Balasore Alloys Ltd

ECONOMIC OVERVIEW

During the Financial Year 2011-12 the Global Economy continued to remain slow andstagnant primarily due to concerns and crisis prevailing in the EURO zone.

According to the International Monetary Fund (IMF) Global growth is projected to dropfrom about 4 percent in 2011 to about 3.5 percent in 2012 because of weak activity duringthe second half of 2011 and the first half of 2012. World Real GDP growth in the emergingand developing economies is projected to slow from 6.25 percent in 2011 to 5.75 percent in2012 but then to reaccelerate to 6 percent in 2013, helped by easier macroeconomicpolicies and strengthening foreign demand.

The GDP growth in US economy continues to show signs of modest recovery. Large scaleliquidity infusions by the European Central Bank have significantly reduced the stress inglobal financial markets. However, a sustainable solution to the EURO area debt problemsis yet to emerge.

As per the Monetary Policy Statement 2012-13 issued by the RBI on 17th April, 2012states that during the year 2011, the Indian economy faced major challenges with Fuelprice hikes, a steep depreciation in the Indian rupee and deceleration in industrialgrowth.

During the year 2011-12, the Indian economy is estimated to have grown by 6.9 percent.While the growth in the agricultural and service sector continuing to perform well,India's slowdown can be attributed almost entirely to weakening industrial growth. Themanufacturing sector grew by 2.7 per cent and 0.4 per cent in the second and thirdquarters of 2011-12. Inflation as measured by the wholesale price index (WPI) was highduring most of the current fiscal year, though by the year's end there was a clearslowdown.

However, for the Indian economy, the outlook for growth and price stability at thisjuncture looks more promising. There are signs from some high frequency indicators thatthe weakness in economic activity has bottomed out and a gradual upswing is imminent.

INDUSTRY STRUCTURE AND DEVELOPMENTS

Your Company is engaged in the production of High Carbon Ferro Chrome which is backedup by captive Chrome Mines. Basically, Ferro chrome is used in metallurgical operations(especially stainless steel) as a raw material. The FeCr acts as an alloy which even addedin the steel production, gives it corrosion resistant properties. Globally FeCr productionis centred near regions with high chrome deposits. It is produced through a highly energyintensive electric arc furnace (EAF) process. Consumption and production of Ferro chromehas been growing for the last few years primarily due to increased usage of stainlesssteel. Globally, major consumers are metal goods followed by building construction andengineering which are driving the demand for Ferro Chrome by consuming more steel andsteel products. In India, Kitchenware is the only major sector which consumes around 75%of ferrochrome in the form of stainless steel. Therefore, demand for FeCr largely followstrends in Stainless steel and Alloy steel production.

GLOBAL OVERVIEW

The financial market turbulence had a knock-on effect on stainless steel production inEurope and the Far East which in turn has reduced demand. And then we have had thetemporary cutbacks in South African production.

Currently, the stainless markets in Europe and the Far East are sluggish and thesustained fall in the nickel price has slowed orders as buyers play the waiting game overalloy surcharges. Demand in the US has picked up as a result of the automobile and energyrelated sectors experiencing improved sales. Mills have found that raising prices has beendifficult, mainly as a result of lower nickel prices but volumes are improving.

The Euro zone crisis in Europe and its effects on the stainless industry is essentiallya story of two halves. Southern Europe is stagnating but in Northern Europe consumption issteady, particularly in the export-led sectors. However, if another crisis develops,consumption will fall, leading to a market surplus and downward pressure on prices.

The Chinese authorities announced that GDP was targeted to grow at 7.5% P.A. for thisyear which has raised concerns about growth in China for the next few years as a whole.

It is expected that global stainless melted production to increase by 3.9% in 2012 andby 7.1% in 2013.

INDIAN OVERVIEW

Stainless Steel production in India growing supported with domestic and export drivendemand. Sustained demand for FeCr is in line with the growth in Stainless Steelproduction. Asian countries alone constitutes more than 75% of the global Ferro Chromedemand and Indian producers have the competitive freight advantage in these market.

In 2011, Indian production of high carbon ferrochrome increased by 81,000 tonnescompared with 2010 to total 962,000 tonnes. In 2012 it is estimated that Indian outputwill expand by almost 140,000 tonnes to total 1.1MT.

It is estimated that growth in Indian ferrochrome production will be moderate toaverage 2.1% P.A., taking total output up to 1.2 MT in 2016.

Opportunity

For several years, power shortages in South Africa, and the need to build moreelectricity generating capacity, have been key factors influencing supply and prices inthe global ferrochrome market. But the situation is gradually becoming more acute overtime leading to production cuts by the South African producers from time to time. SouthAfrican power shortages are limiting the ability of the local industry to expand butpresenting others with a chance to fill the supply gap.

The recent move by many South African producers to put restrictions on Chrome oreexport from South Africa may have an adverse impact on China's plan to increase theirFerro Chrome capacity in coming years.

The above two factors may have an adverse impact on the global supply of Ferro Chrome.

The recent depreciation of Indian currency against US Dollar will boost the exportopportunities and realisation.

Threats

Export of UG2 grade ore from South Africa to China is helping Chinese producer toincrease their production of FeCr at low cost.

Rising power rates in the state of Odisha is a major threat to the Industry as FerroChrome is a power intensive Industry.

Depreciation of South African currency Rand against US dollar will help South Africanproducers to recover their rising cost and may restrict further price increase of FerroChrome.

FUTURE PROSPECTS & COMPANY'S STRATEGIES

Global stainless steel consumption has increased at a CAGR (Compounded Average GrowthRate) of 4.35 percent over the last five years and is expected to increase at a CAGR of4.82 percent in the next five years. The growth rate has been driven by China and otherAsian countries and is expected to be supported by them in the future also. Chinese demandis expected to grow at a CAGR of 6.11 percent with other Asian countries expected to growat 4 percent.

As per Metal Bulletin Review report, the demand for ferrochrome surged to new heightsin the first quarter of 2011-12, but demand receded in the second and third quarter amidreduced demand from stainless steel mills as they faced reduced demand from theircustomers due to Euro zone crisis. But in the long run, in line with expectation ofincrease in stainless steel demand, demand for Ferrochrome is expected to increase. Theconsumption is expected to reach 11Mt by 2013 at a CAGR of 7 percent per annum. Withindustry running at low operating rates of 80-90%, the increase in consumption requirementis expected to be met by a corresponding increase in the operating rates. Also some of theprojects are expected to come live within next few years which are further going to helpin boosting production but not before 2013.

South Africa plays a significant role in the world's output of ferrochrome contributingaround 38% of the total in 2012. Recently, the mining industry has been hit badly becauseof the shortage of electricity. Eskom (South African Power Utility) has revised powertariffs in the last two years and is planning to revise them further up in the comingyears. Because of this, major producers in South Africa have entered into an agreementwith Eskom for reducing their production capacity and participating in electricitybuy-back program. Merafe Resources and International Ferro Metals Ltd are lowering theiroutput till the end of May, 2012 under this program, resulting in a total production lossof about 30% productions.

Your Company is on the verge of setting up a captive power plant to become self reliantand competitive. It is making strenuous efforts to gain foothold in emerging and lucrativesmaller markets and foresees for itself reasonable opportunity for growth and increase inits dominance in the industry owing to the global and Indian developments in the sector.

MANAGEMENT OF RISKS AND CONCERNS

The Company believes that business projections have an inherent element of uncertaintyowing to unknown factors and presumed that managing risks is a paramount need for ensuringpresent and future growth plan. Over the years, the Company has encountered several risksand concerns during the process of its business. In keeping with problem solving approachthat characterized the Company, it has taken several steps to counter and mitigate these,while simultaneously pursuing every possible risk.

Any economic slowdown can adversely impact the demand-supply dynamics andprofitability. Flux in prices will also affect operating margins. Our Company too isvulnerable to these changes. Supply of quality as well as consistent power by the localdistribution Company continues to be a concern area where monopoly in future can beenvisaged.

Wherever possible and necessary, appropriate insurance cover is taken for financialrisk mitigation. Confirmation of compliance with applicable statutory requirements areobtained from the respective unit/divisions and subjected to an elaborate verificationprocess. Quarterly Reports on Statutory Compliances, duly certified, are submitted to theAudit Committee as well as the Board of Directors for review. Compliance(s) withexception(s), if any, are duly reported to the Audit Committee and the Board of Directors.Status of Demand/Notices on the Company, under various Acts and Rules, as well as statusof litigations are reported to the Board of Directors every quarter.

The Company recognizes that risk management is an integrated and process orientedapproach for managing its business risks and opportunities. Accordingly, the Company hasclearly identified and segregated its risks into separate components, i.e., potential,operational, financial, strategic and growth execution. All the identified risks areinter-linked with the Annual Business Plans of the Company so as to facilitateCompany-wide reviews.

Further, the Company have engaged a reputed consultant to again revisit / reassess theRisk Management frame of the Company to identify the method / process of identificationand mitigation of the risks.

A Risk Management Committee of Board of Directors, comprising of Board Members, hasbeen constituted to review periodically updates on identified risks, implementation ofmitigation plans and adequacy thereof, identification of new risk areas etc. The riskManagement Committee constantly monitor the pro-active approach and meets periodically toidentify and assess new risks, formulate mitigation plans, review the updates on theidentified risks and implementation of the mitigation plans etc. The Board of Directorsalso reviews the Risk identification process and mitigation plans regularly.

OPERATIONAL PERFORMANCE

For the year ended 31st March, 2012, the production stood at 93,996 MT as against90,544 MT in the previous year 2010-11, thereby achieving a growth of about 3.18% than theprevious year. Your Company exported 33,191 MT valued at Rs 23,095.14 Lacs during the yearunder review as against 34,996 MT valued at Rs 22,244.93 Lacs during the previous year2010-11.Your Company is putting all its effort to maximize the Net Sales Realization (NSR)by optimizing the domestic and export sales mix. Further, your Company is focusing onoptimum capacity utilization which is a critical factor for achieving sustainedprofitability and we have been achieving continuously even during adverse situation.

Sustainability will continue to be our core strength. Promoting safe workingconditions, planned production schedule, strategic cost reduction across the supply chainand a very clean and green working condition will continue to be strengthened for furtherimprovement upon the sustainability of our operation.

The continued practice of modern management initiatives such as TPM (Total ProductivityManagement), Six Sigma and SCM (Supply Chain Management) practices has immenselycontributed in optimizing the cost and improving the productivity of your organization.

Your Company is working on expanding the capacity by acquisition of plants lying idlein close proximity to the mines and plant. We are targeting a 100% growth in capacity byachieving 2,00,000 MT production per Annum within a shortest span of time. Matching to thegrowth in production volume, mining projects including underground mining for lumpy ore isbeing taken up with the best available technology. This effort will not only improve theproductivity and profitability of the organization but also bring the organization in to asignificant position in the industry.

QUALITYASSURANCE

The Company continues to have ISO 9001: 2008 and ISO 14000 accreditations from theBureau of Indian Standards through commitment to quality and technological excellence andEnvironmental Management System. The Company is committed to maintain the highest qualityof its products and stringent quality assurance procedures with continuous efforts tomaintain the Environmental system. Apart from the existing equipment, we are going to addone Wave length dispersive X-ray-Fluorescence (WDXRF) for better accuracy of testing,which will reduce the testing time.

ENVIRONMENTAL AND SAFETY MEASURES

Your Company continues to give highest priority to all matters related to environmentalprotection as well as safety of its employees.

The Company has been very careful in maintaining all statutory and legal norms relatedto Environment and Safety.

Balasore Alloys Ltd, an ISO-14001 certified Company with the help of structuredEnvironmental Management System has taken care of all the environmental aspects and theemission & discharge levels are much below the statutory norms. The plant continues towork on a Zero discharge model as the entire waste water is recycled and is used in thesystem and horticulture. The solid waste is utilized as a good replacement for stone chipsfor construction purposes. Your Company continues to carry out the Plantation programme atlocal villages keeping in mind the objective of Greenery development for betterenvironmental balance. Moreover, your Company has strengthened its effort with massiveplantation at Mines.

Safety of employees, visitors and local people has also been accorded high priority andall unsafe conditions & practices have been monitored, controlled and eliminatedthrough periodic review, audit and observations. Innovative practices like detailed Hazardanalysis, Near miss situation analysis, on-site emergency mock drill reduced the un-safepractices creating a better and safe work environment. Round the clock Ambulance and FireTender service is maintained to meet any emergency in the factory or the neighbouringareas.

Your Company has ensured compliance on all statutory provisions and norms related toenvironment and safety.

CORPORATE SOCIAL RESPONSIBILITY

Your Company believes that any progressive activity cannot be carried out withoutsustainable development and growth of the society as a whole. Keeping in mind of this factyour Company discharges its social responsibilities in a proactive manner with the help ofits dedicated team. The CSR activities have been aligned with the Vision of the companyand the activities are being carried out regularly. Some of the initiatives undertakenduring the year are given below:

a. Skill Centre: Your Company in association with Confederation of Indian Industriesduring the year has set up a skill centre to impart vocational training to the localstudents. The Company will be sponsoring the students and also assist with their placementon completion of the course.

b. Assistance to poor and needy.

c. Environmental protection through tree plantation.

d. Drinking water facility in the neighbouring villages.

e. Street Light facility in the neighbouring villages.

INTERNAL CONTROL SYSTEMS

The Company remains committed to ensure the prevalence of an effective internal controlenvironment commensurate with its size and nature of business that provides reliablefinancial and operational information to ensure compliance of corporate policies andapplicable statutory regulations and safeguards Company's assets. The internal auditprocess includes review and evaluation of effectiveness of the existing processes,controls and compliance. It also ensures adherence to policies and systems and mitigationof the operational risks perceived for each area under audit.

The full fledged internal audit function is headed by a firm of independent CharteredAccountants to monitor adherence to all internal policies and procedures as well ascompliance with all external regulatory guidelines. The Company has an elaborate financialreporting process which ensures timely review of all financial information. Periodicreviews are undertaken through internal and external audit teams to monitor efficacy ofthe prevalent systems. Independence of the audit and compliance function is ensured by adirect line of reporting to the Audit Committee comprising of all Independent Directors asmembers to maintain the objectivity. All significant audit observations and follow-upactions were reported to Audit Committee. The Audit Committee's observations andsuggestions were acted upon timely by the Management.

FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

(Rs in Lacs)

The net profit for the year was at Rs 3,193.06 Lacs and the Company has announced adividend of 10% successively for the second year.

The Company achieved impressive performance with the improvements across keyparameters. The turnover achieved for the year ended March 31, 2012 was Rs 58,950.69 Lacsregistering a growth of 14% over the previous year (excluding Trading Turnover of Rs12,052.85 Lacs). During the year export was Rs 23,095.14 Lacs higher by 4% despite lowdemand and price pressure in the international market.

The consumption of raw materials increased by 1% from Rs 22,604.80 Lacs to Rs 22,367.28Lacs. This was mainly on account of price increase of coal and coke and higher productionover corresponding financial year.

Power and fuel cost increased by 36% from Rs 12,371.50 Lacs to Rs 16,880.30 Lacs. Theincrease was mainly on account of increase in power tariff by 30% and increased volume ofproduction as compared to previous year.

PBDIT increased by 6% from Rs 10,662.40 Lacs to Rs 11,276.43 Lacs.

Interest and finance charges decreased by 6% from Rs 5,038.16 Lacs to Rs 4,729.38 Lacs.The decrease was mainly due to effect of repayment of term loan during the year.

PBT stood at Rs 4,889.07 Lacs as against Rs 4,078.56 Lacs for the previous year,showing an increase of 20%.

Profit after tax stood at Rs 3,193.06 Lacs as against Rs 2,688.54 Lacs for the previousyear, an increase of 19%.

The Basic Earning per Share (EPS) for the year was Rs 4.97 as against Rs 4.18 for theprevious year, an increase of 19%.

Shareholders' funds (Net worth) increased from Rs 27,066.78 Lacs to Rs 30,179.06 Lacsas on March, 2012.

HUMAN RESOURCES OF THE COMPANY

Your Company has established systems and procedures which are instrumental forrealizing the full potential of human capital, the prime moving force for overallexcellence. The Human Resource (HR) philosophy in your Company is to foster performance,transparency, team work, fairness and empowerment at all levels. The Company believes inequal employment opportunity and fair practices in respect of all matters. Right tofreedom of association and collective bargaining has been established through jointconsultation with office bearers of the Unions, grievance handling mechanism etc. Acongenial atmosphere has been created through an environment of mutual trust andtransparency between the Management and Union bodies. Efforts are made to implement thebest practices like leveraging and upgrading framework for competitive advantage,development of talent pipeline to match Company's growth ambition, creation of youngleaders and creating of performance driven culture. Your Company also encourage work lifebalance for employees. The total manpower strength as on 31st March, 2012 is 696.

INITIATIVES TOWARDS OPERATIONAL EXCELLENCE

The Company is consistently practicing various strategic management initiatives with anobjective to operate at optimum level, exploit favourable market condition &continually improve upon the operational performance. The enthusiasm demonstrated by theseinitiatives being championed by various head of functions and the results of these effortshave enabled these initiatives to gather momentum under the Business Excellence approach.Active involvement of employees across the organisation and structure review mechanism putin place at the apex level has made these initiatives contributing towards operationalexcellence and growth of the organization.

Systematic use of quality Management principles and tools has contributed in achievingthe objectives of improvement in performance, customer satisfaction, stakeholder value andprocess management.

By successfully implementing management initiatives, the organisation achieved &sustained superior levels of performance that exceeds the expectations of allstakeholders. The practice allows Managers/leaders to understand the cause and effectrelationship between the activities and the achieved results. The different initiativesfunction under the umbrella of Business Excellence are:

• SIX SIGMA

Six Sigma initiatives has significantly contributed for transforming Business atBalasore Alloys Ltd. and enables to break various myths & shackles of conventionalthinking. With robust process and demonstrated results Six Sigma Initiatives has led tobreak through improvements and enhanced bottom line by redesigning business process andstandard operating practices.

• TOTAL PRODUCTIVE MAINTENANCE (TPM)

The TPM Program was initiated to create a preventive philosophy, total employeesparticipation and building a profitable culture. We started with the basic concept ofeight pillars (Autonomous Maintenance, Kobetsu Kaizen, Planned Maintenance, Education& Training, Safety, Health & Environment, Office TPM, Initial Flow Control andQuality Maintenance) for internal improvements. To increase the coverage of TPM cultureacross the organization, two more pillars i.e. Sales & Marketing and Supply ChainManagement were initiated to strengthen the Supplier and Customer Relationship.

• SUPPLY CHAIN MANAGEMENT

This initiative is expected to generate significant benefit to the Company by way ofvalue enhancement through reduced cost and risk of inputs, reduced logistic cost, optimizeproduct mix and input feed mix through stream line process and scientific inventorymanagement.

• PERFORMANCE MANAGEMENT SYSTEM (PMS)

First level exercise for this strategic initiative, aimed at optimizing performance ofthe employees and bringing sharper accountability, has been completed by one of therenowned consultant. This initiative is expected to focus at redefining roles andresponsibilities for key positions, realigning the organization structure for impactingfunctions towards highly performance oriented outfit and removes structural anomalies forsmooth control. Lesser hierarchy and grater performance brings transparency andaccountability across the organization for attaining common organization mission, visionand goals.

• QUALITY AUDIT

In addition to the ISO 9000 Quality Management Practices, the Company has engaged oneof the renowned quality firms towards quality compliance of its product for both domesticas well as international market. This has ensured specified quality products for thecustomers.

CAUTIONARY STATEMENT

Statements in this Management discussion and Analysis report detailing the Company'sobjectives, projections, estimates, expectations or predictions may be "forwardlooking statements" within the meaning of applicable securities laws and regulations.Actual results could differ materially from those expressed or implied. Important factorsthat could make a difference to the Company's operations include global and Indian demandsupply conditions, raw material prices, finished goods prices, cyclical demand and pricingin the Company's products and their principal markets, changes in Government regulations,tax regimes, economic developments within India and the countries with which the Companyconducts business and other factors such as litigation and / or labour negotiations.