Adhunik Metaliks Ltd Management Discussions.

ADHUNIK METALIKS - AN OVERVIEW

Your Company operates in a specialised segment of steel industry, producing, special alloy steel, ferro alloys, iron billets and rolled products at its manufacturing facility at Odisha. Though integrated with iron ore and manganese ore mines and a 1.6 MMTPA pellet making facility set up under its wholly owned subsidiary, Orissa Manganese & Minerals Limited, the fortune of your industry are dependent upon the growth and fall of iron & steel segment of the economy. During the year under review, the iron & steel industry has been plagued with several challenges relating to negative growth, issues with the mining sector and uncontrolled imports from countries with surplus capacities. Though a preferred supplier to many major industrial houses, your Companys performance has been marred due to the sharp decline in the performance of the major customers of the Company.

INDUSTRY STRUCTURE AND DEVELOPMENT

Despite the slowdown in the global economy, the Indian economy registered a reasonable growth in the first two quarters of FY 2016-17 benefiting from a good monsoon after successive rain-deficient years. Economic growth however, slowed down to 7% in Q3 FY 2016-17 as compared to 7.4% in Q2 FY 2016-17 due to the impact of demonetisation. GDP growth of 7.1% in financial year 2016-17 as against 7.6% in FY16 was primarily due to industrial slowdown and the possible impact of demonetisation. Despite this, India will remain one of the fastest growing major economies globally in 2017.

The market sluggishness continued in the year 2016-17. However, the growth in alloy steel production during 16-17 improved by 36%. Six new grades of alloy steel products were developed during the year. The customer base was also increased. The growth in the hot metal production was 28%. Gross energy consumption improved from 7.65 Gcal to 7.45 Gcal/ Ton during the year. Now that the market is showing improving trends the productivity in the current financial year is likely to be improved.

During the year under review, the global steel industry gained positive momentum with an upturn in steel prices driven by developments in China and periodic surge in raw material prices. According to provisional data by Joint Plant Committee, Govt. of India, Indian crude steel production has recorded a growth of 9% year-on-year in FY 2016-17 as compared to previous year. In FY 2016-17, Indias crude steel production was 97.39 million tonnes against 89.79 million tonnes in the previous fiscal. On the consumption front, Indias finished steel consumption increased by 3% year-on-year to 83.93 million tonnes during FY 2016- 17 against 81.52 million tonnes in last fiscal. The threat from cheap imports from China was mitigated to a large extent by imposition of protectionist measures by the Government of India (GoI).

Export of pig iron from India remained subdued for first three quarters of FY 2016-17 due to global slowdown. It finally picked up in the last quarter and overall for the year the volume of pig iron exported, ended at the same level as the last year. On the domestic front, pig iron demand continued to remain depressed due to low overall industrial activity in the country and impact of demonetisation. Demand, however, is expected to improve with governments focus on reforms and increased investments in infrastructure and construction sectors including "Make in India" initiatives. The endeavor of GoI in clearing the stalled projects, formalisation of the newly announced scheme "AMRUT" (Atal Mission for Rejuvenation & Urban Transformation) coupled with signs of lowering the interest rates by RBI will have a positive impact on the temporary slowdown being experienced by the industry in the recent past.

An important component of cost of production of pig iron is the cost of coke. International price of coke continued its upward trend from USD 123/t CFR in the beginning of FY 2016-17 to USD 345/t CFR in Nov16 and then closing the year at a level of USD 284/t CFR. Price of coking coal from Australia showed a similar trend of increase from USD 82/t FOB in the beginning of FY 2016-17 to USD 302/t FOB in Nov16 and then ending the year at a level of USD 160/t FOB. Steep rise in coal price resulted in high price of the domestic coke and the same got further aggravated with the imposition of antidumping duty of USD 25.2/t on Chinese coke by the GoI.

International iron ore fines price also saw increase from average of USD 52/t CFR in China in FY 2015-16 to USD 65/t CFR in FY 2016-17.

Pig iron prices also moved up by approx 20% during the year 2016-17, although not to the extent of increase in coal/coke price. During the first two quarters, as there was no export of pig iron, there was pressure on pig iron prices in the domestic market as a result of oversupply.

OUTLOOK

The Indian economy is on a path of gradual recovery. The government has undertaken several steps to unplug the bottlenecks and to revive the business confidence. The Indian economy stands to benefit from the correction in global crude oil prices, will have positive impact on the macro economy in form of lower inflation, reduced current account deficit, healthier fiscal accounts, increased consumption and a stable INR.

India is expected to be Asias biggest turnaround economy and also one of the fastest growing economies in 2018. However, India has its own set of challenges with tepid activity in the infrastructure and manufacturing sectors. Assuming a further moderation in the average annual price of crude petroleum and other products, the current account deficit is expected to decrease further. Though it may take time to see the full benefits of policy changes in India, declining inflation, improved current account balance and stable-to-improving fiscal deficit provide a better picture than previous years. Indias growth, relative to the worlds growth, is expected to move upward. Infrastructure development, increased urbanisation and revival in the manufacturing sector is expected to provide necessary triggers for acceleration in steel demand. In 2017-18, steel demand is expected to grow by 6% to 7%. However, a much sharper than expected increase in inflation and higher than budgeted fiscal consolidation are the key downside risks to the outlook, highlights World Steel Association.

RISK, OPPORTUNITIES AND THREATS

The steel sector is intrinsically linked with the economic growth of a nation. High economic growth in India in the last 10 years has led to an increase in demand for steel and moved the Indian steel industry into a new stage of growth and development. An increase in production has resulted in India becoming the 4th largest producer of crude steel and the largest producer of sponge iron/DRI in the world. Per capita steel consumption also improved from 48 kgs in 2009 to 61 kgs in 2015. However, it is still significantly below world and developed economies averages of 217 Kg/capita and 395 Kg/ capita respectively and thus presents a large opportunity for the Indian steel sector.

The projected increase in demand by sectors like construction and infrastructure, automobiles and railways are expected to contribute to this demand. At the same time, in the current depressed global environment, Indian steel industry faces many headwinds. Globally, the steel industry is affected by significant oversupply. Sharp currency depreciation of some of the steel exporting countries has further compounded the problem. The major risk facing the Indian steel industry is uncorrelated steel prices with the indigenous raw material prices. Thermal coal and Iron ore prices are still high in India compared to global prices. The dynamics of global and Indian steel have changed and its long term sustainability of operations would be dependent on competitive raw material prices and sustainable debt levels in the Company. In the above context of challenges facing the industry, Adhunik has put in place several building blocks to enhance operating efficiency, optimize costs, shift to better product mix for higher value addition with a clear focus on quality improvement, expand its dealer network for deeper market penetration, in order to capitalise on the long-term opportunities as well as mitigate short-term challenges. Its long-term strategy includes globally competitive operations, cost competitiveness and sustained operational excellence.

DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

Financial information discussed in this section is derived from the Companys Audited Standalone Financial Statements.

The total Revenues were Rs. 73,124.52 lacs in Fiscal 2017 (12 months), as compared to Rs. 51,821.78 lacs in Fiscal 2016 (9 months). The reasons for the muted performance have been the outcome of several external industry factors affecting iron & steel industry at large. The Company operated its manufacturing units at 50.6% of its installed capacity; however capacity ramp up could not be achieved due to poor market condition. The Company continued to make all efforts to control costs which are reflected through reduced employee cost and other costs.However, the Company incurred a pretax loss of Rs. 760.81 Crores.

RAW MATERIAL PRICES IRON ORE

Iron Ore price trends continued to be at volatile levels both domestically as well as internationally. Prices crashed at the international levels due to overcapacity and excess supply by major mining companies. The same was further affected due to subdued consumption by major consumers like China.

In contrast to the oversupply in the global market, India witnessed a supply crisis. The closure of 26 mines in Odisha, and defunct mining operations in Karnataka and Goa flushed out a significant quantum of supply from the Indian market, creating a dearth of domestic iron ore. This eventually led to increased prices and high imports to India. Increase in the royalty rates for iron ore from 10% to 15% on sale price ad valorem basis acted as a catalyst in increasing the cost of production for steel and pellet makers.

COKING COAL & COKE

Global Coking Coal prices have receded due to lower consumption by China due to its slowing economy. Also, a slowing Chinese economy has resulted in lower demand for Coke which manifested in lower Coke prices. Going forward, it is yet to be seen whether current levels of Coking Coal & Coke prices are sustainable in the long run. This has also had an impact on the Company, leading to closure of the coke oven batteries set up at the manufacturing facilities at Odisha. Capital cost expended on seffing up of such facilities remained a drag on profitable operations of the Company during the entire term under review.

RAW MATERIALS MANAGEMENT

The Company, during the period under review continued to procure its major raw materials, iron ore and manganese ore from mines located within a radius of 200 Km from the manufacturing facility. This strategy has helped in maintaining working capital cycle time as also minimising delays in the supply logistics.

Coal is being procured from overseas sources through established procurement standards and contracts. Companys proposed merger with OMML would further reduce cost due to elimination of taxes.

ENVIRONMENT

WATER & WASTEWATER MANAGEMENT SYSTEM

A number of initiatives have been taken in the realms of wastewater recycling and reuse by the Company for achieving the aim of zero discharge. In the captive power plant, DRI, blast furnace, steel melting and the rolling mill, the blow down from the closed loop soft water circuits is utilised for the makeup of the industrial cooling circuits. Any excess blow down water generated after the above uses, along with the storm water drainage and the plant drainage is routed to a settling pond, where the suspended solids get settled in a series of chambers and the clear water is used for ore washing and dust suppression systems and the development of green belts. The remaining water from the settling pond is routed back to the raw water reservoir for reuse.

AIR POLLUTION CONTROL MEASURES

DRI hot gas is utilised in the waste heat recovery boilers to generate power. Provision of high-efficiency bag houses electrostatic precipitators in captive power plant to maintain the emission levels. Latest technology is used to control the dusty fumes from SMS (EAF/LRF) including primary and secondary de-dusting technology and Sulphur dioxide emission is controlled by dilution/dispersion process. Sprinklers are regularly used to control and minimise the fugitive emission. All kilns, MBF and other furnaces are also lined with high temperature resistant refractories to control heat loss and protect the personnel from thermal pollution.

CORPORATE SOCIAL RESPONSIBILITY

As a measure of Green Initiative in Corporate Governance, the Ministry of Corporate Affairs (MCA) has now allowed the service of documents to all Members through electronic mode. As a measure to support such initiative, the Company would endeavour to send all its communications through electronic mode. The Company requests all its Members to be a part of this initiative and come forward and register their e-mail addresses so that all communications can flow with minimum footprint on the environment.

HUMAN RESOURCE MANAGEMENT & INDUSTRIAL RELATIONS

People are the primary drivers of operation at the Company. We endeavour to empower our people and reinforce long term value system. During the year under review, no reportable incidents occurred and the management continues to enjoy the patronage of its employees across locations. Inspite of severe stress faced by the Company, employees of the Company endeavoured to capability building and cultural integration. Various in house training programs were held by the HR department and technical staff to enhance and augment skills.

The Company undertakes regular appraisals wherein performers are recognised every month. Your Company has implemented an ESOP scheme for the senior management thereby strengthening the bond between the Company and its decision makers.

CAUTION STATEMENT

Statements in this management discussion and analysis describing the Companys objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations. Actual results may differ substantially or materially from those expressed or implied. Important developments that could affect the Companys operations include a downtrend in the industry - global or domestic or both, significant changes in political and economic environment in India, applicable statues, litigations, labour relations and interest costs.

Approved by: ForAdhunik Metaliks Limited
Sumit Binani
Interim Resolution Professional Ghanshyam Das Agarwal
Place: Kolkata Chairman
Date: 24th August, 2017 DIN- 00507800