Management Discussion and Analysis CAUTIONARY STATEMENT Statements made in this report describing the Company's objectives, projections, estimates and expectations may be "forward-looking statements" within the meaning of applicable securities laws and regulations. Actual results may 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 conditions in the domestic and overseas markets in which the Company operates; changes in the Government regulations; tax laws and other statutes and incidental factors. OVERVIEW The following operating and financial review is intended to convey the management's perspective on the financial and operating performance of the Company at the end of Financial Year 2014-15. This should be read in conjunction with the Company's financial statements, the schedules and notes thereto and the other information included elsewhere in the Annual Report. The Company's financial statements have been brpared in compliance with the requirements of the Companies Act, 2013, the guidelines issued by the Securities and Exchange Board of India (SEBI) and the Generally Accepted Accounting Principles (GAAP) in India. GLOBAL ECONOMIC SCENARIO The world economic growth remained modest at 3.4% in CY2014 amidst divergent growth trend in advanced and emerging economies. While the developed economies led by the US & UK continued to strengthen the growth in most emerging economies slowed down during the year. Many oil exporting economies were under stress due to a sharp drop in oil prices. Despite their slower growth, emerging markets and developing economies still accounted for three-fourths of global growth in CY 2014. The world economy continued to face risks related to geopolitical tensions, disruptive asset price shifts in financial markets, and stagnation/deflation in advanced economies during CY2014 The world economic growth in CY2015 is likely to see moderate improvement. The improvement is expected to be driven mainly by the advanced economies rather than by emerging markets and developing economies. During CY2014 slowing demand in some of the major developing economies led to the softening in crude and other global commodity prices. Though the price correction created financial stress in oil exporting countries and also resulted in disinflationary environment in many oil importing economies, it is expected to be a net positive to world economy in the short to medium term - especially for oil/commodity importing economies like India. INDIAN SCENARIO The Indian economy, supported by lower oil prices, improved FDI inflows and pro-growth economic reforms initiated by new Government saw a moderate improvement in growth momentum during FY15; some of the key macroeconomic indicators also strengthened over the year. The Indian economic growth improved to 7.3% in FY15 as compared to 6.9% in FY14. Several policy measures taken by the Reserve Bank of India (RBI) and the Government, supported by lower global crude oil prices, resulted in decline in inflation during the year; consumer price inflation is expected to be between 5.0-5.5% range during FY16. The Current Account Deficit (CAD) narrowed to 1.3% of GDP during FY15 compared to 1.7% in FY14. The Government had strong focus on fiscal consolidation and as a result, the Gross Fiscal Deficit (GFD) declined to 4.1 % in FY15 and is budgeted to decline further to 3.9% in FY16. The Government in order to enhance is of doing business and attract new investment, took several policies measures. These includes hiking the foreign direct investment limits in defense, Railways and Insurance, labour reforms, transparent and faster environment clearances, transparent auction-based natural resources allocation policy and rationalization/simplification of tax regime. The other important reform measures taken by the new Government such as deregulation of diesel and petrol prices, direct transfer of subsidies and initiatives for employment growth ("Make in India, Skill India and Digital India" campaigns) are the steps taken to create a framework for sustainable growth. STEEL INDUSTRY IN INDIA In 2014, India retained its position as the 4th largest steel producing country in the world, behind China, Japan and the USA. The crude steel production grew by 2.3% to 83.2 million tonnes, while steel demand grew by 2.2% to 75.3 million tonnes. The Indian GDP growth expanded to 7.3% in 2014 due to improving economic sentiments post the election of a new government. However, demand at the grass root level remained stagnant and is only expected to pick up from 2015. Consequently, steel demand grew at 2.2% in the year, though the domestic steel industry suffered due to the influx of cheap imported products, especially from China. This led to India becoming a net importer of steel in the year. Indian GDP is likely to grow at a rate higher than 7.5% in 2015, while steel demand is expected to grow by 6.2% in the year. STEEL TUBES INDUSTRY Dynamics of the steel pipes and tubes industry are closely intertwined with the trends in the construction and oil and gas industries and also influenced by the pace of infrastructure development projects. As a result, economic development and industrialization are primary growth drivers for the global steel pipes and tubes market. The steel and non-ferrous pipes and tubes market witnessed a sharp decline in demand during the recession. Steel pipe industry, which is largely dependent on the spending in sectors such as natural gas exploration, nonresidential and residential construction, consumer goods manufacture, highway spending and agricultural spending, witnessed downward trend due to the weakening economic conditions. The decline was evident across various sectors of the steel industry including tubular steel, stainless steel, substrate metal, and steel tubes. With the global economy on a recovery mode, the demand for steel pipes and tubes is expected to grow led by increased demand from various end-user sectors, specifically from emerging markets. Asia-Pacific and Europe account for a lion's share of the global demand for steel pipes and tubes. Asia-Pacific and Latin America are among the fastest growing markets for steel pipes and tubes due to high economic growth and increased activity in various end user sectors including oil, power, and refineries. Robust growth in Asian countries such as India and China is driven by large population base, and the enormous investments being made into large-scale infrastructure investments. Increasing energy needs, and intensifying activity in the construction and power plant sectors are also expected to drive the development of the steel pipe industry in the region. The increasing energy security investments of global governments particularly from developing regions are likely to generate steady demand for steel pipes. In developed countries, growth opportunities are anticipated due to the need for replacement of existing pipeline systems that are more than 25 years old. Rapidly expanding population, improving standards of living, and steady economic growth are expected to significantly enhance the demand for various forms of energy including oil and gas. India is among the fastest growing steel tubes and pipe manufacturers in the world with production estimated at about 10 million tonnes a year. Over the years, India has emerged as the global pipe manufacturing hub due to lower costs, superior quality and geographical advantages. The Indian steel pipes industry, comprising seamless, SAW and ERW pipes, addressed a vast global and domestic opportunity, as a result of which this industry aggressively expanded capacity. Our Company operates in ERW Steel Tubes segment and over a period of time we have emerged as consistent manufacturer on the strength of our high quality standards and ability to customize products as per specific customer requirements. The sectors in which we are brsent are considerably under-served in India and other parts of the emerging world. But with more government focus and investments, there are reasons for optimism. This reality creates significant headroom for growth and drives our ambition to become a major core sector player, nationally and internationally. The management of the Company recognizes the following as key growth drivers among others: Urbanisation: Urban India contributes to around 63% to India's GDP, which is expected to rise to 75% by 2030-31. About 31% of India's population is estimated to be living in urban areas; this proportion is likely to rise to 49% by 2031, creating increased real estate demand and indirectly for steel pipes demand. In the 12th Plan, the monitorable targets for infrastructure include: -Increase investment in infrastructure as a percentage of GDPto 9% by the end of Twelfth Five Year Plan. -Increase the gross irrigated area from 90 mn hectare to 103 mn hectare by the end of 12th Five Year Plan. -Provide electricity to all villages and reduce AT&C losses to 20% by the end of Twelfth Five Year Plan. -Ensure 50% of rural population has access to 40 Ipcd piped drinking water supply Power: Oil and gas sector: India will have a natural gas pipeline grid running for 30,000 kms connecting consumption centres to fuel sources by 2017, according to the Cabinet Ministers of Petroleum and Gas. Out of these 30,000 km, it includes 12,000 km of gas pipelines and another 12,000 km of oil pipelines to be constructed. Keeping these realities in mind, there are attractive opportunities for the pipes and tubes industry. Aviation sector: With rising income levels, passenger air traffic is expected to increase considerably by 2020. According to the Economic Survey 2010-11, India will be one of the fastest growing civil aviation markets in the world by 2020 with a passenger load of 420 mn in the Indian airport system as compared to 140 mn in 2010. An investment of additional 0.7 percentage point of GDP is required in the infrastructure by 2017. These will be further aided by substantial investments in development of airports in tier-ll cities as well as improvement of infrastructure in existing airports. India is likely to become the third largest aviation market by 2020, handling 336 million domestic and 85 million international passengers with a projected investment to the tune of US$ 120 billion. The government targets to invest US$ 30 billion in the next decade to modernise existing airports and add 16 greenfield airports. Ports and shipping sector: India's port sector is in a rapid expansion mode. There are currently 187 minor and 13 major ports in India, with aggregate capacity close to 1 billion TPA. The National Maritime Agenda aims to create port capacity of 3.2 billion tonnes per annum by 2020, which is more than three-fold increase overthe brvailing capacity. Housing for all by 2022 : Union Government has announced in the Union Budget of 2015 that everyone would get Houses by 2022 besides various incentives to buy and build homes, government also setup a Mission on Low Cost Affordable Housing in National Housing Bank this 'II surely result in huge demand for Steel Tubes Industry. Surface Transportation : With a growing population in India, demand for road transport would increase further by 2020. While state highways are expected to link most districts in the country, all-weather rural roads are expected to provide access to the furthest outlying villages. Moreover, construction of the golden quadrilateral, Delhi-Mumbai-Chennai-Kolkata-Delhi, is expected to help link these metros and other northern, southern, western and eastern cities by 2020. Ministry of Road Transport and Highway's decision to accelerate implementation of National Highways to achieve a completion rate of 20 kms of highways/day will require substantial investment in road infrastructure. This translates to a 35,000 km at the rate of 7,000 km per year during 2009-14 ensuring greater demand for steel tube products. Sanitization : Swatchh BharatAbhiyaan is the main motive of the Government i.e. need for sanitations in all houses. The Government is providing with the resources and requested everyone to co-operate equally. 20,000 habitations affected with arsenic, fluoride, heavy/ toxic elements, pesticides/fertilizers to be provided safe drinking water through community water purification plants in next 3 years. Government is planning that "Swatchh Bharat Abhiyan" to cover every household with sanitation facility by the year 2019 Solar and renewable energy: Several initiatives have been announced to gear up these sectors. Government proposed to take up Ultra Mega Solar Power Projects in several places like Rajasthan, Gujarat and Tamil Nadu. Rs 500 crore was allocated for this sector in Union Budget 2015. There are several schemes which are being added up to gear and transform this sector. As per one estimate this sector entails-Rs. 10,000 Crore capital expenditures in nearfuture paving way for great opportunity for steel tubes industry. In addition to these Company II get benefitted from various schemes and programs initiated under 'Make in India', "100 Smart Cities', 'Metro & Mono Rails', 'BulletTrains corridors' etc. Performance of your Company Our gross sales for the financial ended March 31,2015 crossed the psychological mark of Rs. 200 Crore even though metal prices dropped significantly inline with the global pricing scenario. While the Company continued to focus on maximizing the domestic opportunities, it also strengthened its brsence in the select overseas markets amidst strong competitive brssures and a result our export sales also registered a good growth, during the current fiscal we exported 16.325MT quantity majorly to UK, other European Countries, UAE, Middle East and Africa amounting Rs. 79.15 Crore, against the brvious year's export quantity of 6679MT amounting Rs. 34.72 Crore, a growth of 145% in quantity terms and 128% in value term. We are a recognized 'Star Export House' and recipient of various EEPC India awards conferred in recognition of our export excellence. Our Net Revenues stood at 194.82 Crores as compared to 181.34 Crores brvious year registered a growth of 5.34% whereas the total quantity sold during the current fiscal is 5.21% more (this year we sold 44627.92MT materials as compared to 42418.66 MT during the brvious year). However, due to rising cost of production, and overheads our EBIDTA for the year stood at Rs. 8.40 Crores as compared to Rs. 8.78 Crores for the financial year ended March 31,2014. Leap Forward CARE Research expects the demand for Indian pipe industry to improve from FY14 and remain healthy over the longer term, in the global and domestic markets, on the back of increasing demand arising from oil & gas and infrastructure projects. Enhanced global energy demand arising from increasing population and economic spending in the emerging markets will lead to need for higher exploration and production (E&P) activity, strengthening demand for steel pipes. Shale gas discovery is likely to increase the global demand for pipeline infrastructure. With a new robust government at the centre, India will look to recover the time and opportunities lost in the past few years. Certain areas has already been identified as a major bottle-neck area by the new government and huge investments are on the horizon with substantial private sector participation. In collaboration various governments and their agencies are aggressively announcing various initiatives for strong and robust economic developments such urbanization, sanitization, smart cities schemes, rapid transportation systems for better connectivity, metros, railways and aviation schemes etc. Furthermore, with the increasing per-capita disposable income steel, pipes, structures consumption is increasing day by day. Consequent to all these developments rapid urbanization and accelerating industrialization will drive the demand for more steel tubes and hollow sections. Besides, there is need for accelerated capacity additions to achieve the 'Make in India' initiative of Government of India. Rama Steel Tubes Limited, is attractively poised to grow, as a long-term plan, we have already initiated certain strategic initiatives to expand the manufacturing capacities and strengthen supply chain capabilities; extend our brand brsence across India with qualitative products-delivered in time-with an asset-light model; grow brsence in international markets, venture into synergic products, platforms and opportunities. Risk Management Risk governance, at Rama Steel Tubes, is not an isolated commercial response to external contingencies, but a strategic management response comprising foresight, professionalism and accountability. Industry risk Risk explanation: An economic slowdown might stagger infrastructure development in user industries and adversely affect the Company's business and earnings. Risk mitigation: • The Indian economy is expected to sustain 7-8% growth over the foreseeable future, driving growth in the Company's user industries. • The Company's product diversity straddles the construction, sugar, oil and gas, power, chemical, agricultural equipment and automobile industries, an effective de-risking against an over-dependence in any particular industry. • The Company derived 39% of its revenues from exports, reducing its dependence on the domestic market. Competition risk Risk explanation: The rapid growth of the Indian economy and the huge domestic pipe demand might attract competition. Risk mitigation: • Despite stiff competition, the Company expects to protect its profitability through excellence in product quality, rich domain experience and accelerated delivery. Besides, it is one of the few companies manufacturing more than 150 pipe varieties. • The Company entered into strategic alliances with reputed international entities to benefit from their know-how, engineering insights and project management skills. • It was the only company in India to manufacture br-galvanised tubes in organised sector Raw material risk Risk explanation : The unavailability of quality raw materials might jeopardise the Company's production. Besides, an inability to pass on raw material cost increases could affect margins. Risk mitigation • The Company maintains a minimum raw material inventory of 30 days as a brventive measure against volatility in raw material prices, including steel. • The Company ensures optimum utilisation and effective raw materials managementthrough a coordinated procedure. • Most of the contracts signed by the Company enjoyed an input cost escalation clause as an effective hedge against input cost increases. People risk Risk explanation People attrition can stymie organizational growth. Risk mitigation: The Company's three-pronged strategy in people recruitment, development and retention comprised thefollowing: • The Company recruited locals • The Company developed functional and behavioural skills through training. • The Company reviewed remuneration to enhance motivational levels Quality risk Risk explanation: The Company's failure to maintain quality excellence can trigger client attrition. Risk mitigation: • The Company adopted the online non-destructive testing system, which made real time error detection a reality. • The Company adhered to the quality-control norms laid down by the Bureau of Indian Standards • It received the ISO 9001:2000 certification. Technology obsolescence risk Risk explanation: The Company's dependence on obsolete technology can erode market share and profitability. Risk mitigation • The Company initiated investing in a highly sophisticated Japanese technology to enrich product quality and diversity. • The Company's in-house R&D division focused on the development of technologically innovative products Margins risk Risk explanation: Pipe-manufacturing is a low-margin and volume-driven business. Margins may decline further. Risk mitigation • At Rama Steel Tubes, the Company is consolidating its brsence in niche and value-added segments (br-galvanised and hollow section tubes). • The Company is extending its brsence across the entire value chain by strengthening its forward and backward integration initiatives. Funding risk Risk explanation : Following a strong pipe demand across varied industries, the Company is planning huge investments to set up new manufacturing facilities and increase capacities in existing ones. Any delay in funds mobilization could delay project implementation. Risk mitigation: • The Company has adequate funding tie-ups with its bankers. • The Company strengthened its net worth from Rs 2003.54 Lacs in 2013-14 to Rs 2069.78 Lacs in 2014-15, which enhanced its borrowing room. Debtors' risk Risk impact: The Company's debtors might default or delay, straining working capital management. Risk mitigation • The Company's debtors' appraisal system effectively evaluated the credit-worthiness of prospective customers. • The Company conducted business through letters of credit with unfamiliar customers. Environment management The Company's stringent environment policy complies with the directives issued by the Government of India, State Governments and Pollution Control Boards. The Company's waste management initiatives include welding waste (end cuttings of steel tubes) which is sold as scrap to mini-steel mills, where they are combined with molten steel for producing lower grade steel varieties. Besides, blowing ash, generated from galvanising zinc, is processed and oxides are separated from zinc powder and marketed to brass manufacturers. Appropriate measures for environment protection are taken by adopting the best available technology and implementing a pollution control infrastructure to achieve discharge and emissions within the statutory limits. Cost control The Company realised that effective cost control can lead to an improved operational and financial performance. It has started exploring the avenues to control costs so as to achieve better results. A combrhensive study was conducted by the Company to identify 'cost centres'. The Company adopted the 'responsibility accounting' approach by defining each process, manufacturing lines, department, unit and invoice generation centre as a separate responsibility centre, which facilitated intra-group comparisons and identifying the factors responsible for variances. INTERNAL CONTROL SYSTEMS In Rama Steel Tubes, the Board of Directors is responsible for ensuring that internal financial controls have been laid down in the Company and that such controls are adequate and are functioning effectively. The Company has policies, procedures, control frameworks and management systems in place that map into the definition of Internal Financial Controls as detailed in the Companies Act, 2013. These have been established at the entity and process levels and are designed to ensure compliance to internal control requirements, regulatory compliance and appropriate recording of financial and operational information. Internal Financial Controls that encompass the policies, processes and monitoring systems for assessing and mitigating operational, financial and compliance risks and controls over related party transactions, substantially exist. The senior management reviews and certifies the effectiveness of the internal control mechanism over financial reporting, adherence to the code of conduct and Company's policies for which they are responsible and also the compliance to established procedures relating to financial or commercial transactions, where they have a personal interest or potential conflict of interest, if any. The Company's institutionalised internal control procedures encompass financial and operating functions. It provided proper accounting control, monitoring operational efficiency and general economic trends, while protecting assets from unauthorised use or losses, and ensured reliability of financial and operational information. This facilitated the detection of fraud and irregularities. Internal control was designed to ensure that records - financial or others - remained reliable for brparing financial statements and maintaining the accountability of assets. The Audit Committee, comprising Independent Directors from the Board, reviewed plans, significant audit findings, adequacy of internal controls and compliance with Accounting Standards. STATUTORY COMPLIANCE The Managing Director/Executive Director make a declaration at each Board Meeting regarding compliance with provisions of various statutes after obtaining confirmation from all the departments of the Company. The Company Secretary ensures compliance with the SEBI regulations and provisions of the Listing Agreement, other statutory guidelines on insider trading for brvention of the same. |