Emergent Industrial Solutions Ltd Management Discussions.

COMPANY OVERVIEW

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 2021-22. 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.

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

The global economy enters 2022 in a weaker position than previously expected. Rising energy prices and supply disruptions resulted in higher and more broad-based inflation than anticipated, notably in the United States and many emerging market and developing economies. Further, the ongoing retrenchment of Chinas real estate sector and slower-than-expected recovery of private consumption and the ongoing tension between Russia and Ukraine have limited the growth prospects.

Outlook

Global growth is projected to slow-down from an estimated 6.1% in 2021 to 3.6% in 2022—0.8 percentage-point lower than what was envisioned in the last World Economic Outlook (WEO) of January 2022, largely reflecting forecast markdowns in USA and China. In USA, a revised assumption of removing the Build Back Better fiscal policy package from the baseline, earlier withdrawal of monetary accommodation, and continued supply shortages have induced a downgrade in the outlook by 1.2 percentage-points. In China, pandemic-induced disruptions related to the zero- tolerance COVID-19 policy and protracted financial stress among property developers have induced a 0.8 percentage- point downgrade. Global growth is expected to slow down to 3.6% in 2023.

Elevated inflation is expected to persist longer, with ongoing supply chain disruptions and high energy prices continuing in 2022. Risks to the global baseline are tilted to the downside which is primarily brought by the new COVID-19 variant which may prolong the pandemic and induce renewed economic disruptions. Moreover, supply chain disruptions, energy price volatility, and localized wage pressures have enhanced the uncertainty around inflation and policy paths. Other global risks may crystallize with the surging geopolitical tensions, and the ongoing adverse climate conditions leading to the probability for natural disasters. With the pandemic continuing to maintain its grip, the emphasis on an effective global health strategy is more salient than ever. Worldwide access to vaccines, tests, and treatments have become essential to mitigate the risks posed by new variants of COVID-19. Monetary policy in many countries will need to curb inflationary pressures, while fiscal policy will need to prioritize health and social spending.

Indian Economy

Amidst the challenges brought by the COVID-19 pandemic leading to disruptions in supply chain and surging inflation rate, the Indian Government introduced various policies to cushion the impact on the domestic economy and in specific vulnerable sections of society and the business sector. Through its policies, the Government significantly increased capital expenditure on infrastructure projects to build back medium-term demand and aggressively implemented supply-side measures to prepare the economy for a sustained long-term expansion. With the vaccination programme having covered the majority of the population, recovering economic momentum and the likely long-term benefits of supply-side reforms in the pipeline, the Indian economy is in a good position to witness GDP growth of around 8.0%-8.5% in 2022-23.

STEEL INDUSTRY

Global Steel Industry

In CY 2021, the world steel production has increased by 3.7%, while, Steel production has recorded a double-digit growth (on account of lower base) in all major steel producing countries, Chinas steel production is decreased by 3% reducing Chinas percentage share in global steel production from 56% in 2020 to 54% in CY 2021. Current global Steel production level indicates that it has reached to pre-COVID level in CY 2021.

Indian Steel Industry

As per World Steel Association, crude Steel production in India increased by 18% driven by rising demand in the country and exports. Crude steel production in CY 2021 was 118 Million Tonnes as compares to 100 Million Tonnes in CY 2020, registered growth of 18% from last year.

Rating agency India Rating expects ongoing Russia-Ukraine conflict to impact metal and mining companies cash flow substantially in FY 2023 if raw material and energy prices continue to rise beyond first quarter of FY 2023. Further, due to war situation, Russia & Ukraine steel production is affected creating a space for Indian Steel manufacturers to bridge the supply gap by exporting the steel products to European countries. However, high price volatility and raw material supply uncertainty would be a significant issue.

Overall, in CY 2022, the global steel industry is being impacted as steel users and producers are hit by disrupted supply chains, commodity price increase, geo-political tensions, increased freight rates, increased fuel rates, raw material shortage and price volatility, particularly, in Coking Coal, Coke, PCI and Ferro Alloys etc.

Industry Outlook

As per World Steel Association Short Range Outlook published in April, 2022, demand for CY 2022 to increase by mere 0.4% while it is forecasted to increase by 2.2% in CY 2023. However, steel demand in India is forecasted to grow at 7.5% and 6% in CY 2022 & CY 2023 respectively showing strong outlook for Indian Steel industry in near future. Steel industry profitability is expected to sustain assuming Russia-Ukraine war remain confined to Ukraine and situation does not deteriorate further.

Key factors to be considered for outlook are as follows :

a. High and Volatile Coal & Coke Prices: Prices of one of major raw material which the company has been dealing in - Hard Coking Coal (HCC Peak Down) increased sharply to ~ 4.5 times during FY 2021-22 while Coke prices became almost double from USD 370/tonne to USD 692/tonne in the same period. Further, prices are expected to remain at this level in near short term.

b. Automobile industry may revive in FY 2023 after contracting ~ 6% in FY 2022 over FY 2021 with an expected improvement in semiconductor supply. Construction and manufacturing industry is likely to be supported by increased spending on infrastructure by government. Hence, gradual revival of Auto considering pent-up demand, increased activities in Construction and industrial sector will sustain demand for Steel products in the country.

c. While there are specific challenges being faced by Steel industry in India, overall demand & sentiments about steel industry are bullish and hence substantial fund inducement and increase in CAPEX is expected by Private Sector.

d. Various Government Initiatives like PLI schemes for speciality steel & Vehicle scrappage policy are expected to boost the production.

e. Raw material shortage and price volatility may continue to disrupt overall supply chain in near short term and may impact the profitability of the steel manufacturers. However, as and when the geo-political situation is eased out, the situation is expected to come back to normalcy.

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, due to rise in prices and geopolitical issues the company under performed as compared to last Financial year :

(Rs. In lacs)

2021-22 2020-21
Revenue from operations 10473.28 51391.12
Other income 337.28 525.36
EBITDA 205.74 619.70
Depreciation and amortization expenses 5.80 5.55
Interest expenses 0.84 37.18
Profit before tax 199.10 576.97
PAT 147.59 429.33
Other Comprehensive Income (net of taxes) (1.75) 2.59
Total comprehensive income for the year 145.84 431.92

Review of Performance

During the year under review, the Company generated revenue of Rs. 10473.28 lacs as compared Rs. 51391.12 lacs in FY2020-21. It recorded an EBITDA of Rs. 205.74 lacs in FY2021-22, while 619.70 lacs in FY2020-21 EBITDA stood at Rs 205.74 lacs. Whereas EBITDA margin is increased to 1.90% in FY2021-22 from 1.19% of FY2020-21. Net Profit after Tax of the company is Rs. 147.59 lacs in the year under review as against profit of Rs.429.33 lacs in the previous year. The cash flows of the Company in FY 2021-22 is Rs. 63.17 lacs as compared to 533.55 lacs in 202021. The Shareholders funds increased from Rs. 2080.50 lacs as on 31st March, 2021 to Rs. 2226.34 lacs as on 31st March, 2022.

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 2020-21 2020-21 Change Change (%)
Current Ratio 2.39 2.08 0.31 14.90%
Debtor turnover - Note 1 0.10 0.02 0.08 400.00%
Operating Profit Margin - Note 2 0.68% 0.45% 0.23 51.11%
Net Profit Margin - Note 3 1.37% 0.83% 0.54 65.06%
Return on Net worth- Note 4 6.63% 20.64% -14.01 -67.88%
Inventory turnover (in times) - Note 5 10.04 58.67 -48.27 -82.89%

Notes:

1. Debtors as on 31/03/2022 is Nil whereas debtors as on 31/03/2021 was related to LC interest charges receivable from the customers. The Company does not sell material on credit to its customer thus, it is short term in nature.

2. The Operating Profit Margin increased from 0.68% in FY2022 from 0.45% in FY2021, is mainly due to better realization of sales in terms of price.

3. Due to increase in non-core income in the year under review, the Net Profit Margin increased to 1.37% in FY2022 from 0.83% in FY2021.

4. The decrease in return on Net-worth from 20.64% in FY2021 to 6.63% in FY2022, is in line with decrease in Net profit during the year under review.

5. Due to decline in purchases in last quarter of the year under review, the inventory turnover ratio decreased from last year.

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, 2022 is 12. As on date, all employees of the Company are fully vaccinated. The Company has maintained healthy and cordial industrial relations during the year.

Internal Control Systems and their adequacy

The Company has Internal Controls systems, commensurate with the size, scale, and complexity of the Companys operations. The Board of Directors of the Company is responsible for ensuring that controls have been laid down by the Company and that such controls are adequate and operating effectively. The internal control framework has been designed to provide reasonable assurance with respect to recording and providing reliable financial and operational information, complying with applicable laws, safeguarding assets from unauthorised use, executing transactions with proper authorisation and ensuring compliance with corporate policies. The Companys internal control systems are commensurate with the size and operations of the business and is in line with requirements of the Companies Act, 2013.

Cautionary Statement

The Management Discussions and Analysis describes Companys projections, expectations or predictions and are forward looking statements within the meaning of applicable laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include economic conditions affecting demand and supply and price conditions in domestic and international market, changes in Government regulations, tax regimes, economic developments and other related and incidental factors.