INDUSTRY STRUCTURE AND DEVELOPMENTS

Sources say the sponge iron sector's sales are estimated to have increased 24.3 per cent in 2014-15 due to a stellar performance by large- scale manufacturers. Sponge iron is primarily used to produce long steel, used in the construction sector. It is expected the steel sector will grow 6.2 per cent in 2015-16, against 4.3 per cent in April 2014-February 2015.

The government has announced many projects in the infrastructure sector, which will drive steel demand. Owing to this, production of sponge iron is likely to grow 6.4 per cent in 2015-16.

Iron ore and non-coking coal are used to produce sponge iron. Globally, the prices of these commodities have fallen sharply since 2013. Iron ore prices have fallen from $152 a Tone in 2013 to $50 a Tone. Though domestic prices were considerably higher compared to international prices, these have seen a sharp fall in the second half of 2014-15. Domestic producers of iron ore are reducing prices to compete with cheaper imports. As this is expected to continue, raw material expenses are expected to rise 11.9 per cent, a tad slower than sales.

Operating profits of the sponge iron sector are estimated to have risen sharply in 2014-15. The sector's operating margin is likely to have doubled to 11.1 per cent. During 2015-16, it is likely to remain flat. At the net level, the sector is estimated to have turned around in 2014-15, reporting a net profit equivalent to 2.1 per cent of total income, against a loss equivalent to three per cent of total income in 2013-14. In 2015-16, the net profit margin is likely to expand by 25 basis points to 2.4 per cent.

Our Company operates two kilns with an installed capacity of 1,80,000 tones per annum to produce sponge iron. The company has established loyal and stable customer base in Western India and export market. The company practices have resulted into a small product premium. The waste gas from sponge making kilns has significant energy in the form of heat. This energy is recovered in waste heat recovery boilers to generate steam, which then passes through the generator for producing power. Two power plants, based on waste heat from kilns with a combined generation capacity of 40 MW are also operated. Surplus power is sold. The power revenue also contributed to revenue and the bottom line.

Iron ore and coal are two important raw materials in production of sponge iron.

Ferro chrome is a value-added intermediate product which imparts the non-corrosive property to stainless steel. It is mainly used as an additive for making different grades of stainless steel and special alloy steel.

India is a significant player with almost a tenth of the global Ferro chrome output and produces about 1 million Tones per annum. At present growth of stainless steel production / consumption has been somewhat sedate. However, this is likely to change in the next 5 years as stainless steel is at a tipping point. As focus shifts from initial cost of acquisition to lifecycle cost, it is expected that stainless steel consumption will increase at a faster pace making India one of the key drivers and providing a boost to the Ferro chrome industry.

DISCUSSION ON COMPANY'S PERFORMANCE

During the year under review, Company's net revenue has increased from Rs. 32,941.81 lacs to Rs. 36,604.08 lacs. This marginal increase in turnover is attributed mainly on account of high cost of raw material and low price realization owing to slack market conditions domestically and internationally. However, losses are increased due to high raw material and power cost which impacted the bottom line of the company drastically and thus accumulated losses has made the net worth of the company negative.

SWOT ANALYSIS OF COMPANY

Strength

• Good Industry experience & knowledge of Promoters.

• Good quality standards.

• Cost competitiveness.

• Diverse Supplier Base.

• Long-standing contracts for purchase of raw materials.

• Strong product design and development.

• Skilled, qualified and motivated employees.

• Broad-based manufacturing infrastructure.

• Captive Power Consumption.

Weaknesses

• Exposure to raw material price fluctuations.

• Under-utilization of plant capacity.

• Dependency on third party for raw material.

Opportunities

• Unexplored Markets.

• Ever-growing demand in Steel Industry.

• Strengthened manufacturing base and the existence of product development and marketing teams.

Threats

• Rising raw material prices.

• High Cost of Capital.

• Constraint of Raw Material availability

• Global economic slowdown.

• Unremunerative Prices.

• Unforeseen general macro-economic factors and political turmoil.

RISKS AND CONCERNS

Some of the major risks and concerns identified by the Company are:

• Working Capital risks

• Raw Materials Availability risk

• Raw Material Price Fluctuation risks.

• Government Policy and Political Structure risk

• Competition risk

• Economic Slowdown risk

In its process of Risk Management, Company takes proactive steps in identifying inherent business and operational risks and accordingly takes appropriate steps to guard against these identified risks.

INTERNAL CONTROL SYSTEM

Your Company has in place adequate internal control systems commensurate with the size of its operations. Internal control systems comprising of policies and procedures are designed to ensure reliability of financial reporting, timely feedback on achievement of operational and strategic goals, compliance with policies, procedures, applicable laws and regulations, safeguarding of assets and economical and efficient use of resources. The system is assessed periodically. The Internal Audit team continuously monitors the effectiveness of the internal control systems. It reports to the Audit Committee about the adequacy and effectiveness of the internal control system of your Company.

HUMAN RESOURCES AND INDUSTRIAL RELATIONS

Company maintained healthy, cordial and harmonious industrial relations at all levels. The Board of Directors and management wish to place on record their appreciation of the efforts put in by all employees to achieve good performance.

RISK MANAGEMENT

Risks are events, situations or circumstances which may lead to negative consequences on a Company's business. Risk management is a structured approach to manage uncertainty. It involves identifying potential risks, assessing their potential impact, taking timely action to minimize potential impact and continuous monitoring of identified risks. Your Company has a robust risk management process to identify and assess business risks and opportunities. Your Company's risk management plan describes the potential risk, contains an analysis of the impact of risks and includes risk strategies to help the business reduce the consequences. The risk management plan of your Company is regularly reviewed to ensure that it accurately reflects the current potential risks to its business.

FUTURE OUTLOOK

Steel manufacturing industries, sponge iron & Ferro chrome manufacturing industries are running simultaneously. The future of Sponge Iron is dependent on the availability of the substitute i.e. iron scrap considering that there is enormous scope for increasing steel consumption in the domestic sector shows the prospects for the sponge iron also.

Sponge iron is mainly used to produce long steel which is used in the construction sector. The steel sector is expected to do well with production set to grow by 6.2% in 2015-16 as against 4.3% reported during April14 - February 2015. The government has announced many infrastructure projects which will drive the demand for steel & accordingly the production of sponge is also likely to grow by 6.4% in 2015 16. During 2015-16, company expects the operating margin of the industry to remain flat.

On the other hand, Ferro-Alloys Industry envisages power intensive production. In the absence of competitively available electrical power, the domestic industry may face stiff competition from imports leading to possible closure or underutilization of the capacity in the industry. To support power intensive production and steady power supplies to the Industry at a stable price, Company has its own 40 MW power plant and is focusing on its captive power generation for cheaper availability of electricity.

The chrome industry is at the crossroads buffeted by rising costs, stagnant prices and the dominance of China.

Your Company is confident about the future given the integrated nature of its operations, its location which is ideal to cater to demand. The main advantage to be shown is being closer to Sea ports for raw materials and being in Western India which is in the heart of finished products' requirement.

In the year 2014 world steel demand grew higher than previous forecasts due to a stronger than expected performance in the developed world in the second half of the year. It is expected that the global steel demand recovery continues but growth is stabilizing at a lower rate with continued volatility and uncertainty leading to a challenging environment for steel companies.

With the commitment of the Government towards infrastructure development in the country, the demand of stainless steel will definitely increase which in turn will provide a great opportunity for the higher demand for Ferro chrome.

CAUTIONARY NOTE

Statement in this "Management Discussion and Analysis" describing the Company's objectives, projections, estimates, expectations or predictions may be "forward looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Company's operations include global and Indian demand supply conditions, finished goods prices, feed stock availability and prices, cyclical demand and pricing in the Company's principal markets, changes in Government regulations, tax regimes, economic developments within India and the countries within which the Company conducts business and other factors such as litigation and labour negotiations. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent development, information or events or otherwise.