Goa Carbon Ltd Management Discussions.

Global prospects remain highly uncertain one year into the pandemic. New virus mutations and the accumulating human toll raise concerns, even as growing vaccine coverage lifts sentiment. Economic recoveries are diverging across countries and sectors, reflecting variation in pandemic-induced disruptions and the extent of policy support. The outlook depends not just on the outcome of the battle between the virus and vaccines—it also hinges on how effectively economic policies deployed under high uncertainty can limit lasting damage from this unprecedented crisis.

Global growth is projected at 6 percent in 2021, moderating to 4.4 percent in 2022. The projections for 2021 and 2022 are stronger than in the October 2020 WEO. The upward revision reflects additional fiscal support in a few large economies, the anticipated vaccine-powered recovery in the second half of 2021, and continued adaptation of economic activity to subdued mobility. High uncertainty surrounds this outlook, related to the path of the pandemic, the effectiveness of policy support to provide a bridge to vaccine-powered normalization, and the evolution of financial conditions.

(Source: IMF-outlook-april-2021)

The aluminium industry is the largest consumer of calcined petroleum coke. Global demand for primary aluminium aggregated to approximately 63.4 million tonnes in CY 2020 and is expected to grow to approximately 70.0 million tonnes by CY 2024, representing a CAGR of 2%. Of the total production in CY 2020, 56% was from China, 12% from Europe (including Russia) and 6% from North America. Production of primary aluminium is growing in Asia (excluding China) and the Middle East, and these two markets contributed 7% and 9% of global primary aluminium production during CY 2020. The expected demand will be driven by electrical conductors, increased usage in automobiles and significant growth in the packaging industry. India is expected to see an increase in aluminium consumption, which mainly will be driven by the construction, automobile and packaging industries.

Aluminium continues to chip away steels position as the metal of choice for the automotive industry. Due to more stringent regulations and societal pressure to improve fuel economy, automobile manufacturers are increasing their use of lighter materials such as aluminium for the structural shell of vehicles as well as closing panels such as the hood, trunk and doors. Aluminium producers will continue to innovate with new alloys and production processes to meet the automotive industrys demand.

By 2024, more than 6.0 million tonnes of aluminium smelting capacity additions are expected through various greenfield and brownfield projects announced across the world. Approximately 62% of the additional capacity will take place in China and 38% in Asia (excluding China), Europe and the Middle East.

Indian Economy

While the Indian economy was losing growth momentum for several years before the pandemic, the exceptionally bad growth performance in 2020-21 is largely on account of the 68-day long hard lockdown which was imposed on March 25 2020 to prevent the spread of Covid-19 infections in the country, and continuing restrictions on economic and recreational activities for the rest of the year.

Thereafter, the economy has been recovering with the easing of restrictions. Indias GDP re-entered growth territory in the quarter ending December 2020.

The World Bank has estimated Indias GDP (Gross Domestic Product) growth to be in range of 7.5 to 12.5 per cent during FY 2021-22 (FY 22). For the fiscal year 2020-21, GDP contraction is estimated at 8.5 per cent as against growth of 4 per cent during FY 2019-20.Growth estimate for FY 22 is "depending on how the ongoing vaccination campaign proceeds, whether new restrictions to mobility are required, and how quickly the world economy recovers," the Bank said in its report titled Sour Asia Economic Focus Spring 2021: South Asia Vaccinates.

Further it said that as economic activity normalises, domestically and in key export markets, the current account is expected to return to mild deficits (around 1 percent in FY22 and FY23) and capital inflows are projected by continued accommodative monetary policy and abundant international liquidity conditions. (Source: The Hindu Businessline Bureau dated 31.03.2021)

Outlook

The United Nations has raised Indias growth forecast to 7.5 per cent for calendar year 2021, marking a 0.2 per cent increase from its projection in January, but said the countrys outlook for the year remains highly fragile.

The surging Covid-19 infections and inadequate vaccination progress in many countries threaten a broad-based recovery of the world economy, said the World Economic Situation and Prospects report.

It also projected Indias GDP to grow by 10.1 per cent in 2022. "India has been particularly affected by a brutal second wave which is overwhelming the public health system in large parts of the country".

The global economy is now projected to expand by 5.4 per cent in 2021 following a sharp contraction of 3.6 per cent in 2020, reflecting an upward revision from the UN forecasts released in January.Amid rapid vaccinations and continued fiscal and monetary support measures, China and the United States -- the two largest economies -- are on the path to recovery. (Source: The Business Standard Bureau dated 12.05.2021)

Industry Overview

The demand for Calcined Petroleum Coke (CPC) is directly correlated with the demand for aluminium and steel. Around 85% of the global CPC is supplied to the Aluminium Industry and the rest caters the requirements of the steel and other allied industries. The demand for aluminium is forecast to rise briskly at around 7.5% during 2021 riding on the back of a high growth rate in China and a rebound in other major markets across the world. The demand for the metal is expected to move past the 90 million mark with improvements in global mobility and the release of pent-up demand as the year progresses. While the industry has started working towards sustainable alternatives such as low carbon aluminium/green aluminium and innovating new technologies and alloys to bolster its position as the most sustainable metal in the world, aluminium produced through renewable energy sources is expected to gain much more importance in the coming years.

On the end-user front, usage of aluminium is expected to resume to normal levels during 2021 as operations resume across various end-user sectors. The packaging sector is estimated to continue growing and buoy the aluminium demand, while the automobile industry is expected to reach pre-Covid levels during the third quarter of 2021.

Aluminium, the second most used metal in the world after steel, is the fastest growing metal which has grown by nearly 20 times in the last 60 years (compared to 6 to 7 times for other metals). Some of the unique properties like light weight recyclability, conductivity non-corrosiveness and durability have helped establish it as a metal of choice for various applications across varied segments of the manufacturing sector. Aluminium is also called the metal of future due to the above properties. Being lighter (three times lighter than steel), it aids in fuel efficiency making it an efficient choice for automotive, defence and aviation. The construction industry relies on a variety of aluminium alloys in the manufacture of products ranging from exterior siding to structural components due to its durability and non-corrosive properties.

India is the fastest and most promising growing economy in the world today. With the eyes of global super powers and business houses on India, the time is ripe to capitalise all opportunities that can significantly boost Indias economy in a sustainable and holistic manner. However, the plight is Aluminium consumption in India at 2.5 kg per capita is much below the global average of 11 kgs. per capita. To reach this global average, India will require an additional annual consumption of 16 million tonnes. This would make India the second largest consumer in the world (absolute terms).

Even at low consumption, aluminium contributes 2% of manufacturing GDP (steel 12%, cement 9%) and this is expected to move up with consumption growth. This growth is critical for Indias industrial vision of achieving 25% of GDP from manufacturing by 2022.

(Source:alcircle.com/global-aluminium-industry-outlook-2021 and Metal Asia)

Company Overview

GCL is a manufacturing flagship Company of the Dempo Group. Established in 1967, Goa Carbon is engaged in processing and manufacture of Calcined Petroleum Coke (CPC). During this manufacturing process, the by-product of oil refining (i.e. Green Petroleum Coke [GPC]) is converted into high-value carbon-based product (CPC). This process removes moisture and volatile matter from the GPC at a very high temperature. This product is a critical raw material for aluminium, graphite, titanium dioxide, refractory, and several other industries.

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 100,000 MT for the Goa Unit, 1,68,000 MT for Paradeep Unit and 40,000 MT for Bilaspur Unit.

With the continuing restrictions on the import of GPC by the calciners and the import of CPC by the aluminium smelters which is capped by the Honble Supreme Court of India at 1.40 million tonnes per annum and 0.50 million tonnes per annum respectively, the additional requirement of both calciners and smelters will have to be met from domestic supplies within India.

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 2020-21. 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 31.03.2021 As at 31.03.2020
PAT (Loss)/ Sales (0.82%) (6.84%)
Return on Net Worth (3.72%) (30.55%)
Earning per share (Rs.) (5.26) (30.32)

The net cash flow of the Company during the year ended 31.03.2021 is as follows:

Particulars As at 31.03.2021 As at 31.03.2020
Cash from operations (1,506.57) 345.19
Cash from/(used in) investing activities (946.73) 1,479.24
Cash from/(used in) financial activities (954.94) (1,511.48)
Net increase/ (decrease) in cash .24) (3,408 312.95

Details of Key Financial Ratios are given below:

Particulars As at 31.03.2021 As at 31.03.2020
Debtors Turnover Ratio 8.20 9.96
Inventory Turnover Ratio 2.84 2.70
Interest Coverage Ratio 0.49 (1.06)
Current Ratio 1.15 1.24
Debt Equity Ratio 2.50 1.68
Operating Profit Margin % 1.35 (3.49)
Net Profit Margin % (1.36) (6.62)

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 import of raw materials.

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 that 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.

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 of professionals to monitor the production planning and inventory control systems, which improves control over raw materials planning.

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 emission and can have an adverse impact on the environment. To curb the extensive production of aluminium and steel, the Honble Supreme Court of India had banned the import of RPC during July 2018 but eventually lifted it, 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 is expected to 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.

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 spill-overs. 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.

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. 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

Covid Response

GCL took immediate measures to keep its people safe and protect their health. In the absence of any prior blueprint to manage such a crisis, the management designed a comprehensive Business Continuity Plan that was cohesively executed by empowered, local cross-functional teams.

In view of the ill effects and the health hazards posed by the COVID virus, GCL has strengthened efforts to protect employees across the ranks and to support the community at large directly as well as through the various initiatives undertaken at the Dempo Group level.

Employee Care

GCL has facilitated vaccination to its eligible employees. Ex-gratia benefits are being provided to support families of deceased employees.

Oxygen Support

The Company as a part of group initiative has donated oxygen concentrators which have been distributed to the major government hospitals in the state of Goa.

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 2021, the Company had 186 permanent employees consisting of 19 managerial personnel and 167 other employees in addition to 4 industrial trainees and an advisor. 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 quarterly declaration at the 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 materially from those expressed or implied statements. Important factors that could make a difference to the companys operations include inter alia 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.