Goa Carbon Ltd Management Discussions.

Global Economy

Global Growth decelerated markedly in FY 2019-20 with continued weakness in global trade and investment. This weakness was widespread affecting both advanced economies and emerging market & developing economies.

Bi-lateral negotiations between the United States and China since October 2019 resulted in a phase one agreement. This comes after a prolonged period of rising trade disputes between the two countries, which has heightened policy and certainty and weighed on international trade, confidence and investment. Financial market sentiment improved appreciably towards the end of 2019 along with the elevation of trade tensions.

During 2019, there has been a decline in the prices of most commodities mainly reflecting the deterioration in the growth outlook, specially, that of emerging markets. Prices for most base metals weakened in the second half of 2019, primarily due to weaker global growth and trade tensions. China Growth has decelerated more than previously expected amid cooling domestic demand and heightened trade tensions. China was further impacted by the COVID-19 Pandemic at the end of FY 2019-20. The impact of China slow-down was felt around the world. Virus out-break has disrupted manufacturing supply chains and sharply curtailed energy and commodity demand.

The metal industry and particularly, Aluminium Sector faced a volatile and challenging year in fiscal 2019-20. Global Aluminium production excluding China grew around 1% y-o-y in the year 2019 v/s growth of around 2% y-o-y a year ago; production in China declined by 3% y-o-y due to production cuts, as compared to flattish growth in 2018. In the current year 2019, due to significant weakness in demand and the ongoing US China Trade war, global aluminium prices continued to plunge from US $ 1846 / T in January 2019 to close at US$1770/ T in December 2019. (Source : Industry Estimates)

Indian Economy

The Indian economy witnessed a slow down during FY 2019-20 and the GDP estimated at 4.2% as compared to 6.1% in FY 2018-19 (Source: National Statistical Office).

The sluggish growth is due to both endogenous and exogenous factors, key indicator being lack of credit growth and demand in market, leading to growth in final consumption expenditure, decline in gross fixed capital formation and export earnings.

Major global contributing factors are the Sino-American Trade Complex, Brexit, Geo-political tensions and deceleration in developed economies. Another reason for this sluggish growth is due to poor showing by manufacturing and construction sectors.

To improve the economic situation, the government took measures to revamp financial sector by increasing credit outflows by the Banks and non-banking financial companies (NBFCs), reducing stress in real estate sector, liberalising Foreign Direct Investment norms, a significant cut in the corporate tax rate easing tax rules for foreign portfolio investors and start-ups and speeding up the resolution process under Insolvency and Bankruptcy Code 2016.

Indias economic growth already had been weakening before the corona virus outbreak because of a slowdown in consumption and weak investment.

The COVID-19 Pandemic enforced fresh challenges to economy in the 4 quarter of FY 2019-20. Steps taken to contain its spread such as complete lock down of the Country brought economic activities to a stand-still and impacted consumption and investment. The Reserve Bank of India (RBI) has moved in a calibrated fashion to ensure conducing financial conditions and normalcy in the functioning of financial market and institutions. The Government has come up with targeted measures to ease the economic pain in various sectors and announced overall economic revival package to the industries.

In the domestic market, aluminium production declined by 2% in FY 2019-20 while domestic consumption is estimated to decline by around 6% - 7%. User industries like transportation, electrical and industrial machinery equipment sector saw drop in consumption, while packaging and consumer durables were the major demand drivers. Imports continued to be a concern for domestic players, which accounted for 58% of the market in FY 2019-20.

FY 2020-21 has started on a jarring note for aluminium makers with the price of the metal plumbing four-year lows of $1,450 per tonne on the London Metal Exchange, and domestic demand evaporating because of the corona virus (COVID-19) pandemic-driven lock-down. While that will squeeze bottom-lines this fiscal, efficient cost structure and adequate cash would buffer credit profiles and help Indian aluminium makers weather the viral disruption, says a research note from CRISIL.

Outlook

In the CY 2020, the global macro-economic environment is expected to remain highly volatile due to rising trade tensions between the US and China and the impact of COVID-19. The necessary protection measures imposed because of the pandemic are severely affecting the economic activity and causing demand shocks and supply chain disruption. Consequently, as per the World Bank June 2020 update, the global economy is expected to shrink by 5.2% in CY 2020 compared to 2.4% growth in CY 2019.

The global aluminium consumption is seen to be highly correlated with economic growth and hence, global aluminium consumption growth in CY 2020 may decline by 7% to 8%. Almost all user industries except packaging are likely to show a declining trend. As smelting is a continuous process, global aluminium supply is likely to increase marginally by 1% to 63 to 64 MT. The production in the world excluding China, is expected to drop by around 1% to approx. 27-28 MT. Primary Aluminium supply in China is likely to grow marginally in the 36 to 37 MT range, on the back of ramp-ups at state owned enterprises. In CY 2020, with an increase in supply and a sharp slow-down in demand, the inventories are expected to increase by approx. 5 MT by end of 2020, leading to significant surplus market.

According to World Bank, Indias GDP growth in FY 2020-21 is projected to contract sharply by negative 3.2%, which is likely to be the lowest in many decades as the impact of COVID -19 Pandemic materialises.

Stringent measures to restrict the spread of the virus, which heavily curtailed activity, will contribute to the contraction of the economic growth. Spill overs from contracting global growth and balance sheet stress in the financial sector will also adversely impact economic activity despite some support from fiscal stimulus and continued monitory policy easing.

Industry Overview

Worldwide CPC production for CY 2019 was about 28.5 million tonnes, 75% of which was produced in China and North America. China continues to play a dominant role in the CPC industry, and its share of the worlds CPC production is estimated to remain at 55-60% in the near term. China and North America will maintain a positive surplus. Due to a large gap between production and demand in the Middle East, Asian calciners are expected to increase their focus on the region for the surplus capacity.

As per recent industry estimates, worldwide demand for CPC aggregated to approximately 28.4 million tonnes in CY 2019. The demand is expected to grow to approximately 31 million tonnes by CY 2024, representing a CAGR of +2.3%. Worldwide production of CPC aggregated to approximately 29 million tonnes in CY 2019 and is expected to grow to approximately 31 million tonnes by CY 2024, representing a CAGR of +2.3%.

The availability of low-sulphur GPC is expected to be negatively affected due to regulations implemented by the International Convention for the Prevention of Pollution from Ships ("MARPOL"), which went into effect at the beginning of 2020 and is expected to cause oil-refining companies to shift to heavier or high-sulphur crudes. The regulation aims to reduce the amount of sulphurous gasses emitted at sea by reducing the allowable level of sulphur in marine fuel used for operating ships from 3% to 0.5%. It is expected that larger vessels will use scrubbers to meet this requirement. The freight cost is estimated to increase in all perspectives. Refineries may also find it reasonable to process the high-sulphur feedstock in their cokers to get a premium rather than selling high-sulphur fuel oil (HSFO) at a discount. Hence, there is a limited possibility of a petroleum coke shortage due to the implementation of new regulations by MARPOL.

It is expected that India will continue to lead CPC demand growth in the world (ex-China) as a result of capacity expansions by major aluminium producers in the country over next few years. However, it is essential to have sufficient quantity of RPC available in the world market. RPC is the by-product of the petroleum refining process. Recent demand crash due to the COVID-19 pandemic lockdowns, continues to woe refining margins, leading to lower capacity utilization by the refineries in the United States, Asia and even Europe.

Company Overview

Established in 1967, Goa Carbon is engaged in processing and manufacture of Calcined Petroleum Coke (CPC). The Company has three plants across India, i.e., Goa, Paradeep and Bilaspur and all the plants are ISO 9001 and ISO 14001 certified by Bureau Veritas. One of the leading producers and manufacturers, the Company possesses license capacity to manufacture CPC of 1.00 lakh MT for the Goa Unit, 1.68 lakh MT for Paradeep Unit and 0.40 lakh MT for Bilaspur Unit.

With the restrictions on the import of GPC by calciners and the import of CPC by aluminium smelters, capped at 1.40 million tonnes per annum and 0.50 million tonnes per annum respectively by the Honble Supreme Court of India, the additional requirement of both calciners and smelters will have to be met from domestic supplies within India. Further, the Honble Supreme Court of India has also directed the Ministry of Environment to finalise the standards of emissions from calciners by March 2020 which seems to have delayed due to COVID-19 challenges. The Company is awaiting these standards and shall ensure full compliance with the emission standards to be announced by the Ministry of Environment.

The Company, in the domestic market, has been supplying to National Aluminium Co. Ltd., Hindalco Industries, Bharat Aluminium Co. Ltd., Vedanta Aluminium, Kerala Minerals and Metals Ltd., Steel Authority of India Ltd., and a number of steel plants located in the South-Western region and Odisha. The overseas clients to whom the Company had been supplying are Aluminium Pechiney – France, Aluminium of Greece (AOG), SABIC – Saudi Arabia, Dubai Aluminum (DUBAL), Sohar Aluminium Co. – Sultanate of Oman, ALUCAM – Cameroun etc.

Financial and Operational Review

The following operating and financial review are intended to convey the managements perspective on the operating and financial performance of the Company for the Financial Year 2019-20. This should be read in conjunction with the Financial Statements, the schedules and notes thereto and the other information included elsewhere in the Annual Report. The Financial Statements have been prepared in compliance with the requirements of the Companies Act, 2013, the guidelines issued by the Securities and Exchange Board of India ("SEBI"), in accordance with Indian Accounting Standards (Ind AS) and the other accounting principles generally accepted in India.

Some of the Key Financial ratios are given below in percentage, except for earning per share:

Particulars As at 31.03.2020 As at 31.03.2019
PAT (Loss)/ Sales (6.84%) (1.48%)
Return on Net Worth (30.55%) (5.82%)
Earnings per share (Rs) (30.32) (8.21)

The net cash flow of the Company during the year ended

Particulars As at 31.03.2020 As at 31.03.2019
Cash from operations 345.19 10,953.76
Cash from/(used in)
1,479.24 6,096.39
investing activities
Cash from/(used in)
(1,511.48) (21,754.87)
financial activities
Net increase/ (decrease)
312.95 (4,704.72)
in cash

Details of Key Financial Ratios are given below:

Particulars As at 31.03.2020 As at 31.03.2019
Debtors Turnover Ratio 9.96 7.81
Inventory Turnover Ratio 2.70 3.04
Interest Coverage Ratio (1.06) 0.07
Current Ratio 1.24 1.26
Debt Equity Ratio 1.68 2.17
Operating Profit Margin % (3.51) 0.17
Net Profit Margin % (6.62) (1.62)

The Companys operation and its results fluctuate from period to period on account of the delivery schedule of the customers which vary from time to time and the inability of the Company to always increase selling prices in line with cost of imported raw material, the FOB price which varies substantially from time to time; and the exchange fluctuations arising because of the Companys dependence on imports of raw materials.

The Honble Supreme Court of India vide order dated 26.07.2018 had banned the import of petroleum coke if used as a fuel. Since the company uses petroleum coke only as "Feedstock" for producing calcined petroleum coke, the Company had filed an application with the Honble Supreme Court of India representing that the Company uses Raw Petroleum Coke (RPC) as "Feedstock"and hence Calcination Industries should be allowed to import RPC. Based on the recommendations of Ministry of Environment/Forest and Climate Change (MOE&CC) and Environment Pollution Control Authority (EPCA), the Honble Supreme Court had passed an order dated 9.10.2018 permitting the import of RPC up to 1.40 million metric tonnes (MMT) per annum for the Indian calcination industry as a whole for feedstock.

On the basis of Court order dated 09.10.2018, the Director General of Foreign Trade (DGFT) notified the procedures to apply for quota and granting the import license for RPC every financial year which is based on the licensed capacity of the respective calciner.

Noting that at present there are no National Level Standards for So2 emissions for the Calcination Industry, the Honble Supreme Court has ordered the Ministry of Environment and Forest to study and notify these standards. Your Company shall ensure full compliance with the standards that will be notified by the Ministry for the Calcination Industry.

COVID-19 Pandemic

The Pandemic "COVID-19" spread has severely impacted business around the world including India. There has been severe disruption in regular business operations due to lock down and emergency measures taken by the Government. The Company has done a detailed assessment of the impact on the liquidity position and carrying value of assets like trade receivables, property, plant and equipments and other financial assets. Based on these assessments, there are no adjustments required in the financial statement as on 31 March 2020.

Your Company has been focusing on ensuring safety and business continuity within the guidelines issued by the government and health authorities. The Company had temporarily shut down or scaled-down operations of manufacturing facilities in line with state government directives. Operations were being managed with minimal staff as part of the ongoing effort to practice social distancing. Several measures have been taken to protect the health and safety of the workforce. The operations have been resumed, after obtaining necessary permissions from the respective authorities and after undertaking necessary health and safety measures to combat COVID-19 crises. This enabled the Company to proactively commence its production activities at all its major plants during April 2020 and start selling the finished products during April 2020 itself. Further, to improve the liquidity position, the Company apart from collections from sales, has availed additional fund based facilities from Banks. Due to this, the Company has repaid all the suppliers credit facilities availed from overseas suppliers on due date without any delay. The management has taken into consideration all the known impacts of COVID-19 while preparations of the financial results and the Company will monitor any material changes in future economic conditions.

Business Challenges

At Goa Carbon, we ensure to work towards addressing the potential threats and challenges and thereby minimising the losses. The Company has identified some of the critical business challenges and their mitigation plans include:

Aluminium Industry

There could be variations in the demand and supply of aluminium and steel, which could impact the demand for CPC. Due to the high cost of production in the west, aluminium production is going to shift to the East, and this is expected to boost demand for CPC manufacturing and thus likely to increase the business for the Company.

l Foreign Exchange and Interest Rate

A sharper-than-expected tightening of global financing conditions, or a renewed rapid appreciation of the U.S. Dollar against Indian Rupee, could exert further downward pressure on countries like India that have large current account deficits financed by portfolio and bank flows.

Supply of Raw materials

It is essential for our Company to source the appropriate raw material with the right price and at the right time, without which the production and quality would be impacted. Since the Company has been in the industry for decades, and have long-term relationships with refineries and suppliers, raw materials are obtained from different sources at competitive prices.

The Company has put forward a team to monitor the production planning and inventory control systems, which improves control over raw materials planning.

l Environment & Regulations

Aluminium is the second most used metal in the world after steel, and approximately 0.4 tonnes of CPC is required in the production of every tonne of aluminium produced. Any regulations that impact either import or production of CPC will directly impact the aluminium industry in India. Thus, it is a critical and strategic part of the economic growth of India and occupies a due position in the global economy.

The Environmental Protection Agency (EPA) does not classify RPC as hazardous. EPA has surveyed the potential human health and environmental impacts of RPC through its High Production Volume (HPV) challenge program and found the material to be highly stable and non-reactive at ambient environmental conditions. Most toxicity analysis of coke finds that it has a low potential to cause adverse effects on aquatic or terrestrial environments as well as a low health hazard potential in human, with no observed carcinogenic, reproductive, or developmental effects.

However, Aluminium and Steel production create immense pollution and can have an adverse impact on our environment. To curb the extensive production of aluminium and steel, the Honble Supreme Court of India banned the import of RPC but eventually lifted it in later half of the year, permitting the import of RPC by the Indian calciners to be within 14 lakh MT/year which is used as feedstock and not as a fuel.

Presently, there are no National Level Standards for So2 emissions for the Calcination Industry. The Government through the Ministry of Environment and Forest is studying the matter and shall soon notify these standards. Your Company is poised to ensure full compliance with the standards that will be notified by the Ministry for the Calcination Industry.

l Trade Wars

Escalating trade tensions are another major downside risk to the global outlook. If all tariffs currently under consideration were implemented, they would affect about 5 percent of global trade flows and could dampen growth in the economies involved, leading to negative global spillovers. While some countries could benefit from trade diversion in the short run, rising trade protectionism would stifle investment and severely disrupt global value chains, contributing to higher prices and lower productivity.

l Working Capital Requirements

The Company mainly avails non-fund-based facilities from Indian Banks in the form of Letter of Undertaking (LOU) to avail Buyers credit facilities from overseas banks at a lower interest rate. Recently, the Reserve Bank of India has vide Circular No. RBI/2017-18/139 dated 13.03.2018, barred the issue of Letter of Undertaking by banks for trade credits. This has compelled the

Company to borrow expensive fund-based facilities like overdraft from its bankers which are sanctioned strictly based on the working capital cycle. Instead of procuring the raw material in bulk at competitive prices considering the ocean freight, now the Company is constrained to limit the procurement of raw material based on working capital cycle at the higher interest rate applicable to overdraft facility till RBI lifts the ban on issue of LOUs by banks. However, efforts have been made to explore the possibilities of newer ways of financing the working capital requirements and the commercial contracts are being negotiated to contain the finance cost impact.

Human Resources

Human Resources is the Companys most valuable asset and Goa Carbon Limited ensures to periodically conduct skill development training programmes for the employees from time to time for a continuous growth in their competencies and to keep them updated on new technical developments resulting in optimum capacity utilization and cost-effectiveness. In order to boost employee morale and motivate them to perform the best, the Company also provides a safe and healthy work environment.

As of 31 March 2020, the Company had 195 employees consisting of 20 managerial personnel and 175 other employees. These employees provide an excellent combination of experienced workforce and talented technical managers.

Internal Control System

The Companys internal control is commensurate with the size of its business and the nature of industry it operates in. The Internal Auditor ensures prompt recording of transactions and their adherence to the applicable laws, statutes as well as internal policies and procedures. Internal Audit is conducted regularly and the reports are submitted to the Audit Committee at their quarterly meetings.

Statutory Compliance

The Executive Director submits a declaration at each Board Meeting regarding compliance with respect to the applicable statutes, enactments and guidelines after obtaining confirmation from all the operating plants and the Head of the Departments. The Company Secretary who is also the Compliance Officer gives a declaration of compliance to the Board with respect to the applicable provisions of Companies Act, 2013 and SEBI Regulations.

Cautionary Statement

Some of the statements given in the above management discussion and analysis about the Companys projections, objectives, estimates, expectations and predictions may be forward looking statements within the meaning of applicable securities laws and regulations. The actual results may differ substantially from those expressed or implied statements. Significant factors that could make a difference to the companys operations including domestic and global economic conditions affecting demand and supply and price conditions in the industry, changes in Government laws, tax regime and other statutory changes, environmental laws and labour relations. The Company undertakes no obligation to periodically revise any such forward looking statement to reflect future events or circumstances.