), the demand for steel is projected to increase in the coming years. B. OPPORTUNITIES & THREATS FOR SAIL Opportunities: • With an accelerated push from the policies proposed by the Government regarding steel intensive segments such as infrastructure, capital goods and construction, India is all set to become the 2nd largest steel consumer in the World in next 4 to 5 years • High export potential for markets of Middle East and South East Asia • Potential for improving product quality and reducing cost through operational efficiency Threats: • Increased competition from domestic and international steel companies located in India. Dumping of steel from abroad, particularly from China due to its large surplus capacity and slowing domestic consumption • Cheap sourcing of steel from countries with whom India has Free Trade Agreements(FTA) viz. Japan, Korea and ASEAN C. RISKS AND CONCERNS • With most of the domestic players expanding their production capacities, there is a possibility for an excess capacity situation, especially in flat products if the demand growth remains sluggish • Out of 13 iron ore leases in the State of Jharkhand, lease extension of six sub-judice iron ore leases is awaited. • In view of revised Guidelines dated 1st April, 2015 issued by the Ministry of Environment & Forest and Climate Change (MoEF&CC), Government of India, there is a requirement for payment of Net Present Value (NPV) for entire forest land within mining lease area. The matter has been taken up with MoEF&CC for granting exemption to SAIL, being a Government Company. • With the enactment of MMDR Amendment Act, 2015 a provision of District Mineral Foundation (DMF) has been introduced. The details of amount payable in the DMF are awaited. D. OUTLOOK For the Financial Year 2015-16, the thrust is on infrastructure sector, which will both spur domestic demand and ease supply side constraints. Setting up of 5 Ultra Mega Power Projects and announcement of similar projects for roads, rail and ports would also provide a thrust to the economy. Similarly, National Investment and Infrastructure Fund will help in easing the funds flow for the infrastructure sector. Further, in the Union Budget for 2015-16, 'Make in India' has got a boost by a slew of measures aimed at improving the ease of doing business in the Country. Small and medium industry - a major employment generator for the economy - has been liberated to participate in the Nation's development in accordance with its potential. Measures such as Mudra Bank, technological facilitation agencies, etc. are likely to foster the entrebrneurial spirit and see emergence of numerous start-ups. The issue of 'ease of doing business' has been addressed by the Finance Minister by introduction of measures such as Procurement Law, Public Contract Dispute Resolution Bill, Regulatory Reform Law, etc. Similarly a low and stable Corporate Tax regime without multiple exemptions will reduce litigations and improve business sentiments. Bold measures by the Government such as improved targeting of subsidy, broadening of the tax base and expected buoyancy in tax revenue are all aimed at achieving the fiscal consolidation which had been an area of concern in recent past. E. STRENGTHS & WEAKNESSES Strengths Strengths of SAIL include diversified product mix, well established nationwide marketing network, captive iron ore resources, skilled manpower, captive power plants, land bank for future expansion, dedicated R&D wing and strong balance sheet. Further, the on-going modernisation is going to take SAIL ahead in terms of modern technology adoption, automation, enhanced production, product quality, wider product basket, process efficiency & diversification opportunities. The diversified product mix and multi-location production units are an area of strength for the Company. SAIL, as a single source, is able to cater to the entire steel requirement of any customer. Also, it has a nationwide distribution network, with brsence in every district in India. This makes quality steel available throughout the length and breadth of the country. SAIL has the largest captive iron ore operations in India, which take care of its entire requirement. With plans in place to expand the mining operations, the Company will continue to be self-sufficient in iron ore after completion of the on-going phase of expansion. SAIL's large skilled manpower base is a source of strength. With continuous emphasis on skill based and multi-skill training, SAIL has achieved Labour Productivity of 302 tonnes of Crude Steel per man per year during 2014-15. With emphasis on selective skilled recruitment for manning of upcoming facilities and recoupment against superannuating manpower, the manpower profile as well as the labour productivity will improve gradually over the years. SAIL's captive Power Plants take care of about 70% of its total power need. With augmentation of capacities of Power Plants operated under Joint Venture, the Company will continue to have security in this key input in future as well. The Company has one of the biggest in-house research and development centers for Iron & Steel in Asia. SAIL's Research & Development Centre for Iron & Steel is a source of regular product and process innovation. Low overall borrowings lend strength to the Company's Balance Sheet as it can mobilize resources while keeping the leveraging at manageable levels. Weaknesses • Dependence on external sources for key input - coking coal leads to exposure of the Company to the market risk. • Adverse employee age-mix, with the average age of 46.7 years, is a concern area. Skilled and competent manpower is being inducted for improving the manpower mix (age & qualification). • Currently, around 19% of the products are in the form of semifinished steel, resulting in lower value addition to the product portfolio. This trend is expected to continue for one more year till new rolling mills become fully operational. • High manpower cost and relatively low manpower productivity. F. REVIEW OF FINANCIAL PERFORMANCE 1. FINANCIAL OVERVIEW OF SAIL SAIL achieved a sales turnover of Rs.50,627 crore during the Financial Year 2014-15, which was lower by 2% over turnover of Rs.51,866 crore in the brvious Financial Year. The profit after tax of Rs.2,093 crore was lower by Rs.523 crore over last year (Rs.2,616 crore). The comparative performance of major financial parameters during the Financial Years 2014-15 and 2013-14 is given below: The profit of your Company for the Financial Year 2014-15 was favourably impacted by profit on sale of its investment in Bokaro Jaypee Cement Limited, lower coke rate & energy consumption, reduction in usage of external BF Coke, lower imported coal price, higher CDI usage, lower loss on account of foreign exchange fluctuation, etc. The profit has been adversely affected mainly due to stagnant Saleable Steel production and lower sales volume, higher salaries and wages, higher stores and spares expenditure, higher repairs & maintenance expenditure, increase in royalty on iron ore, increase in purchased power rate, lower BF productivity, higher usage of imported coal in the blend due to lower availability of indigenous coal, higher interest charges, higher debrciation due to capitalisation of new facilities and reduction in interest earning on term deposits. 1.2 Initiatives taken by the SAIL Management 1.2.1 Cost Control Measures • Emphasis on cost reduction and productivity improvement continued during the year through systematic application of new technology, process improvement through R&D efforts and strong awareness to control cost at all levels of operation. • Continuous monitoring of procurement of high value items, maximising use of in-house engineering shops and optimisation in procurement including negotiations with suppliers for price reduction. • Several strategic actions were taken to achieve cost control savings in major areas of operation viz. Optimisation of coal blend, higher yield, higher CC production and improvement in revenue maximisations areas. 1.2.2 Marketing Number of initiatives were taken during 2014-15 for improving customer satisfaction and strengthening our position in the steel market, including the following - • Promotion of new products (universal sections, wide plates, high quality wire rods, etc.) was undertaken during the course of the year through road shows/brsentations by a Cross Functional Team (CFT) of R&D, Plants and Marketing to create awareness about the products coming from new mills of SAIL among the target customers. • 24 new products were developed during the year for a wide variety of application. Some of the products developed are mentioned below- ? JISG 3136 SN490B Grade Plates for Construction ? ASTM A 131 FH 36 Grade HR Coil for containers ? ASTM A387 Gr. 22 Cl. 2 Plates for Boilers and Pressure Vessels for elevated temperature applications ? Armour Plates for Bullet Proof Application ? DMR 292 A Grade Plates through CC route for Defence ? SAILFORMING 410 Grade HR Coils for Auto (Axle beams) • Supply of Long Rails to the Indian Railways was further increased during 2014-15 registering a growth of 3% over brvious year. • New WAP-5 Loco Wheel was developed for the Indian Railways. • Uniform embossing was started on TMT Bars from all SAIL Plants for better product positioning. • Delhi and Vizag warehouses of SAIL were recommended by TUV in 2014-15 for certification of IS0 140001 as per the norms of the Environment Management Systems (EMS) taking the total number of green SAIL warehouses to eight. • SAIL has the largest marketing network among all steel producers in the Country. As on 1st April, 2015 SAIL's functional network of marketing offices consists of 37 Branch Sales Offices, 27 Customer Contact Offices, 25 Departmental Warehouses and 24 Functional Consignment Agency yards. In addition, marketing effort is supplemented by a strong dealer network of 2711 dealers sbrad across the Country. The dealer network was further expanded by adding 532 new dealers during the year. 1.3 Funds Management During the year, the Company continued its thrust on better funds management. The high cost short-term loans were replaced with low cost debts. Also, the Company earned interest of Rs.256 crore through short-term deposits with scheduled banks. The Company has maintained term deposits with Banks of Rs.2,000 crore against borrowings of Rs.29,898 crore as at the year-end. The total debt during the current year increased by Rs.4,617 crore. The Company hedged the foreign currency risk on Buyers' Credit availed during the year. M/s India Ratings & Research Pvt. Ltd. (erstwhile FITCH) and M/s CARE, RBI approved credit rating agencies maintained "AAA" ratings indicating the highest rating to SAIL's long-term borrowing programme. The International borrowings programme of the Company has been rated at 'BBB-' by M/s FITCH Ratings. The trend of borrowings, net worth and term deposits is given as und G. MATERIALS MANAGEMENT A number of initiatives were taken to reduce cost of inputs and improve the performance in the area of materials management. Salient points are summarized as under- Cost Reduction • Procurement value through Global tender increased to 15.98% in 2014-15 from 12.73% in 2013-14. Similarly, e-procurement including use of SRM / EPS platform increased to 36.83% from 28.31% on Y-o-Y basis. • MOU for grease including Vendor Managed Inventory (VMI) started in all Plants. •VMI initiated for general purpose bearings. •Consolidated procurement items increased with addition of 5 new items. Total number of such items is now 46. •Agreement for chartering of vessels (ships) with injunction services limited. •Procurement of Mn-ore through auctions. •Global specifications for CRM rolls at BSL. Systems Improvement •Purchase/Contracts Procedure-2014 (PCP-14) issued, which is effective from 1st Sep'2014. •Standard Sampling Procedure for testing of ferro-alloys issued. Other Highlights •Procurement through Reverse Auction was Rs. 4,829.24 Crore. •Sale of Secondary Products through Forward Auction was Rs. 2,915.41 Crore. H. FOREIGN EXCHANGE CONSERVATION The Company endeavors to procure equipment, raw materials and other inputs from indigenous sources to the extent they become available to the Company, at the commercially acceptable prices/costs and meet the requirements of the technologies being used in the Company. For incurrence of expenditure in foreign currency, besides exercising the requisite control, it is ensured that it is in the commercial interest of the Company. Further, the Company has also taken reasonable steps to ensure that all receivables in foreign exchange, which are due to the Company, are realized within contractual period. I. PROJECT MANAGEMENT AMR SCHEMES Besides Modernisation and Expansion Projects, the Addition, Modification & Replacement (AMR) Schemes have also been taken up which are required for management of existing operations and primarily focuses on improving the current level of efficiency & output in incremental measures. AMR Schemes are undertaken for improving or revamping of existing facilities for sustaining the existing operations, balancing/debottlenecking of production processes, improvement in energy & other resource consumption/services/safety and environment. Replacement includes mostly replacing the existing Plant & Equipment/facilities with better performance Plant & Equipment/facilities; Re-building of certain facilities like Coke Oven Batteries (COB) after its useful life is one of the types of replacement scheme. Accordingly, a number of AMR schemes costing around Rs. 3,201 Crores are under implementation in different SAIL Plants as under: • Installation of Oxygen Evacuation Facilities for 2x1250 TPD New Oxygen Plant; Cold Repair of COB-9, Up-gradation of Stoves of BF-4, Modification of Mid stack Cooling System of BF-7, Detailed Project report for development of Rowghat Iron Ore Deposit and Construction of Permanent Barrack at 21 locations for Rowghat Deposit at Bhilai Steel Plant. • Rebuilding of COB-3; Installation of Additional Heat Treatment Facilities in SPP; Re-habilitation of Mandira Dam; Up-gradation of BF-1 and Installation of 125 tpd Sulphuric Acid Plant at Rourkela Steel Plant. • Re-building of COB-5, Upgradation of Wheel Press Electronics and Hydraulic system of Wheel &Axle Plant, Augmentation ofWheel Machining Facilities of Wheel & Axle Plant and installation of new Rotary Health Furnace at Wheel & Axle Plant at Durgapur Steel Plant. • Replacement of Battery Cyclones with ESPs in Sinter Plant, Replacement of Converter Shell Trunion Ring and Pedestal Assembly in SMS-2, Rebuilding of COB-7 and provision of Hydraulic Mudgun cum drill machine for BF-1 at Bokaro Steel Plant. • Installation of One 45MVA Sub-merged Arc Furnace; 4 MW Power Plant and 220 kV Sub-station at Chandrapur Ferro Alloy Plant. J. IN-HOUSE DESIGN & ENGINEERING Centre for Engineering & Technology (CET), the in-house design, engineering & consultancy unit of SAIL provides the complete range of services from concept to successful commissioning of projects in the complete value chain of integrated steel plant and its mines. With a strength of 260 qualified, trained and experienced engineers, CET is now taking leadership role in mineral beneficiation, pellet plant, material handling, power plant, slag granulation plant, stoves, water management, IT services, automation and many other related areas. The current major projects in its basket include the new 3.0 Mt Hot Strip Mill at RSP, Up-gradation of BF #1 at RSP, Pellet and Beneficiation Plants at RSP and Dalli, Modernisation of SMS-1 at BSL and New Sinter Plant at BSL and Rebuilding of a number of Coke Oven batteries/ new batteries at all SAIL Plants. K. CONSULTANCY SERVICES Your Company has one of the largest pool of qualified and experienced engineers, technologists, and professionally qualified HR & training experts. Based on its large and varied expertise and experience acquired over the last five decades, SAIL, through SAILCON, provides design, engineering, training, technical & management consultancy services in Iron & Steel and related areas and offers a wide range of services to clients globally. Technical and Management Training services are its forte and these services have been availed of by several organizations in private and public sector within India and abroad. To scale up the activities and to further reinforce the brand image of SAIL as a consultant, SAILCON is continuously exploring the market, both within and outside the Country for possible business opportunities as well as joint ventures with Global consultants for commercialization of SAIL's expertise. "SAILCON" has executed assignments within India and abroad covering countries like Egypt, Saudi Arabia, Iran, Qatar, Thailand, Nepal, Philippines, etc. During the Financial Year 2014-15, SAILCON laid enhanced focus on taking up training assignments along with technical consultancy in setting up of steel plants for some leading organizations. Consultancy is also being extended for setting up of Power Plants, based on waste heat recovery from the flue gases released out of Blast Furnace and non-recovery type of Coke Oven batteries, as an environment friendly measure and as a step to combat global warming. L. RESEARCH & DEVELOPMENT Research and Development Centre for Iron & Steel (RDCIS) of the Company is India's brmier research organization in the field of ferrous metallurgy. Recognizing that development and assimilation of new technologies & process innovations are basic tenets for sustainable growth, the Company gives thrust to R&D efforts through its well equipped R&D Centre located at Ranchi. It has more than three hundred diagnostic equipment and adequate pilot facilities under fifteen major laboratories. The Centre undertakes research projects encompassing the entire spectrum of iron & steel making starting from raw materials to finished products. In the year 2014-15, 80 projects were pursued and 48 projects, as scheduled, were completed with substantial benefits to the organization. R&D Centre also pursues pioneering work in the area of development of niche products as per market requirements aiming at superior performance based on application. During the year, 24 products have been developed and some of the noteworthy products include seismic resistant steels for Indian construction segment, Steel for Lighter and Safer Indian Domestic Cylinder, Boiler Quality Plates, Armour Plates for Bullet Proof Application, etc. The Centre in its pursuit for excellence in various research fields enters into collaboration for research in specific areas with renowned research institutions and academia. During the year 2014-15, MOU/Collaboration agreements have been entered into with institutions such as Deakin University, Australia; National Metallurgical Laboratory, Jamshedpur; Institute of Minerals and Materials Technology, Bhubaneswar; Liquid Propulsions Systems Centre, ISRO, Thiruvananthapuram; IIT, Kharagpur, etc. In order to maintain market leadership, improve operational efficiencies, nurture process innovations and enhance quality of products to international levels, SAIL has embarked upon an ambitious Master Plan for R&D during 2011-12, aiming at integrating R&D initiatives towards business and operational goals of the Company. This called for creating Centre of Excellence (CoE) in all the Plants and implementing High Impact Projects (HIP) and Technology Missions (TM) so as to achieve technological eminence. This initiative has taken roots and is under different stages of implementation. The efforts of RDCIS engineers and scientists in association with SAIL Plants have culminated in filing of 37 patents and 36 copy rights during 2014-15. As many as 90 technical papers (38 international) were published and 118 papers (45 international) were brsented. In recognition of the contributions made, RDCIS bagged several brstigious awards (14 in total) during 2014-15 like Metallurgist of the Year, O.P. Jindal Gold Medal, Dr. M. Visvesvaraya Award 2014, etc. M. INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY The Company has an efficient system of internal controls for achieving the following business objectives of the company : • Efficiency of operations • Protection of resources • Accuracy and promptness of financial reporting • Compliance with the laid down policies and procedures • Compliance with various laws and regulations. In SAIL, Internal Audit is a multi-disciplinary function which reviews, evaluates and appraises the various systems, procedures/policies of the Company and suggests meaningful and useful improvements. It helps the Management to accomplish its objectives by bringing a systematic and disciplined approach to improve the effectiveness of risk management towards good corporate governance. The Company has taken a number of steps to make the audit function more effective. The Internal Audit is subjected to overall control environment supervised by Board Level Audit Committee, providing independence to the Internal Audit function, emphasizing transparency in the systems and internal controls with appropriate skill-mix of internal audit personnel, etc. Audit Plan based on identification of key-risk areas with thrust on system/process audits and benchmarking of the best practices followed in the Plants/Units is made and approved by Audit Committee so as to achieve overall efficiency improvement including cost reduction in operations of the Company. Development of Internal Audit Executives, bringing awareness amongst auditees, converging on the pro-active role of internal audit remained other focus areas during the year. The Audit Committee in its meetings with the Company's Statutory Auditors also ascertained their views on the adequacy of internal control systems in the Company and their observations on financial reports. The Audit Committee's observations are acted upon by the Management. The Audit Committee, inter-alia, has also monitored the following areas: - Issue of unauthorized occupation of Land and quarters in SAIL Townships. - Usage, availability and future requirement of coking coal in Steel Plants including Backward Integration of coal mines for improving the quality of Coal by setting up Beneficiation Plant and Coal washeries. - Organisational Support with requisite skill mix for expeditious completion of projects. - Energy Audit. - IT strategy and ERP implementation at Plants and Units of SAIL. - Reconciliation of Title Deeds of land at different Plants/Units. - Periodic review of Enterprise Risk Management (ERM). The Internal Audit system is supplemented by well-documented policies, guidelines and procedures and regular reviews are being carried out by our Internal Audit Department. The reports containing Significant Audit Findings are periodically submitted to the Management and Audit Committee of the Company. CAUTIONARY STATEMENT Statement in the Management Discussion and Analysis, describing the Company's objective, projections and estimates are forward looking statements and progressive within the meaning of applicable security Laws and Regulations. Actual results may vary from those exbrssed or implied, depending upon economic conditions, Government Policies and other incidental factors. |