MANAGEMENT DISCUSSION AND ANALYSIS

OVERVIEW

During the financial year 2014-15, the financial and operational performance of the Company has been adversely affected due to various external factors including failure of commitment to grant Iron Ore mines, de-allocation of Coal Block, non-availability of raw materials at viable prices due to mine closures, weak product prices due to over capacity and dumping of Steel mainly by China & Russia, Global Crash in Steel, delay in disbursement of sanctioned working capital & corporate loan and non-disbursement of the working capital for plant operation by some lenders. During the financial year 2014-15, your Company has registered consolidated revenue of Rs. 12,951.44 million, EBITDA of Rs. 307.59 million and the loss after tax is Rs. 2,729.10 million.

INDUSTRY STRUCTURE AND DEVELOPMENTS

Industry Overview

The Global steel industry continues to face problems of large surplus capacity, especially in China. In FY 2015, the World economy has slowed down, mainly due to lower growth rates in emerging economies such as China and India. This has resulted in sharp weakening of commodity prices. The index of Industrial production for steel recorded a significant fall from 11.5% in FY'14 to mere 0.5% in FY'15. This is the lowest growth recorded in last 10 years.

There is a huge growth potential in steel consumption in India given that per capita steel consumption is very low compared to China and the global average. With a stable Government in place and a strong leadership, it is expected that major policy decision in various areas will boost the economy. Any significant  improvement in demand for Iron and Steel products may take a little longer and show up once investments in infrastructure and construction industries start picking up.

India's auto sector including passenger vehicles and two / three wheeler production is likely to grow significantly over the next decade. The Auto Component Sector has attracted huge investments and exports are growing at rapid pace. The Government of India has increased FDI limit in Defence and Railways from 26% to 49%, which is positive for demand for Special Steel products.

India is a significant player with almost a tenth of the Global Ferro Chrome output and produces about 1 million TPA. At brsent, Stainless Steel demand has been weak, but with the increase in production of Stainless Steel going forward, the Ferro Alloys demand is likely to recover.

Demand for Coke from Blast Furnaces has been weak due to Iron Ore availability issues domestically and cheap imports of Coke from China. However, the Company has established itself as the best quality Coke manufacturer and enjoys advantage over imported Coke from China. Being a debt free Company, VISA SunCoke Limited has been able to leverage its operating and technological expertise to be cost efficient and serve customers across India with the best quality Coke.

COMPANY OVERVIEW

The Company has created a world class facility for production of Special Steel, Ferro Alloys and LAM Coke at Kalinganagar in Odisha.

BUSINESS REVIEW

Your Company is engaged in the business of manufacturing of value added products including Pig Iron, Sponge Iron, Special Steel Billets/Blooms, Bars & Wire Rods, Rebars and Ferro Alloys. In addition, the Company generates Power mainly for captive use.

The manufacturing facilities of your Company are situated at Kalinganagar in Odisha. The Kalinganagar Industrial Complex has been declared as a National Investment & Manufacturing Zone (NIMZ) and is a major Steel hub of India.

During the year under review, the financial and operational performance of the Company has been adversely affected due to various external factors including failure of commitment to grant Iron Ore mines, de-allocation of Coal Block, non­availability of raw materials at viable prices due to mine closures, weak product prices due to over capacity and dumping of Steel mainly by China & Russia, Global Crash in Steel and commodity prices and the high interest costs, logistics costs, infrastructure bottlenecks etc. for domestic Steel Companies.

The Special Steel and Ferro Alloys operation were adversely impacted due to the various mine closures and consequent non-availability of Iron Ore and Chrome Ore / Concentrates at viable prices. The Coke Business has been adversely affected due to removal of 40% Export Duty on Coke from China due to which cheap Coke is entering Indian market. Your Company has been taking up with Government Authorities for imposition of Safeguard Duty and / or Anti-Dumping Duty.

PRODUCTS

(a) Ferro Alloys

The Ferro Alloys Plant, with a brsent operating capacity of 120,000 TPA (including the Furnaces taken on lease from VISA BAO Limited (VBL), a subsidiary Company) has produced 62,719 MT of Ferro Alloys in 2014-15 compared to 70,568 MT in 2013-14. The main raw material is Chrome Ore and Chrome Concentrates (sourced from OMC, Tata Steel & B. C. Mohanty). Ferro Alloys produced by the Company is sold to various Special and Stainless Steel Plants in India and globally. Ferro Alloys business has contributed 30.57 percent of total revenues during the year amounting to Rs. 3,959.06 million.

(b) Power

The Power Plant produced 367 million units in 2014 -15 as compared to 435 million units in the brvious year. The Power produced was mainly used captively.

Due to the lower production of Ferro Alloys and Steel, the captive requirement of power resulted in lower capacity utilisation in comparison to the brvious year.

(c) Pig Iron

The Blast Furnace with a total capacity of 225,000 TPA is currently producing Hot Metal which is poured into moulds to produce Pig Iron.

Due to non-availability of Iron Ore at viable prices, Blast furnace operated at a low capacity with production of 42,931 MT in 2014-15 as compared to 105,718 MT in 2013-14. Pig Iron sales contributed 3.83 percent to the total revenues amounting to Rs. 496.21 million.

(d) Sponge Iron

The Sponge Iron Plant having total capacity of 300,000 TPA produced 184,149 MT of Sponge Iron in 2014-15 as compared to 156,082 MT of Sponge Iron in 2013-14. Sponge Iron sales contributed 28.24 percent to the total revenues amounting to Rs. 3,657.11million.

The main raw materials for DRI/Sponge Iron Plant are Iron Ore and Thermal Coal. Iron Ore is procured mainly from OMC, Indrani Patnaik and BRPL. Thermal Coal is procured from Mahanadi Coalfields Limited and through imports from South Africa.

(e) Special Steel

During the year under review, SMS and Rolling Mill operated at very low capacity due to uneconomical prices of raw material and finished products.

STRATEGIC INITIATIVES

Transfer of Special Steel Business

The Company is in advanced stage to transfer its Special Steel business to VISA Special Steel Limited (VSSL), to unlock shareholder value and enable induction of suitable strategic / financial investor. The Board of Directors, shareholders and lenders have approved the Scheme of Arrangement for transfer of Special Steel Undertaking of the Company with all its assets and liabilities, into VSSL, and the approval from the Hon'ble High Court is awaited.

The Company is in discussions with strategic / financial investors for a strategic alliance in VISA Special Steel Limited.

Amalgamation of VISA BAO Limited

VISA BAO Limited, a Joint Venture with Baosteel Resources Company Limited, China (Baosteel), with the Company holding 65 percent equity while the remaining 35 percent is held by Baosteel, has a Ferro Alloys Plant with 4 Submerged Arc Furnaces at Kalinganagar Industrial Complex in Odisha out of which 2 furnaces are operational and have been leased to the Company and the remaining two furnaces under completion.

The Board of Directors both VISA BAO Limited (VBL) and the Company and Shareholders of VBL have already approved the amalgamation of VBL with the Company. Post amalgamation, Baosteel will hold 5% stake in the Company. This amalgamation will make the Company one of the largest Ferro Alloys producers in India and also improve the operational and cost efficiency of the Ferro Alloys business.

Joint Venture with SunCoke

The Company has entered into a coke making joint venture with SunCoke Energy, USA, in which the Company holds 51 percent stake and remaining 49 percent is held by the SunCoke Europe Holding B.V. (SunCoke). The joint venture comprises of 400,000 TPA Heat Recovery Coke Plant and associated Steam Generation units at Kalinganagar in Odisha.

The Coke plant is equipped with highly advanced Chinese technology with Stamp Charging facility, along with waste heat recovery facility from flue gases, wherein the four waste heat recovery boilers produce adequate steam for generating 20 MW of clean power.

During 2014-15, the total Coke production was 295,734 MT, compared to 370,999 MT in 2013-14 in VISA SunCoke. Coking Coal, the primary raw material for producing Coke, was imported from Australia. Coke was partly consumed in the Blast Furnace of the Company and partly sold with sales contribution amounting to Rs. 3,635.18 million, equating to 28.07 percent of total consolidated revenues.

OPPORTUNITIES AND THREATS

Opportunities

India's per capita steel consumption of 52 kg is one-fourth of the global average of 203 kg. India has favourable demographic factors, which will result in higher demand for high quality steel and higher value Long Steel products.

The growing Auto Sector and opening up of Railways and Defence Sectors for FDI will help in increasing the domestic demand of Special Steel Long products. Having commissioned the plant and established the quality, the Company is ready to take on this opportunity to cater to this market segment.

The Government of India plans to give thrust to the infrastructure sector. The Company has a good range of product-mix to serve this segment.

Further the raw material scenario is likely to improve significantly due to the passing of MMDR Amendment Act effective from 12 January, 2015 which provides clarity on lease renewal and enables a transparent auction process for grant of iron ore mines to user industries. We expect that because of this important reform, the mineral production in the country is set to  increase significantly from second half of FY'2015-16 onwards, and this is good news for the value addition industry including your Company.

Threats

Due to global over capacity, mainly in China, and sharp fall in commodity prices, the business environment remains extremely challenging. There is huge competition in the domestic and international markets, due to low demand, non-availability of vital raw material at viable prices, volatile foreign exchange, adverse duty structure, unfair trade practices including dumping of products.

The port and rail infrastructure needs to be upgraded. The majority of the ports, mines and railways have inadequate and low capacity bulk handling facility. The congested road networks connecting steel plants to mines and ports lead to delays in supply and delivery of raw materials like Iron Ore, Chrome Ore and Coking coal.

However, your Company is determined and capable to face the challenges in the Steel Industry through its strengths of locational and logistical advantages, raw material linkages, technology edge and management expertise.

RISK MANAGEMENT

The volatility in the global economy and the increasingly complex interplay of factors influencing a more globally integrated steel business makes Risk Management an inevitable exercise and to cater to the same, your Company has identified major focus areas for risk management to ensure organisational objectives are achieved and has a well-defined and dynamic structure and proactive approach to assess, monitor and mitigate risks associated with these areas, briefly enumerated below:

a) Operations - Timely and cost-effective raw material supply is critical to growth. Fluctuations in the price and availability of key raw materials and commercial changes such as domestic duties / taxes on raw materials have an impact on the operations. Moreover, the stocks are also subject to the other foreseeable risks. Necessary coverage has been taken in the form of a combrhensive Industrial All Risk (IAR) policy which covers plant, machinery, buildings (with contents), tools and equipment and stocks (raw materials, stores and spares and finished goods) against fire, allied perils and all other foreseeable risks. The policy also covers loss of profit to the business arising from any accidental event. The Company also has coverage in form of a Sales Turnover policy which provides all-risk transit insurance cover to the finished goods produced and sold by the Company and also covers transit of all the incoming raw materials.

b) Foreign Exchange - Your Company deals in sizeable amount of foreign exchange in imports of raw materials and exports of finished products. A combrhensive forex policy has been formulated for managing its foreign exchange exposure.

c) Systems - Your Company has implemented SAP, the leading software for Enterprise Resource Planning, to integrate its operations and to use best business and commercial practices.

d) Statutory compliances - Procedure is in place for periodical reporting of compliance of statutory obligations and is reported to the Board of Directors at its meetings.

FINANCE REVIEW AND ANALYSIS

Your Company reported consolidated revenue of Rs. 12,951.44 million showing a decrease of 11.80% as compared to the brvious year mainly because of low capacity utilisation due to non availability of raw materials at viable prices due to mine closures, weak product prices as a result of over capacity and dumping of Steel mainly by China & Russia, Global Crash in Steel and commodity prices. The Loss after Tax is Rs. 2,729.10 million.

Sales & Other Income

Sales have declined mainly due to drop in sales volume and prices of Pig Iron and Coke.

Raw materials consumed

Raw material consumption has decreased due to lower production of Pig Iron and Coke.

Finance Cost

Finance cost has increased during the year compared to brvious year due to increase in the value of tangible asset and borrowings.

Debrciation

Debrciation has marginally increased due to change in debrciation method pursuant to applicability of Companies Act, 2013, from 1 April 2014.

Exceptional & Extraordinary Item

Exceptional & Extraordinary items mainly rebrsents write down of excess of costs of period end inventories in coke business over their net realisable values.

Profit after Tax

PAT was adversely impacted due to low EDITDA margin and high interest costs.

BALANCE SHEET ANALYSIS Fixed Assets

There is an increase in the value of fixed assets including CWIP on account of additions in Capital Work in Progress in Steel Units.

Inventories

Inventory of Raw Materials have gone down due to lower operation of Blast Furnace, Ferro Alloys and Coke Oven.

Sundry Debtors, Loans & Advances

Sundry Debtors level has reduced by 37 percent as compared to brvious year mainly due to lower revenue during the year.

Loans & advances decreased on account of receipt of tax refunds and lesser advances made to suppliers for raw materials, goods and services owing to lower production.

Cash & Bank Balances

During the year Cash and Bank balances have reduced substantially by more than 80%. Your Company has realized fixed deposits maintained with banks and deployed in the operations.

The subsidiary Company continues to maintain Fixed Deposit at attractive rates of interest towards margin money for working capital.

Trade Payables & Current Liabilities

Trade Payables & Current Liabilities has increased due to adverse financial performance of the Company during the year.

FINANCE

Your Company is focusing on consolidating its operations, improving raw material availability and operational efficiencies to reduce costs. The operations and cash flow of the Company have been affected due to delay in disbursement of sanctioned working capital & corporate loan and non-disbursement of the working capital for plant operation by some lenders. In view of the cash losses suffered by your Company due to high cost of raw material, weak product prices and high interest rate, and the consequent impact on cash flows, the Company has not been able to service its debt in a timely manner. In order to mitigate the cash strain and irregularity in debt servicing, the Company has been in discussions with lenders for a Corrective Action Plan under Corporate Debt Restructuring (CDR) mechanism since 20 May 2015. Your Company has already infused additional equity funds of Rs. 325 Crores in a phased manner as per the CDR package. Meanwhile, lenders have invoked Strategic Debt Restructuring on 22 September 2015, which is subject to necessary approvals/authorizations (including special resolution by the shareholders). The Company is also evaluating option to induct strategic / financial investor to refinance debt to a sustainable level.

DEVELOPMENTS IN HUMAN RESOURCES & INDUSTRIAL RELATIONS

Your Company has formulated a detailed Code of Conduct in order to practice ethical behavior and sound conduct to establish the principles that guide our daily actions. Ethical conduct is the cornerstone of how the Company does business. Your Company is committed to creating a healthy work environment that enables employees to work without fear of brjudice, gender bias, sexual harassment and all forms of intimidation or exploitation. It is committed to provide a work environment that ensures every employee, is treated with dignity and respect.

Your Company recognizes Human Resource as its most important assets and is constantly engaged in enriching the value and developing competencies of Human Resources through various development & training programmes. We improve our team building and encourage family bonding through various employee engagement social activities.

The total number of employees in your Company, including those inducted as trainees in the Company, as on 31 March 2015 was 1,101.

INTERNAL CONTROL AND SYSTEMS

Your Company has in place detailed and well spelt internal control systems, which commensurate with the size and nature of its operations and periodic audits are conducted in various disciplines to ensure adherence to the same. During the year, M/s. L. B. Jha, Internal Auditors of your Company had independently evaluated the adequacy and efficacy of the audit controls. The direct reporting of the Internal Auditors to the Audit Committee of the Board ensures independence of the audit and compliance functions. The Internal Auditors regularly report to the Audit Committee on their observations on the Company's processes, systems and procedures ascertained during the course of their audit. The Company has also appointed Cost Auditors for the cost audit of its manufactured products and the Cost Auditors also report to the Audit Committee on their observations. Concerted efforts towards stabilisation of SAP have also contributed to tightening of control systems. Your Company has been able to adapt adequately to this ERP package and is placed to derive significant benefits from the same. Emphasis is placed on adequacy, reliability and accuracy of dissemination of financial data and information. Compliance issues are given utmost importance and reported regularly to the Board.

Your Company has been accredited with the ISO 9001 certification. It shows commitment to quality, customers, and a willingness to work towards improving efficiency. It has also been accredited with the ISO/TS 16949:2009 certification. The ISO/TS 16949 is obligatory for all steel manufacturers to sell their products to the automotive industry. ISO/TS 16949:2009 has given the Company a global standing as a reputable supplier, improved risk management, ability to win more business and subsequently a wider spectrum of customer base.

CORPORATE SOCIAL RESPONSIBILITY

The Company's CSR interventions have been taken up after socio-economic surveys conducted to assess community needs in the local area. The main areas of intervention comprise health, infrastructure development, education, livelihood, sports, art and culture.

HEALTH AND SAFETY

The Company endeavors to be one of the most respected enterprises across the world in terms of providing a safe work place to its employees, contractors and other stakeholders. The management is making every possible effort to ensure that its employees and contractors adopt, practice and enjoy world class health and safety standards.

OUTLOOK

With the reforms initiated by the new government, and railways, defence and infrastructure sector being one of the major focus areas, there is huge potential for growth of this industry.

The Indian economy is on a path of gradual recovery. The government has undertaken several steps improve raw material availability and to revive the business confidence. The Indian economy stands to benefit from the correction in global crude oil prices and will have positive impact on the macro economy in the form of lower inflation, reduced current account deficit, healthier fiscal accounts, increased consumption and a stable INR.

Indian economy is among a few economies globally for which economic growth forecast has been raised by the IMF. The IMF has raised its GDP growth estimates for India for FY 2015-16 to 7.5%

Your Company with a well-diversified product portfolio is well poised to take advantage of the growth in the demand for Special Steel products, Coke and Ferro Alloys.

CAUTIONARY STATEMENT

Statements in this "Management Discussion & Analysis" describing the Company's objectives, projections, estimates, expectations or brdictions may be 'forward looking statements' within the meaning of applicable securities laws and regulations. Actual results could differ materially from those exbrssed or implied. Important factors that could make a difference to the Company's operations include global and Indian demand supply conditions, finished goods prices, input availability and prices, cyclical demand and pricing in the Company's principal markets, changes in Government regulations, tax regimes, economic developments within India and the countries within which the Company conducts business and other factors such as litigation and labour negotiations.