MANAGEMENT DISCUSSION AND ANALYSIS Steel Industry Structure and Developments: Global Scenario: In 2014-15, the world crude steel production reached 1665 million tons (mt) and showed a growth of 1% over 2013. China remained the world's largest crude steel producer in 2014 (823 mt) followed by Japan (110.7 mt), the USA (88.2 mt) and India (86.5 mt) at the 4 th position World Steel Association (WSA) has projected Indian steel demand to grow by 6.2% in 2015 and by 7.3% in 2016 as compared to global steel use growth of 0.5% and 1.4% respectively. Chinese steel use is projected to decline in both these years by 0.5%. Domestic Scenario • The Indian steel industry had entered into a new development stage from 2007-08, riding high on the resurgent economy and rising demand for steel. • Rapid rise in production resulted in India becoming the 3 rd largest producer of crude steel in 2015 and the country continues to be the largest producer of sponge iron or DRI in the world. • As per the report of the Working Group on Steel for the 12 th Five Year Plan, there exist many factors which carry the potential of raising the per capita steel consumption in the country. These include among others, an estimated infrastructure investment of nearly a trillion dollars, a projected growth of manufacturing from current 8% to 11-12%, increase in urban population to 600 million by 2030 from the current level of 400 million, emergence of the rural market for steel currently consuming around 10 kg per annum buoyed by government projects. • At the time of its release, the National Steel Policy 2005 had envisaged steel production to reach 110 million tons (mt) by 2019-20. However, based on the assessment of the current ongoing projects, both in Greenfield and Brownfield, the Working Group on Steel for the 12 th Five Year Plan has projected that domestic crude steel capacity in the county is likely to be 140 mt by 2016-17 and has the potential to reach 149 mt if all requirements are adequately met. • The National Steel Policy 2005 is currently being reviewed keeping in mind the rapid developments in the domestic steel industry (both on the supply and demand sides) as well as the stable growth of the Indian economy since the release of the Policy in 2005. Government Initiatives The Government of India is aiming to scale up steel production in the country to 300 MT by 2025 from 81 MT in 2013-14. The Ministry of Steel has announced to invest in modernization and expansion of steel plants of Steel Authority of India Limited (SAIL) and Rashtriya Ispat Nigam Limited (RINL) in various states to enhance the crude steel production capacity in the current phase from 12.84 MTPA to 21.4 MTPA and from 3 MTPA to 6.3 MTPA respectively. The Ministry of Steel is facilitating setting up of an industry driven Steel Research and Technology Mission of India (SRTMI) in association with the public and private sector steel companies to spearhead research and development activities in the iron and steel industry at an initial corpus of Rs 200 crore (US$ 31.67 million). Some of the other recent government initiatives in this sector are as follows: • An Inter Ministerial Group (IMG) has been setup in the Ministry of Steel for effective coordination and expediting implementation of various investment projects in the steel sector. • A Project Monitoring Group (PMG) has been constituted under the Cabinet Secretariat to fast track various clearances/resolution of issues delaying the investments in the sector. • To increase domestic value addition and improve iron ore availability for domestic steel industry, duty on export of iron ore has been increased to 30 per cent. • Rates of custom duty on stainless steel flat products have been enhanced from 5 per cent to 7.5 per cent in the Union Budget for 2014-15. POWER The company has a 60 MW captive power plant which produces power from waste heat gas generated by the Sponge Iron Kilns and also utilizes the coal fines and coal char generated in the sponge iron making process. About 14 MW of power is generated from waste heat and the balance power is generated by using coal fines, coal char and fresh coal. The surplus power, which was about 60 % of generation, was sold to the state utilities. The power revenue also contributed to revenue and the bottom line. Opportunities: The demand for steel has been sluggish for past few years. Globally steel prices have been on a continuous decline since March 2014. Iron ore prices which were about US $ 121 in March 2014 was about US $ 52 in July 2015. Domestic prices have also reduced substantially in line with the global prices. It is expected that the prices would be more stable in the coming years. Going forward, the government policies aimed at increasing steel consumption and production should augur well for the country with the low prices. The need to increase expenditure on infrastructure projects cannot be avoided for long. India is still a developing company and this augurs well for the domestic steel industry. The fall in prices is expected to increase the demand for steel. The company is into long products and is dependent on the construction sector doing well. With the formation of the new state of Andhra Pradesh, substantial government spending on infrastructure is expected in the creation of new capital and development of smart cities. Threats: Iron ore and coal form major part of the cost of production for the company. The change in price of both these inputs affects the profitability of the company. Despite the fall in international prices, the domestic price of raw materials did not fall in line with the global price. However, the price of domestic finished products of steel fell with increased competition from higher import of cheaper steel products. In a sluggish demand scenario, this causes adverse effect to the domestic producers. Increased cost structure of the domestic players owing to higher royalty on iron ore, increased railway freight as well as levy of DMF under the MMDR law has made them less competitive compared with their counterparts from some of the exporting countries. In June, the government upped import duties on both long and flat steel products by 2.5% to 7.5% and 10% respectively but the quantum is not deterring as the international prices are much lower. The threat of cheaper imports and slow down of infrastructure projects could have a direct impact on the steel industry as a whole. The company sources its raw materials from state owned mines and the prices are sometimes higher than international prices. The company also sources its requirements through imports. Any volatility in currency and prices can have adverse impact. Slowdown of infrastructure projects is also a threat for domestic consumption of steel. Couple of reassuring measures taken by state owned mines and government agencies should help mitigate the above threats in the long run. In tune with global prices, the indigenous prices of iron ore have been brought down with an assurance of more production by NMDC in FY16. The coal mining auctioning process has raised the hope of boosting of supply of indigenous coal for steel plants. CIL is putting up maximum endeavors to raise coal availability. Division wise Performance: Note: The current year figures are not comparable with the brvious year figures as the current year figures includes Simhadri Power Limited figures also pursuant to the amalagamation of Simhadri Power Limited with the company. 1) Trading Division The Trading division deals with a wide range of products from finished steel products to related items semis, coal, scrap, Sponge Iron etc. The division has been primarily responsible for developing the marketing base for the company throughout the coastal region of Andhra Pradesh, and establishing stock yard in Cochin. The division deals with the products manufactured by the Company, RINL (Vizag Steel), and other manufacturers for special products. The division reported a turnover of Rs. 819.36 crores which is about 52% of the total turnover for the year ended 31st March 2015 compared to Rs. 606.41 crores in the brvious year ended 31st March 2014. There was increase in turnover from this division as demand for steel has been increased during the year. 2) Steel Ingot Division - 90,000 TPA This division manufactures ingots using sponge iron and scrap / pig iron. The unit also has a power generation unit using natural gas for captive consumption. The company continued with low level of operations for the period under review keeping in view the market conditions and sold the power produced from the Power Plant. The division reported a turnover of Rs. 29.93 crores which came from sale of power compared to the turnover of Rs. 21.38 crores in the brvious year from sale of power. The power sales increased as no manufacturing activity of steel ingots was carried out during the year. 3) Wire Products Division: The unit of this division produces High Carbon steel wire and Galvanised Wire Products. The division reported a turnover of 11.60 crores as against 20.64 crores in the brvious year. The Management will continue its efforts to maximise the revenues from this division in the current year. 4) Integrated Steel Plant: The Integrated Steel Plant (ISP) of the Company is located at Srirampram Village, L. Kota Mandal, Vizianagaram District and consists of following units: 1. Sponge Iron Unit - 220,000 TPA 2. SMS Billet Unit - 240,000 TPA 3. Rolling Unit - 225,000 TPA 4. Captive Power Plant - 60 MW The total revenue for the period under review from ISP stood at Rs. 550.34 crores as against Rs. 605.68 crores in the brvious year. The division reported marginal decrease in turnover on year to year basis. The TMT bars produced are sold under the well established brand name Simhadri TMT Bars. The total revenue from the sale of Power for the period under review from Power Divison stood at Rs. 154.14 crores. Financial Performance 1) Share Capital The paid up equity share capital of the Company stands at Rs. 519,500,000 comprising of 51,950,000 Equity Shares of Rs. 10/- each and there is no change in the paid up equity share capital compared to the brvious year. However the Authorised capital of the Company increased from 233,00,00,000 to Rs.. 332,00,00,000 consequent to the amalgamation of Simhadri Power Limited with the Company. 2) Reserves and Surplus For the year ended 31st March 2015, the Reserves and Surplus have increased from Rs. 280.77 crores to Rs. 260.04 crores due to the balance transferred from the profit and loss account amounting to Rs. 28.46 crores. 3) Secured Loans There has been increase in Secured Loans from Rs. 340.90 crores to Rs. 658.31 crores. The increase was on account of amalgamation of Simhadri Power Limited with the Company. 4) Unsecured Loans There has been an increase in Unsecured Loans from Rs. 58.55 crores to Rs. 68.98 crores. The increase was mainly on account of availing unsecured loans for business purposes. 5) Fixed Assets During the period under review, there was an increase in the Fixed Assets and the total Fixed Assets (Net Block) stands at Rs. 614.09 crores as against Rs. 349.91 crores in the brvious year. The increase was mainly on account of the amalgamation of Simhadri Power Limited with the Company. Operational Performance 1) Income The income of the Company was Rs. 1565.37 crores for the year ended 31st March 2015 as against Rs. 1255.46 crores in the brvious year ended 31st March 2014, registering 24% increase in turnover. The increase was due to increase in demand for steel products. 2) Direct Cost & Other expenses The Direct Costs comprising of cost of material consumed and purchase of traded goods was to Rs. 1309.89 crores for the year as against Rs. 1022.08 crores in the brvious year ended 31st March 2014. Other expenses comprises of other manufacturing expenses, staff costs, administration and selling & distribution expenses etc. The same was Rs. 117.04 crores for the year ended 31st March 2015 as against Rs. 146.79 crores in the brvious year ended 31st March 2014. The Company continues its efforts to minimise the costs and overheads. 3) Interest Cost For the year under review, the interest and financial charges were Rs. 127.63 crores rebrsenting 8.15 % of the turnover as against Rs. 80.43 crores rebrsenting 6.41 % of the turnover in the brvious year. The interest cost is higher due to increase in term loans and other credit facilities belonging to Simhadri Power Limited which was amalgamated with the Company. 4) Debrciation The Company has provided a sum of Rs. 25.02 crores towards debrciation rebrsenting 1.60 % of the turnover for the year under review as against Rs. 15.09 crores rebrsenting 1.20 % of the turnover in the brvious year. 5) Provision for Tax The Company has not provided any amount towards income tax as the Company has accumulated losses. The accumulated losses of GSAL (India) Limited were transferred to the company upon its amalgamation with the company. The deferred tax provision for the period under review is Rs. 6.42 crores as against Rs. 2.22 crores in the brvious year. 6) Net Profit The operations for the year ended 31st March 2015 have resulted in a Net Profit of Rs. 25.46 crores as against Rs. 35.82 crores in the brvious year ended 31st March 2014. Decrease in margins in manufacturing activity and trading activity coupled with high raw material costs and decrease in steel prices resulted in lower net profit when compared to brvious year. 7) Dividend No Dividend is recommended on the Equity Shares for the year ended 31st March 2015. Internal Controls & Their Adequacy The Company has in place adequate systems of internal control commensurate with its size and nature of its business. These have been designed to provide reasonable assurance that all assets are safeguarded and protected against loss from unauthorised use or disposition and that all transactions are authorised, recorded and reported correctly. The internal control systems are reviewed at regular intervals by the Audit Committee and corrective actions are initiated whenever deemed necessary. The Committee also meets the Company's Internal Auditors as well as Statutory Auditors to ascertain, interalia, their views on the adequacy of internal control systems of the Company and keeps the management informed of its major observations. Human Resources Development and Industrial Relations In this era of globalisation, the industrial scenario is changing frequently, forcing the organisation to develop its human resources and enable them to adapt to contemporary technological advancements to achieve the goals of the Organisation. To sustain in this competitive and challenging environment, the Company believes that the quality of its employees is the key to its success and is committed to provide necessary human resource development and training opportunities to develop themselves. The Management firmly believes that business cannot grow without utilising the potential of its human resources. The Company is committed to provide conducive working environment to its employees, fully utilising their potential and enhancing their skills through cross functional exposure, training and development, sharing information and experiences. Employee relations during the period under review continued to be cordial and your Company is committed to maintain good relations. The Board of Directors and the Management wish to place on record their apbrciation of the efforts put in by all employees at all levels. The total number of employees is about 1221 as on 31st March 2015. Cautionary Statement Statements in the Management Discussion and Analysis describing the Company's objectives, projections, estimates, expectations, may be 'forward looking statements' within the meaning of applicable securities laws and regulations. Actual results would differ materially from those exbrssed or implied. Important factors that could make a difference to the Company's operations include economic conditions affecting demand, supply, and price and supply conditions in the domestic/overseas markets in which the Company operates changes in the government regulations, tax laws, other statutes, and other incidental factors. |