USHA ISPAT LIMITED
ANNUAL REPORT 2004-2005
MANAGEMENT DISCUSSION AND ANALYSIS
AN OVERVIEW OF STEEL SECTOR:
As a result of the economic developments IISI had projected an increase by
6.2% or 53 million metric tonnes in 2004 in the global consumption of
finished steel products. IISI has split the growth into two separate areas,
China and the Rest of the World (ROW). Steel consumption in China has been
estimated to increase by 13.1% or 31 mmt in 2004.
Apparent consumption of finished carbon steel increased from 14.84
Million Tonnes in 1991-92 to 33.370 million tonnes in 2004-05. China has
been an important export destination for Indian steel. The steel industry
is buoyant due to strong growth in demand particularly by the demand
for steel in China.Pig Iron production in 2004-05 was 3.171 Million Tonnes
(Prov). (Source: Joint Plant Committee)
Exports of Iron & Steel
Iron & Steel are freely exportable. Advance Licensing Scheme allows
duty free import of raw materials for exports. Duty Entitlement Pass Book
Scheme (DEPB) introduced to facilitate exports. Under this scheme exporters
on the basis of notified entitlement rates, are granted due credits which
would entitle them to import duty free goods. The DEPB scheme was
temporarily suspended from 27th March 2004 to 12 July, 2004 for export of
steel items. The-Scheme has since been restarted. The DEPB rates have also
been substantially reduced.
Duties & Levies on Iron & Steel:
The customs duty on items falling under Chapter 72 has been reduced sharply
during the last five years The customs duty on non-alloy steel and alloy
steel was brought down to the level of 5% and 15% respectively in 2004-05.
In the Union Budget 2005-06 customs duty on alloy steel has been further
brought down to 10%. Currently the customs duty on prime non-alloy steel
and prime alloy steel is 5% and 10% respectively. The peak rate of customs
duty on Chapter 72 items was brought down from 40% to 20% w.e.f. 1.1.2005,
as a result the customs duty on seconds and defectives also stands reduced
from 40% to 20%. Some of the other changes made during the last one year in
the structure of customs duty on items falling under Chapter 72 are as
i. Customs duty on melting scrap reduced from 5% to Zero.
ii. Customs duty on ships for breaking reduced from 15% to 5%.
iii. Customs duty on steel making raw materials like non coking coal,
metcoke and charged nickel have been reduced to 5%.
The excise duty on all iron and steel items falling under Chapter 72 has
been increased from 12% to 16% in the Union Budget 2005-06.
Opportunities for growth of Iron and Steel in Private Sector:
(i) The New Industrial Policy Regime:
The New Industrial policy has opened up the iron and steel sector for
private investment by (a) removing it from the list of industries reserved
for public sector and (b) exempting it from compulsory licensing. Imports
of foreign technology as well as foreign direct investment are freely
permitted up to certain limits under an automatic route. Ministry of Steel
plays the role of facilitator, providing broad directions and assistance to
new and existing. steel plants, in the liberalized scenario.
ii) Pig Iron:
In pig iron also, the growth has been substantial. Prior to 1991, there was
only one unit in the secondary sector. Post liberalization, the AIFIs have
sanctioned 21 new projects with a total capacity of approx 3.9 million
tonnes. Of these, 16 units have already been commissioned. The production
of pig iron has also increased from 1.6 million tonnes in 1991-92 to 5.28
million tonnes in 2002-03. During the year 2003-04, the production of Pig
Iron was 5.221 million tonnes
Profitability of players to increase in 2004-05:
Higher price realizations and increased volumes led to healthy operating
profits and an improvement in the margins of domestic steel manufacturers.
Restructuring and repayment of debt, with better accruals, led to a
reduction in interest costs and, consequently. higher net margins.
In the first 7 months of 2004-05, apparent consumption of steel increased
by around 6 per cent, compared to the previous year. The domestic demand
for steel is expected to be 7-8 per cent in 2005-06. The demand for steel
in the domestic markets will be driven by sectors like automobiles.
construction and tubes and pipes. The domestic demand-supply balance is
expected to remain favorable with operating rates continuing to remain
Growth in domestic prices was curtailed due to stiff user resistance and an
unfavourable government stance with respect to frequent price hikes,
resulting in weakening linkage between domestic and international prices.
The industry's operating profit margins will come under pressure in 2005-
06, due to the sharp increase in the cost of raw materials, mainly iron ore
and coking coal, while the cost of sponge iron, coke and scrap will remain
at high levels.
Your Company is primarily engaged in the production of industrial
intermediaries. The companies main business is production of pig iron
During the the financial year 2004-2005 witnessed scarcity of raw materials
and other inputs along with increase in prices of raw materials and other
inputs. Despite plant having been to be shut down upto 10th August, 2004
due to the said reasons. Because of its constant efforts at improving
operational efficiencies, Usha Ispat Ltd was able to contain the impact of
the adverse raw material price hikes and softening end product prices. The
highlights of Usha [spat Ltd. financial performance in 2004-2005 are:
The Turnover during the year was Rs. 1119485 thousands (for apporx Eight
Months) compared to last year (Full year) Rs 1438690 thousands
The loss during the year under review is Rs. 544065 Thousand as against a
loss of Rs. 300303 Thousand during the previous year. The total loss
suffered by the company as on 31st March 2005 is Rs 14196115 thousand.
The production during the year under review along with previous years
figures are given below:
Class of Goods Unit Production Production
Current Year Previous Year
Pig Iron M.T. 54205.000 106898.000
Power KWH 4913400 10677000.00
Coke M.T. 30623.046 51354.945
During the year under review the prices of iron ore went up sharply
However, your company could negotiate a higher increase from many of its
During the year, the average price of coke was quite high owing to nigher
international price. The international price of coke was abnormally high at
the beginning of the Financial Year mainly due to lower exports from China.
The cost of transportation continued to remain high because of poor
availability of railway rakes and high road transport charges
On the cost front, there was an increase in the diesel prices, higher wages
& salaries owing to new wage settlement signed during the year and cost of
ore purchased due to prevalent market situation.
While many of the coke producers faced uncertainty as to supply of coal
owing to buoyant steel production, your company was also affected with the
same problem in getting the scheduled shipments.
The demand for raw materials required for production of steel continues to
be very strong. As a result, the international price of both iron ore and
coal have registered an unprecedented increase during the current year
71.5% for iron ore and 120% for coal on FOB basis. In spite of various
measures adopted by the Chinese authorities to cool down the pace of growth
of its economy, the production of steel in China is still growing at a
phenomenal rate. The Indian economy is also growing at a rate of around 7%
while the growth of manufacturing sector is even higher. Indian steel
production is also planned to be almost doubled from its current capacity
to more than 60 million tonnes in the course of next 6 to 7 years.
In view of the above, your company does not foresee any let up in demand
for iron ore in the medium term. However, there are reports of new
capacities coming on stream, if they materialize, will definitely create a
supply side pressure and consequently, the iron ore price is likely to come
down from the current unprecedented level.
Pig Iron Business:
Engineering, automobile and infrastructure sectors in the Indian economy
are the drivers of growth for the pig iron business. The industry has
undergone a metamorphosis since the liberalization. In the past, integrated
steel mills mainly supplied pig iron. However, after liberalization,
secondary sector capacities I-ave increased substantially to cater to the
large requirements in the domestic market and even export to niche markets.
The major raw materials used for manufacturing pig iron are iron ore and
coke. Both together constitute about 80-85% of the cost of production Iron
ore is procured locally. Coke is either imported or procured from domestic
The demand supply gap this year, has resulted in decrease in pig iron
prices on the other hand hike in the cost of its main raw materials, viz.
coke and iron ore had adverse effect on the bottom-line. Though the global
coke market passed through a turbulent phase, the company is assured of
coke supply intra-group. The productivity level of the blast furnace
continues to remain at optimum level. Therefore, the company is confident
of maintaining its market share.
OPPORTUNITIES AND THREATS:
The expected increase in per capita consumption of steel in India shall
provide a good opportunity for the company. The increase in steel
production will improve the demand for metallic like pig iron. Moreover,
with the automobile and engineering sectors likely to grow at 10% and 5%
respectively during the current year, the demand for pig iron from the
foundry industry is likely to grow further.
On the other hand, the increased pig iron capacities which may result in
temporary over-supply situation in the industry, Technological changes,
Cheaper substitute of steel, Use of more scrap, Delay in forward
integration projects to manufacture steel are the major threats to the
Pig Iron Business:
The Company produces Basic and Foundry Grade pig iron for the Steel Mills
and foundries. Various grades manufactured by the company, have been
accepted by the customers for consistency in quality and deliveries,
resulting in a strong customer base over a long period of time.
Pig iron consumption, in India, is expected to grow moderately at the rate
of 5-6%. The expected high growth rate in the automobile sector will
increase the demand by about 10%. Moreover, with reasonably good monsoon,
demand in the agricultural sector for tractors and pumps will further
improve the demand. Pig iron growth is likely to rise further with increase
in investment in India in the engineering and machinery sector.
On the other hand, the pig iron market being a volatile market and also a
seasonal one, it faces competition from other competing materials like
scrap, and sponge iron. The Production cost of pig iron is under severe
pressure owing to increase in iron ore price and transportation cost.
RISKS AND CONCERNS:
The product of the company i.e. pig iron continues to suffer from over/
increasing capacities and moderate demand of the product. Product is also
1. Technological Obsolescence
2. Increased cost of Raw Materials
3. Intense competition
4. Increased cost of Logistics
The company has no control on the external factors which are adverse to the
companies operations. However, risk factors are taken into consideration
while evolving business plans and they are continuously monitored by the
FINANCIAL / OPERATIONAL PERFORMANCE:
The gross turnover of the company during the year is Rs. 1119485 thousands
as against previous year turnover of Rs. 1438690 Thousand. The decrease in
turnover is due to shut down of plant during the year. The higher cost of
coke and iron ore during the year, which are major raw materials for
manufacture of pig iron, had checked the growth in profit during the year
under review. While the price of coke appears to have stabilized to a more
reasonable level, the high cost of iron ore would continue to put its
bottom line under pressure during the year.
INTERNAL CONTROL SYSTEM:
Usha Ispat Limited has appointed M/s S V Modak & Company, Chartered
Accountants, as the internal auditors of the company from 1st April 2004 to
31st March, 2005, in order to ensure better internal control and a
professional view on the affairs of the company
The internal control systems designed by internal auditors ensure that the
financial and other records are reliable for preparing financial statements
and other data and for maintaining accountability of assets There are well-
established procedures for internal control at various levels of the
The internal auditors are reporting independently to the top management to
ensure that all assets are safeguarded, and protected against loss from
unauthorized use or disposition and that all transactions are authorized,
recorded, and reported correctly.
HUMAN RESOURCES & INDUSTRIAL RELATIONS:
Employee relations continued to be cordial and harmonious rooted in the
philosophy of bilateralism. Appox. 560 people were employed in the company
as on the date of the report.
Statements and opinions in the Management Discussion and Analysis Report
given to the shareholders reflects the Company's assessment and perception
of the situation and reports and other publications of various agencies.
The Board of Directors do not in any way guarantee to their accuracy or
correctness and that it may differ materially with the change in the
Government regulations, policies and other related factors.
For and on Behalf of the Board
S. C. Gupta S. A. Bhat
Wholetime Director Wholetime Director
Place : Redi (Maharashtra)
Date : 30th July,2005