Godawari Power & Ispat Ltd

Your Company is an Integrated Steel Producer with operations ranging from mining tofinished steel product in form of HB Wire and generation of Captive Power. Our productionfacilities are currently located in Siltara in Raipur. We have five main divisions:mining, sponge iron, steel melting shop, rolling mill & captive power.

I. REVIEW OF INDUSTRY SCENARIO & DEVELOPMENTS

i) Steel Industry Scenario:

The global economic crisis that began in second half of the 2008 continued through 2009and thus there remained period of uncertainty and instability in the global markets. Theyear will be remembered for the panic & economic downturn impacting the economicgrowth all across the globe. As per IMF's estimate of April 2010, the global economycontracted by USD 3.3 trillion in the period under review.

Steel, being at the core of the economic growth cycle also witnessed unprecedenteddownturn. The demand in all the developed economic came to stand still, thus inventoriesstarted piling up. Thus the crude steel production went down by approx 8% over the lastfinancial year. Even the consumption of steel took a beating & took a sharp downturn.World's consumption of finished steel excluding BRIC countries went down by 26% in 2009,though BRIC countries registered 18% growth in consumption mainly led by China's domesticconsumption.

The statistics of production & consumption in the last two years is produced below:

(Source: World Steel Association)

Amidst the global chaos, China & India emerged as the steel's new super powers.With the global steel trade sliding downwards, China focussed on internal consumption& as much as 542.4 million tones was consumed by China alone in last financial year.China has the steel production capacity of 716.1 million tones as on 31st Dec 2009, whichis almost 40% of the world's total capacity. The total production of steel in China was568 million tones in 2009 which is also 46% of the total world's consumption. (Datasource: World Steel)

India is currently the 5th largest producer of the crude steel in the world and isexpected to become 2nd largest producer by 2015-2016 as per the target set by the Ministryof Steel. As per the data from Ministry of Steel, during April to December 2009 the totalcrude steel production in India was 45.77 million tons which is up by 4% and consumptionwas approx 40.97 million tons which is up by 7.8% over last year.

The national steel policy had projected the total steel capacity in the country to goupto 124 million tons by 2011-12 from currently 73 million tons in Dec 2009. Theproduction has grown at 8.6% CAGR during the last 5 years from 2004-05 to 2008-09.

India is a leading producer of sponge iron both with coal based & gas based units.Capacity of sponge iron making has increased significantly over the years and currently isapprox 32 million tonnes.

Future Outlook

With continued focus of the government on the infrastructure development & Powersector, the consumption of steel is expected to increase, which is expected to translateinto demand growth for sponge iron and finished steel in form of rods, bars and wires.Domestic demand is also expected to remain robust because of sustained growth of majorsteel consuming sector such as construction, infrastructure and capital goods, barringtemporary decline in the growth due to collapse of global financial markets.

ii) Power Sector

With the world population nearly doubling in the past three decades, the present surgein electricity demand, and the projected increase of the global population, the importanceof available energy cannot be underestimated.

Usually energy, especially electricity, has a major contribution in speeding up theeconomic development of the country. The existing production of per capita electricity inIndia is around 600 KWH per annum. Ever since 1990s, India's gross domestic product (GDP)has been increasing very rapidly and it is estimated that it will maintain the pace in thenext couple of decades. The rise in GDP should be followed by an increase in theexpenditure of key energy other than electricity.

In India, the burning of coal accounts for approximately one half of all electricitygeneration. Globally, India is presently positioned as the eleventh largest manufacturerof energy, representing roughly 2.4% of the overall energy output per annum. Coal basedgeneration of power remains major contributors for meeting the energy demand in thecountry in view of huge thermal coal availability in India and coal based power generationshall continue to play a dominant role in Indian Power Sector. The Government of India isalso making efforts in Development of Generation of power through Renewal energy likewind, solar etc.

Demand Supply Scenario:

India's electricity consumption accounts for about 4% of World's total electricityconsumption and it is expected to grow at 8 to 10 % per year. All India installed capacityas on 31st January, 2008 was 141080 MW. (Thermal - 90896 MW., Hydro-35208 MW.,Nuclear-4120 MW., Renewable - 10856 MW.) Total Energy shortage of 9% with Peak shortage at15.2%. Country's Power demand is likely to soar from around 120 GW at present, to 315 to335 GW by 2017. To meet this demand, India will require generation capacity of 415 to 440GW, including spinning reserve. In IXth and Xth 5-year plan together, Country has addedonly 40 GW i.e. 4 GW per year and 9 GW in 2007-08. The Xlth Plan envisages Capacityaddition of 78.5 GW. If business continues as usual, India is likely to face a capacityshortfall of 95 to 140 GW by 2017 and the peak deficit shall be of about 70 GW by 2017.

Investments required in Indian Power Sector- US $600 billion i.e. Rs 24 lakh crores by2017 out of this, around US $ 300 billion or Rs 12 lakhs crores will be necessary inGeneration, and the remaining in Transmission and Distribution by 2017.

In view of huge demand supply gap in India, the merchant power business is expected toremain in lime light for next couple of years till the supply situation improvesconsiderably. The power sector offers attractive investment opportunities in India in viewof huge demand supply gap. Your Company is also venturing into power business through 100%subsidiary Company and has signed an MOU with the Chhattisgarh Government for setting up1200 MW of power plant, which is awaiting regulatory approvals.

Your Company is presently engaged in generation of captive power for use inmanufacturing of steel and also selling power in short term market through merchant salewith view to optimize revenue and profitability.

i) Review of Operations

The Company's operations are divided into two major segments i.e. Steel Division andPower Division. The Company is engaged in manufacturing steel intermediate products i.e.Sponge Iron and Ferro Alloys and finished long steel products i.e. billets, wire rods(through subsidiary Company) and mild steel wires. The power division of the Company iscaptive, however looking at the present market scenario, the Company is also selling powerin the open market in order to optimize the revenue & profitability.

In fiscal 2010, GPIL reported total revenue of Rs. 832.39 crores, 28% less as comparedto last fiscal. The fall was mainly because of the difficult market conditions especiallyin the first half of the year which led to lower realization across the product rangeexcept power. DRI production in the year under review was 285833 mts as compared to 279533mts in the previous year but the average realization for the year was just Rs 13000 ascompared to Rs 15750 in the previous financial year, a fall of almost 17% which led tolower profitability. Performance was affected by the difficult global economic andoperating environment throughout the year but still with the onset of captive mining ourEBITDA margins has increased from 12.15% to 16.18%, a significant jump of over 400 bpswhich if taken as indicator of next year gives very good signals of better performance foryears to come.

The Company during the current financial year continued with its business strategy ofcommercial sale of power rather than using the same for captive consumption in manufactureof steel billets and Ferro alloys, due to better price realization from sale of power,which resulted into lower production and sale of steel billets and ferro alloys andconsequent increase in sale of sponge iron & electric power. The Company wouldcontinue with such strategy till price for commercial sale of power remains robust. TheCompany may shift to manufacture of steel billets and ferro alloys as and when theopportunities turn in favor of manufacture of such products.

(a) Net sales/ Income from operations:

The Company has achieved net sales turnover of Rs.776.43 crore, as compared toRs.1035.54 during the previous year, registering a decline of 34%. The prices of thefinished steel products sharply declined which resulted into lower salesturnover/operating margin. The product wise revenue breakup is as follows:

(b) Raw Material Cost:

The raw material cost which mainly consists of iron ore & coal cost went downsignificantly during the current financial year. The cost as percentage of net salesdecreased to 72.04% as compared to 80.84% during the previous year, which was mainly onaccount of commencement of commercial operation of captive iron ore mines. During theyear, the Company purchased 583053 MTs of iron ore from market as against 729816 MTs inprevious year.

(i) Operating & Other Expenses

The operating & other expenses have gone up from 6.49% of net sales to 9.92% mainlydue to commencement of operations in pellet plant, resulting into additional expenditureon operation of pellet plant.

(ii) Employees Cost

The employees cost during the year increased by 28.81 % to Rs.17.34 crore from Rs.13.46crore due to annual increase in salaries and recruitment of additional employee to meetincreased requirement. The overall employees cost increased to 2.23 % of the sales ascompared to 1.30% during previous year. The cost increase in terms of percentage of saleis higher due to reduction in sales turnover, whereas the overall employees cost has goneup.

(iii) Operating Margins (EBIDTA):

The operating margins of the Company increased to 16.18 % as compared to 12.15% of netsales during the year, mainly on account of decrease in raw material cost on account ofcaptive mines.

(iv) Interest & Financial Charges:

The total expenses towards interest cost and bank charges during the year decreasedfrom Rs.34.17 crore to Rs.32.04 crores mainly on account of better working capitalmanagement and reduction in overall borrowing cost.

v) Depreciation:

The depreciation on fixed assets has gone up due to commissioning of additionalcapacities, which started production during the current financial year. The Company hasapplied depreciation on straight line method as per rates prescribed under the CompaniesAct, 1956,

c) Profit Before Tax:

The Company has achieved net profit before tax and extraordinary items of Rs.61.97crore which is 7.98% of net sales as against Rs.65.26 crore, which was 6.30% of net salesduring the previous year.

d) Provision for taxation:

The provision for income tax is made as per provisions of the Income Tax Act. Theprofit of the power division is exempt u/s 80I of the Income Tax Act.

(e) Appropriation

The Company has transferred Rs. 10.00 crore (Previous year Rs 10 crore) to the GeneralReserve during the year.

(f) Provision for Dividend & Dividend Tax

The Board of Directors of the Company has recommended a final dividend 25% (Rs.2.50/-per share) for the year ended 31st March 2010, subject to approval of the shareholders.Further provision of dividend distribution tax of Rs.1.19 crore has been made. The totaloutgo of funds on account of dividend payment including corporate tax on dividend for theyear is Rs. 8.21 crore.

(g) Fixed Assets

The Company has during the year incurred additional capital expenditure of Rs. 120.69crore towards implementation of iron ore crushing, beneficiation, pelletisation plant andexpenditure on infrastructure development at the existing plant and 20 MW Biomass PowerPlant. The reduction in capital work in progess in on account of capitalization of ironore mines and pelletisation plant.

(h) Inventories

The overall value of inventory of raw materials increased to Rs. 82.08 crore as on 31stMarch 2010 as compared Rs 77.22 crore as on 31st March 2009 due to increase in prices ofraw materials towards the end of the financial year. The average level of holding of rawmaterial was at 1.73 months of consumption as compared to level of 1.20 months during theprevious year.

(i) Sundry Debtors

The average number days sales outstanding for the FY 10 are 17 days as compared to 10days in FY 09 which is due to higher realization period in case of sale of steel billets& sponge iron.

(j) Loans & Advances

The loans and advances as on 31st March 10 stood at 47.25 crores which increasedby17.41 % as compared to the year ended 31st March 09, which is mainly due to the advancespaid to raw material suppliers for ensuring regular supplies of raw materials. Theadvances are normal in ordinary course of business of the Company and as per the industrypractice.

(k) Current Liabilities

The overall current liabilities increased due to increase in the volume of operationsof the Company. The advances from customers increased by Rs.12.26 crores and creditors forcapital goods increased by Rs.10.23 crores.

(I) Secured and Unsecured Loans

At the end of year, the secured long term loans stood at Rs. 277.91 crores as againstRs. 253.82 crores in FY 2009. The Company does not have any unsecured loans as on BalanceSheet date.

m) Key Financial Indicators:

The key financial ratios of the Company for the year under review as compared toprevious year as given below:

III- INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

Monthly information system is backbone of our internal control system. Roles andresponsibilities for all managerial positions have been clearly defined. All operatingparameters are closely monitored and controlled. The management also regularly reviews theoperational efficiencies, utilization of fiscal resources, and compliance with laws so asto ensure optimum utilization of resources and achieve better efficiencies. The Companyhas adequate internal control system. In order to further strength the internal controlsystems, the Company has successfully implemented the SAP-ERP and the system has gone livew.e.f. 1st June, 2009.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES/ INDUSTRIAL RELATIONS FRONT

The employees are basically its human resource assets. They have played significantrole in growth of the Company and enabled Company to deliver superior performance duringthe year. The Company has initiated several steps for overall development, training andwelfare of its human resource asset and progress is monitored on regular basis. Employeerelations have continued to remain cordial during the year under review. The Company alsoinitiated the action for overall welfare of the employees and workmen and in line with itsobjectives.

RISK MANAGEMENT

The Company being in steel business is subject to certain risks which are inherent inthe Industry. Thus we are trying to put in place effective risk management policies. Themain risks are:

1) Change in the Political Situation:

Though GPIL has its major operations based in the State of Chhattisgarh, change in thepolitical climate across the country can impact our operations. Possibility of new tradebarriers in view of China's global operations and other such things also impacts thebusiness in general. Political risks also include terrorist acts, social unrest &potential conflicts which can impact our operations at existing locations, mines etc.

However, the probabilities of these events are considered to be very quite low.

2) Change in the Economic Situation:

After experiencing the global downturn and events those followed it, nothing seemsimpossible. As per IMF estimates, world GDP decreased by 0.8% in fiscal 2009 as comparedto fiscal 2008.

But the second half of the FY 2010 gave rise to new hope with lots of positivedevelopments both in global markets & steel industry. Emerging economies demonstratedstrong demand lead by the government stimulus which in turn is major sentiment booster.

The domestic consumption of steel is again on rise and this is our core area ofoperation. Also, the flexibility which we work in SMS & captive power segment alsohelps us reduce the risk of any sudden change in economic scenario.

3) Fluctuation in prices of Raw Material & Fuel:

Our major raw material is Iron Ore & Coal.

On the iron ore front, one of the two of our own captive mines has commenced productionin the year under review. By the year end, the capacities have been ramped up at AriDongri and we expect to be completely self sufficient in iron ore requirement. The othermine i.e. Boria Tibu also got all regulatory clearances and should start production soon.Hence, we will be insulated from the fluctuation of iron ore prices in the market.

On the coal front, we are currently purchasing the requirement of coal through longterm linkages from Coal India Ltd and import of coal. The prices of imported coal dependupon the global market demand & supply and linkages prices as may be determined by theMinistry of Coal. The Company shall be insulated from price fluctuations as the captivemines starts the production. The Company is awaiting environmental clearance from Ministryof MOER Govt, of India, for the coal blocks allocated to the Company.

4) Changes in Selling Prices:

One of the specific features of steel & mining industries is their liability tocyclical changes in steel prices. In crisis conditions which were prevalent for the firsthalf of the year under review, the selling prices were almost equal to average cost ofproduction of sponge iron barely leaving any margin at EBIDTA level. So if the prices ofthe finished products fall to such level, the margins cannot be maintained.

Though high spot iron ore & coking coal prices along with scrap prices resulted inincrease in steel prices in the H2 of fiscal 2010. It is likely that the steel prices maynot substantially vary from the present levels in view of new iron ore & coalcontracts globally at current spot price.

5) Credit, Interest & Exchange Fluctuation Risk:

The financial crisis led to an inter bank crisis of trust thereby reducing the levelsof interbank credits & liquidity of the financial system. Simultaneously, increasedvolatility and uncertainties led to increased premium in the cost of external financing.The increased cost of financing may negatively affect our financial results & lead tolower profitability. Fluctuation of interest rates may vary the value of existing foreigncurrency.

The level of existing rupee debt as on 31st March 2010 is Rs. 218.55 crores &foreign currency term loans of USD 15 million out of which 10 million is un-hedged. Hence,change in the interest rates may have significant impact on the financial results.

Interest rates, fixed or floating, are normally linked to LIBOR. We monitor thesituation on the continuous basis and take measures necessary to be able to respond tochanging the market conditions.

6) Other miscellaneous risks:

Other risks constitute various risk viz: Operational risk, risk of production &equipments, loss of skilled employees, health, safety & environment risk.

We have taken adequate steps to ensure the continuation of the annual production plansand to mitigate these risks.

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis and the annual report describingthe company's objectives, projections, estimates, expectations may be"forward-looking statements" within the meaning of applicable securities lawsand regulations in India and other countries. Actual results could defer materially fromthose expressed or implied. Important factors that could make a difference to thecompany's operations include economic conditions affecting demands/supply and priceconditions in the domestic markets in which the company operates, changes in theGovernment regulations, tax laws and other statutes and other incidental factors andunforeseen circumstances.