MANAGEMENT DISCUSSION AND ANALYSIS
1. INDUSTRY STRUCTURE AND DEVELOPMENTS:
The Company is engaged in the manufacture and sale of Pig Iron and also MetallurgicalCoke - an input material for Pig Iron, thus operates in the Iron and Steel Industry, whichis considered as core sector. The Company is using Mini Blast Furnace Technology. Earlierthe Company had replaced TATA-KORF technology with CHINA-SHOUGANG technology for Pig Ironmaking. The Company uses the Anshan technology, sourced from P.R.China for MetallurgicalCoke making.
Pig Iron is of two grades basic grade and foundry grade. Basic grade is used inthe manufacture of steel and whereas foundry grade is used for making castings. Basicgrade is produced mainly by the Integrated Steel Plants (ISPs) for captive consumption inthe manufacture of steel and exports. Part of the production is also diverted to thedomestic market. Foundry grade is mainly used for castings and is produced by the MiniBlast Furnace units.
Pig Iron is the basic raw material for most of the engineering products andconstruction industry. Pig Iron is also a raw material for foundry and engineeringindustry also. With the significant growth in the main user industries like automobiles,construction, foundries, the demand for Iron and Steel has increased significantly. Thetotal production of Pig Iron in India has increased from 1.59 Million tons in 1991-92 tothe present level of 5.00 million tons in 2011-12. The production of Pig Iron as perstatistics (provisional) released by the Joint Plant Committee (JPC) attached to theMinistry of Steel for the financial year 2011-12 is at 5.00 million tons as against 4.89million tons in the previous year, registering a marginal growth. The setbacks on rawmaterial front mainly in the form of high rise in costs and supply constraints;competition from the Integrated Steel plants and continued financial crisis in theeuropean and western economies resulted in the subdued performance of Pig Iron industry.
Metallurgical Coke is the key input material for Iron making. The Company hasintegrated itself backward for this key input material. The surplus Metallurgical Cokeproduction from this facility is being sold in the nearby market.
The Global Iron and Steel industry although moderately grew in 2011, yet the growth issaid to have slowed down mainly on concerns of rising uncertainty in the euro zone, slidein western economies, tapering of growth in China. The weakening growth in constructionsector and moderating industrial production had impacted the Iron and Steel demandsignificantly. Amidst this volatile scenario the Steel production improved from 1.414billion tons to 1.490 billion tons, registering a growth of 5.37%. The Asian Iron andSteel production continues to dominate the global scene. The Asian Steel productionaccounted for about 64.03% of the global production in 2011 as against 62.34% in 2010.China, with its 683 million tons production, continues to be the worlds largestSteel producer accounting for 45.83% of global Steel production and 71.61% of Asian Steelproduction. Japan, India and South Korea together account for 16.66% of global Steelproduction and 26.02% of the Asian Steel production. The global Pig Iron production, inline with the Steel production also improved from 1.030 billion tons to 1.083 billiontons, registering a growth of 5.3%. Led by Asian demand for Steel raw materials, theindustry continues to suffer from tight raw material situation and high price trends whichimpacted the industry in a hard way.
During the year 2011-12, the Indian Steel industry achieved a milestone of crossing 70Million tons and thus grading itself to be the fourth largest Steel producer in the worldand third largest in Asia. The Steel production during the year 70.4 million tons asagainst 66.01 million tons a before, registering a growth of 6.65%. The imports at 6.8million tons and exports of 4.1 million tons continue to have uptrend. The realconsumption at 69.2 million tons as against 65.6 million tons a year before shows ahealthy trend. The Pig Iron industry with its 5.60 million tons production as compared to5.54 million tons a year before also exhibited resilience despite slowing industrialproduction. The real consumption of Pig Iron remained at 5.1 million tons during the year.Anti inflationary policy measures, a very high volatile foreign exchange fluctuations,weak external demand, high price trends for raw materials; ban on mining of Iron Ore inthe State of Karnataka had acted as deterrents in the growth of the Pig Iron industry.
Although the year started with comfortable price trend lines, yet the cost of rawmaterials was a major cause for concern. The Coking Coal saw a peak at US$ 335/mt F.O.BAustralia, which remained firm almost during the first half of the year although the trendduring the second half of the year declined to about US$240/mt levels. Similarly the IronOre prices that were at about Rs.4000/MT during the start of the year went up toRs.6000/mt towards year end mainly due to supply constraints. On the back of steep rise ininput costs, the finished Steel prices which were at about Rs.40000/MT in the beginning ofthe year have gone up to Rs.46000/MT towards year end. In line with Coking Coal prices,the Metallurgical Coke prices have come down from Rs.24500/MT to about Rs.20500/MT towardsyear end mainly due to softened Coking Coal prices. The sharp depreciation of Rupeevis--vis US Dollar and the resultant increase in costs of Coking Coal in Rupee termsthat has offset softening F.O.B prices, could not be passed on in the Metallurgical Cokeprices due to sluggish market conditions. The Pig Iron prices during the year alsoimproved from Rs.28000/MT to Rs.30000/MT mainly due to increased input costs. The increasein sale prices was not commensurate with the increase in the prices of inputs and thisresulted in the sharp decline and negative margins.
2. OPPORTUNITIES, THREATS, RISKS AND CONCERNS:
i) As the Companys Pig Iron enjoys brand value and being one of the low costproducers of Pig Iron, there is an opportunity of increasing the market share. The Companyhas augmented additional capacity at its existing operations to improve its market share.
ii) Opportunity of modernising the plant, which not only facilitates further efficiencyand reduction in process costs but also increases volumes. The Company is carrying out ona continuous basis modernisation of its existing operations to improve it efficiencyparameters and bring down operating costs over a period.
iii) Being in the intermediate stage in the industry there is an opportunity for bothbackward integration and forward integration. The Company has set up a Coke Oven facilitywith Co-generation of Power at a greenfield siteas a first phase of forwardintegration. The Company is also implementing a project for setting up Sinter plant as abackward integration and Ductile Iron Pipe plant as forward integration at its Pig Ironmaking plant.
iv) Company sources Coking Coal, a key input material, by importing from outside Indiaand thus suffers from import constraints. However, the Company has identified reliablesuppliers, which minimises the import constraints. The Company has set up a Coke makingfacility with latest technology at a Greenfield project site to minimize the impact ofimport of Metallurgical Coke.
v) Ban on Iron Ore mining in the vicinity of the plant is a threat in sourcing the keyraw material viz., Iron Ore. The Company is able to source the Iron Ore through e-auctionprocess held from time to time by the Government nominated committee. It is expected thatthis arrangement will continue until the ban on mining of Iron Ore is completely lifted.
vi) Future competition from the prospective domestic producers of Pig Iron. The Companyis conscious of the threat and constantly upgrading its technology so as to derivecompetitive advantage.
vii) As the customs duties on Pig Iron imports are lowered from time to time there isan import threat to that extent. However, given the importers profile of Pig Ironwho are mainly foundries and are in an unorganised sector, the import threat is minimal.Moreover, with the surge in global demand for Iron and Steel and increase in raw materialprices, the availability of Iron and Steel at competitive price is remote.
Negligible imports during the last couple of years are an ample indication of zero riskof the threat.
viii) The levy of export duty on Pig Iron is a deterrent for exporting the Pig Iron.Given the global scenario of high prices and growing demand, such levy will have lessbearing in the short term but is a major deterrent in the long term. Exporting Pig Iron -avalue added product over Iron Ore makes a sense and hence such levy on Pig Iron in allprobability will not be re-imposed.
ix) The Companys business is mainly commodity business. The financial health ofthe unit will be affected by adverse changes in the Industry.
Company is looking at both forward integration and backward integration and will takesteps to minimise the risk.
3. SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE
The Companys business comprises manufacture and sale of Pig Iron as one segmentand manufacture of Metallurgical Coke with Co-generation of power as the other segment.The operations of the Company during the year under review were satisfactory. Actual PigIron production during the year was 85648 MTs as against 113103 MTs in the previous year.The setback on raw material front in the form of non availability of Iron Ore which inturn was due to total ban imposed by the Supreme Court on mining of Iron Ore in theBellary-Hospet belt has resulted in lower production. The actual sales in volume termswere 92625 MTs as against 103548 MTs in the previous year. The Companys market sharein Pig Iron constitutes about 1.53% of the domestic consumption. The Company produced250624 MTs of Metallurgical Coke as against 283063 MTs in the year before. Out of thetotal production, 84128 MTs was captively consumed as against 94886 MTs in the previousyear. The Company sold 157438 MTs of Metallurgical Coke as against 186158 MTs in the lastyear in the nearby markets. The Co-generation Power plant at Kudithini generated 123223094kwh of Power (including 41033290 kwh considered in trial runs expenses) as against72135000 kwh in the year before, of which 62586710 kwh, previous year 55654500 kwh(excluding sale 41033290 kwh transferred to trial runs expenses) was sold and 21881294 kwh(previous year 17244000 kwh) were captively consumed (including Power plant auxiliaryload) that includes Power import of 2278200 kwh (previous year 979500 kwh). The gross saleof products in value terms were Rs.6878243223/- as compared to Rs.7075798516/- in the lastyear.
Although the short to medium term outlook for the Iron and Steel industry appears to besubdued, yet in the long term the growth of the industry is encouraging given theresilience of the industry even during the testing times during the last couple of years.Despite uncertainties and volatilities in the global economies the global Iron and Steeldemand has maintained relatively stable recovery momentum. However, the factors likesovereign debt crisis in the euro zone, subdued growth as a result of austerity measures,significant slowdown in the growth of emerging economies and hard landing of China wouldimpact the global Iron and Steel industry in the short term. In the medium to long term,the significant and sustainable growths in the BRICS nations, symptoms of positive growthin the US is expected to give a good momentum to the Iron and Steel growth in theimmediate future. The availability and prices of Steel making raw materials, regulatoryinterventions by the government authorities in the distribution of minerals continues toexert pressure on the bottomline of the Iron and Steel industry. The Indian Iron and Steelindustrys dependence on sourcing the key raw materials from abroad and sharpdepreciation of Rupee would have impact on the performance of the industry. The antiinflationary policy measures and weak external demand would also act as deterrents in thegrowth of the Indian Iron and Steel industry. However, rising per capita incomes, impetusto infrastructure by the government, sustainable growth in the end use segments likeautomobile, construction and capital goods are likely to contribute in the growth of theindustry in India.
The outlook for the Indian Pig Iron industry continues to be mixed. The ban on Iron Oremining in the State of Karnataka and the sharp increase in the prices would impact theperformance of the industry. The slowing industrial production and anti inflationarypolicy stance by the regulatory authorities would also have a bearing on the performanceof the industry. The dependence of the Pig Iron industry for the Metallurgical Coke /Coking Coal from outside India and sharp depreciation of Rupee are not conducive for thegrowth of Pig Iron industry. Your Company is striving hard to overcome the problems facedby the industry and has taken measures to insulate itself from the shocks. YourCompanys move to integrate itself both backward and forward and modernisation ofBlast Furnace would not only enable it arrest the losses sustained but also enable it tosustain its growth path.
5. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
The Company has adequate internal control systems commensurate with the size and natureof its business. Internal control systems are supplemented by internal audits carried outregularly by outside independent qualified auditors. The Audit Committee interacts withthe statutory and internal auditors. The Management also regularly reviews the operationalefficiencies, utilisation of fiscal resources and compliance with laws so as to ensureoptimum utilisation of resources, achieve better efficiencies and comply with the laws ofland.
6. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE:
The financial statements for the year under review have been prepared on a goingconcern basis and in compliance with provisions of the Companies Act 1956 and by followingthe generally accepted accounting principles in India and the applicable mandatoryAccounting Standards. The operational performance vis--vis financial performance is asunder:
|Indicator ||Year 2011-12 ||Year 2010-11 ||Increase / (Decrease)% |
|I In volume terms || || || |
|Production - Pig Iron (mt) ||85648 ||113103 ||(24.27) |
|- Metallurgical Coke (mt) ||250624 ||283063 ||(11.46) |
|- Power (kwh)* ||123223094 ||72135000 ||70.82 |
|Sales - Pig Iron (mt) ||92625 ||103548 ||(10.55) |
|- Metallurgical Coke (mt) ||157438 ||186158 ||(15.43) |
|- Power (kwh) ||62586710 ||55654500 ||12.46 |
|II In value terms: ||Rs. ||Rs. || |
|Gross Revenue from operations ||6885378047 ||7075798516 ||(2.69) |
|Net Revenue from operations ||6336387609 ||6786952782 ||(6.64) |
|III Operating Profit / (Loss) before finance costs and Depreciation ||(237348923) ||1234151494 ||(119.23) |
|IV Finance costs ||433439056 ||276148493 ||56.96 |
|V Depreciation ||198998588 ||167721074 ||18.65 |
|VI Net Profit / (loss) before tax ||(869786567) ||790281927 ||(210.06) |
|VII Tax expense ||(75307698) ||224874986 ||(133.49) |
|VIII Net Profit / (loss) after tax ||(794478869) ||565406941 ||(240.51) |
(* includes 410233290 kwh, previous year Nil considered in Trail Run expenses account)
Both operational and financial performances of the Company during the year havesuffered heavily due to various macro factors like total ban on mining of Iron Ore in theBellary-Hospet belt; unprecedented/ volatile foreign exchange fluctuations; and highinterest costs. This resulted in significant losses during the year. The production volumeof Pig Iron at 85648 mts as compared with 113103 mts in the year before was lower by24.27% which is due to setbacks on raw material front including supply constraints andhigh rise in prices. Consequently the Pig Iron sales were also lower at 92625 mts asagainst 103548 mts in the year before which is partially due to slump in the markets.Metallurgical Coke production was at 250624 mts as against 283063 mts in the previousyear, which decrease is due to slackened demand which in turn was due to shut down of Ironand Steel plants for want of Iron Ore. Metallurgical Coke sales volumes have also comedown from 186158 mts in the previous year to 157438 mts in the current year. On theCo-generation Power front at Kudithini plant, the Company generated 123223094 kwh(including 410233290 kwh, previous year nil considered in trial run expenses) as against72135000 kwh in the year before and sold 62586710 kwh (excluding 410233290 kwh, previousyear nil considered in trial run expenses) as against 55654500 kwh at Kudithini plant inthe previous year, while consuming the balance units for auxiliary loads and captive use.In value terms the gross revenue from operations for the year under review was atRs.6885378047/- as compared to Rs.7075798516/- in the year before, marginally lower by2.69%. In consequence the net sales also posted a lower growth of 6.64%, down fromprevious years level of Rs.6786952782/- to Rs.6336387609/-. The sales revenue wasdown partially due to non availability of Iron Ore consequent to ban on mining imposed inthe State of Karnataka and partially due to regulated production of Iron and Steelproducers in the belt who were sourcing the Metallurgical Coke from this Company. Theaverage sales realisation on Pig Iron during the year under review works out to Rs.30965/mt as against Rs.27850/mt during the last year. The average sales realisation on sale ofsurplus Metallurgical Coke was at Rs.22395/mt as compared to Rs.20648/mt in the previousyear. The average sales realisation on Power sold was at Rs.4.71/kwh as againstRs.5.42/kwh in the last year. The average cost of Iron Ore consumed was at Rs.5252/mt ascompared with Rs.3517/mt in the last year, which in percentage term works to 49.33%higher. The average cost of Coking Coal was at Rs.14662/mt as against Rs.12133/ mt in theyear before, accounting for an increase of 20.84%. The increase in sale prices wasdisproportionate to the increase in raw material prices and this resulted in negativemargins during most part of the year.
On the financial performance front the operating loss before finance costs anddepreciation was at Rs.237348923/- as against profit of Rs.1234151494/- in the last year.Consequently the year ended with net loss before tax of Rs.869786567/- as compared with anet profit before tax of Rs.790281927/- and net loss after tax of Rs.794478869/- asagainst net profit after tax of Rs.565406941/- in the year before. The finance costs werehigher mainly due to increase in interest rates and charging of interest relating toborrowal for expanded capacity of power plant to the statement of Profit and Loss. Theincrease in other income was due to sales of scrap and waste. The current tax charge is onaccount of application of deferred tax provisions which increased in deferred tax assetthat was recognised and carried forward only to the extent that it has become a reasonablycertain or virtually certain, as the case may be, that sufficient future taxable incomewill be available against which deferred tax assets can be realised.
7. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT,INCLUDING NUMBER OF PEOPLE EMPLOYED
The Company has a strong and dedicated workforce. The relations between the managementand the workforce continue to be cordial during the year. The employees are impartedtraining on site and are encouraged to participate in the decision making process. Themanagement acknowledges the contributions made by each employee at all levels and recordsits appreciation for the co-operation extended, but for which the present growth would nothave been possible. The employee strength of the Company is 812 persons excluding workingDirectors as on 31st March 2012.
8. CAUTIONARY STATEMENT:
Statements in the Management Discussion and Analysis describing the Companysobjectives, projections, estimates, expectations may be "forward-lookingstatements" within the meaning of applicable securities laws and regulations. Actualresults could differ materially from those expressed or implied. Important factors thatcould make a difference to the Companys operations include economic conditionsaffecting demand/supply and price conditions in the domestic and international markets inwhich the Company operates, changes in the Government regulations, tax laws and otherstatues and other incidental factors.
AUDITORS CERTIFICATE ON COMPLIANCE OF CORPORATE GOVERNANCE
The Members of
SATHAVAHANA ISPAT LIMITED
We have examined the compliance of conditions of corporate governance by SATHAVAHANAISPAT LIMITED, for the year ended on 31st March, 2012, as stipulated in clause49 of the Listing Agreement of the said company with stock exchanges.
The compliance of conditions of corporate governance is the responsibility of themanagement. Our examination was limited to procedures and implementation thereof, adoptedby the company for ensuring the compliance of the conditions of the Corporate Governance.It is neither an audit nor an expression of opinion on the financial statements of thecompany.
In our opinion and to the best of our information and according to the explanationsgiven to us, we certify that the company has complied with the conditions of CorporateGovernance as stipulated in the above mentioned Listing Agreement.
We state that in respect of investor grievances received during the year ended 31stMarch, 2012, no investor grievances are pending against the Company for a period exceedingone month as per the records maintained by the Company which are presented to theShareholders/ Investors Grievance Committee.
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.
| ||For P.V.R.K. NAGESWARA RAO & CO., |
| ||Chartered Accountants |
| ||Firms Registration Number : 002283S |
| ||P.V.R.K. NAGESWARA RAO |
|HYDERABAD ||Partner |
|30.05.2012 ||Membership Number: 18840 |