Goa Carbon Ltd Management Discussions.

Global Economic Overview

Global economy strengthened to 3.8% compared to 3.1% in 2016 with a notable rebound in global trade mainly driven by an investment recovery in Advanced Economies, continued strong growth in emerging Asia, a notable upswing in emerging Europe, and signs of recovery in several commodity exporters. On the economic front, FY 2017-18 ended on a high note, with GDP continuing to accelerate over much of the world in the broadest cyclical upswing since the start of the decade. Stronger activity, expectations of more robust global demand, optimistic financial markets, the cyclical recovery in manufacturing and trade, etc. are all upside developments. Moreover, the global economy witnessed an upsurge in trade (with trade growth rising from 2.2 percent in 2016 to 6.4percent in 2017), reflecting improved investment growth rates in formerly stressed commodity exporters as well as the recovery in advanced economy investment.

Going forward, with partial recovery in commodity prices, increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes, the global growth forecasts for 2018 and 2019 have been revised upward by 20 basis points to 3.9%. (Source: IMF World Economic Outlook, alu 2018)

Indian Economic Overview

On the domestic front, the economic activity was hit by the twin blows of demonetization and rollout of Goods and Service Tax (GST) resulting in a lower GDP of {6.5% in 2017-18 as compared to 7% in 2016-17. However, this year also witnessed significant steps being undertaken towards resolution of problems associated with Non-Performing Assets of the banks, Insolvency and Bankruptcy Code (IBC), further liberalization of FDI, etc., thus strengthening the momentum of reforms. (Source: Central Statistics Office)

GST is a significant move that will enable the country to overcome the multiple taxation regime and have a unified tax system. Though in the initial stages, GST saw some challenges faced by small and medium businesses, in the longer run, GST will boost corporate investment, productivity and growth by creating a single market and reducing the cost of capital equipment. GST is expected to benefit companies by narrowing the price gap between organised & unorganised players, streamlining business operations to become more compliance and profitability-oriented and reducing logistics costs. The countrys economic performance is likely to witness an improvement in 2018-19 owing to greater stability in GST, recovery in investment levels and ongoing structural reforms. Recent initiatives by the NDA Government such as ‘Make in India, ‘Digital India, nation wide road-building program, Ease of Doing Business, etc. will boost and uplift the manufacturing sector. Apart from these, the government plans to build 100 smart cities with an outlay of Rs.2.04 Lakh Crores, investment over Rs.50 Lakh Crore in the countrys infrastructure to increase the GDP growth, etc. thus uplifting the countrys economy.

(Source: Union Budget 2018-19; IBEF Report)

Owing to these positive developments in the country, IMF has predicted Indias GDP at 7.4% in 2018 and a higher 7.8% in 2019, citing it as the worlds fastest-growing economy in 2018 and 2019.

Company Overview

The Company, one of the leading producers and manufacturers of Calcined Petroleum Coke (CPC) has a manufacturing facility each on both of Indias coasts at Goa and Paradeep. The Company has its third plant which is centrally located at Bilaspur-Chhattisgarh o3ering strategic benefits of better logistics management. The total installed capacity of all the three plants is 2,40,000 MT per annum. All the plants of the Company are ISO 9001 and ISO 14001 certified by Bureau Veritas.

The wide experience in the industry and well-established suppliers contacts provides the Company flexibility to capitalize on market opportunities by selecting raw materials from a wide range of sources across various geographies adjusting the composition of our product-mix and producing products that meet stringent quality specifications of each individual customer. In FY 2017-18, the Company clocked better overall capacity utilization at 90%. This growth was attributed to the rising demand for aluminium and steel in the country.

Industry Overview

As 85% of Calcined Petroleum Coke (CPC) is used in the aluminium smelting process, aluminium production is one of the most important factors influencing CPC usage. Resultantly, the growth of CPC industry is directly linked with the growth of the Aluminium industry. As per the Industry Reports, global aluminium production is projected to resume growing in 2018 and 2019 at an increasing rate, with output reaching 76 million MT by 2022, driven by increased capacity in China, the Middle East and the USA.

On account of its inherent characteristics of being light in weight, superior electric conductivity, non-corrosive and high tensile strength, it is expected that aluminium output will show increasing trend owing to its preferred use in packaging and transportation. Also, owing to government emphasis on boosting power and construction projects as well as the automobile sector, the aluminium and steel industry is expected to grow at a robust pace which in turn, will bode well for CPC demand. The Peoples Republic of China has emerged as the worlds largest producer of aluminium. It continues to be the primary driver of growth in the aluminium industry despite a lower GDP growth rate. As per the industry data, the country produced 36 million tons of aluminium in Calendar Year 2017, a rise of 10% from that of the Previous Year, thereby contributing to 57% of the total world production. The aluminium demand in Western Europe is expected to grow around 2.5%. Asia and the Middle East are expected to register around 5-6% growth in consumption. (Source: S & P Global Platts, World Aluminium Publications)

On the domestic front, the Countrys aluminium consumption is expected to grow from 3.3 million tonnes now to reach 5.3 million tonnes by 2020-21. Demand in the domestic market is likely to accelerate on the back of expected traction in industrial activity, infra spending, demand for packaging material and government focus on power transmission and distribution. Today, the Indian aluminium industry is on the cusp of transformation and this bodes well for the domestic manufacturers. The growing demand for aluminium in the last decade, driven by Indias underlying growth story, has resulted in the expansion of smelting capacities of the major domestic players. Despite the challenging commodity market, the aluminium industry continued its growth trajectory throughout the year 2017. (Source: IIFLW, CRISIL Report)

Outlook

Various government reforms such as the Make in India Campaign, Smart Cities, Rural Electrification and focus on building renewable energy projects under the National Electricity Policy will spur the demand for aluminium. Further more, rapid urbanization, government initiatives to boost infrastructural development, rapid growth in automobile and food packaging sector, etc. shall augment consumer demand. Indias aluminium production is expected to grow at a CAGR of 3-5% in the next 2-3 years. Also, increase in use of recycled aluminium products globally provides lucrative opportunities for the market expansion. Therefore, with the growth of the Aluminium industry, it is expected that CPC industry will grow in the same proportion.

Production trend of Aluminium in India (mn tonnes)
FY FY FY FY
2016-17 2017-18 2018-19 2019-2020
(E) (E) (E)
Aluminium 2.80 2.94 3.12 3.33

Source: CARE Ratings Industry Research

As per the Industry Reports, the global Petroleum Coke market is forecasted to grow at a CAGR of 7.82% during the period 2017-2021 resulting in a positive impact of CPC demand too.

Financial & Operational Review

The following operating and financial review is intended to convey the managements perspective on the operating and financial performance of the Company for the Financial Year 2017-18. 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 earnings per share :

As at 31.03.2018 As at 31.03.2017*
PAT (Loss)/ Sales 9.18% 2.86%
Return on Net Worth 52.44% 12.28%
Earnings per share (Rs.) 58.84 10.38

The net cash flow of the Company during the year ended 31.03.2018 is as follows:

( Rs. in Lacs)
As at 31.03.2018 As at 31.03.2017*
Cash from operations 2678.06 1737.57
Cash from/(used in) investing activities 190.27 1125.89
Cash from/(used in) financial activities 2000.84 (5571.33)
Net increase/ (decrease) in cash 4869.17 (2707.87)

*The figures for FY 2016-17 have been recast as per the applicability of Ind AS.

Business Challenges

The Risk Management framework of the Company ensures the identification of potential threats and challenges and addressing them appropriately to minimize the losses. The key business challenges identified by the Company along with their mitigation plans include:

Industry

Variance in the demand and supply of aluminium and steel may impact the demand for CPC. However, as aluminium production is shifting from West to East due to the high cost of operations in the West, demand is coming closer to Companys manufacturing facilities, catalyzing to its growth.

Foreign Exchange and Interest Rate

The Company imports almost 100% of its raw material - Green Petroleum Coke and has USD currency exposures. A down turn in the value of currency could lead to huge losses or reduction in profits of the Company.

The management of the Company tracks the movement of currency daily and takes forward contracts to hedge the currency. The management does not do speculative hedging.

Raw material Supply

Another challenge for the Company is to source right type of raw material at the right price and right time which otherwise may aect production and quality. However, since the Company has long-term relationships with refineries and suppliers, raw materials are procured from dierent sources at competitive prices. New refineries are coming up in China in line with increased demand for CPC with additional cokers to produce raw material. The management has put in place a mechanism to ensure proper production planning and inventory control systems which enhances control over raw materials planning.

Environment & Regulations

The various regulators have been imposing stringent provisions on the use of Green Petroleum Coke and manufacturing of the CPC which has an important bearing on the smooth business for the Company.

For every tonne of aluminium produced, it needs approximately 0.4 tonnes of CPC. Thus, any regulation aecting the use of Calcined Petroleum Coke will significantly impact the Aluminium Industry in India. Aluminium is the second most used metal in the world after steel. Thus, it is a critical and strategic part of the economic growth of India and occupies a due position in the global economy.

According to the Congressional Research Service (CRS), The Environmental Protection Agency (EPA) does not classify Green (Raw) Petroleum Coke as hazardous. EPA has surveyed the potential human health and environmental impacts of Green (Raw) Petroleum Coke 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 eects on aquatic or terrestrial environments as well as a low health hazard potential in human, with no observed carcinogenic, reproductive, or developmental eects.

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, e orts 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

The Company has an excellent combination of experienced and talented Technical Managers. Numerous skill development training is imparted to 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-e ectiveness. In order to boost employee morale and motivate them to perform the best, the Company also provides a safe and healthy work environment.

In 2017-18, the Company ensured a healthy relationship with its workforce. As on 31st March 2018, the Company had 205 employees consisting of 17 managerial personnel and 188 other employees including workmen.

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

All declarations and compliances with respect to the applicable statutes, enactments and guidelines are submitted at every meeting of the Board of Directors of the Company. The Company Secretary who is also the Compliance Ocer gives a declaration of compliance to the Board with respect to the applicable provisions of Companies Act, 1956/2013 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 di er substantially from those expressed or implied statements. Significant factors that could make a di erence to the companys operations including domestic and global economic conditions a ecting 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.