MANAGEMENT DISCUSSION AND ANALYSIS REPORT The Board takes pleasure in brsenting your Company's Twenty-Fourth Annual Report for the FY 2014-15 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. Major development post year ending: The Company's seamless steel and pipe division unit at Umbergaon, Gujarat, has been transferred to Tubacex Prakash India Private Limited on 25th July, 2015, pursuant to the joint venture Agreement between the Company and Tubacex S.A. Spain. The Company however retains 32.47% shareholding in the said Tubacex Prakash India Private Limited post transfer of the Seamless division. The Company will continue the manufacturing of welded tubes and pipes and also the trading in S. S. Products. The sale proceeds has helped the Company reducing its debts substantially. Industry Overview a) Global Scenario The process of recovery of the global economy continued during FY 2014-15, though the recovery process was uneven across geographies. While the world economic growth stagnated at 3.4% in CY 2014; economies like the US and the UK strengthened marginally on account of higher domestic production and falling oil prices; Eurozone believed expectations and lurched from one crisis to another. China's growth faltered during the year, wh ile Latin American economies underperformed. Russian economy also came under tremendous brssure due to sanctions by several countries following the Ukrainian crisis and the drop in oil revenue. The global steel industry showed positive momentum in the second half of 2013. This demand, however, declined in 2014 because of a weaker than expected performance in the emerging and developing economies. The slowdown in steel's demand in countries like China, the CIS and South America resulted in a significantly lower global growth projection. In contrast, developed economies fared better in the last financial year, resulting in a sustained demand of the commodity. The global steel demand expanded by a mere 0.6% to 1.537 billion tones in 2013-14, primarily due to contraction of demand in emerging economies like China, Brazil, Russia and Turkey. Chinese demand fell by 3.3% in the year to 710.8 million tonnes, with the outlook for the coming years showing signs of reducing further by 0-5% year-on-year (yoy). Developed nations like USA, Germany, South Korea and Japan continued to show growth support during the year. The global steel demand for the years 2015 and 2016 is forecast to grow by 0.5% and 1.6% respectively to a level of 1.544 and 1.565 billion tonnes. The EU region economic growth started its cycle of revival in 2014, leading to an increase in steel demand in the year. The apparent steel use in the EU (28) grew by 4.5% in 2014 to 146.8 million tonnes and is expected to grow by a further 2.1% in 2015 to reach 149.9 million tonnes. In the near future, recoveries in the US, Europe and Japan are expected to be stronger than brviously thought, but not strong enough to offset the slowdown in the emerging economies. It is expected that the growth in the industry will be moderate, and consequently pick speed. b) India's economy The government's 'Make in India' thrust has boosted the confidence of indigenous manufacturers to compete globally with more capability and confidence. The monetary policies of the Reserve Bank of India, steadily reducing repo rates have brought in dynamism in the country's financial architecture. India's economy outshined other major global economies as growth touched 7.3% in FY 2014-15, following economic reforms unleashed by the new government. The challenges that dogged the economy high rate of inflation, fiscal deficit and current account deficit-were brought within manageable limits. The country's investment scenario and consumer sentiments also improved significantly. The manufacturing sector is seeing better days, there is steady growth in the services landscape, and the agricultural sector has remained resilient. Major demand drivers i) Make in India The "Make in India" is an international marketing strategy initiated by Mr. Narendra Modi, our worthy Prime Min ister recently in Sept. 2014. The purpose of this scheme is to attract investments from businesses around the world. The concept of "Make in India" attempts to attract the inflow of Foreign Direct Investment to improve the services by partial privatization of loss making corporations in the Public Sector of India. The main focus of this scheme is to fulfill the purpose of job creation, enforcement to secondary and territory sector resulting in boosting of our economy and ultimately making India a self reliant and dominant country in the world. The policy aims to project India as one among the top three manufacturing destinations globally by 2020. This initiative is expected to enhance the industry's contribution to GDP from 15% to about 25% by 2022. The creation of 100 million additional jobs by 2022 in the manufacturing sector has also been envisioned. With the proposed amendments, there has never been a better time to make in India, and turn the country into a powerful manufacturing hub. The steel and power industry will realise a derived demand because of the innumerable manufacturing plant set ups and infrastructure requirements. ii) Infrastructure India's growing population, rising per capita income, increasing housing need and migration from rural areas to urban areas are expected to drive the infrastructure sector, and hence, the requirement for steel. Government impetus to drive key infrastructures like roads, railways, bridges and ports will augur well for the steel industry going forward. iii) Per Capita Steel Consumption Adding to these drivers of growth, is the fact that India's per capita consumption of steel is less than 60 kgs, which is close to one-fourth of the international average. This indicates a strong growth opportunity. The country's steel demand will be at par with China's current demand by 2035; this allows huge headroom for growth. Risks and Concern s The Steel Industry displays strong commodity characteristics and is subject to cyclical price movements in business cycles. The Company is exposed to risks from overall market fluctuations, changes in government policy, laws of the land, taxation, man-made disaster, political risks and increase in cost of inputs like Iron ore, coal, power, diesel, freight, etc. which affect the financial performance of the Company Risks management: Your Company continuously monitors and revisits the risks associated with its business. It has institutionalized the procedure for identifying, minimizing and mitigating risks and the same are reviewed periodically. The Company's Structured Risk Management Process attempts to provide confidence to the stakeholders that the Company's risks are known and well managed. The risk management framework ensures compliance with the requirements of amended Clause 49 of listing agreement. Risk Management comprises three key components which are as below: i. Risk identification ii. Risk assessment and mitigation iii. Risk monitoring and assurance Your Company has identified the following aspects as the major risks for its operations: i. Economic Risk ii. Foreign Exchange Risk iii. Industrial Risk The risk mitigation plans are reviewed regularly by the Audit Committee of your Company. PrakashSteelage Limited risk management policy is designed to ensure sustainable business growth with stability, and to promote a pro-active approach in reporting, evaluating and resolving risks associated with the business. The policy establishes a structured and disciplined approach to risk management to guide decisions on risk related matters Government Initiatives a) An Inter-Ministerial Group (IMG) is functioning in the Ministry of Steel, under the Chairmanship of Secretary (Steel) to monitor and coordinate major steel investments in the country. b) As a facilitator, the Government monitors the steel market conditions and adopts fiscal and other policy measures based on its assessment. Currently, basic excise duty for steel is set at 12.5% and there is no export duty on steel items. The government has also imposed export duty of 30% on all forms of iron ore except low grades which carry a duty of 10% while iron ore pellets have a export duty of 5% in order to control ad-hoc exports of the items and conserve them for long term requirement of the domestic steel industry. It has also raised import duty on most steel imports by 2.5%, taking the import duty on carbon steel fat products to 10% and that on long products to 7.5%. c) For ensuring quality of steel several items have been brought under a quality control order issued by the Government. d) Further, a Steel Price Monitoring Committee has been constituted by the Government with the aim to monitor price rationalization, analyze price fluctuations and advise all concerned regarding any irrational price behaviour of steel commodity. Subsidiaries and strategic alliance. The Company's UAE subsidiary carried on normal level of business during the year. The strategic alliance with Karagwal Developers Pvt. Ltd. to develop the spare factory land at Umbergaon started yielding good results though not as per the expectations due to sluggish market conditions. Outlook The global steel consumption demand in CY 2015 is expected to increase by 0.5% to 1,544 MT, while in CY 2016, it is projected to grow by 1.4% to 1,566 MT. The increased positive vibes from developed economies and a strengthened Eurozone momentum will further push the world steel demand. In the developing and emerging economies like India, MENA and ASEAN countries, the use of steel is likely to increase in the near future. With the surging demand and investment projects continuing to take place in many parts of the world, nominal global steel making capacity is expected to climb by 120 mmt in the period to 2017, bringing the total worldwide capacity to 2,361 mmt by 2017 (Source: OECD). The Company's revenue and profitability will be impacted adversely due to transfer of its Seamless business during the current year. Financial Performance On the operational front, the Company has made significant progress in the last year. The Company, on standalone basis, has recorded net revenue of Rs.107243.18 Lacs, as compared to Rs.94421.79 Lacs in the brvious year reflecting a growth of 13.58%. The profit before exceptional item and tax is Rs.3165.62 Lacs as against Rs. 2356.46 Lacs in the brvious year reflecting an increase in Profit by Rs. 809.16 Lacs. An increase of 34.34%. The Net Profit after Tax is Rs.1406.01 Lacs as against Rs. 1654.92 Lacs in the brvious year reflecting a decrease of profit by Rs. 248.91Lacs, a decrease of 15.04%.The Earning per Share (EPS) before exceptional stood at Rs. 11.90 per share. Opportunities and Theats In India, the per capita consumption of steel is very low in comparison to global average as well as in comparison to various other Asian economies. Eventually India has a long way to go in the consumption of steel which is ensuring long term growth and good prospects for the steel sector. Ma in hurdles in Indian Steel Industry are high cost of power and fuel and non availability of metallurgical coke, which are expected to be addressed by new Government in due course of time. Continuous capacity expansion of integrated steel manufacturer for processing value added products are resulting into increase in their market share at the cost of secondary manufactures. To stay ahead your company continues to develop more and more value added specialized products to ensure its own growth. Your company is having high exposure to forex due to significant export and import. The volatility of currency contributes to high risk and to minimize the impact of the same a prudent policy of necessary hedging / forward sales has been adopted to draw the balance between the forex asset and liabilities. The Board of Directors is being informed periodically in respect of risk assessment and steps being taken by the company. Internal Control Systems and their Adequacy The Company has in place adequate systems of internal control commensurate with its size and the nature of its operations. These have been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorized use or losses executing transaction with proper authorization and ensure compliance of corporate policies. Internal Audit is conducted at regular intervals covering the key area of operations. It is an independent assurance and functions responsible for evaluating and improving the effectiveness of risk management control and governance processes. An Audit Committee consisting of three Independent Directors is in place. The Internal Audit Reports are placed before the Audit Committee. The Audit Committee deliberates and advises the Management on improvements/compliance. Quality In today's global competition and open economy, quality plays a vital role in marketing the products and in staying ahead of others. Therefore more emphasis is being given to manufacturing of products that meets high standards of quality in the global market and customers' satisfaction. Proactive efforts are directed towards determining customers' requirements and achieving all-round customer satisfaction. This is primarily achieved through automated systems, high attention to complaint resolution, online communication and information exchange, at various levels. Certification Prakash Steelage Limited is an ISO 9001-2008, ISO 14001-2004, ISO18001-2007, PED certified and AD-2000-Merkblatt WOEIL, Lloyds, IBR Approved and Government recognized Star Export House. Statutory compliance The Company Secretary, as the Compliance Officer of the Company, ensures compliance of the SEBI regulations and provisions of the Listing Agreements. Compliance certificates are obtained from various units of the Company and the Board is informed of the same at every Board Meeting. Environment Prakash Steelage Limited believes in prioritizing safety and health and incorporating it as a value within the organisation to give a sense of satisfaction, along with security not only to the employees but also to their family Safety is embedded and forms an integral part of the business conduct, with an aim to achieve zero harm through the implementation of worldclass technology, embedded with hig hest safety standards. Cautionary statement Statements in this management discussion and analysis report describing the Company's objectives, projections, estimates and expectations may be termed as "forward looking statements" within the meaning of applicable laws and regulations. Actual results may differ materially from those either exbrssed or implied. The readers of this report are, therefore, advised to read the same with this caution The Company assumes no responsibility to publicly modify or revise any forward looking statements on the basis of any future events or new information. For & on behalf of Board Sd/- Prakash C. Kanugo (Chairman & Managing Director) DIN: 00286366 Place: Mumbai Date: 14thAugust, 2015 |