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.