Beekay Steel Industries Ltd Management Discussions.

Indian economic overview

After registering a GDP growth of over 7% for the third year in succession in 2016-17, the Indian economy headed for somewhat slower growth, estimated 6.7% in 2017-18. Even this lower growth for 2017-18, GDP growth averaged 7.3% for the period from 2014-15 to 2017-18, the highest among the major economies. This was achieved on the back of lower inflation, an improved current account balance and a reduction in the fiscal deficit-to-GDP ratio .

The year under review was marked by various structural reforms being undertaken by the Central Government. In addition to GST introduction, the year witnessed significant steps towards resolution of problems associated with NPA levels, FDI liberalisation, bank recapitalisation and privatisation of coal mines. (Source: CSO, Economic Survey 2017-18)

Outlook

The World Bank projected India’s economic growth to accelerate to 7.3% in 2018-19 and 7.5% in 2019-20. Strong private consumption and a growth in the services sector are expected to continue supporting economic activity. Private investments are expected to revive as the corporate sector adjusts to the GST. Source: IMF, World Bank)

Steel sector overview

After almost a decade of limping growth, the significant recovery of the global economy as well as the global steel industry in 2017 points to a favourable outlook for the Indian steel industry. While global production of crude steel at 1,691 million tonne (MT) reported a growth of 5.3 per cent in 2017 over the previous year, the estimated steel consumption rose to 1,622 MT. The latest Internal Monetary Fund projection has estimated that the global economy is slated to grow at 3.9 per cent in 2018, and Indias GDP is to move up by 7.4 per cent in 2018 compared to 6.7 per cent in the previous year. The continued growth in GDP in India, in fact, indicates that major steel consuming segments such as construction, real estate/housing, capital goods/machinery, consumer goods, automobiles and energy sector shall benefit.

Indian steel enterprises invested hugely into modernisation and expansion of their existing units as well as green-field plants to build a world class, cost competitive, environment-friendly and socially responsible industry. This is in line with the objectives of the National Steel Policy 2017 to increase the countrys per capita steel consumption to 160 Kgs by 2030-31 from the current 60 kgs. This will necessitate a steel capacity of 300 MTPA compaired with the current 128 MTPA. The Indian steel industry is fully geared for this, while focusing on remaining competitive. This can be substantiated from the fact that as per the list of World Class Steel Makers in the World released by World Steel Dynamics in June 2017, 36 Indian steel makers were classified as World Class Steel Makers out of more than 250 large steel makers in the world. The housing and construction sector, where a major chunk of steel is consumed, should get a boost with an increase in per capita incomes and social sector schemes like Pradhan Mantri Awas Yojna-Housing for All, Sardar Patel Urban Housing Mission, 100 Smart Cities Mission (by 2022), Pradhan Mantri Gram Sadak Yojna, Urban Infrastructure Development Scheme for Small & Medium Towns (UIDSSMT), National Heritage City Development and Augmentation Yojana (HRIDAY), Bharatmala project, 24x7 Power for All initiative (by 2019), Development of Industrial Corridors & National Investment & Manufacturing Zones, 75,000 MW Clean-Energy initiative (by 2022) and many others.

(Source: Indian Steel Association)

RISK MANAGEMENT

Demand risk Mitigation strategy
The steel industry is cyclical in nature and factors affecting the demand for and requirement of processing steel products, alongwith, global economic conditions, may adversely affect our business, financial condition, results of operations and prospects The Indian economy is rapidly growing with an enormous focus on the infrastructure and construction sector. Several initiatives, mainly affordable housing, expansion of railway networks, development of domestic shipbuilding industry, opening up of the defence sector for private participation, and the anticipated growth in the automobile sector are expected to create a significant demand for steel in the country. While the focus of the industry is on the domestic market, being in the vicinity of the developed west and developing east, gives it a strategic locational advantage that augurs well for the industry seeking export opportunities.
Inventory risk Mitigation strategy
Our failure to accurately forecast and manage inventory could result in an unexpected shortfall and/or surplus of products, which could harm our business Beekay Steel has an efficient inventory management system in place. The Company maintains minimum quantity level as per orders. It forecasts demand and keep adequate buffer inventory to cater to the demand.
Financial risk Mitigation strategy
Inability to service debt could impact the financial stability of our company. Beekay Steel has, over the years, strengthened itself. The Company had a peak term loan of of Rs 7.50 cr which has now come down to Rs 3.48 cr. The interest coverage ratio of the Company strengthened to 7.22 in 2017-18 from 3.07 five years ago.
Price risk Mitigation strategy
Significant increase in the cost or shortage of raw materials and finished goods could effect operations and financial position. The cost of steel is cyclical. During the last two years, it has improved, providing the company with a cushion against risk. The Company buys raw materials at low prices and maintains inventory levels, which helps it to avoid buying at high prices.
Forex risk Mitigation strategy
Beekay earns 27.79% of its total revenues from export and any fluctuations in exchange rates could affect the revenues of our company. The Company exports TMT bars and Structurals and is exposed to exchange fluctuation risks. It hedges this risk by not keeping open curency positions. The Company closes its position within 2-3 days of receiving the order, which protects the Company from exchange fluctuations.

PRODUCT WISE PERFORMANCE

Your Company is in the secondary steel manufacturing segment and produces HR sections (TMT bars, rounds, squares, flats, hexagons and special profiles) and bright bars of different sizes and shapes with different compositions and while engaged in conversion jobs. The production of all manufacturing units of the Company was 6,26,494 MT (including conversion 3,93,528 MT) in 2017-18, compared to 5,18,592 MT (including conversion 3,40,606MT) in the previous year.

HUMAN RESOURCES

Beekay Steel believes that its competitive advantage lies within its people. The Company’s people bring to the stage a multi-sectoral experience, technological experience and domain knowledge. The Company’s HR culture is rooted in its ability to subvert age-old norms and enhance competitiveness. The Company takes decisions aligned with the professional and personal goals of employees, achieving work-life balance and enhancing pride of association. The direct employee count stood at 505 during the year ended March 31, 2018.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has an effective internal control system in place that ensures the internal processes comply with regulated business policies and procedures. The Board has adopted appropriate measures ensuring orderly and efficient conduct of its business. These controls have been designed to provide reasonable assurance with regard to adherence to the Company’s policies, safeguarding of its assets, prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial disclosures. The Company has an efficient audit committee in line with the provisions of Regulation 18 of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 read with Section 177 of the Companies Act, 2013 that ensures that the financial reporting process and the disclosure of its financial information are correct, sufficient and credible. These are reviewed by the management and recommendations are made prior to the finalisation of financial statements.