Management discussion and analysis
The global recovery that started in the second half of 2009-10 continued in mostmarkets in 2010-11. However, the recovery was not uniform as the emerging markets grewfaster than the developed markets, which still face headwinds due to fiscal imbalances insome geographies. The sustainability of the global recovery depends on how the developedmarkets manage their public debt, boost private economic activity and generate employment.
The emerging economies face the risk of very high inflationary conditions due to highcommodity prices and food inflation. This is prompting the central banks to tightenmonetary policies which in turn may affect growth significantly. The emerging marketcountries including India need to continue their economic reforms to attract capitalinvestments, which in turn would facilitate growth and employment. Although Indiaregistered 9% GDP growth in FY 11, it is now faced with high-core inflation due to risingcommodity prices and food inflation. This is forcing the Reserve Bank of India to tightenits monetary policy even at the cost of slower growth. The growth data in the EU zonereveals significant differences at the country level. Recovery in Germany and most of theNorthern European countries remains well on track, whereas growth in the peripheralcountries has been hampered by several factors such as export competition and weakdomestic demand, exacerbated by cuts in government spending. Euro-area growth is sustainedby strong investment and is largely export led, which will remain its key driver, helpedby exchange rates and specialised products. The UK, in contrast, remains a fragile marketand lags behind some of its European peers. The construction activity remains belowpre-crisis levels in Europe. While the forward indicators point to modest growth in thecoming quarters, the outlook for this sector remains sober due to weak recovery in privateconstruction and cuts in public expenditure.
Real steel will still be below the pre-crisis levels. Steel inventories in Europeremain relatively low both in tonnage as well as months of consumption and the level ofimports is currently below historic levels, as stock replenishments are done in smallquantities while avoiding longer lead times. The risk of sustaining the recovery is highand it really depends on the national governments to prudently steer the fiscal managementand take policy decisions to facilitate growth and employment.
The hangover of meltdown particularly in USA and Europe continued in 2010-11. Theearthquake and tsunami in Japan have added further uncertainties in recovery process. Sofar immune to the global economic scenario, India's economy is directly linked with therest of the world as much of the growth depends upon export and import. Hence, the fear ofglobal economic slowdown is likely to percolate to Indian economy as well. The deepeningdebt troubles in the West are too big to dodge or ignore for Asia, and difficult topinpoint precisely where the worst damage will be done. Indeed government machineries aremore worried about risks emanating from Europe, where debt fears have spread beyondGreece, Ireland and Portugal, to a much larger economy, Italy.
The growth in Indian economy is considered to be driven primarily by domestic demand.However, during FY2011, eight core industries—coal, crude oil, natural gas, petroleum& refinery products, fertilisers, steel, cement and electricity, registered a growthof 5.72% against 6.64% a year ago, mainly due to sluggish demand.
A major factor for this performance is the sluggish demand which has affectedindustries like steel, cement and power. As far as coal is concerned, the demand exists,but supply constraints have hit the industry. In FY2011, coal production registered adecline of -0.30% compared to an increase of 8.12% in FY2010.
Steel production has declined as well. The sector registered a growth of 4.8% in April2011 compared to 12.9% in April 2010. From March-April 2011, steel production has droppedby 12% compared to a drop of 7% during the same period last year. The demand for steeldepends on the infrastructural development within the country and additionalinfrastructural projects taken up by the government. The realty sector is experiencing asevere crunch. NCR (National Capital Region) and Mumbai have been worst hit. On one hand,the RBI (Reserve Bank of India) has gone for successive hikes in repo rates which havemade home loans dearer, and on the other, increased restrictions on borrowing have made itdifficult for builders to get funds for their projects. Last year saw a steep rise inhousing prices, and now neither investors nor customers are willing to buy homes atsky-high rates.
The Union ministry of housing has reported that by 2012, India will need 26.30 millionhouses—but 92,000 units remain unsold in Mumbai. Since offtake has been nil andreturns have been poor, many financers have pulled out, and others are reluctant to enterthe sector. Builders are blaming the delay in getting clearances and rise in stamp duty asthe reason for price hike. Such excuses are losing credibility.
Auto Industry, another industry generating demand for steel, has also started feelingthe pinch of dwindling car sales. The steel manufacturers are staring at a drop in demandfrom automakers. Car sales volumes have dropped and prices have bottomed out, too. Thedrop in demand and lower steel prices will reflect in the second quarter numbers, as theeffect will be fully factored in by then. Though the auto-grade variety forms just 7-8 percent of the total steel demand in the country, there was indeed a fall in the demand forsteel from automakers. Sales growth in the passenger vehicles segment came down to just8.8 per cent to 601,547 units in the first three months of 2011-12, as compared to 29 percent in the same period of last year. SIAM had forecast this segment would grow at 16-18per cent, which was revised downwards to 10-12 per cent. The overall growth for the autosector is also lowered to 11-13 per cent from an earlier indication of 12-15 per cent. Theissues that plague the auto sales and hence, the steel sales, are similar.
The Government has planned a huge investment for the development of variousinfrastructure sectors during the 11 Five Year Plan period and has outlined the sharesPrivate Sectors in the total investment during the period. The participation of theprivate sector in India's infrastructural development during the 10th plan period was notadequate. It is expected that Government's thrust on PPP model will see their betterparticipation during the 11th plan.
Based on current trend the total investment is likely to generate a steel demand forabout 125 Mt over a period of five years and any shortfall may reduce the demandgeneration. According to experts, for 1% growth in GDP, steel consumption grows by 1.11percent and for 1 percent growth in Index of Industrial Production (IIP) steel consumptiongrows by 1.33 percent. Current investment in infrastructure as a percentage of GDP islikely to reach 9.0 per by 2011-12.
Steelmakers & allied industry have had a challenging couple of years in the wake ofthe global financial crisis. In 2010, recovery in steel demand was far from consistent.Steel Industry had to work hard at managing every aspect of their business in the face offluctuating demand. This is compounded by increasing raw material costs. The fluctuationsin demand, as well as raw material price volatility are the two biggest challenges facingsteelmakers. With these market conditions likely to persist, steelmakers need to factorthis volatility into their business models. During the recent financial crisis, the Indiansteel sector remained resilient due to strong domestic demand from Indian end users. Theconstruction and infrastructure sector which is India's largest steel consumer, accountingfor 61% of total steel consumption in FY09; the future demand looks shaky. Hence, theexpected growth in steel products is currently at stake. Domestic crude steel producershave started a production cut. The companies are facing huge raw material shortage due toKarnataka government's ban on iron ore exports.
While Indian steel companies have chalked out mega expansion plans, land acquisitioncontinues to be a major hurdle for setting up Greenfield projects and environmentalproblems have also added to this. There may be a shortage in steel supply in future if newcapacities do not come up. Problems such as land acquisition and opening of mines continueto block commissioning of new projects. The government will have to make efforts and bringabout changes in regulations to ensure that land and mines available to the steelcompanies in time
The Company is following the policy to strike a balance between different products andhave an appropriate product mix in order to optimize its return. The result of the policyhas been started to come out. During the year, the Company's production in terms ofquantity has increased by 6.93 % and has reached to 116.71 thousand tones. Quantity wiseturnover has also risen to 119.72 thousand tones, where as in terms of value it has beenincreased by 16.25%. The Company is committed for maximize its returns and putting somemore production facilities in its existing plants which will help in producing high returnproducts and value added goods.
This year the company has started in dealing with CRCA sheets, which is mainly used inautomobile industry and general engineering industry. Indentifying as the high potentialmarket for CRCA sheets, the company is also considering to enhance its productioncapacity. The forging division is also doing a great job for the company. There is anincrease of 71.5% in contribution to total turnover in comparison of last year, at presentthis division is having a share of around 9% of the total turnover & the company hasidentified it as a one of the major thrust area. The following chart is showing thecontribution of different products towards the total turnover of the company during theyear 2011:
To sustain a high GDP growth, the Government is giving major thrust on investment intoinfrastructure and is determined to beg the infrastructure growth at CAGR of 10 percentover the 11th Plan period. About four years of the 11th Plan period has already elapsedbut not even 70 percent of the target compliance has been achieved in some major sectorslike Power, Roads, Railways and Ports.
The Industry Outlook is very bright as steel consumption within the country is expectedto grow by 20% in the coming years which implies good opportunities for your Company.
However, Weaker international demand would result in falling international raw materialand steel prices and this would further undermine the current market situation. Debtproblems in Europe and a hard landing in the Chinese economy are key concerns; both wouldpush down prices to a lower-than-forecast trough.
International market outlook may not be as promising as compared to Domestic Market andyour Company will concentrate more on expanding business activity within Domestic Markets.At the same time your Company will maintain its share in International Market catering toniche size/product and maintaining its presence.
Risk & concern
Aftermath of debt crisis and signals of financial meltdown in the US and Europe issending shivers down the Indian steel industry. Banning of iron ore mining at Bellary inKarnataka has also dampened the spirits of steel producers and is going to adverselyaffect the availability in the coming months.
In spite of the depressing scenario of depleting investment in infrastructure,particularly in fresh capacity creation, and subdued growth of manufacturing sector, thedrop in steel supply may paradoxically result in price rise as inventory accumulation maybe a reality.
Estimates reveal that finished steel consumption in the country has come down to 0.7%only in the April-July 2011 period. This only confirms that demand drivers, namelyconstruction and automobile are slowing down.
Passenger car sales in July are already lower than last year. A reasonable growth ofmore than 7% in finished steel production has been sustained by 39% growth in exports,while imports have dropped by as high as 57% compared to last year.
This implies that even to achieve a growth of at least 8% in the current fiscal, steelconsumption must grow by 11.6% in the balance eight months. This may not be a tall orderfor the Indian steel industry but for the return of better market sentiments.
There is a potential of achieving a higher growth in steel exports by India in thecoming months, which would enable the indigenous producers to sustain capacity utilisationin the face of decline in demand from major steel intensive sectors.
Internal control system and risk management
The Company's internal risk and audit management, supported by competent personnel andadequate internal control mechanisms, safeguard assets from possible losses andunauthorized use and ensure transactions are being authorized, recorded and reportedproperly. Besides, the Company has also availed services of external firms to help theCompany's internal audit and risk management department.
The Company recognizes the Human Resources as most important assets of the company. TheCompany is constantly engaged in enriching the value and developing competencies of theHuman Resources.
The Human Resource function provides in-house and on-the-job training to fresher andfunctional personnel. Regular workshops are conducted. The comprehensive PerformanceManagement System helps map employees' competency gaps and strategic development plans areformulated to bridge the gaps. The HR activities cover a lot of initiatives in the areasof skill development. The organization continues to regularly review people policies andimplement need based revision.
Statements made in this report describing the Company's objectives, projections,estimates, expectations, may be forward looking statements. Actual resultscould differ materially from those expressed or implied. Important factors that could makea difference to the Company's operations include economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Companyoperates, changes in the Government regulations, tax laws and other statutes andincidental factors.