Gujarat NRE Coke Ltd

ECONOMY

As per latest reports, emerging markets are forging ahead in the current world order,in contrast to advanced economies. China's output is projected to average just short of10% in 2011-12, thanks to its strong domestic demand. The International Monetary Fund(IMF) has projected that the Indian economy would expand by 8.2 percent in 2011, unchangedfrom its growth forecast made in April while Brazil, Indonesia and South Africa will alsocontinue strong. Other emerging economies, such as Mexico, Turkey and Poland, are alsocontributing with higher rates of growth.

The Central Statistical Organisation (CSO) has pointed out that India's GDP at factorcost at constant prices registered an increase of 8.5 percent in the year 2010-11. Thisrevised estimate of 8.5 percent growth for GDP in 2010-11 is only a shade below theadvance estimates that had pegged GDP growth for 2010-11 at 8.6 percent. This slight dipin overall GDP growth can be attributed to weaker performance in sectors such as 'miningand quarrying', 'manufacturing', 'trade, hotels, transport and communication' and'financing, insurance, real estate and business services' than anticipated earlier.

While the Indian economy has geared up to race ahead during 2011-12, it is going to bechallenged by the hurdles of large scale corruption, inflationary pressures, volatility inglobal markets due to increase in crude oil prices etc. These have been cause of concernduring the last one year, underscoring the need for further fiscal and monetaryinterventions by the RBI. In 2010, the Indian economy rebounded robustly from the globalfinancial crisis - largely because of strong domestic demand and such feats need to bere-performed to keep the growth on track.

WORLD COKING COAL AND METALLURGICAL COKE INDUSTRY

Coking Coal market has remained relatively stable for a large part of last year withthe only exception to the period post January 2011. The quarterly contracted price of hardcoking coal remained at around $225 per tonne mark for almost the entire of 2010. Thisprice was substantially higher from the price prevalent in 2009 and was primarily due tothe increased demand of coking coal due to restarting of many steel mills in Europe andincreased steel production in China and the rest of Asia. Severe short supply of cokingcoal has been the major concern of steel industry world wide. The supply scarcity becamecritical early this year due to the floods in Queensland in Australia. Queenslandconstitutes about 80% of coking coal exports from Australia, the major supplier of cokingcoal to the world. The floods have resulted in a steep rise in prices of coking coal to ashigh as $330 per tonne earlier this year, and despite the floods having receded and mostmines back in normal production, the prices for the July September quarter have alsosettled much higher at around $310 -$315 per tonne. This only shows that global demand ison the rise, while supply has not been able to match the same. This supply demandimbalance is expected to continue for a while thereby implying that the world is expectedto face severe shortage of prime hard coking coal in the near future.

Metallurgical Coke being a derivative of Coking Coal naturally follows the same trendas that of coking coal. The world is presently in the eye of a shortfall of met coke. Withglobal steel production set to rise further, primarily being led by increased productionin China and India, the demand for met coke is bound to be much higher. This severe demandsupply disequlibrium has already been reflected in the spiralling prices, with pricerising to around $540 per tonne in early 2011.

DOMESTIC COKING COAL & MET COKE INDUSTRY

India has acute shortage of premium quality hard coking coal and even the availablemetallurgical coal is of inferior quality which can be used mostly as a blender withimported superior quality coking coal. Consequently the bulk of India's requirement ofhard coking coal is met through imports, with Australia accounting for over 80% of India'simport requirement. India imported around 35 MT of coking coal in 2010, which is expectedto rise to around 45 MT this year and further increase to reach around 150 MT by the endof this decade in 2020.

India has been one of the major importers of met coke in the world. The scarcity ofcoking coal has many a time resulted in steel makers buying met coke directly from themarket to keep their blast furnaces burning. Hence the shortage of coking coal translatesinto supply constraints in met coke in India as well. It is a fact without any doubt thatcoking coal and metcoke are going to be critical and most sought after commoditiesparticularly for India, in the years to come.

INDIAN STEEL INDUSTRY

The Indian steel sector has experienced a roller coaster ride of late wherein it haswitnessed a significant spurt in demand due to expanding oil and gas sector, largeinfrastructure spending coupled with growth in housing, consumer durables and autosectors. India became the fourth largest producer of crude steel in the world in 2010 asagainst the eighth position in 2003 and is expected to become the second largest producerof crude steel in the world by 2015. As per World Steel Association (WSA), India was thefourth largest producer of crude steel during January - September 2010 producing 50.1million tonnes (MT) crude steel during the period. Currently, with the government'sincreased emphasis on infrastructure, it is believed that the sector is poised forsignificant growth over medium to long term. As a matter of fact, India's per capita steelconsumption continues to be low at 46 kg as against the global average of 198 kg. Thus,this further strengthens the belief that the potential ahead for India to raise its steelconsumption is very high.

During the year 2010, steel consumption in India grew by 9.6% and in 2011, it isexpected to grow by around 13%. Growing steel consumption indicates healthy economicgrowth. The major steel consuming segments such as auto, consumer durables, capital goods,power and construction have reported incremental growth during 2010-11 and the projectedinvestment in infrastructure during the 11th plan period is expected to be substantial.Based on these parameters and the large potential for consumption in the rural sector, itis expected that the demand for steel in India will continue to grow during the nextdecade.

The steel industry is responding by installation of additional capacities. India isexpected to add around 30 MT in next two years and is expected to become a net exporter ofsteel by 2013.

We, at Gujarat NRE are poised to meet this incremental demand and production by Indiansteel industry and accordingly, we are in the process of setting up additional capacitiesfor producing met coke while simultaneously increasing production at our coking coal minesin Australia to ensure uninterrupted supply to our metcoke plants in India as well ascoking coal supply to the world in general

OPPORTUNITIES & THREATS

The increasing demand of steel worldwide with BRIC (Brazil, Russia, India, China)countries steadily increasing steel production has caused a severe shortfall of cokingcoal and met coke world wide. The supply situation has further worsened with no new goodcoking coal mines having started production which can considerably cater to this increaseddemand. Though this has been a cause of major concern for the steel producers, however,all these factors attribute to a brighter future for met coke as well as coking coalproducers.

Scarcity in availability of met coke globally, which may be attributed to a variety offactors, viz., drastic reduction in Chinese exports, increased demand from new steelplants, etc have provided a good opportunity for growth to the global met coke industry.Many new steel plants that have come up in South East Asia and also in India that do nothave a captive met coke plant, which further provides an excellent opportunity formerchant coke producers in India and elsewhere to expand and grow.

However, China being the largest consumer of both coking coal and metcoke plays acritical role in determining its global demand and supply and consequently, the prices ofboth. Therefore, any major shift in policy by China may pose a threat to the industry.Most of the global steel plants use blast furnace route for manufacturing steel and in theprocess create huge demand for coking coal. Fluctuations in demand in global steelindustry or increase in use of other mode of steel making i.e. Electric Arc Furnace bySteel Industry might act as a threat to the met coke and coking coal industry.

COMPANY'S PERFORMANCE

The income from operations of the Company was higher at Rs. 325.96 crores in the yearunder review as compared to Rs.246.98 crores during the previous year and consequently,the net profit during the year under review was also reported higher at Rs. 102.65 croresas compared to Rs. 51.87 crores during the previous year. Accordingly, the Basic &Diluted earnings per share of the Company were reported higher at Rs.1.85 and Rs.1.82respectively, for the year under review as compared to Rs.0.98 and Rs.0.93 during theprevious year.

Coal & Coke

Coking coal and Coke Segment has been at the core of the operations of the Companycontributing around 80% of the total turnover during the year under review. NetSales/Income from this segment for the year under review amounted to Rs. 1296.81 crores ascompared to Rs.1111.55 crores in the previous year.

Steel

Steel Segment contributes around 20% to the total turnover. It achieved a turnover ofRs. 300.06 crores during the year under review as compared to Rs.292.08 crores duringprevious year.

The Company is generating power through its Wind Turbines and is in the process ofsetting up co-generation power plant to produce electricity from waste heat. This helpsthe Company to reduce its power costs and ensures regular supply of clean power to itsproduction facilities.

Outlook

Metallurgical coke is an important part of the iron and steel-making process because itprovides the carbon and heat required to chemically reduce iron ore in blast furnaces tomolten pig iron. The world coke consumption was 357 million tonnes in 2001, which hasgrown to around 600 million tonnes in 2010. In North America and Europe coke productionhas declined and the shortage is projected to exceed more than 12 million tonnes annuallyover the next 20 years. In UK and France each, a shortage of two million TPA has beenestimated. Other European countries are also shutting capacity and the subsequentcoke-manufacturing capacities are being relocated in Asian countries.

China used to export up to 15 million tonnes annually till 2008 that got reduceddrastically to a meagre over million tonne in 2009 and just over 3 million tonnes in2010. Hence the world faces an acute shortage of met coke. With shortage of coking coal inthe market, steel makers have also opted to buy met coke directly from merchant cokeproducers to keep their blast furnaces burning. The world is today staring at an acuteshortage of met coke when the world coke trade would reach to the level of 30 MTPA(approximately by 2012). The void created by the absence of supply of Chinese coke is hardto fill and it is everybody's guess how the shortage of 12 MTPA of Chinese coke would bemet by then. Prices are sure to rise further in future as an eminent outcome of shortage.

RISKS & CONCERNS

Typically, the Company's business, operating results, cash flows and financialwell-being are subject to various risks and uncertainties including, without limitation,those set forth below. Any of these risks has the potential of causing the actualoperating results in future to vary materially from the current results or fromanticipated future results.

a) Commodity Price Risk : The Company is exposed to the risk of pricefluctuations on raw materials and finished goods. However, considering the normalcorrelation in the prices of raw material i.e coking coal and finished good i.e. met coke,this risk gets reduced/adjusted over a period of time.

b) Production Risk : Coking coal, the critical raw material required formanufacture of met coke is in short supply internationally resulting in uncertainty in itsavailability and consequently, its prices. Timely availability of raw material atreasonable prices is therefore, critical for survival in this industry. The Company'sstrategy of backward integration by acquiring coking coal mines in Australia helps inminimising the effect of volatility in prices and secures availability of premium qualityhard coking coal.

c) Forex Risk : The Company has a policy to hedge its foreign exchange riskwithin the defined parameters. As imports (raw materials etc) exceed exports, the Companysuitably hedges the differential from time to time to appropriately manage the currencyrisk.

d) Risk from Natural Calamities: Any act of nature detrimental to the smoothfunctioning of the mining of Coking coal in Australia as well as production ofmetallurgical coke in India, can adversely affect the performance of the Company.

INTERNAL CONTROL SYSTEMS AND ITS ADEQUACY

The Company has in place adequate system of Internal Controls. These controls have beendesigned to provide a reasonable assurance with regard to maintaining of proper accountingcontrols, monitoring of operations, protecting assets from unauthorised use or losses,compliance with regulations and for ensuring reliability of financial reporting. TheCompany has continued its efforts to align all its processes and controls with best globalpractices in these areas as well.

The internal control system is supplemented by extensive internal audits carried out byInternal Audit Cell supported by external auditors by preparing Annual Audit Plans andconducting extensive reviews covering financial, operational and compliance controls. TheAudit Committee of the Board of Directors periodically reviews the adequacy andeffectiveness of Company's control and also analyses the Internal Audit Reports andsuggests ways to improve the existing Controls. The Company has strong ManagementInformation System which is an integral part of control mechanism.

HUMAN RESOURCES

Your company considers its people at its most important resource. All employees ofGujarat NRE are considered leaders and encouraged to take responsibility to do their bestthat they can while meeting business needs. Our strength lies in our human pool ofresources and our success is largely dependent on them. The Company therefore, focuses ondeveloping its talent pool and its employee capability through increased emphasis onlearning and skill upgradation, job rotation, multi skilling and inter plant sharing ofexperiences. Critical skills identification and ramp up planning continues at theoperating level. The Company continuously reviews its policies/practices with a view tomake them more contemporary and uniform in application and this is an ongoing process. Toimprove quality of work life, medical, transport facilities, welfare and recreationalfacilities have been reviewed and upgraded. All these efforts had an impact on reducingthe attrition levels at our plants and offices. Cordial industrial relations prevailedacross the Company and its subsidiaries during the year under review.

CAUTIONARY STATEMENT

The statement in this Management Discussion and Analysis Report describing theCompany's objectives, projections, estimates, expectations or predictions may be'forward-looking statement' within the meaning of applicable securities laws andregulations. These statements being based on certain assumptions and expectations offuture events, actual results could differ materially from those expressed or implied. TheCompany assumes no responsibility whatsoever, in this regard.

Auditors’ Certificate on Corporate Governance

To the Members of

Gujarat NRE Coke Limited

We have examined the compliance of conditions of Corporate Governance by Gujarat NRECoke Limited for the year ended on 31st March 2011, as stipulated in Clause 49 of theListing Agreement of the said Company with the Stock Exchanges.

The compliances of the conditions of the Corporate Governance is the responsibility ofthe management. Our examination was limited to a review of the procedures andimplementations thereof, adopted by the Company for ensuring the compliance of theconditions of the Corporate Governance as stipulated in the said clause. It is neither anaudit nor an expression of opinion on the financial statements of the Company.

In our opinion and to the best of our information and according to the explanationsgiven to us, and based on the representation made by the Directors and the management, wecertify that the Company has substantially complied with the conditions of CorporateGovernance as stipulated in the above-mentioned clause of the Listing Agreement.

As required by the guidance note issued by the Institute of Chartered Accountants ofIndia, we state that as per the records maintained, there were no investors' complaintsremaining unattended/pending for more than 30 days as at 31st March 2011.

We further state that such compliance is neither an assurance as to the futureviability of the Company nor the efficiency or effectiveness with which the management hasconducted the affairs of the Company.

Managing Director (CEO) & Chief Financial Officer (CFO) Certification

We, Mr. Arun Kumar Jagatramka, Chairman & Managing Director and Mr. P R Kannan,Chief Financial Officer certify that:

1) We have reviewed the Financial Statements and the Cash Flow Statements for the yearended 31st March 2011 and to the best of our knowledge and belief :

a) These statements do not contain any materially untrue statement or omit any materialfact or contain statements that might be misleading;

b) These statements together present a true and fair view of the company's affairs andare in compliance with existing Accounting Standards, applicable laws and regulation.

2) To the best of our knowledge and belief, no transactions have been entered into bythe company during the year, which are fraudulent, illegal or violative of the company'scode of conduct.

3) We accept responsibility for establishing and maintaining internal controls forfinancial reporting and that we have evaluated the effectiveness of internal controlsystems of the company pertaining to financial reporting. We have disclosed to theAuditors and the Audit Committee, any deficiencies in the design or operation of suchinternal controls of which we are aware and the steps that have already been taken orproposed to be taken to rectify these deficiencies.

4) We have disclosed based on our most recent evaluation, wherever applicable, to theCompany's Auditors and the Audit Committee that -

a. there has not been any significant change in internal control over financialreporting during the year under reference;

b. there has not been any significant change in the accounting policies during the yearrequiring disclosure in the notes to the financial statements; and

c. we are not aware of any instance during the year of any significant fraud withinvolvement therein of the management or any employee having a significant role in thecompany's internal control system over financial reporting.

5) We further declare that all board members and senior management personnel haveaffirmed compliance with the Code of Conduct (since its adoption) during the year underreview.