Aanchal Ispat Ltd Management Discussions.

INDUSTRY STRUCTURE AND DEVELOPMENT

After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half of last year, reflecting a confluence of factors affecting major economies. As a result of these developments, global growth is now projected to slow from 3.6 percent in 2018 to 3.3 percent in 2019, before returning to 3.6 percent in 2020. While global growth could surprise favorably if trade differences are resolved quickly so that business confidence rebounds and investor sentiment strengthens further, the balance of risks to the outlook remains on the downside. A further escalation of trade tensions and the associated increases in policy uncertainty could further weaken growth. (International Monetary Fund, April 2019).

World Steel Scenario In 2018

Global Crude Steel production increased by 4.51% to reach 1808.00 million tonnes (MT) compared to 2017. All major steel production regions registered an increase in Crude Steel output, except Japan, Germany, Turkey where output decreased marginally. Asia accounted for 1238.00 MT of Crude Steel production in 2018, up by 5.4% vis--vis 2017. China continued to dominate World Crude Steel production with an output of 928.3 MT, at a growth of 6.59% over 2017. In 2017, China increased its share of Global Crude Steel Production to 51.33% compared to 50.34% in 2018. India, which is currently the worlds third largest steel producing nation in 2017, increased its annual Crude Steel Output by 4.93% and has reached to Second Largest steel Producing nation by producing 106.5 MT in 2018. Japan produced 104.3 MT of Crude Steel in 2018, a marginal decline by 0.38% compared to 2017. South Koreas Output of Crude Steel stood at 72.5 MT in 2018 at a growth of 2.10%. Crude Steel Production in the US in 2017 stood at 86.6 MT, up by 6.13% over 2017. The EU (28) also saw marginal growth in Crude Steel output by 0.18% to reach 162.50 MT in 2018. World Steel Association forecast that in 2019 and 2020 global steel demand was expected to continue to grow, but growth rates would moderate in tandem with a slowing global economy.

INDIAN IRON & STEEL INDUSTRY OVERVIEW

Industry Profitability Outlook

For Indian steel industry, FY 2018-19 suffered from slowdown in demand from auto sector (particularly in second half), continued steel imports and highly leveraged balance sheets. Going forward, the industry profitability is expected to witness more challenges and risks as follows:

• High and volatile Coke prices: Prices of Metallurgical Coke remained consistently high (>USD 320/T) and quite volatile ranging from USD 324/ T to USD 408/T during the financial year 2018-19.

Further , in November, 2016, the Department of Commerce had imposed an anti-dumping duty on Low Ash Metallurgical Coke at 25.2 USD/T and 16.29 USD/T for imports from China and Australia respectively. Such anti-dumping duty coupled with rising global Coke & Coking coal prices has severely affected Indian steel Industry.

• Chinese overcapacity: As China shifts towards consumption led economy, Chinese steel industry is being forced to export more and more steel to maintain its capacity utilisation.

It is pertinent to note that even though there were various talks of China reducing its steel capacity, in reality, the Chinese crude steel production has increased by 6.6% in CY 2018.

Given the above scenario, it is becoming more and more important to focus on cost reduction and quality improvement to remain competitive in current market and to maintain margins.

Development of Indian Steel Sector

Indian Economic Environment GDP growth for the year 2018-19 has been estimated at 6.9% at constant market prices as per the provisional estimates of annual national income by the Central Statistics Office (CSO), compared to 6.7% in 2017-18. The most important and the fastest growing sector of Indian economy are services. Trade, hotels, transport and communication; financing, insurance, real estate and business services and community, social and personal services account for more than 60 percent of GDP. Agriculture, forestry and _shing constitute around 12 percent of the output, but employs more than 50 percent of the labor force. Manufacturing accounts for 15 percent of GDP, construction for another 8 percent and mining, quarrying, electricity, gas and water supply for the remaining 5 percent.

GDP growth rates of Agriculture & allied, Industry, and Services sector are 2.92%, 6.86%, and 7.53% respectively. India has registered highest growth of 8.74% in Construction sector and lowest 1.34% in Mining & quarrying sector. The economic reforms initiated by the Government since 1991 added new dimensions to industrial growth in general and the steel industry in particular.Licensing requirement for capacity creation was abolished, except for certain locational restrictions and the steel industry was removed from the list of industries reserved for the public sector. Automatic approval of foreign equity investment up to 100% was granted. Price and distribution controls were removed with a view to make the steel industry efficient and competitive.Restrictions on external trade, both in import and export, were removed with drastic reductions in import duty. General policy measures like reduction in import duty on capital goods, convertibility of rupee on trade account, permission to mobilise resources from overseas financial markets among others, also benefited the Indian steel industry.

Indias economic growth is contingent upon the growth of the Indian steel industry. Consumption of steel is taken to be an indicator of economic development. While steel continues to have a stronghold in traditional sectors such as construction, housing and ground transportation, special steels are increasingly being used in engineering industries such as power generation, petrochemicals and fertilizers. India occupies a central position on the global steel map, with the establishment of new state-of-the-art steel mills, acquisition of global scale capacities by players, continuous modernization and up gradation of older plants, improving energy efficiency and backward integration into global raw material sources.

Steel industry derives its demand from other important sectors like infrastructure, aviation, engineering, construction, automobile, pipes and tubes etc. With the Indian economy poised for its next wave of growth under the reforms being unleashed in the last one year, there lies tremendous opportunity for the Indian steel industry to prosper and grow exponentially. The Indian steel industry is largely iron-based through the blast furnace (BF) or the direct reduced iron (DRI) route. Indian steel industry is highly consolidated. About 50% of the crude steel capacity is resident with integrated steel producers (ISP). But the changing ratio of hot metal to crude steel production indicates toward the increasing presence of secondary steel producers in the eco-system.

Initiatives taken by the Company

The Company is in continuous pursuit of creating more value for all its stakeholders. The Companys various functional teams have taken some initiatives to not only strengthen its profitability in near future but also gain medium to long-term competitive advantage over its peers.

OPPORTUNITIES AND THREATS Opportunities:

• India was a net exporter of total finished steel. Growth in exports ensures greater access to far out markets.

• Intention of Government to increase funding in infrastructure, affordable housing (Prime Minister Awas Yojana), strengthening of Real Estate norms through ‘Real Estate (Regulation and Development) Act, 2016 etc. will generate positive demand for steel.

• In line with Central Governments announcement of various road/rail infrastructure projects,the market for local manufacturers is expected to improve.

• India s steel production is increased to 106.15 MT in year 2018 to 128.6 MT by 2021.

• The Government has taken various steps to boost the sector including the introduction of National Steel Policy 2017 and allowing 100 per cent Foreign Direct Investment (FDI) in the steel sector under the automatic route. Between April 2000 and December 2018, inflow of US$ 11.18 billion has been witnessed in the metallurgical industries as Foreign Direct Investment (FDI).

• India s per capita consumption of steel grew to 68.9 kgs, during 2017-18. National Steel Policy 2017 aims to increase the per capita steel consumption to 160 kgs by 2030-31.

Threats:

• Improper supply-demand balance

• Depletion of high quality raw materials required for production of steel.

• Environmental concerns.

• Dumping of excess inventory in other countries by countries producing steel in abundance.

• The glut in the global steel market, which led to an influx of cheap imports into India and a series of steps by the government to protect the domestic steel industry, might not end anytime soon. In what indicates that threats of low-priced imports are here to stay, the world capacity utilization ratio of the alloy climbed upwards in the current year. So only structural reforms that will help cut costs and improve productivity could enable the domestic steelmakers to acquire competitiveness in the domestic and global markets. Rising cost of raw material, fuel, power prices coupled with unforeseen general macro economic factors may affect the industry adversely.

SEGMENT WISE OR PRODUCT WISE PERFORMANCE

The Company has no other segments apart from steel business, details of which have been included in the financial performance. Hence, no separate details on segment wise or product wise performance are being reported.

OUTLOOK

Analysts are upbeat over the expected above normal monsoon and higher GDP growth. The slow pace of public and private sector projects is expected to improve with the Government of Indias thrust on infrastructure projects. Further, Make in India initiative has got a boost by a slew of measures aimed at improving the ease of doing business in the Country. Small and medium industry a major employment generator for the economy has been liberated to participate in the Nations development in accordance with its potential. Bold measures by the Government such as improved targeting of subsidy, broadening of the tax base and expected buoyancy in tax revenue are all aimed at achieving the fiscal consolidation which had been an area of concern in the recent past.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company employs an adequate and effective system of internal control commensurate with its size and nature of business that provides for assurance of the efficiency of operations, security of Companys assets, accurate and prompt recording of transactions, efficient Management Information Systems and compliance with prevalent statutes, accounting standards.

The internal control is supplemented by an extensive review by internal auditors. The prime objective of internal audit is to test the adequacy and effectiveness of the internal controls laid down by the management and to suggest improvements.

Observations of the internal auditors are subject to periodic review and compliance monitoring. The Audit Committee of Directors reviews the significant observations made by internal auditors along with status of action thereon.

RISKS & CONCERNS

Here are some of the key risks which could emerge and the corresponding mitigation measures:

Sr.No. Type Impact Mitigation Strategies
1. Macroeconomic Risk •Overcapacity and oversupply in global steel industry may affect steel prices. •Diversification of product portfolio.
•Newer developments in competitive global business. •Development of alternate techniques to ensure better capacity utilization.
•Cheaper imports and raw material defficiencies may lead to low capacity utilization despite of the ability of Indian steel sector to work at full capacity level.
2. Operational Risk •Risk of limitation or disruption in the supply of raw materials. •Establishing sources of supplies from al ternate geographies.
3. Market Related Risk •Excess volatility in steel and raw material markets may affect financial condition. •Enhanced product development and focus on value addition.
•Competition from substitute materials may lead to change in demand pattern.
4. Environmental Risk •Share of iron and steel industry in CO2 emissions is around 7%. •Innovation in products and methods to ensure sustainable development.
•Stringent international and domestic regulations relating to climate control. •Investment in environmental related projects.
5. Regulatory Risk •Non-compliance to increasing stringent regulatory norms. •Focus on compliance and fulfilling regulatory requirements.
•Removal of favorable trade measures.

FINANCIAL PERFORMANCE

The Company had prepared its financial statements based on Indian Accounting Standard (Ind AS).The financial statements were prepared under the historical cost convention on an accrual basis. Figures of the previous years were reclassified/ regrouped to confirm the presentation requirements under Ind AS and the requirements laid down under Schedule III of the Companies Act,2013 The Companys revenues in FY 2018-19 following was 35,367.83 Lakhs. EBIDTA stood at Rs.1,070.23 lakhs compared to Rs. 769.24 lakhs in the previous year. The Company reported a post-tax profit of Rs. 279.94 Lakhs in FY 2018-19 compare to a post-tax profit of Rs. 132.72 Lakhs in the previous year.

KEY FINANCIAL RATIOS

Particulars F.Y 2019 F.Y 2018
Inventory Turnover (months) 1.04 0.93
Interest Coverage ratio 1.75 1.47
Current Ratio 1.50 1.44
EBITDA/Turnover (%) 1.42 0.77
EBITDA/Net Interest ratio 1.88 1.63
Debt-equity ratio 1.24 1.49
Operating Profit Margin (%) 1.21 0.58
Net Profit Margin 0.81 0.34
Return on net worth 4.46 2.12
Earnings per share(Rs) 1.38 0.63

HUMAN RESOURCE

The Company recognises the importance of human resources in realising its growth ambitions and believes in nurturing talent within the organisation to take up leadership positions. The Company believes in investing in people development and process improvements, aligned with Companys vision and values. As on March 31, 2019 the Company has 95 employees.

CAUTIONARY STATEMENT

Statements made in Management Discussion and Analysis Report describing the Companys objectives, estimates, expectations or predictions are "Forward looking Statement" within the meaning of applicable laws and regulations. They are based on certain assumptions and expectations of future events. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operation include global and Indian demand- supply condition, raw material availability, trained manpower, changes in Government regulations, tax regimes, economic development within India and the countries within which the Company conducts business and other incidental factors.