ECONOMIC OVERVIEW
This year has been marked by several historic economic policy developments. On the domestic side, a constitutional amendment paved the way for the long-awaited and transformational goods and services tax (GST) while demonetisation of the large currency notes signaled a regime shift to punitively raise the costs of illicit activities. On the international front, United Kingdoms decision to leave the European Union and the outcome of presidential elections in United States of America, both the events are expected to have long-term effects on the global economy. India has emerged as one of the fastest growing major economy in the world as per the Central Statistics Organisation (CSO) and International Monetary Fund (IMF). As per the Economic Survey 2016-17, the Indian economy should grow between 6.75% and 7.5% in Financial Year 2017-18. The Indian Governments decisive policy manoeuvres towards ensuring fiscal consolidation and pegging back inflation will help it maintain economic stability in the years ahead. Indias eight core infrastructure industries coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity registered cumulative growth of 4.9% during the April-November period compared to 2.5% a year ago.
GLOBAL STEEL INDUSTRY
Steel market conditions at a holistic level at the end of 2016 was mixed but overall optimistic, looking upto a rebound in Chinese market conditions to resurrect. The system, despite being weighed down by issues on stability of global economic/manufacturing growth and the streamlining of still-lingering excess capacity situation.
During the period under review the growth in the global steel demand was sluggish, mainly attributable to weaker than expected performance in the emerging and developing economies. The slowdown in the emerging economies has revealed in deceleration in steel usage. Growth in China which had been the main driver for both demand and supply in the past, has moderated significantly reflecting the structural transformation of the economy. China has been exporting steel despite several barricading measures taken by the affected countries.
With demand remaining lukewarm for major part of the year and impact of excess capacity remaining unabated, steel prices remained on uneven grounds generally only to witness some bouncing back globally towards the end of the year.
An equally-strong rally was noted in global cooking coal prices specially in latter part of 2016, where rising demand in face of a stringent supply side impacted price markedly.
World crude steel production was stagnant in 2016. However, Asia is the only major steel producing region showing moderate increase in steel production and Indias steel production has shown the highest growth. Worlds steel demand grew 0.2% in 2016 and is set to grow 0.5% in 2017.
INDIAN STEEL INDUSTRY
During the year, Indias steel production has shown the highest growth. Indian steel demand is set to grow at 5.7% in 2017 vis-a-vis 5.4% growth in 2016, highest among the large economies. India is set to beat Japan to second position in 2018. The steel vision by Government of India envisage creation of crude steel capacity of 300 MTPA by 2030-31 and per capita steel consumption of 160 kg against current 61 kg in India. In India mild steel consumption increase during 16-17 is expected at 76.78 MT - a likely growth of 4.5%. Consumption of TMT is estimated to be 27.4 MT (projected growth of 4%).
Though China continued to rule the world crude steel production and consumption scenario in 2016, the year saw the sustenance of India as the most stable market and a major global investment destination and the country maintained its global ranks of being the 3rd largest crude steel producer and 3rd largest consumer of finished steel during the year.
Performance of the Company
The Companys Greenfield Integrated Steel & Ductile Iron Pipe Plant with 2.51 Million Ton Per Annum (MTPA) capacity as detailed hereunder is under construction and erection:
Finished Products | MTPA |
Wire rods | 0.60 |
TMT Bars | 0.85 |
Ductile Iron Pipe | 0.33 |
Billets | 0.33 |
Pig Iron | 0.40 |
Total | 2.51 |
The Company is selling Pig Iron, Billets, TMT Bars, Wire Rods and Ductile Iron Pipes in the open market. Its flagship product - Ductile Iron Pipe has established its presence in the market and is contributing significantly to Companys growth. Continuous efforts for reduction of production cost and improvement in operational efficiency has resulted in the Company being able to report positive Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) for the year.
Owing to the shutdown of the Oxygen Plant as a result of an accident and to sustain the production level, your Company had to resort to procurement of oxygen from Open Market which resulted in increase in cost and increase in operating and maintenance cost which adversely affected performance of the Company to some extent. Wide fluctuation in raw material prices, especially imported coking coal, also had a negative impact. Effective steps towards implementing better guidelines for operational procedure and precautionary measures thereto have been put in place. Continuous efforts were initiated to improve performance of the Company in both, quantitative and qualitative terms.
Fixed Assets (including capital work in progress)
As on 31st March 2017, the Gross Block of Fixed Assets of the Company was Rs. 1,239,868.43 lakhs, comprising of Rs. 179,907.04 lakhs of capital work-in-progress and a Net Block of Rs. 11,71,092.43 lakhs (including capital work-in-progress of Rs. 179,907.04 lakhs). Capital work-in-progress was primarily on account of expenditure including advances towards plant & machinery and construction & erection thereof. The expenditure incurred during the construction period is classified as Project Development Expenditure pending capitalization to be allocated to the asset on the completion thereof. Necessary details as per Schedule III of the Companies Act, 2013 have been disclosed in the notes to accounts forming part of the Annual Accounts for the year 2016-2017.
Indebtedness
The total secured outstanding indebtedness (including interest) as on 31st March 2017 is Rs. 1,237,661.53 lakhs out of which the long term borrowings is Rs. 1,168,032.26 lakhs and short term borrowings (including interest) is Rs.69,629.27 lakhs.
OPPORTUNITIES AND THREATS
Huge global overcapacity and demand slowdown has resulted in historically low international steel prices. The primary factors, amongst others, which could affect the operations/performance of the Company in near future are:
O Weak economic growth
O Raw material security and high logistics cost issues
O Steel sector recognized as stressed by the Banks
O Volatility in supply of prices of raw materials or protracted low steel prices.
O Increased competition in steel industry.
O Excessive capacity in the steel industry may weigh on the profitability of steel producers.
O Competition from foreign players mainly China, Japan, Korea and CIS.
The political and economic importance of steel industry necessitates changes in the steel sector through export benefits, duty protection, etc. The operating efficiencies would largely improve on account of economies of scale, reduction in administrative and overhead cost. The expected growth in housing sector, increasing urbanization of rural India and increase in investments in infrastructure projects are expected to improve industry prospects.
COMPETITION
The long-term competitiveness of the Steel industry in India will depend on the cost of doing business including regulatory costs, logistics costs for inbound and outbound transportation of raw material and finished goods, finance costs as also the availability of energy at competitive costs. We have seen significant increase in levies, duties and regulatory costs in this sector in the recent years and also high interest rates and other incidental costs. If this trend continues in the future, it will seriously impact the long term prospects of steel sector. The Company has designed an efficient distribution network and robust marketing set up to capture new markets and to remain competitive. Efficient sales process & improved service levels have resulted in customer confidence and positive referrals. The production of Wire Rod has strengthened the Companys presence in the segment.
Strengthening of marketing team for the sale of products has resulted in product being sold across the country thereby making a pan India presence of the Company. With inclusion of distributors, from time to time, for the sale of products across the country, the Company is aggressively making products available for various sections of consumers. Hence, a strong foundation has been laid for the marketing of the products by creation of the marketing team and continuous increase in the customer base which is reflected in the sale of Pig Iron, Billets, TMT bars, Wire Rod and Ductile Iron Pipes. Initiation of branding activity has helped us to penetrate retail markets and enhance our reach to various regions across India.
In anticipation of increase in demand of Billets, TMT bars, Wire Rod and Ductile Iron Pipes in future, the Company is revamping production facilities. Your Company believes that quality and service are sole parameters that will help to develop loyal customers through long term contracts. Your Company has a Customer Services Department, to address complaints and queries raised by customers. It has helped to map consumer perceptions for products and develop focused Brand communication.
RISK MANAGEMENT
The Steel Industry is cyclical and volatile. A willingness to take entrepreneurial risk enables the Company to exploit the opportunities, as they drive. To achieve balance between risk management and maximizing profitability, Your Company is adept at controlling the balance by grasping business opportunities and by ensuring that risk transgression is not pursuit of profit of the Company. Risk Management is a systematic, cyclical process, involving a series of steps from identification of a risk, to the analysis, evaluation and management of risk and finally to monitor the measures taken in reaction to the risk.
The Company has a proper Risk Management and Control framework to ensure that the risks are identified and managed effectively. The risk and mitigation measures are weaved into strategic plans and reviewed periodically as and when required. The purpose of the risk management is to make it more certain that growth and earnings targets as well as strategic objectives are met. The Company has already undertaken, extensive risk management efforts via a structurally compiled Risk Management Manual, which is a comprehensive profile of the key risks to the Company, identifying the key gaps in managing those risks and developing preliminary action plans to address those risks. These efforts would, inter-alia, facilitate:
(a) to respond to the Boards need for enhanced risk information and improved mitigation plan(s).
(b) to provide the ability to prioritize, manage and monitor the risks in the business
(c) to formalize the explicit requirements for assessing risks on an on-going basis, including an effective internal control and management reporting system.
Market Risk
The key factors that drive your Companys position are its market share and customer profile. A wide product range enables Your Company to cater to larger client base and thus diversify risk. Your Company has put in efforts for implementing the initiatives that enable it to identify and make assessment of the causes of losses and sharing such information among top management and related departments in the Company for corrective measures.
Raw Material Risk
The operations of Your Company is primarily dependent on iron ore and coking coal which are linked to international demand for and supply of resources and hence exposed to possible increase in price of raw materials. Timely and cost-effective raw material supply is critical to growth. Your Company is exposed to the risk of price fluctuation of raw materials as well as of finished goods. Your Company proactively manages the risk through inventory management, proactive vendor development practices and robust marketing network.
Foreign Exchange Rate Risk
The currency exposure is on account of exporting goods and for import of equipment and other goods for commissioning of the Plant as well as for import of raw materials, which is covered by using currency transactions on the spot market and/or forward market. Your Company has adopted a prudent and conservative risk management strategy in line with the Foreign Exchange Policy approved by the Board.
Interest Rate Risk
Interest rate conditions and fluctuations in financial markets have impact on the earnings/performance of the Company. To complete the commissioning of the Plant and to meet the working capital requirements, your Company procures/avails funds from various Banks/Financial Institutions, from time to time. In some of the cases financial liabilities are exposed to the risk of changing interest rates. To manage these risks regular interest rate analysis are done, from time to time.
Sales Risk
Steel prices are influenced by many factors including demand, raw material cost, capacity utilization and improvement in manufacturing process. The said risk is countered by Your Company on an on-going basis through different measures, monitoring the trend in the market and if necessary, production is adjusted accordingly.
Credit Risk
Your Company extends credit to its customers and hence exposed to credit risk in form of accounts receivables. The Company regularly reviews customers credit limits and appropriately manage the credit exposure under those limits. Your Company continuously performs credit evaluation on the financial conditions of customers and based on such evaluation take collateral, if required, to secure receivables.
Construction Risk
The Plant of the Company is under construction and erection. The Company has taken out appropriate insurance against the potential losses and liability risks to ensure that potential financial consequences of any risks which have arisen gets eliminated/limited.
Technology Risk
The Company has in place reporting framework with lead indicators that reliably flags emerging risks while they can be efficiently mitigated. This ensures that the Plant is equipped with updated technologies in order to serve customers and secure cost competitiveness. This would facilitate in long term increase in productivity across supply chain and improved market valuation.
Environment Risk
The existing environmental regulation may have impact on the earnings of the Company. The increase volume and scope of regulations is increasing the cost of compliances, risk of noncompliance and delays while interacting with regulators. Your Company has robust compliance tool in place that ensures adherence to all applicable laws and regulations.
INTERNAL CONTROLS
The purpose of the internal control is to prevent risk arising in course of operations by adopting appropriate controls and process, especially with regard to conformity with the laws, compliance with the strategy, the quality of accounting and reporting, the quality of process and protection of assets amongst others.
Your Company has an effective internal control system commensurate to its size, scale and complexities of its operations. M/s K M Gupta & Co, Chartered Accountants, Internal Auditors of the Company have conducted the Internal Audit in line with the scope formulated, functioning, periodicity and methodology agreed with the Audit Committee. The reports furnished by them are exhaustive and detailed discussion are held from, time to time, on their findings/observation with the Management. The Internal Auditors monitors and evaluate the efficacy and adequacy of the internal control system in the Company, its compliance with operating systems and accounting procedures and policies adopted by it. Based on the reports of the internal audit, process owners under take corrective action in their respective areas and thereby strengthening the controls. Significant audit observations and corrective actions thereon are presented to the Audit Committee, from time to time. To maintain its objectivity and independence, the Internal Auditors reports to the Chairman of the Audit Committee. The Company has appointed consultants/professionals to conduct Cost Audit and Secretarial Audit and observations made, if any, are reviewed by the Management periodically and corrective actions, if required, are taken.
INDUSTRIAL RELATIONS AND HUMAN RESOURCE (HR) MANAGEMENT
Your Company recognizes people as the primary source of its competitiveness and continues to focus on peoples development by leveraging technology and developing a continuous learning human resource base to unleash their potential and fulfill their aspirations.
During the period under review many HR initiatives which are directed towards building a knowledge sharing and performance enhancing organizational culture were undertaken as mentioned below:
O Strong emphasis on structured communication sessions for all sections of workmen across departments.
O Skill development Training and engagement programmes for workers in different categories.
O Structured training and counselling session for improvement of work place behavior and discipline through Central Board for Workers Education (Government of India)
O Ensuring compliance of all Labour Statutes.
O Effective grievance redressal mechanism is in place.
O The Performance Management System and Goal Setting exercise has been aligned to support the business plan of the Company.
O Formal Reward and Recognition programme is in place for all employees to encourage superlative performance and recognise outstanding individual and team achievements and further improve engagement levels.
O Structured training intervention is in place to address behavioural and technical skill gaps through launch of annual training calendar.
O Periodic meetings with all employees with Director and Senior Management for providing business updates and open house interaction.
Safety at project site, medical care requirements of workers and on the job training is being provided at the Plant to avoid mishaps and ensure high level of security, safety and confidence among employees.
We strongly believe that a strong team only can enable an organization to gain edge in the business. At Electrosteel we maintain strong focus on preserving and nurturing our people through various employee engagement initiatives like continuous education, training and developmental programmes. Personal and professional growth of the employees has always been a concern for us. We like our people to grow with the business, as we believe growth of people ensures over all business growth. Therefore, Electrosteel maintains a budget separately for employee development programmes with human face in addition to internal development measures to augment managerial and technical capabilities.
Your Company recognizes Human Resource as its most important assets and is constantly engaged in enriching the value and developing competencies of Human Resources through various development & training programmes. We improve our team building and encourage family bonding through various employee engagement social activities.
During the year, Your Company has maintained cordial relations with the employees and there has been no material development in Human Resources/Industrial Relations front. The number of employees directly employed in the Company as on 31st March 2017 was 2153.
CORPORATE SOCIAL RESPONSIBILITY
Corporate Social Responsibility is at the front of Electrosteel Steels Limiteds (ESL) operating Philosophy and in pursuance of this policy the Company has always walked that extra mile to develop strong and sustainable relationships with the communities in its operational areas. The Company, in its endeavor to attain new bench marks in excellence and the delivery of responsive and responsible socio-economic facilities to the communities, designs CSR programs in consultation and participation of stakeholders. It aims to plug the gaps in social disparities and in this regards undertakes many innovative and sustainable programs which act as catalysts in making deep penetrating changes in the socio-economic quality of daily life of the villagers. Concerted efforts are made to ensure up-liftment of the deprived sections of society through community based development initiative in bringing changes from the grassroots to upwards. Some of the many schemes it undertakes in various segments are listed below:-
HEALTH: The Company runs a primary health Center, in Chandaha, in Chas Block, Bokaro, under the Sparsh Trust banner, philanthropic wing of the Company. These facilities are designed to provide responsive and qualitative medical services on a 24x7 basis with qualified doctors and nursing staff in attendance. It also has a comprehensive range of diagnostic and supporting medical instruments to attend to and provide quick and healing treatments to its patients. The hospital also has an inpatient facility for its underprivileged sections. The Health research Centre (HRC) also has an ambulance facility to attend to emergency calls and transfer critically ill patients to referral and specialty hospitals in Bokaro and other locations. More than 2000 patients from 20 villages have availed of this facility during the year.
The Company also runs various awareness camps and preventive health programs for the communities around its operating areas. During the year the Company conducted two HIV-STD camps for truckers and the labourers in tie up with National Aids Control Organisation (NACO), a two day eye/cataract camp in collaboration with Jay Prakash Narayan Eye Hospital, one Blood donation camp with tie up with Red Cross Society, Safe Motherhood program at 10 places, Diarrhea management programs, Vector Borne disease Prevention Program, etc. In appreciation, the Red Cross Society and NACO have evinced keen interest in jointly undertaking these programs with your Company in the future.
Company also runs Mobile Health Camps in the villages around its operational areas on a daily basis as a Preventive health Care program. These Mobile Clinics comprise of a qualified and experienced doctor, a qualified Pharmacist along with a good supply of quality medicines which are provided free of cost. This unit visits each village on a biweekly basis. 200 such camps were held during year and more than 3500 patients availed of this scheme.
In addition the Company also conducts Bleaching powder distribution and sprinkling activities during monsoon season as preventive measure across villages. Under these programs, water bodies such as wells, ponds, tube wells etc. are de-sanitized by sprinkling of bleaching powder. Even schools and other potential threat areas from vector borne disease are disinfected by this method. The villagers are also given training and free supply of bleaching powder and shown where and how to use this method. Around 30 villages were taken up in this program during the year and helped in the prevention of diseases.
EDUCATION: Company also emphasis on the development of basic education and skills of various segments of society. As a primary step the Company has undertaken the development of basic infrastructure in schools around it. It has helped in the construction and up gradation of pucca classrooms, school kitchens and toilets as well as setting up of laboratories and libraries in these schools. Also the provision of safe drinking water and sanitization were undertaken in many government and private schools. These schools were provided KENT made water filters and where ever needed filter candles were also replaced on regular basis. Training is also provided to the students of 48 schools and 15 Anganwadi is in the use of first aid techniques and their benefits. 35 schools were also provided first aid boxes stocked with the necessary medicines and these medicines are also restocked whenever needed free of cost.
One of the most neglected aspects of education in villages or backward communities is the unavailability or lack of extra curriculum activity and sports opportunities. Your Company has made a sustained and sincere effort to provide these facilities to the children of these areas. Your Company has provided sports equipment such as footballs, volley ball kits, skipping ropes, Badminton kits to more than 15 school so that these children also get to develop their talents in such activities. As an added input, your Company has also appointed trained and qualified Physical
Trainers/Sports teachers to impart training/classes in these activities. The Company has also appointed teachers to impart drawing classes in selected schools. As an incentive to the students, competitions and tournaments are held in all the schools on their annual day in which competitions in various categories and sports are held with prizes being distributed to winning students. A mega football tournament was also held among these schools and from the participants, 36 talented children, 18 boys and 18 girls, were chosen for advanced training and talent enhancement. A mega drawing event was also held this year. Around 300 students selected from 40 schools got an opportunity to participate, in three drawing categories, and from these 24 winners were awarded prizes.
The Company also lays stress In the matter of promotion of quality education in youths, children and women. In this regard it has set up special Tuition classes and Prerna Classes for school going children and youths. Adult education classes to literate women have been started in this year and more than 100 such uneducated women are getting benefitted from this initiative supported by literacy mission, Government of Jharkhand. Your Company has set up 8 tuition classes in various villages and was attended by more than 500 children. It also runs 9 Prerna classes in select locations which provide special coaching classes to 120 students who would be appearing for Board exams in 2017. Only underprivileged students are eligible for this tuition classes at free of cost which runs for one year and all supporting teaching materials along with quality teachers are provided by ESL to help them secure good marks. At least 70% students from the Perna Classes secure first division every year. Company provided 2 Teachers in PSM School on the request of villagers.
WOMEN EMPOWERMENT: Women form a very large segment of Indian society but they are highly neglected and exploited. Company has made efforts to bridge the gap for them who stays around its operational areas. To make women independent and self-reliant the CSR Department conducts many schemes that help them realize their potential and made them self-reliant. 102 SHGs (Self Help Groups) operating in these villages which are being run by women under the guidance of the NGO Sparsh. The women have been provided guidance in the matter of credit culture of making savings, how to keep accounts, book keeping and managing their own bank accounts and also how to invest in Fixed Deposits. They have also been provided training in the setting up of micro enterprises and manufacturing of some daily use and fast moving items such as Muri, Vadi Pappad, Phenyl, Candles, Petticoats, etc. With the intention of helping the women attain self-reliance, your Company has also set up a production unit which produces petticoats and other such fabric items which are being used in the plant and Candle, Muri and Phenyl making units. These activities have helped these women to keep their families out of the clutches of money lenders and being exploited by others. Also women of these SHGs conduct Adult Education Classes where educated women from these groups educate other members to read and write under the guidance and aid from Sparsh members. Another program conducted for the upliftment of women is to train them in Sewing and Embroidery arts. These classes have been set up in various villages and there are 9 such centers being run in which more than 250 students are enrolled and successful ones have been given certificates by the Sparsh Foundation. Pass out and meritorious students from these Sewing and Embroidery centers were also provided Sewing and Embroidery machines so that they can earn their own livelihood and lead a dignified life.
WATER AND SANITATION: Company lays stress on the need to provide safe and clean drinking water to the villages under its social development programs. Safe drinking water to the people is the primary need in these rural areas. With the intention of making available safe drinking water the Company has under taken several measures. Tube wells are the primary source of water in these villages. So the Company has hired the services of 3 tube well mechanics, one in each zone, for the timely repairing of these facilities. The Company also provides the mechanics the requisite spare parts needed free of cost. In the year gone more than 200 tube wells were repaired and one new tube well was also installed. From time to time repairs to the well platforms are also done and 5 such units were repaired and the response time for attendance of such complaints and repairs has been set to be done in 24 hours after receiving complaints. In the case of wells, 7 defunct wells were also repaired and sanitized. Even ponds in villages are also taken up for excavation so as to increase their storage capacity and to de-silt and clean them. During the summer season, for festivals and on social occasions the Company provides drinking water through water tankers and on more than 250 such occasions, water was provided to the needy villagers. Schools, both government and private, were also the beneficiaries of this program. Tube wells in these schools are also regularly repaired and maintained on a priority basis free of cost.
FARM BASED ACTIVITY: Your Company has also taken up many activities that promote farm based development and help the farmers to gain knowledge and training for the enhancement of farm and agricultural products. In this regard the Company in the past year has conducted training in more than three training camps which were attended by more than 50 farmers from many villages. These farmers were taught about new methods of rice cultivation such as the SRI method which considerably increases the production of rice per hectare. The farmers were also given training in production of other farm products and provided high quality seeds for vegetables and other agro products. These villagers were trained, in tie up with Krishi Vigyan Kendra (KVK), Petarwar, in the setting up of Vermi culture pits and how to produce Organic manure and make judicious use of it to get maximum benefit. Four farmers have already started these units and many others have shown keen interests for the same.
ANIMAL WELFARE: Company has also organized Animal Welfare camps to promote the well-being of farm animals such as cows and goats. In co-operation with the Animal Husbandry Department of the Jharkhand Government, your Company during the year conducted two such camps to identify and treat such animals. As many as 500 cows and goats were treated in these camps at free of cost.
CAUTIONARY STATEMENT
This report contains projections, estimates and expectations etc. which are forward-looking statements. Actual results could differ from those expressed or implied in this report. Important factors that may have impact on Companys operations include economic conditions affecting demand / supply and price conditions in the domestic and overseas markets, changes in the Government regulations / policies, tax laws and other statutes and other incidental factors. The Company assumes no responsibility to publicly modify or revise any forward looking statements on the basis of any future events or new information. Actual results may differ from those mentioned in the Report.
For and on behalf of the Board of Directors |
||
R S Singh | Lalit Kumar Singhi | |
Place : Kolkata | Whole-time Director |
Director |
Dated : 15 May, 2017 | (DIN: 02093276) | (DIN: 00893144) |
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