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Facor Alloys Ltd Management Discussions

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Jul 19, 2024|09:56:00 AM

Facor Alloys Ltd Share Price Management Discussions

This report is aimed to highlight managements broad perspective on the external factors that may have bearing on performance of company, as well as strategy, counter measures, operating and financial performance, material developments, risk and opportunities and internal control systems and their adequacy. These discussions and analysis shall be read in the light of companys standalone and consolidated financial statements, the directors report and other information included elsewhere in the Annual Report.

INDUSTRY STRUCTURE, DEVELOPMENT AND OTHER RELATED MATTERS

Ferro chrome is an alloy of chrome and iron with 50% to 68% chrome content primarily used in manufacturing stainless steel. Ferro chrome strengthens and offers corrosion resistance to stainless steel, thereby making it a unique product with multiple applications. Most of the worlds ferro chrome is produced in China, South Africa, Kazakhstan and India. China is the worlds largest producer of ferro chrome and contributes to more than half of global ferro chrome demand. It is the hub of ferro chrome production heavily dependent on chrome ore imports, primarily from South Africa. However, Indias position as the second-largest producer and the second largest finished steel consumer after China highlights its remarkable presence in the global steel market.

On the basis of application, ferro alloy market is segmented into carbon steel, alloys steel, stainless steel and others. Alloy steels have applications in various end use industries such as general engineering, aerospace & defence, railways etc. with increasing investment in manufacturing sector of various emerging nations, the demand for alloy steels is also expected to increase in near future.

The global ferroalloys market is expected to grow on account of rising steel production around the world. The ferroalloys include ferrochrome, ferrosilicon, ferromanganese and ferromolybdenum, among others. Various types of ferroalloys have different purposes in the production of steel. For instance, ferrovanadium in steelmaking is used to provide strength against alkalis and acids such as sulphuric and hydrochloric acid. It provides corrosion resistance and enhances tensile strength of casting & welding electrodes.

Nearly 85 to 90% of all the ferroalloys are used in the production of steel. Therefore, production and consumption of steel and related products have a huge impact on the pricing of ferroalloys and vice versa. Cost of ferroalloy is one of the key criteria for deciding suitable ferroalloy for the production of a particular grade of steel. Specification of steel is also an important factor while calculating the costs of steelmaking. For instance, specific grade of steel with low phosphorous can be manufactured using two methods viz. either by the use of normal steelmaking process, which uses expensive ferroalloys with low phosphorous content or by increasing the refining time and basicity of slag to reduce phosphorous at low levels.

Construction is the largest end-use industry of steel products, wherein rebars, sections, channels and angles are widely used in the industry. The construction sector around the world is projected to grow moderately from 2022 to 2030. This is expected to positively affect the demand for steel products and thus benefit the demand for ferroalloys, which are among the key feedstocks in the production of steel.

GLOBAL ECONOMIC OUTLOOK:

The International Monetary Fund (IMF) forecast global growth to slow from 3.5% in 2022 to 3.0% in 2023 and 2.9% in 2024, well below the historical (2000-19) average of 3.8%. Advanced economies are expected to slow from 2.6% in 2022 to 1.5% in 2023 and 1.4% in 2024 as policy tightening starts to bite. Emerging market and developing economies are projected to have a modest decline in growth from 4.1% in 2022 to 4.0% in both 2023 and 2024. Global inflation is forecast to decline steadily, from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024, due to tighter monetary policy aided by lower international commodity prices. Core inflation is generally projected to decline more gradually, and inflation is not expected to return to target until 2025 in most cases.

The Global economy is currently confronting several challenges such as unfavourable development of elevated inflation, a sluggish recovery from the COVID-19 pandemic, reduced capital investment, Higher inflation, and ongoing Geopolitical conflicts etc. These factors continue to take a toll on the global economy, hindering its progress & supply chain.

INDIAN ECONOMIC:

The World Economic Outlook has forecasted that growth in India remain strong, at 6.3% in both 2023 and 2024, with an upward revision of 0.2% point for 2023.

IMF had estimated Indias GDP forecast at 6.1% for 2023-24. However, this is lower than the RBIs latest estimate of 6.5% for the current financial year. However, Indias growth is projected to be higher than Chinas, the third-largest economy in the world.

On the oil import, it said about 35% to 40% of Indias crude oil imports came from Russia during April-June 2023, a stark rise from less than 5% before the war in Ukraine. While Indias oil exports (mostly petroleum products) are small relative to its oil imports (mostly crude oil). so higher prices will impact Indias trade and fiscal deficit, inflation and growth adversely.

Geopolitical tensions have intensified from rising tensions between India and Canada, as well as the attack on Israel by Palestinian militant group Hamas which caused oil prices to spike higher .

Widening current account deficit, resurging inflation and heightened geopolitical tensions would be the major headwinds for India.

However, Government is focusing on economic growth through capital investment, Infrastructure development, job creation etc. capital investment outlay has been increased by 33% to

Rs 10 lakh crore for FY 2023-24 by the government which will be 3.3% of GDP. With this, capital investment outlay has been increased for third year in row. Capital outlay of Rs. 2.40 lakh crore has been provided for Railways in FY24. Effective capex will be Rs 13.70 lakh crore, forming 4.5% of GDP in FY 24. The ratio of capex-to-GDP, which rose to 2.7% in 2022-23, is estimated at 3.3% in FY 24 and the fiscal deficit is estimated to go down to 4.5% of GDP. Budget 2023-24 has lots of year in row. The allocation is higher than the Rs 7.50 lakh crore budgeted for in the previous year and the highest on record. Encouraging announcement such as Capital outlay of Rs. 2.40 lakh crores for Railways, Rs.10000 Crores allocation for Sustainable Cities, announcement related to creation of one hundred critical transport infrastructure projects with an investment of Rs 75,000 crores that will ensure first and last mile connectivity for ports, coal, steel, fertilizer, and food grain sectors will spur up growth for domestic steel.

Overall, the key steel consuming sector are expected to perform well in FY 2023-24 supported by a rise in infrastructure spend by Government.

GROWTH DRIVERS:

Economic growth in the Asia-Pacific region and increased production in African continents have increased the market for ferro alloys around the globe. Besides this, emerging technologies for the production of ferroalloys, increased consumption and exports from China, Japan and India have contributed towards the growth of the industry. In India, several initiatives like- affordable housing, expansion of railway networks, development of domestic shipbuilding industry, anticipated growth in the automobile sector are expected to create significant demand for steel industry, which is also likely to push up growth for the Indian Ferro Alloys industry.

RISKS AND CONCERNS /OPPORTUNITIES AND THREATS / OUTLOOK

High prices of power and raw material shortage are major concerns for the ferroalloys industry. The country does not have abundant raw materials for ferroalloy, and the players are importing at high prices from Australia and South Africa. Besides, power cost is also very high in India. High operational costs, stringent industry standards and environmental regulations may hamper the growth of the industry in future. Amount of energy consumption in manufacturing of some alloys is high and volatility in fuel prices might adversely impact production cost.

While the country is self-sufficient in Chrome Ore whereas the same is not true in case of Manganese Ore against the target of 300 million tons of steel production by 2030 nearly 80% of manganese Ore would have to be imported from South Africa, Zambia, Gabon, Ivory Coast, Brazil, Australia etc. Coke has import duty which needs to be removed and low phosphorous coke is not produced in India, which is also a major issue for Indian ferroalloys producers. There is anti- dumping duty on the low phosphorus Chines coke. Imports also pose challenges, as the incursion of cheaper materials from Malaysia into India, which is unfavorable for the industry. Ferro Silicon (FeSi) and Ferro Manganese (FeMn) is being imported on a regular basis.

Replacement of stainless steel by carbon fibres is projected to restrain the market growth for ferroalloys market. Carbon fibres are widely being used in automotive industry due to their lightweight, high strength, and load-bearing properties. Carbon fibres reduce the weight of a car by almost 30%. Growing importance of lightweight vehicles has made carbon fibre the most desired material. Automation associated with the manufacturing process further makes carbon fibres a brighter prospect compared to stainless steel.

With rapid industrialisation, rising construction activities as well as infrastructure development around the world, and high product usage across applications such as automotive, power, pipes, fittings and valves, industrial machinery, among others, the metals and alloys market is expected to grow significantly in the coming years.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Company is continuously endeavoring to maintain highest standards of internal control designed to provide adequate assurance on the efficiency of operations and security of its assets. The adequacy and effectiveness of the internal control across various activities, as well as compliance with laid-down systems and policies are comprehensively and frequently monitored by management at all levels of the organization, internal and statutory auditors and based on the experience gained and suggestions received, if any, these are updated, modified and accordingly implemented. The Audit Committee of the Board of Directors also reviews these matters from time to time during their meetings.

FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

During the year under consideration, Company achieved the production of 70,062 M.T. as against 69,626 M.T. in the previous year recording an increase by 1%.

Exports (Deemed) are at Rs.69.61 crores as against Rs.47.38 crores in the previous year and during the year under review foreign currency earnings in rupee terms was NIL. The Company derived 21.78% of its total sales from deemed exports as against 18.42% in the previous year.

On account of above and other factors including higher sales realization, the profit before tax is at Rs.15.95 crores as compared to profit of Rs.26.24 crore in the previous year. Reduction in PBT despite higher sales revenue in current year is due to power cost reimbursement amounting to Rs.20.26 crores were included in Miscellaneous income of previous years (Refer note no.29.1 of Standalone Financial Statements).

DETAILS OF SIGNIFICANT CHANGES (I.E. CHANGE OF 25% OR MORE AS COMPARED TO THE IMMEDIATELY PREVIOUS FINANCIAL YEAR) IN KEY FINANCIAL RATIOS, ALONG WITH DETAILED EXPLANATIONS THEREFORE

a) Key ratios and margins

Particulars FY 2022-23 FY 2021-22
Debtors turnover ratio 8.45 11.26
Inventory turnover ratio 27.49 42.64
Interest coverage ratio 21.31 26.95
Current ratio 1.69 1.72
Debt equity ratio 0.03 0.04
Operating profit margin (%) (before exceptional items) 1.09% 12.15%
Net profit margin (%) (after tax) 7.13% 6.88%

b) Significant change in Financial Ratios

Particulars FY 2022- 23 FY 2021- 22 Changes in % Reasons for Changes
Debtors turnover ratio 8.45 11.26 -24.96 % Mainly due to increase in Average Debtors on account of Increase in turnover and non- realization from RTVNPL on due dates (refer note no. 49 of Standalone Financial Statements).
Inventory turnover ratio 27.49 42.64 -35.53% The reduction in ratio is due to Increased Average inventory as compare to Turnover.
Operating profit margin (%) (before exceptional items) 1.09% 12.15% -91.03% Due to reduction in operating profit and other income.

DETAILS OF CHANGE IN RETURN ON NET WORTH AS COMPARED TO THE IMMEDIATELY PREVIOUS FINANCIAL YEAR ALONG WITH DETAILED EXPLANATIONS THEREFORE

Particulars FY 2022- 23 FY 2021- 22 Changes in % Reasons for Changes
Return on net worth (%) (after Exceptional items) 12.96% 11.36% 14.08% Mainly due to increase in operating profits due to higher sales achieved during the year.

MATERIAL DEVELOPMENT IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT INCLUDING PEOPLE EMPLOYED

Employees participation schemes such as Central Safety Committee, Quality Circles, Intra department level reviews have been adopted to ensure transparency and open communication at all levels. In house training to employees was imparted focusing on safety, productivity and skills improvement inputs. Multi skills improvement program has been implemented encouraging the trade workmen to learn additional skills. Executives were nominated to various seminars and programs for exposure to the best business practices. Adequate cost consciousness in the minds of all employees has been inculcated to attain the ultimate goal of cost reduction. The overall manpower consisting of workmen, supervisors and managers etc. worked out to 411 excluding indirect employment.

CAUTIONARY STATEMENT

Statements in this Management Discussion and Analysis Report are based upon data available with the Company and on certain assumptions having regard to the economic conditions, government policies, political developments within and outside the country. The management is not in a position to guarantee the accuracy of the assumptions and the projected performance of the Company in future. It is, therefore, cautioned that the actual results may differ from those expressed or implied herein.

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