bhushan power steel ltd Management discussions

BHUSHAN POWER AND STEEL LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS INDUSTRY OVERVIEW - GLOBAL SCENARIO Economic meltdown during the year under report has adversely affected the production and demand globally. Inventory built up has caused global steel demand slow down. It is estimated that global steel production during the year 2010 is expected to be about 1350 million tonnes of crude steel. The current year growth may not be in tune with the past few years due to economic slowdown world over, which has also affected Asian continent and developing countries to some extent. Basic raw-material i.e. coal and iron ore witnessed increase in prices resulted into volatile in price trend. Steel prices during the year under report remained highly volatile. Due to recession and crisis in prices, unexpectedly created problem for many steel-consuming industries. Inventories were piled up. The steel demand which is on a decline in recent times is expected to pick up in the medium to long term due to higher than historical GDP growth, integration of economies and convergence in GDP of developing countries like China, India and Brazil with the developed economies. OVERVIEW OF INDIAN STEEL INDUSTRY: Govt, has been supporting the Indian Steel Industry to improve the consumption per capita and production of steel. The National Steel Policy 2005 had projected an annual steel consumption growth of 7 per cent based on GDP growth rate of 7-7.5 per cent and production of 110 MMT of crude steel by 2019-20. Nonetheless, with the current rate of ongoing greenfield and brownfield projects, the Ministry of Steel has projected that these growth trends are likely to be exceeded and it is envisaged that in the next five years demand will grow at higher annual average growth rate of over 10 per cent as compared to around 7 per cent growth achieved between 1991-92 and 2005-06. As per estimate of the Ministry of Steel, Govt, of India, the crude steel production capacity in the country by 2011-12 will be nearly 124 MMT. The Indian steel industry recorded a crude steel production of 70.13 MMT in 2009 and expected to grow by 107.86 MMT by 2011-12. The growth in the Indian steel industry in earlier years had been backed by strong economic growth with a GDP growth of above 7%. The industry which is presently witnessing a slowdown and is estimated to grow at a rate of 4-6% per annum as there is a strong correlation between GDP growth and steel consumption and Indian economy (i.e. GDP) is projected to grow at a rate of 7% per annum. In Union Budget 2010-11, the Government has allocated US$ 37.4 billion to the infrastructure sector and has increased the allocation for road transport by 13 per cent to US$ 4.3 billion which will further promote the steel industry. Despite many obstacles, Indian steel industry still enjoys significant competitive and natural advantages to emerge as a key player in global steel, which lends it a competitive edge to emerge as a location of choice for steel manufacture. Abundant deposits of iron ore, particularly in the eastern region located in Orissa, Jharkhand and Chhattisgarh is prime destination of steel industry. Your Company visualizes the potential of growth in steel sector. Secondary steel manufacturers have played vital role and has been contributing around 60 to 65% of total Countrys finished steel productions that consume Hot Rolled Coil as a major input. India has emerged as the fifth largest producer of steel in the world and is likely to become the second largest producer of crude steel by 2015-16. India will become the worlds second-largest steel producer by 2012, more than double of its present capacity to 124 million tonnes (MT) as part of the push being given to assist overall infrastructure development. Indias steel consumption rose 8 per cent in the year ended March 2010, over the same period a year ago on account of improved demand from sectors like automobile, infrastructure and housing. The countrys steel consumption increased to 56.3 MMT in the 12 months to March 2010 from 52.3 MMT in the previous year, as per the Ministry of Steel. OVERVIEW OF INDIAN POWER SECTOR: Power Sector for the Indian steel industry plays pivotal role to its competitive edge and price reduction. Waste heat recovery process has been recognized the competitive generation cost of power. In the Indian scenario, electricity sector is predominantly controlled by Public Sector Undertakings of Govt, of India in generation of electricity which includes NTPC, NHPC and NPCI. Nuclear based power generation in the near future in the country shall bridge the gap of generation and demand of power sector. State level Corporations are also involved in the generation of electricity. The intra state distribution is managed by the State Electricity Boards (SEBs) and private companies. Power Grid Corporation of India is responsible for the inter-state transmission of electricity and the development of national grid. India is worlds 6th largest energy consumer, accounting for 3.4% of global energy consumption. Due to Indias economic rise, the demand for energy has grown at an average of 3.6% per annum over the past 30 years. More than 50% of Indias commercial energy demand is met through the countrys vast coal reserve. About 75% of the electricity consumed in India is generated by thermal power plants, 21% by hydroelectric power plants and 4% by nuclear power plants. The country has also invested heavily in recent year on renewable sources of energy such as wind energy. OPPORTUNITIES AND THREATS: Opportunities: * National Steel Policy, 2005 aiming at higher production viz a viz higher consumption. * After the recovery of economic crisis, Europe will witness demand buoyant in housing and white goods industry according to industry sources. * Developing countries in Asia and Africa are focusing more on infrastructure development and are also witnessing strong internal demand. * Liberalized Foreign Direct Investment (FDI) in India and rationalization of taxation. * Demand supply gap is expected to increase in Asian and African countries. * Expected increase in per capital consumption of steel in India and Asian countries. * Higher budgetary support provided for in the Budget for infrastructure development in India. * Decrease in input cost on operation of own mines or otherwise. Threats: * Witnessing input cost rise in raw material. * Volatility rising cost of fuel & crude oil. * Volatility in prices of input cost steel prices in international scenario due to unexpected international events. * Volatility in foreign exchange currency. * Other rising input cost. * Buoyant due to strong growth in demand. COMPANYS PROSPECTS: Company has successfully completed Phase-III of Orissa Project and put to use which will give edge to the cost of production of the existing plants. Commissioning of Phase IV shall enhance the value addition. Production of Billets and HR Coils at its plants will help in improving top line and bottom line of Company in the years to come. Mining of Companys coal blocks at Jamkhani and Bijhan and generation of additional power will further reduce the cost of inputs and saving in cost of production and increase in profitability. Further, the extracting of coal from Rohne Coal Block in the State of Jharkhand will supplement to meet the demand of the Company further enhancing the self reliance. Company is holding 24.09% of total shareholding Allocation of Patal (E) coal block and Chatuburu Iron Ore Mines in the State of Jharkhand to the Company for its proposed Integrated Steel & Power Project will further make the Company truly integrated. 1000 MW Power project in the State of Chhattisgarh is envisaged for uninterrupted supply of power. FINANCIAL OPERATIONAL PERFORMANCE: Term Lending: During the year under review, Company has availed Rupee Term Loan of Rs.380 crores for Orissa Phase-III out of sanctioned Rupee Term Loan of 1,580 crores. It has further availed Rs. 750 crores out of sanctioned Rupee Term Loan of 2,853 crores, ECB of Rs. 450 crores out of sanctioned ECB of Rs. 787.50 crores from SBI Syndication and ECA of Rs. 168.02 crores out of sanctioned ECA of Rs. 356.50 crores from KFW IPEX Bank Gmbh, Frankfurt, Germany for Orissa Phase-IV. During the year, Company has received Long Term Loans/Quasi Equity / Subordinated debt of Rs. 990 crores from Banks. Working Capital: Your Company enjoyed working capital facilities of Rs. 3,600 crores (Fund Based Rs. 1,700 crores and Non Fund Based Rs. 1,900 crores) from consortium of Banks lead by Punjab National Bank. Credit Rating: The Credit Rating agencies Fitch Ratings India (P) Ltd and Credit Analysis & Research Ltd (CARE Ratings) has done the rating of the company. The Ratings assigned by the credit rating agencies are as under:- Fitch Ratings India (P) Ltd: The Fitch Ratings has assigned the Long Term rating of A-(ind). Further, it has assigned the rating of F1+(ind)(SO)for commercial paper (carved out of sanctioned working capital limits) who has also assigned the rating of F2+(ind) for short term bank loans. Credit Analysis & Research Ltd (CARE Ratings): The CARE has assigned the Long Term rating of CARE A-(ind)(Single A Minus). Further, it has assigned the ratings of PR1 (PR one) for short term debt/commercial paper/NCD (carved out of sanctioned working capital limits) who has also assigned the ratings of PR 2+(PR Two Plus) for short term bank loans. INTERNAL CONTROL SYSTEM: The Company has an adequate system of internal control implemented by management having regard to size and nature of business activities of the Company to achieve operational efficiency, accuracy, compliance of policies and procedures, law and regulations and close monitoring. The exercise is carried out across all locations of the Company. This ensures the control and safeguard of the Companys assets against loss through inefficiency, waste, negligence or fraud. Internal Audit functioning is regularly reviewed by the Audit Committee. A follow up audit is carried out to review the progress on recommendation, if any, made. COST AUDIT: In compliance with the Central Governments order, cost audit is conducted every year in accordance with Cost Audit Rules relating to steel plant which further enhances level of operational efficiency and cost control. CONTINGENT LIABILITIES: Details of contingent liabilities are given in notes on Balance Sheet and Profit and Loss Account. STATUTORY COMPLIANCE: Company having complied with all applicable statutory obligations, a declaration of compliance of statutory and legal obligations of various applicable statutes is made by Whole Time Director and Company Secretary at each Board Meeting. QUALITY: Greater emphasis is laid down on total customer satisfaction, continuous upgradation of technology and customer oriented marketing that represents the total commitment to set higher standards for quality assurance. SEGMENT REPORTING: The Company is engaged in iron & steel business, which in context of Accounting Standard 17 is considered only business segment.