MANAGEMENT DISCUSSION AND ANALYSIS The Board takes pleasure in brsenting your Company's Forty-Third Annual Report for the year 2015-16 along with the compliance report on Corporate Governance. This chapter on Management Discussion and Analysis forms a part of the compliance report on Corporate Governance. Global Economy As per IMF, World GDP growth decelerated to 3.1% in 2015 as compared to that in 2014. The growth forecast for near future is slightly optimistic with World GDP expected to grow at 3.2% in 2016 and accelerate further to 3.5% in 2017 Advanced Economies Global economic growth slowed down with Advanced Economies just managing to better their growth record in 2015. The Advanced Economies are expected to maintain 1.9-2.0% growth rate till 2016 and 2017. This can be attributed to soft demand, unfavorable demographic trends, low productivity growth and prolonged after-effects of the global financial crisis. Emerging Markets Given the situation of Advanced Economies, majority of the global growth is expected to be driven by Emerging Markets. However, the growth prospects across Emerging Markets remain uneven and generally weak. In particular, few large emerging markets including Brazil and Russia are still in recession. There are signs of distress in other commodity exporting countries due to fall in commodity prices. In addition to this, there are concerns about the global impact of overcapacities or excesses in China's economy as it moves towards consumption led economy after almost a decade of investment fueled growth. Indian Economy As per Ministry of Statistics and Programme Implementation (MoSPI), Government of India's Advance Estimates (AE), Indian Gross Value Added (GVA) grew by 7.3% in FY 2015-16 as compared to FY 2014-15. As shown in the chart, India's overall GVA growth was fuelled by Services & Industry Sectors which grew by 9.2% & 7.3% respectively in FY 2015-16. Agriculture Sector grew by 1.1% in FY 2015-16 after marginally shrinking by 0.2% in the year earlier. Due to Government's various efforts, the "Ease of Doing Business" in India has improved with the country standing at 130th rank in 2015, as compared to 142nd in 2014 as per the World Bank. Going forward, India's economy is expected to witness 7.7% growth in FY 2016-17. Here, Agriculture and Industry Sectors are expected to grow at 2.6% and 7.4% respectively. The Services Sector is expected to see marginal decrease in growth to 9.1%. Due to insufficient irrigation, Indian Agriculture Sector is still largely dependent on monsoon. Fortunately in 2016, as per Indian Meteorological Department (IMD), the monsoon seasonal rainfall is likely to be 106% of the Long Period Average (LPA) i.e. above normal. This will boost the Agriculture Sector and the overall rural economy All numbers are in Million Tonnes except percentages. Source : World Steel Association (WSA), January, 2016 In 2015, all the major steel producing countries (except India) saw a decrease in crude steel production. China, the leading producer of steel, contributed 49.5% of the global output at 803.8 Million MTs in 2015, showing 2.3% de-growth over brvious year. The European Union (EU) recorded a decrease of 1.8% over 2014, producing 166.2 Million MTs of crude steel. Japan's crude steel production decreased by 5% in 2015 to 105.2 Million MTs. United States' crude steel production saw a huge decrease of 10.5% to 78.9 Million MTs. India saw an increase in crude steel production to 89.6 Million MTs in 2015 with 2.6% growth over that in 2014 Global Crude Steel Capacity Utilisation Global steel industry still suffers from excess capacity and the situation worsened in 2015 as compared to 2014. Overall global capacity utilisation saw a downtrend in 2015 and touched 64.6% in December, 2015. However, as per latest data from World Steel Association, the global capacity utilisation has seen an increasing trend in 2016 to reach 70.5% in March, 2016. Indian Steel Industry As per World Steel Association, crude steel production in India increased by 2.6% in 2015 as compared to 2014. It is interesting to note that in 2015 out of the top 10 global steel producers, only India managed to increase its crude steel production. In 2015, Indian steel companies faced stiff competition due to dumping from China, Korea and Japan. Against this backdrop, Indian Government in February, 2016 imposed Minimum Import Price (MIP) ranging from $341 to $752 per tonne on 173 steel products (mainly flat products). Apart from the MIP, Government also raised the import duty to 10% for flat products and 7.5% for long products. India has overall positive economic prospects due to the Central Government's reform momentum and policies to increase infrastructure and manufacturing output. Low oil prices are also benefitting India as majority of India's crude oil is imported. Due to these positive factors, India's steel demand is expected to increase by 5.4% in both 2016 as well as 2017. Industry Profitability Outlook FY 2015-16 has been a challenging year for Indian Steel industry with shrinking profitability due to sluggish demand, onslaught of imports and highly leveraged balance sheets. Even though the raw material prices have gone down in FY 2015-16, the same was not enough to maintain margins given the decrease in steel prices Going forward, the industry profitability is expected to witness more challenges and risks as follows : • Possibility of revocation of MIP : MIP has been imposed for 6 months. It is unclear whether this will be extended further. Even currently, various institutions in steel user industries have objected to this decision. • Chinese overcapacity : As China shifts towards a consumption led economy, Chinese steel industry will be forced to export more and more steel to maintain its capacity utilisation. • Increasing Iron Ore prices : Globally, Iron Ore prices have seen an uptrend recently. Even in India, especially Karnataka, the Iron Ore prices are increasing rapidly. • Increasing Coke prices : Indian Metallurgical Coke Manufacturers' Association (IMCOM) has filed an application to Department of Commerce alleging dumping of Low Ash Metallurgical Coke originating in or exported from China and Australia. IMCOM has also demanded imposition of anti-dumping duty on Coke. If such anti-dumping duty is applied by the Indian Government, it will negatively impact companies without captive Coke ovens. Apart from this, recently there has been a visible increase in imported coke prices, mainly due to the increased demand in Chinese market. • Slow demand pick-up : Even though the Government has initiated many infrastructure and policy reforms, the pick-up in steel demand in the domestic market has been slower than expected, making it difficult to improve capacity utilisation. Given the above scenario, it is becoming more and more important to focus on cost reduction to remain competitive in current market and to maintain margins. Initiatives taken by the Company Your Company is in continuous pursuit of creating more value for all its stakeholders. The Company's various functional teams have taken some remarkable initiatives to not only strengthen its profitability in near future but also gain medium to long-term competitive advantage over its peers. Marketing Initiatives Your Company has chalked out clear roadmap for Approvals and New Product Development with major OEMs in Domestic and International spaces. Your Company has continued focus on niche segments such as critical components in Automotive and Engineering, where the product range is less susceptible to global market fluctuations. Moreover, our efforts to improve service levels and close co-ordination with all stakeholders allowed us to consolidate our position as the brferred supplier to our customers. Cost Reduction & Quality Improvement Initiatives Your company continued its efforts for Cost reduction and Quality improvement. The details of the same are mentioned in Annexure 'A' to the Directors' Report. Company Performance • Sales, Gross - Rs. 14,542 Million • Profit before Taxation - Rs. 1,742 Million Sales, Gross includes Manufacturing Revenue of Rs. 14,430 Million and Trading Revenue of Rs. 112 Million. Manufacturing Revenue consists of sale of Rolled Products, As Cast Blooms and Pig Iron, Misc. Sales and Conversion Charges received. The Company sold 201,566 tonnes of 'Rolled Products' aggregating Rs. 10,530 Million, 17,157 tonnes of 'As Cast Blooms' aggregating Rs. 605 Million, 13,420 tonnes of 'Pig Iron' aggregating Rs. 248 Million, Misc. sales amounted to Rs. 148 Million and Conversion Charges received were Rs. 2,899 Million. The Manufacturing Turnover includes exports of 6,462 tonnes of Steel aggregating Rs. 442 Million. Internal Control Systems and their adequacy The Company has well established internal control systems commensurate with its size and nature of business. These systems have been designed to provide a reasonable assurance with regard to maintaining of proper accounting controls for ensuring reliability of financial reporting, monitoring of operations, protecting assets from unauthorised use or losses and compliance with regulations. The systems provide for well-defined policies, guidelines and authorisations and approval procedures. The internal control is supplemented by an extensive review by internal auditors. The prime objective of internal audit is to test the adequacy and effectiveness of the internal controls laid down by the management and to suggest improvements. Observations of the internal auditors are subject to periodic review and compliance monitoring. The Audit Committee of Directors reviews the significant observations made by internal auditors along with status of action thereon. Human Resources The Company is privileged to have an excellent pool of human resources working with it. The Company considers the quality of its human resources to be its most important asset and places great emphasis on training and development of employees at all levels. The Company's strategy of empowering people at all levels to take decisions and encouraging free flow of information and ideas has helped strengthening of its human capital. As on 31st March, 2016 the Company has 101 employees. 1,084 employees are on the role of Hospet Steels Limited, which is a Joint Venture Company formed with the specific purpose of managing and operating the composite steel making facility at Ginigera, in terms of Strategic Alliance between the Company and Mukand Limited. Cautionary Statement Statements in this management discussion and analysis describing the Company's objectives, projections, estimates and expectations may be 'forward looking statements' within the meaning of applicable laws and regulations. Actual results may differ substantially or materially from those exbrssed or implied. Important developments that could affect the Company's operations include a downtrend in the industry - global or domestic or both, significant changes in political and economic environment in India, applicable statues, litigations, labour relations and interest costs. |