Beekay Steel Industries Ltd Management Discussions.

Indian economic overview

India emerged as the sixth-largest and retained its position as the fastest-growing trillion-dollar economy through the course of the year (except in the last quarter of 2018-19). However, after growing 7.2% in 2017-18, the Indian economy was expected to grow at 6.8% in 2018-19 as per the third advanced estimates of the Central Statistics Office released in May 2019.

The principal developments during the year under review comprised a sustained increase in per capita incomes, decline in national inflation, steadying interest rates, and weakened consumer sentiment starting from the second half of the financial year. The weaker sentiment was on account of a large non-banking financial company announcing its inability to address liabilities. This affected credit expansion, financial markets and consumer sentiment, which resulted in a slower GDP growth, declining to 5.8% by the fourth quarter of 2018-19.

In 2018, the country attracted ~US$ 38 billion in foreign inflows. India witnessed a 23-notch jump to a record 77th position in the World Banks latest report on the ease of doing business that captured the performance of 190 countries. The commencement of the US-China trade war opened a new opportunity for India. Inflation (including food and energy prices) was estimated at 2.6% on an annual basis, one of the lowest in years and well below the Reserve Bank of Indias medium-term target of 4%. The rupee rebounded after touching a low of Rs 74.45 to a dollar to close the financial year at Rs 69.44. During the fiscal under review, the Indian Government continued to invest deeper in digitisation, renewable energy capacity generation and infrastructure building.

Key government initiatives Bank recapitalisation scheme: In addition to infusing Rs 2.1 Lakh Crores in public sector units, the Indian Government announced a capital infusion of Rs 41,000 Crores through the recapitalisation bonds in 2018-19.

Expanding infrastructure: The Government of India invested Rs 1.52 trillion to construct 6,460 kilometres of roads in 2018. Its expenditure of Rs 5.97 trillion (US$ 89.7 billion) towards infrastructural development for 2018-19 is expected to strengthen the national economy.

Increasing MSPs: The Indian Government fixed MSPs of 22 mandated kharif and rabi crops and FRP for sugarcane. The Indian Government committed to provide a 50% return over the cost of production for all mandated crops, strengthening the rural economy.

Budgetary allocation: Indias defence budget is projected to surpass Rs 300,000 Crores (US$ 42.19 billion) in 2019-20 for the first time ever.

The Insolvency and Bankruptcy code (Amendment), Ordinance 2018:

Passed in June 2018, the ordinance provides significant relief to home-buyers by recognising their status as financial creditors. The major beneficiary comprised MSMEs, empowering the Indian Government to provide them a special dispensation under the code.

Pradhan Mantri Kisan Samman Nidhi:

The Indian Government announced in February 2019 the Pradhan Mantri Kisan Samman Nidhi, a scheme promising an annual assured income of Rs 6,000 (US$ 84.5) for any farmer owning =2 hectares of farmland. The Budget for fiscal year 2020 allocated Rs 75,000 Crores for the scheme, benefiting ~120 million landowning farmer households.

Direct Benefit Transfer: The Direct Benefit Transfer initiative re-engineered the cash disbursement process in welfare schemes through simpler and faster flow of information/funds to ensure accurate targeting of beneficiaries, de-duplication and reduction of fraud. In 2018-19 alone, this scheme is estimated to have transferred Rs 3,14,465 Crores and the gains to have accrued since scheme implementation were estimated at more than Rs 120,000 Crores.

Outlook

The Indian economy is expected to encounter a sluggish 2019-20 with a stronger outlook across the foreseeable future.

(Source: CSO, Fitch, Economic Times, Business Standard, IBEF, Business Today, India Today, Money control)

Indian steel industry overview

India emerged as the worlds second-largest steel producer after China in 2018 while retaining its position of the third-largest finished steel consumer after China and the US.

India also emerged as the largest global producer of sponge iron. India had an installed capacity of 132 million tonnes in 2018 whereas the production for the period was pegged at 106.5 million tonnes compared to 101.5 million tonnes in 2017, registering a y-o-y growth of 4.9%.

Indias per capita steel consumption rose from 59 kilograms in 2013-14 to 69 kilograms in 2017-18, way below the global average of ~214 kilograms. India is the fastest-growing market for stainless steel. The per capita consumption of stainless steel in the country was estimated at 2 kilograms, compared to the global average of ~6 kilograms.

Domestic steel prices remained firm during the period between April and September 2018. Average prices of cold-rolled coils, hot-rolled coils and TMT bars increased by 27-29% y-o-y during the period under review. Per tonne prices of cold-rolled coils, hot-rolled coils and TMT bars averaged at Rs 61,550, Rs 55,716 and Rs 49,139, respectively. Strong demand resulted in India emerging as a net importer of steel, imports increasing 12% y-o-y and exports declining 42% y-o-y as of November 2018.

The Indian steel sector is estimated to register robust growth over 12-18 months. The countrys steel demand is estimated to grow 7.3% in 2019, riding robust GDP growth. Despite the burgeoning demand, Indias steel production is projected to grow at a mere 2.5-3% by the end of 2018-19. Domestic steelmakers are expected to increase their capacity by ~16 million tonnes between 2018-19 and 2020-21. This capacity ramp-up and debottlenecking of stressed assets could lead to an industry-wide capex of ~H750-800 billion between 2018-19 and 2020-21.

Looking ahead, the steel industry is expected to achieve 300 million tonnes of production capacity by 2030. Increased outlays for the railways sector, affordable housing push,and rising demand in capital goods and consumer durables could boost the domestic steel industrys growth.

(Source: Live Mint, Economic Times, PIB, Bloomberg, Ministry of Steel, Hindu Business Line, Business Standard, World Steel, ICRA)

The boost by ‘Housing for All

The Housing and Urban Affairs Ministrys budgetary provisions were pegged at Rs 48,000 Crores in the Union Budget 2019-20, clocking ~12% y-o-y increase from 2018-19. The Pradhan Mantri Awas Yojana (PMAY-Urban),was allotted a lumpsum of Rs 6,853.26 Crores in the 2019-20 Budget compared to Rs 6,505 Crores in 2018-19. Furthermore,under PMAY-Urban, >81 Lakh houses with an investment of ~H4.83 Lakh Crores was sanctioned. Of the 81 Lakh houses, construction for 47 Lakh houses has already been initiated.

Key downstream demand drivers

Construction and infrastructure: Indias construction and infrastructure sector is the largest consumer of steel in India. It accounts for more than 60% of the total finished steel consumed in India. The demand for steel in India is estimated to grow at around 7.3% in 2019, following growing demand from the construction sector. Steady order inflow supported by increased governmental spending towards infrastructure has improved medium-term revenue visibility for most construction players. The construction companies are likely to witness significant opportunities from the railways, ports, urban infrastructure and aviation sectors, strengthening steel demand.

Engineering and fabrication: The engineering and fabrication sector accounted for the second largest share (more than 20%) of total finished steel consumed. This segment involves industries such as capital goods, consumer durables, electrical goods, general engineering and defence equipment, among others. Steel products including hot-rolled coils and sheets are used in general engineering, while galvanised sheets are used in the manufacture of consumer durables. Rapid urbanisation and growing per capita income could catalyse this industrys growth along with rising temperatures, pollution and evolving lifestyles.

Automotive: The automotive sector accounted for the third-largest share (around 10%) of the total finished steel consumed in India. The Budget catalysed the development of the rural economy by extending necessary incentives. The increase in the zero-tax income limit to Rs 500,000 could strengthen the middle-class, catalysing sales of automotive products, especially two-wheelers, farm equipment and entry-level passenger vehicles, which could fuel growth of the steel industry. (Source: Economic Times, CARE, SIAM, ICRA)

Financial performance

Though the Companys revenues went down by 3.26 % to Rs 960 Crores in 2018-19, the Companys EBITDA stood at Rs 182.30 compared to Rs 143.49 in the previous year. Further, interest cost decreased to Rs 15.77 Crores in 2018-19 compared to Rs 18.49 Crores in the previous year. The Company reported a post-tax profit of Rs 98.26 Crores in 2018-19 compared to a post-tax profit of Rs 70.79 Crores in the previous year.

Human resources

Beekay Steel believes that its competitive advantage lies within its people. The Companys people bring to the stage a multi-sectoral experience, technological experience and domain knowledge.

The Companys HR culture is rooted in its ability to subvert age-old norms in a bid to enhance competitiveness. The Company always takes decisions which are in alignment with the professional and personal goals of employees, thereby achieving an ideal work-life balance and enhancing pride association.

Internal control systems and their adequacy

The internal control and risk management systems are structured and applied in accordance with the principles and criteria established in the corporate governance code of the organisation. It is an integral part of the general organisational structure of the Company and involves a range of personnel who act in a coordinated manner while executing their respective responsibilities. The Board of Directors offers its guidance and strategic supervision to the Executive

Directors and management, monitoring and support committees. The control and risk committee and the head of the audit department work under the supervision of the Board-appointed Statutory Auditors.

Cautionary statement

This statement made in this section describes the Companys objectives, projections, expectation and estimations which may be ‘forward looking statements within the meaning of applicable securities laws and regulations. Forward–looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realised by the Company. Actual result could differ materially from those expressed in the statement or implied due to the influence of external factors which are beyond the control of the Company. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements on the basis of any subsequent developments.