Facor Alloys Ltd Management Discussions.

MANAGEMENT DISCUSSIONS AND ANALYSIS

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.

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.

As per the World Steel Association, the global production of crude steel reached 1,950.5 million tons in 2021, an increase of 3.7% from 2020. China was the leading producing country with production of 1,032.8 million tons in 2021. China was followed by India, Japan, the U.S., Russia, South Korea, Turkey and Germany. These leading countries are expected to remain the key markets for ferroalloy producers.

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.

Infrastructure investment plans in different countries around the world is likely to benefit the crude steel demand and thus ferroalloys. For instance, Turkeys long term infrastructure development plan is likely to generate high demand for steel products in the country. Under ‘Vision 2023, the government

of Turkey is expected to build 5,748 km of highways and 13,478 km of roads by 2023. The plan also includes development of 10,000 km of high speed railway line by 2023.

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

RISKS AND CONCERNS /OPPORTUNITIES AND THREATS /OUTLOOK

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 69,626 M.T. as against 36,140 M.T. in the previous year recording an increase by 93%.

Exports (Deemed) are at Rs.47.38 crores as against Rs.71.40 crores in the previous year and during the year under review foreign currency earnings in rupee terms was NIL. The Company derived 18.42% of its total sales from deemed exports.

On account of above and other factors including higher sales realization, the profit before tax is at Rs.26.24 crores as compared to loss of Rs.1.69 crore in the previous year.

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 2021-22 FY 2020-21
Debtors turnover ratio 11.26 8.87
Inventory turnover ratio 42.64 35.53
Interest coverage ratio 26.95 1.09
Current ratio 1.72 0.81
Debt equity ratio 0.04 0.05
Operating profit margin (%) (before exceptional items) 12.15% -4.73%
Net profit margin (%) (aftertax) 6.88% 0.31%

b) Significant change in Financial Ratios

Particulars FY 2021 22 FY 2020 21 Changes in % Reasons for Changes
Debtors turnover ratio 11.26 8.87 26.94 % Mainly due to increase in sales by approx. 79% as compared to FY 2020-21.
Interest coverage ratio 26.95 1.09 2372.48 % Due to increase in EBITDA and reduction in financial liabilities as compared to FY 2020-21.
Current ratio 1.72 0.81 112.35 % Due to increase in Inventory and cash & cash equivalent as compared to FY 2020-21.
Operating profit margin (%) (before exceptional items) 12.15% -4.73% -356.87 % Due to increase in sales by approx. 79% as compared to FY 2020-21.
Net profit margin (%) (after tax) 6.88 % 0.31 % 2119.35 % Mainly due to increase in PAT due to increase in sales and other income as compared to FY 2020-21.

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

Particulars FY 2021 22 FY 2020 21 Changes in % Reasons for Changes
Return on net worth (%) (after Exceptional items) 11.36% 0.30% 3686.67% Mainly due to increase in PAT because of 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.