Facor Alloys Ltd Management Discussions.

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. Global ferro chrome production, in line with stainless steel production, grew from 12.36 million tonnes in 2017 to 13.41 million tonnes in 2018, registering a growth of 8.53%. Indias ferro chrome production stood at 1.3 million tonnes in 2018 registering a growth of 8.79% from 2017. The country exports 50% of its annual ferro chrome output, primarily to China, South Korea, Japan and Taiwan.

The demand for ferro alloys principally is determined by developments within the Stainless Steel industry. The global stainless steel market size was valued at USD 93.69 billion in 2018 and is expected to witness a CAGR of 5.2% from 2019 to 2025. Rising demand from end-use industries such as automotive, oil and gas, and construction is anticipated to propel the growth. Stainless steel caters to demand from various application segments such as building and construction, heavy industries, consumer goods, and others. Stable Stainless Steel industry scenario augurs well for the ferro alloys industry.

RISKS AND CONCERNS /OPPORTUNITIES AND THREATS / OUTLOOK

Ferro alloy industry is mainly driven by demand from the steel industry. The global ferro chrome industry is largely dependent on Chinese demand and the stainless steel cycle. Chinas consumption is met through a combination of domestic production and substantial imports from countries including South Africa, India and Zimbabwe. Other leading importers of ferro chrome are the US, South Korea and the European Union

(EU) although the EU and US have witnessed a steady decline in their dependence on imports for ferro chrome in the last decade. The global crude stainless steel production grew by 5.5% to 50.73 million tonnes in 2018 from 48.08 million tonnes in 2017. The global stainless steel market size is projected to expand at a CAGR of over 5% till 2025 from 2018.

Further Company had entered into a Conversion Agreement with M/s. Tata Steel Limited (TSL) for conversion of Chrome

Ore into Ferro Chrome. The Agreement is extendable on mutually agreed terms and conditions. This has led to reasonable stability in the business of the Company.

The Indian Ferro Alloys Industry is grappled with various issues, such as non-availability of power with competitive rate, suitable quality and quantity of Chrome Ore/ Coke, minimum duty protection etc. Further Ferro Alloys Industry is purely dependent on the demand for Steel in the country. Cheaper steel imports from countries like China can cause damage to the domestic steel companies which can impact the demand for Ferro Alloys. Highly volatile prices of Chrome ore also pose a risk to the realizations of the domestic ferro alloys producers. Besides above, the Industry has to compete with the integrated producers having captive mines situated in South Africa, Australia, Brazil, CIS, etc. to sell acceptable quality of Chrome Alloys in the world market for earning the valuable foreign exchange for the country. Further Reductants viz Anthracite Coal, Coke, Charcoal etc. are vital inputs for the Ferro Alloys Industry. The availability of these items in good quality is declining in the country and the Ferro Alloy Industry may have to totally depend on import of these reductants on regular basis. Ferro alloy industry is saddled with the overcapacity issues also. Further the problems of this industry are aggravated because of the high input cost of power. The ferro alloy Industry is a power intensive Industry, the power cost is about 35-40 percent of its total production cost. These issues need to be addressed by the Government to enable the Ferro Alloys Producers to compete in the Domestic as well as International Markets.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Company is continuously endeavoring to maintain high standards of internal control designed to provide adequate assurance on the efficiency 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 Board of Directors also reviews these matters from time to time in their meetings.

FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

During the year under consideration, Company achieved the highest ever production of 82,340 M.T. as against 73,600 M.T. in the previous year recording a surge of 11.88%. Exports are at Rs 124.41 crores as against Rs 111.01 crores in the previous year and during the year under review foreign currency earnings in rupee terms was Rs 24.60 crores. The Company derived 34.55% of its total sales from exports.

On account of above and other factors, the profit before tax was at Rs 17.07 crore as compared to Rs 1.00 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 2018-19 FY 2017-18
Debtors turnover ratio 23.73 19.39
Inventory turnover ratio 20.11 15.78
Interest coverage ratio 2.41 1.21
Current ratio 0.61 0.52
Debt equity ratio - 0.16
Operating profit margin (%) 8.53% 5.65%
(before exceptional items)
Net profit margin (%) (after 3.32% 0.93%
exceptional items)

b) Significant change in Financial Ratios

Particulars FY FY Changes Reasons for Changes
2018-19 2017-18 in %
Inventory Turnover ratio 20.11 15.78 27.00% Due to lower inventory level and higher sales volume
Interest Coverage ratio 2.41 1.21 100.00% Due to lower term borrowing and increase in EBITDT
Debt Equity ratio - 0.16 -100.00% Due to lower term borrowing
Operating Profit margin (%) 8.53% 5.65% 51.00% Due to high production and lower pay out of interest
(before Exceptional items) 3.32% 0.93% 258.00% Due to better sales, lower interest cost etc.

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

Particulars FY 2018-19 FY 2017-18 Changes Reasons for Changes in %
Return on net worth (%)(after Exceptional items) 9.06% 2.32% 290.00% Due to increase in PAT because of higher sales volume, lower interest cost etc.

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 336 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.