Emergent Indust. Management Discussions


The objective of this report is to convey the Managements perspective on the external environment and particularly to steel industry, as well as strategy, operating and financial performance, material developments in human resources and industrial relations, risks and opportunities and internal control systems and their adequacy in the Company during the FY 2022-23. This should be read in conjunction with the Companys financial statements, the schedules and notes thereto and other information included elsewhere in this Annual Report. The

Companys financial statements have been prepared in accordance with Indian Accounting Standards (‘Ind AS) complying with the requirements of the Companies Act, 2013, as amended and regulations issued by the Securities and Exchange Board of India (‘SEBI) from time to time.

COMPANY OVERVIEW

The Company is primarily into international trading of Steel, Low ash Metallurgical Coke, carbon, iron-ore, Coal, Coke and Petroleum Coke products, Manganese ore, ferro alloys and other allied products etc, for supply to various steel and ferro alloys industries.

EXTERNAL ENVIRONMENT AND OUTLOOK

Global Economy

Overview: The global economy was estimated to have grown at a slower 3.20% in 2022, compared to 6% in 2021 (which was on a smaller base of 2020 on account of the pandemic effect). The relatively slow global growth of 2022 was marked by the Russian invasion of Ukraine, unprecedented inflation, pandemic-induced slowdown in China, higher interest rates, global liquidity squeeze and quantitative tightening by the US Federal Reserve.

The challenges of 2022 translated into moderated spending, disrupted trade and increased energy costs. Global inflation was 8.80% in 2022, among the highest in decades. US consumer prices increased about 6.50% in 2022, the highest in four decades. The Federal Reserve raised its benchmark interest rate to its highest in 15 years. The result is that the world ended in 2022 concerned that the following year would be slower. Gross FDI inflows equity, reinvested earnings and other capital declined 8.4% to $55.3 billion in April- December. The decline was even sharper in the case of FDI inflows as equity these fell 15% to $36.75 billion between April and December 2022. Global trade expanded by 2.7% in 2022 (expected to slow to 1.7% in 2023).

The S&P GSCI (benchmark for commodity investments and a measure of global commodity performance) fell from a peak of 4,288 in June 2022 to 3233.4. There was a sharp decline in crude oil, natural gas, coal, lithium, lumber, cobalt, nickel and urea realisations. Brent crude oil dropped from a peak of around USD 120 per barrel in June 2022 to USD 80 per barrel at the end of the calendar year following the enhanced availability of low-cost Russian oil.

Outlook

Outlook: The global economy is projected to grow a weak 2.9% in 2023, marked by sustained Russia-Ukraine conflict and higher interest rates. Global inflation is projected to be 6.5% in 2023 (Source: IMF). On the positive side, the reopening of Chinas economy after the waning of the pandemic, the decline in the European energy crisis and robust US consumption outlook (despite high inflation) remain positives. Interestingly, even as the global economy is projected to grow less than 3% for five years, India and China are likely to account for half the global growth in 2023 (IMF). (Source: PWC report, EY report, IMF data, OECD data)

Indian Economy

Overview: Even as the global conflict remained geographically distant from India, ripples comprised increased oil import bills, inflation, cautious government and a sluggish equity market. India reported an estimated economic growth of 6.8% in FY 2022-23. India emerged as the second fastest- growing G20 economy in FY 2022-23. India had retained its position as the fifth-largest global economy and was seen as a principal driver of the global economy (with China).

Outlook: India is expected to grow 6.8% in FY2024, catalysed in no small measure by 35% capital expenditure growth by the government. The growth could also be driven by broad-based credit expansion, better capacity utilisation and improving trade deficits. Headline and core inflation rates could trend down. Private sector investments could revive. According to the World Bank April 2024 projections, Indias GDP is projected to expand by 6.3 percent In FY24, supported by domestic demand and increased public investment. Indias retail inflation rate could decline from 6.6 percent to 5.2 percent in FY24.

STEEL INDUSTRY

Global Steel Industry

Global steel demand was impacted by high inflation and consequent aggressive monetary policy tightening by major central banks, coupled with supply chain bottlenecks. In 2022, the developed economies experienced a significant decline in steel demand due to factors such as monetary tightening and surging energy expenditure. Following a substantial decrease of 6.2% during CY 2022, there is an anticipation of a modest rebound with a projected 1.3% increase in steel demand for CY 2023. Chinas steel demand contracted by 4% in 2022. In CY 2022, total crude steel production stood at 1,885 MnT, down 3.9% y-o-y, as steel producers reduced output in response to weak demand and weak margins due to falling steel prices and elevated raw material costs. The worlds largest steel producer China recorded production of 1,018 MnT, a 1.6% y-o-y decline and Japans production fell 7.4% y-o-y to 89.2 MnT. This was partly offset by a 6.0% y-o-y increase in production to 125.3 MnT in India. Source: JPC

Indian Steel Industry

India is the second-largest producer of crude steel in the world, with an output of 126.2 MnT in FY 2022-23. Crude steel production rose 5.0% year-over-year while finished steel consumption rose 13.3% to 119.9 MnT. Although production and consumption increased due to robust domestic demand, margins came under pressure due to high raw material and energy costs. The imposition of export duty on steel led to the built-up of domestic inventories, as exports became unviable in the weak global price environment. Further, few low-priced shipments from Russia and duty-free steel from FTA countries made their way to domestic markets, as imports rose sharply putting more pressure on steel prices5. Source: JPC

Industry Outlook

Against the backdrop of soft global economic outlook, India remains a bright spot with rising demand for steel. India domestic demand grew 13.3% year on year in FY 2022-23, recording consecutive two years of double-digit growth. According to ICRA, domestic steel demand is estimated to grow at 7-8% in FY 2023-24, owing to strong demand from end-user industries such as construction, infrastructure, automobile, real estate, and consumer durables and enabling steel players to maintain high-capacity utilization levels. In addition, the benefits of easing raw material prices are expected to flow through Q2 FY 2023-24 onwards. Further, the rollback of export duty should support exports, though near-term outlook remains challenging.

Opportunities and threats:

The forecast for steel demand suggests that it will continue to grow over the next few years. By 2026, the global industry is expected to reach a production level of 2.2 billion metric tonnes. Several factors, like increasing demand for steel products in emerging markets, technologies that make steel production efficient, are driving this growth in the steel industry.

Raw material costs account for a large proportion of the total cost of steel production. The price of raw materials can fluctuate based on supply and demand, which can significantly affect steel demand. The global steel industry uses about 2 billion metric tonnes of steel iron ore in crude steel production. So, changes in the price of iron have a significant impact on steel production. Along with the raw material costs, factors like the type of steel being produced and the size and scale of the operations also influence the steel demand.

The steel industry is highly global, as steel trade between countries is regular. Several factors affect the demand for steel production in different parts of the world. When trade barriers are curtailed between countries, it strengthens trade volume and typically results in lower steel prices. This development can impact the steel industry positively by increasing demand. But in the case of a hike in prices, the effect can be the opposite, leading to reduced demand for steel.

Government regulations have a major influence on how steel is produced and traded. They can have a positive or negative impact on the steel industry, depending on the specific regulations. In some cases, the regulation is favourable, which helps promote a level playing field for domestic steel producers.

Given the above scenario, it is important on steel industry to focus on cost reduction, better management of volatile prices, quality improvement, tapping export opportunities, raw material security and to remain competitive in current market. The Company is committed to create more value for all of its stakeholders. The Companys management are taking initiatives to strengthen its profitability.

Financial performance

During the year under review, the financial performance for the company was better as compared to last financial year:

(Rs. In lacs)

2022-23 2021-22
Revenue from operations 15054.02 10473.28
Other income 400.12 337.28
EBITDA 209.70 205.74
Depreciation and amortization expenses 9.56 5.80
Interest expenses 1.54 0.84
Profit before tax 198.60 199.10
PAT 149.23 147.59
Other Comprehensive Income (net of taxes) 0.91 (1.75)
Total comprehensive income for the year 150.14 145.84

Review of Performance

During the year under review, the Company generated revenue of Rs. 15054.02 lacs as compared Rs. 10473.28 lacs in FY2021-22. It recorded an EBITDA of Rs. 209.70 lacs in FY2022-23, while in FY2021-22 EBITDA stood at Rs 205.74 lacs. Whereas EBITDA margin is increased to 1.92 % in FY2022-23 from 1.90% of FY2021-22. Net Profit after Tax of the company is Rs.149.23 lacs in the year under review as against profit of Rs.147.59 lacs in the previous year. The cash flows of the Company in FY 2022-23 are Rs. 929.74 lacs as compared to negative cash flows of Rs 63.17 lacs in 2021-22. The Shareholders funds increased from Rs. 2226.34 lacs as on 31st March, 2022 to Rs.2376.48 lacs as on 31st March, 2023.

Key financial ratios

Details of significant changes (i.e., change of 25% or more compared to the immediately previous financial year) in key financial ratios, alongwith detailed explanations

Particulars

2022-23 2021-22 Change Change (%)
Current Ratio - Note 1 4.44 2.39 2.05 85.82%
Inventory turnover - Note 2 25.10 10.04 15.06 149.99%
Net capital turnover Note 3 6.89 5.14 1.75 34.12%
Net Profit Margin Note 4 0.99 1.41 (0.42) (29.66%)
Return on Net Worth 6.26 6.50 (0.24) (3.65%)

Notes:

1. Current ratio improved from previous year is mainly due to better management of cash flows and timely payments of Current liabilities which results in low payables as on 31/03/2022.

2. Few contracts undertaken during the year were having longer periods than the normal period therefore the movement of Inventory were also slow.

3. During the year net working capital has been improved and Sales increased compared to previous year therefore increase in Net working capital ratio in line with both the factors.

4. Due to decrease in gross margins in the year under review, the Net Profit Margin decreased to 0.99 % in FY2023 from 1.41% in FY2022.

5. Return on Net Worth marginally lower due to lower gross margins in FY2023 as compare to FY2022.

Risks and concerns

The identification and evaluation of risks play a crucial part in the sustainability of any organization. The Company adopted a robust risk management framework for identifying and evaluating risks and opportunities.

The key risks are global steel demand scenario, domestic steel demand, economic slowdown, increase in financial charges, non-availability (or undue increase in cost) materials and services, coupled with market fluctuations.

Mitigation of Risk /Risk Management

The Board identifies and categorizes risks in the areas of operations, finance, marketing, regulatory compliances and corporate matters. The Company reviews the Risk Area periodically to identify potential business threats and takes suitable corrective actions. The Internal Auditor expresses his opinion on the level of risks during the audit of a particular area and reports to the Audit Committee if any corrective actions / steps are being taken as and when necessary, in a continuous manner by the company.

Human Resources and Industrial Relations

Human Resources Department ("HRD") works continuously for maintaining healthy working relationship amongst the staff members. The underlying principle is that staff at all levels are equally instrumental in attaining the

Companys goals. Training programmes are conducted to update their skills. Senior management is easily accessible for counselling and redressal of grievances. The HR department continuously strives to maintain and promote harmony and coordination among staff and members of the senior management. The total number of employees of the Company as on 31st March, 2023 is 13. The Company has maintained healthy and cordial industrial relations during the year.

Internal Control Systems and their adequacy

The Company has strong internal control procedures commensurate with its size and operations. The Board of Directors, responsible for the internal control system, sets the guidelines and verifies its adequacy, effectiveness and application. The Companys internal control system is designed to ensure management efficiency, measurability and verifiability, reliability of accounting and management information, compliance with all applicable laws and regulations and the protection of the Companys assets. This will help identify and manage the Companys risks (operational, compliance-related, economic and financial).

Cautionary Statements

Certain statements in the Management Discussion and Analysis Report describing the Companys objective and predictions may be "forward-looking statements" within the meaning of applicable laws and regulations. Actual results may vary significantly from the forward-looking statements contained in this document due to various risks and uncertainties. These risks and uncertainties include the effect of economic and political conditions in India, volatility in interest rates new regulations and government policies that may impact the Companys business as well as its ability to implement the strategy.