Hariom Pipe Industries Ltd Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS

Global Economy

In 2023, the global economy continued its expansion but at a slower pace, with the IMF estimating a average growth of 3.3%, down from 3.5% in 2022 and 3.8% from 2000-2019. This deceleration was largely due to geopolitical tensions, supply chain disruptions, inflation, exchange rate volatility, and higher living costs, prompting many countries to adopt restrictive monetary policies.

The US economy grew by 2.5%, driven by consumer spending, whereas Europe benefited from government support during the energy crisis. Advanced economies saw slower growth at 1.7%, while emerging markets grew at 4.4%, with India leading at 8.2%. Chinas growth was 5.2%, bolstered by government interventions despite low demand and a downturn in the property market.

According to the IMFs latest projections, global GDP growth for 2024 and 2025 will be 3.2% and 3.3% respectively.

Indian Economy

In FY24, India remained the fastest growing major economy in the world, with real GDP accelerating to 8.2%, compared to 7% in FY23, driven by robust private consumption and steadily improving investment demand. Industrial and manufacturing activities maintained their momentum, with the PMI for manufacturing hitting a 16- year high. The construction sector continued to witness increased momentum due to increased government capex and rising demand for office spaces and housing, particularly in urban areas.

On the demand side, private consumption grew at a steady rate of 4% in real terms in FY24. Urban demand conditions remain strong, as reflected in various urban consumption indicators such as domestic passenger vehicle sales and air passenger traffic. Additionally, Gross Fixed Capital Formation (GFCF) continued to emerge as an important driver of growth, as indicated in its rising share of nominal GDP. India is in the midst of a private capex upcycle that has been aided by government capital expenditure. According to Axis Bank Research, private investment across a consistent set of over 3,200 listed and unlisted non-financial firms has grown by 19.8% in FY24.

Indias economic outlook for FY25 remains robust, with a projected growth rate of 7% and a gradual decline in inflation. The Reserve Bank of Indias inflation expectation survey highlights that both near term and longer-term median inflation could remain soft. Domestic economic activity is expected to be healthy, supported by an improving investment cycle, higher capacity utilisation, resilient services sector, strong credit growth and healthier corporate and bank balance sheets. The reforms instituted and implemented by the Government over the past decade have laid a solid foundation for sustained long-term economic expansion.

Indias GDP Growth Trend (%)

Industry Overview Global Steel Industry

According to the World Steel Association, Global steel demand is estimated to have de-grown by -0.1% to reach 1,763 million MT in 2023 due to higher interest rates, slowdown in the global economy and weaknesses in manufacturing activity. Additionally, steel demand in China, the worlds largest producer and consumer, remained weak owing to turmoil in the countrys property sector. Going forward, steel demand in China

in 2024 is expected to remain around the level of 2023, as real estate investments continue to decline, but the corresponding steel demand loss is expected to be offset by growth in steel demand coming from infrastructure investments and manufacturing sectors.

Notably, India continued to remain an outlier in the global steel industry. Indias finished steel demand grew by 13.6% to reach 136.25 million MT in FY24 on the back of strong economic growth. The growth is backed by a booming construction sector with private consumption as well as robust government expenditure fuelling infrastructure and capital goods as well.

On the production side, global crude steel production in 2023 reached 1,892 million MT, maintaining a level similar to that of 2022, as per World steel data published on January 25. China, the largest steel producer globally, saw a slight increase of 0.1%, bringing its total to 1019 million MT. India, the second-largest steel producer globally, saw a significant rise in production, increasing by 12.3% to 140.2 million MT in 2023, owing to strong domestic demand.

Total Production of Crude Steel Worldwide

					(Thousand Tonnes)
Country	2019	2020	2021	2022	2023
Brazil	32,568	31,414	36,071	34,089	31,868
China	9,95,418	10,64,766	10,35,242	10,19,080	10,19,080
Germany	39,627	35,680	40,241	36,860	35,438
India	1,11,350	1,00,256	1,18,201	1,25,377	1,40,706
Iran	25,609	28,990	28,320	30,593	31,039
Japan	99,284	83,186	96,336	89,226	86,998
Russia	71,729	71,620	77,019	71,746	76,028
South Korea	71,411	67,078	70,418	65,846	66,683
Turkiye	33,743	35,810	40,360	35,133	33,713
United States	87,761	72,732	85,791	80,535	81,392
Remaining Countries	3,10,003	2,92,474	3,34,437	3,01,574	2,89,087
Total	18,78,507	18,84,011	19,62,439	18,90,063	18,92,035

Source: World Steel Association, World Steel in Figures 2024

Market Influences and Overall Observations

Starting from FY21, there was a notable increase in the indices for most raw materials and steel itself, likely driven by supply chain disruptions and economic recovery post-pandemic. Peaks in prices were observed in 2021 and 2022, followed by a downward trend in 2023, indicating general market volatility influenced by external factors such as the pandemic, economic recovery, and geopolitical events.

Trends in Raw Material Prices

From 2016 to 2019, coking coal prices showed variability, peaking around 2018 before declining in 2020. A substantial rise occurred in 2021 and 2022, followed by a drop in 2023. Crude oil prices remained stable from 2016 to 2019, dipped in 2020 likely to the COVID-19 pandemic, then surged sharply in 2021 and 2022, and eventually declined in 2023. Iron ore prices displayed marked volatility, with a significant increase from 2016 to 2018, fluctuations thereafter, and a sharp rise in 2021 and 2022 before decreasing in 2023.

Trends in Steel Prices

Steel prices followed an upward trend with fluctuations, showing a significant rise beginning in 2021, peaking in 2022, and then declining in 2023. Steel scrap prices remained relatively stable compared to other indices, with a gradual increase from 2016 to 2021, peaking in 2022, and a subsequent decline in 2023.

Outlook

Globally, the steel demand forecast for 2024 is projected to be 1,793.1 million tonnes, with a YoY growth rate of 1.7%. For 2025, the forecasted global steel demand is 1,815.2 million tonnes, reflecting a YoY growth rate of 1.2%.

The table below provides a forecast for the steel demand in the top 10 steel-using countries for the years 2024 and 2025. The figures, presented in million tonnes, highlight the expected year-over-year growth rates. The projected numbers indicate a mix of growth trends across different countries, reflecting various economic and industrial dynamics.

Countries	2024 (P)	2025 (P)	YoY Growth Rate 2024 (%)	YoY Growth Rate 2025 (%)
China	895.7	886.7	0.0	-1.0
India	144.3	156.0	8.2	8.2
United States	92.2	94.0	1.8	2.0
South Korea	54.3	54.4	-0.8	0.2
Japan	53.3	53.9	-0.1	1.1
Russia	46.4	46.4	4.0	0.0
Turkiye	41.5	39.4	9.0	-5.0
Mexico	28.8	29.3	1.2	1.6
Germany	28.9	31.8	3.2	10.0
Brazil	24.1	24.5	1.0	1.6

Source: World Steel Association, SRO April 2024

Indian Steel Industry

Indias steel consumption rose significantly by 13.6% in 2023, with further growth of 8.2% expected in 2024 and 2025. This remarkable rise can be attributed to several key factors:

1. Infrastructure, Construction and Real Estate:

The booming real estate sector, government infrastructure projects, and construction initiatives are expected to significantly drive the growth in steel consumption in India. The rapid urbanisation and expansion of cities increases the demand for residential and commercial buildings, which requires vast amounts of steel. Government-led infrastructure projects, including highways, bridges, and metro systems, is expected to further boost steel usage. Additionally, construction initiatives aimed at improving urban and rural infrastructure, such as affordable housing and smart cities, are also expected to play a crucial role in driving the surge in steel consumption across the country.

2. Manufacturing Sector: India is becoming a manufacturing hub, with significant investments in automotive, appliances, and other sectors that require steel. The growth in these industries is expected to directly translate to higher steel consumption.

3. Government Initiatives: Various government initiatives, such as the development of smart cities, affordable housing schemes, and the expansion of railways and highways, have created a substantial demand for steel. Policies aimed at boosting domestic steel production also support this growth.

4. Investment in Renewable Energy: India has set an ambitious renewable energy target of achieving 500 GW of installed capacity from non-fossil fuel sources by FY30. This is expected to drive steel demand as solar panels and wind turbines require considerable steel for their structures and components.

Steel Prices

In FY24, Indian steel prices declined due to high imports, weak exports, and a 15% drop in coking coal prices. Despite a 13-15% increase in domestic consumption driven by government infrastructure spending, steel prices remained subdued. HRC prices fell by 7%, rebar by 10-11%, and semi-finished steel by 12%. Factors contributing to this include increased imports, limited export growth, and a decrease in coking coal and scrap prices.

Factors Impacting Steel Prices:

High Imports and Weak Exports: Indian steel imports increased to 7.2 million tonnes in April-February24 from 5 million tonnes in the same period last year. Despite this, steel product exports are set to reach 9 million tonnes in FY24, up from 8.7 million tonnes in FY23. However, the weak global market has limited export growth.

Coking Coal Prices: Premium hard Australian coking coal prices fell by around 14% y-o-y in FY24. Coking coal accounts for about 45% of the hot metal production costs for integrated steel producers. The decrease in coking coal prices significantly impacted steel prices.

Scrap and Sponge Iron Prices: Global scrap prices declined due to the macroeconomic scenario in Turkiye, which influenced imported scrap prices and, in turn, domestic scrap prices. Similarly, sponge iron prices, a key feedstock for secondary steel manufacturing, fell by around 14-15% y-o-y.

Domestic Iron Ore Prices: Domestic iron ore prices remained firm, supported by the removal of export duty in November 2022, which increased pellet and iron ore exports. High-grade ore availability is tight in Odisha, with logistics issues and inventory declines leading to shortages.

Outlook

India will continue to remain a bright spot in the global steel industry and domestic steel demand is expected to show healthy growth of 7-8%. This is expected to be driven by strong economic growth of 7.2% projected for FY25, a record government capex, buoyant demand from major steel consuming sectors like infrastructure and construction, automotive, capital goods as well as consumer durables.

Indian Steel Pipes and Tubes Industry

The state of the Indian economy mirrors the growth seen in the Indian tube and pipe sector. Rising demand for oil and gas, increased global need for steel pipes, a booming transport industry, expanding urbanisation, and government initiatives in sanitation and wastewater management are key drivers. The sector is also benefiting from the escalating need for efficient water distribution and irrigation systems. These factors collectively propel the Indian tube and pipe industry forward, reflecting the broader economic trends and infrastructural developments within the country.

According to BlueWeave Consulting, the market size of the India steel pipes and steel tubes market was calculated at $32.88 billion in 2023, and it is anticipated to expand at a CAGR of 6.43%. This growth is expected to culminate in a total value of $37.69 billion by the year 2030. In terms of volume, the market is expected to increase from 6.98 million MT in 2023 to 7.66 million MT by 2030.

Company Overview

Hariom Pipe Industries Limited is a prominent manufacturer and supplier of iron and steel products in India. Established with a vision to provide high-quality piping solutions, the company specialises in producing a diverse range of products, including premium steel items like Mild Steel (MS) Billets, HR Pipes, CR Pipes, GP Pipes, GI Pipes, Hot Rolled (HR) Coils, Cold Rolled (CR) Coils, Pre-Galvanized (GP) Coils, and Scaffolding systems. With a strong emphasis on customer satisfaction, the Company has built a reputation for excellence with a nationwide presence and a significant market presence in entire south India and the west part of India. The companys state-of-the-art manufacturing facilities and commitment to sustainable practices underscore its dedication to contributing to the growth of the steel industry while adhering to stringent quality standards.

Review of Operations in FY24

Operational Highlights

• Successful Ramp-Up of GP/GI Units:

The new GP unit (capacity of 1,20,000 MTPA) and the enhanced MS pipe unit (capacity of 1,32,000 MTPA) in Telangana, along with the GP/GI plant in Tamil Nadu (capacity of 1,80,000 MTPA), were successfully ramped up during the year.

• CR Tandem Mill Enhances Product Portfolio:

A state-of-the-art Cold-Roll Tandem mill and an annealing furnace were commissioned at the Mahabubnagar Plant in Telangana during the quarter. The tandem mill, with its three cold rolling processes to reduce thickness variation and achieve high quality, produces pipes as thin as 0.4mm, which are in higher demand and command a premium. This addition brings new customers from industries such as fans, packaging strips, furniture, auto components, and pre-engineered building products to the companys portfolio.

Financial Highlights

HPIL achieved its best-ever performance in terms of revenue, volume, EBITDA, and PAT in FY24. Total Income reached Rs.1,15,838.47 lakhs, and EBITDA soared to Rs.14,379.14 lakhs, representing 80% and 74% YoY increases, respectively. This performance was bolstered by higher production from an enhanced capacity of 7,01,232 MTPA, up from 5,33,232 MTPA at the end of FY23, a higher share of Value-Added Products, and improved efficiency. The Companys commitment in expanding its Value-Added Products share resulted in a record high of 92% for the FY24, compared to 80% in FY23. This led to a 23% YoY increase in PAT, reaching Rs.5,679.95 lakhs.

Positive Operating Cash Flow

The companys dedicated efforts to enhance cash flows resulted in a positive Operating Cash Flow for the FY24.

Strategic initiatives such as the Galvanized Pipe Project in Mahbubnagar, efficient inventory management, and proactive measures to reduce debtor days, like channel finance and efficient collection methods, led to an Operating Cash Flow of Rs.495.54 lakhs in FY24, compared to a usage of Rs.10,056.84 lakhs in FY23. This highlights the companys commitment to financial stability and growth. Notably, debtor days were reduced by 10 days from 49 days in FY23 to 39 days in FY24.

RoCE Improved to 18.8%

The Return on Capital Employed (RoCE) saw a significant increase during the fiscal year, rising from 14.63% to 18.83% due to effective resource utilisation. This improvement translated to an absolute figure of Rs.3,671.86 lakhs, marking a 50% increase in earnings.

Financial Performance:

Particulars	FY24	FY23
Total Income ( Rs. Lakhs)	1,15,838.47	64,446.03
EBITDA ( Rs. Lakhs)	14,379.14	8,263.15
PAT ( Rs. Lakhs)	5,679.95	4,620.80
Revenue per MT ( Rs.)	57,944	59,010
Cost per MT ( Rs.)	50,719	51,435
EBITDA per MT ( Rs.)	7,225	7,575
EBITDA margin (%)	12.41%	12.82%
PBT Margin (%)	6.68%	9.75%
PAT Margin (%)	4.90%	7.17%

Profitability Ratios:

Particulars :	FY24	FY23
Return on Capital Employed (RoCE)	18.8%	14.6%
Return on Equity (RoE)	12.2%	12.3%

Cash Flow Analysis:

Particulars	FY24	FY23
Operating Cash Flow	495.54	(10,056.84)
Investing Cash Flow	(18,159.02)	(22,151.88)
Financing Cash Flow	7,437.18	42,605.74

Balance Sheet Metrics:

Particulars	FY24	FY23
Net Working Capital	19,502.09	22,662.94
Total Debt	37,088.54	29,601.80
Total Outside Liabilities (TOL)	41,612.48	33,401.78
Net Worth	46,411.75	37,516.66
Cash and Equivalents	177.97	10,404.27

Financial Ratios:

Particulars	FY24	FY23
Current Ratio	1.68	2.12
Interest Coverage Ratio	3.38	7.05
Debt to Equity Ratio (D/E)	0.80	0.79
TOL / Net Worth	0.90	-

SWOT Analysis of the Company

STRENGTHS

Established Presence in the steel pipes and tubes

Industry

• Experience and Expertise: The promoters of HPIL have combined experience of over 50 years of experience in the industry, which gives them a deep understanding of market dynamics.

• Diverse Product Profile

Our diverse product portfolio has enabled the company to cater to a broader market and adapt quickly to changing industry demands.

• Strong Relationships and Dealer Network

The company has established strong relationships with steel traders, dealers, and manufacturers across key regions, including Karnataka, Maharashtra, Kerala, Andhra Pradesh, Telangana, and Tamil Nadu. A robust dealer network further strengthens the companys market presence and distribution capabilities, ensuring efficient product availability and customer service.

Integrated Operations Leading to Healthy Operating Efficiency

• Manufacturing Evolution: We have now grown to producing HR strips, MS tubes, galvanized coils, galvanized iron pipes, and scaffolding.

• Backward Integration: We have now grown to producing MS sponge iron in FY22, enhancing control over raw materials and into MS billets and HR strips.

• Profitability: Maintained superior profitability with operating margins between 11.0-13.4% over the past three years, outperforming many peers.

• Cost Savings: Utilising solar power and a new furnace unit has resulted in significant power cost savings, further boosting operating margins.

Comfortable Financial Risk Profile

• Capex Management: Avoiding large, debt-funded capex projects over the medium term, which helps maintain financial stability.

• Fund Infusion: Received Rs. 135 crore from the issue of warrants and shares on a preferential basis, with an additional Rs. 55 crore anticipated in the first half of FY25.

WEAKNESSES

Exposure to Intense Competition and Cyclicality in the Industry

• Fragmented Market: The Indian Steel Pipes and Tubes sector consists of numerous small and medium-sized enterprises (SMEs) alongside larger, well-established players. This fragmentation leads to intense competition, diverse product offerings, and varying scales of production and technological advancement across the industry.

• Cyclicality of Industry: The industrys performance is closely tied to the overall economic environment, making it susceptible to economic downturns.

• Exposure to Volatility in Steel Prices

o Input Cost Fluctuations: Operating profitability is highly sensitive to changes in the prices of inputs like sponge iron, steel scrap, and power.

o Market-Driven Prices: The company is a price taker in the market, with no price contracts with suppliers or customers.

o Margin Impact: Any significant fluctuation in steel prices can adversely affect the operating margin.

OPPORTUNITIES

Expansion & Increasing Efficiencies.

The fragmented nature of the industry also presents opportunities for consolidation and growth, as companies seek to expand their market share and improve operational efficiencies.

• Value-Added Products: Continued addition of value-added steel products can drive higher margins and revenue growth.

• Geographic Expansion: Exploring new domestic and international markets can enhance market presence and reduce regional dependency.

• Technological Advancements

o Operational Efficiency: Investing in advanced manufacturing technologies can further improve operational efficiency and reduce costs.

o Sustainability:

Implementing eco-friendly practices and sustainable operations can attract environmentally conscious customers and investors.

Strategic Partnerships and Alliances

• Collaborations: Forming strategic partnerships with other companies can enhance market reach and operational capabilities.

• Supply Chain Improvements: Strengthening the supply chain through alliances can reduce input cost volatility and improve profitability.

THREATS

Regulatory Changes

• Compliance Costs: Changes in environmental regulations and industry standards can increase compliance costs and affect profitability.

• Trade Policies: Alterations in trade policies and tariffs can impact the cost of raw materials and finished goods, affecting overall business performance.

Economic Downturns

• Demand Fluctuations: Economic slowdowns

can lead to reduced demand for steel products, impacting revenue and profitability.

• Credit Risks: Economic instability can increase credit risks, affecting the companys financial health.

Technological Disruptions

• Innovation by Competitors: Rapid technological advancements by competitors can disrupt the market and challenge HPILs market position.

• Operational Obsolescence: Failing to keep up with technological changes can lead to operational inefficiencies and reduced competitiveness.

Risk Management

The risk management process at our organization involves identifying both current and potential internal and external events that could influence strategy and objectives. The Risk Management Committee of the Company reviews and oversees the comprehensive risk assessment to evaluate the level of risk, nature, likelihood, velocity and impact of these risks. The committee is also responsible for risk treatment, which includes selecting appropriate management options, evaluating existing controls, and developing new treatment plans to ensure their effectiveness. Internal controls ensure timely and accurate information, enabling proactive risk management. Risk mitigation includes implementing policies, procedures, and processes to address potential future events. Continuous risk control and monitoring involve analyzing trends, tracking changes, and conducting quarterly reviews by the functional department to update risk profiles and treatment plans.

Risk Mitigation

At Hariom Pipes, mitigating business operational risks is achieved through a well-defined organisational structure, ensuring role clarity, and maintaining proper systems for inventory management of raw materials and key spares. We emphasise technology selection, process standardisation, and clear SOPs, complemented by training and asset upkeep. Our strategic initiatives include tracking micro and macroeconomic data, market trends, and forecasts by expert agencies, as well as developing alternative sources for uninterrupted raw material supply. We closely monitor competitor dynamics and implement cost-control initiatives to enhance operational efficiency. Additionally, the company has established a dedicated transport group to manage logistics, continuously evaluates technological obsolescence, and maintains a robust disaster risk management plan, including insurance coverage and safety training.

Financial risks are managed by maintaining a low credit risk profile, with timely realisation of trade receivables and a strong assessment system for customer creditworthiness. Liquidity risk is mitigated through prudent financial planning, maintaining sufficient cash, and securing funding via sanctioned credit facilities. Detailed annual and quarterly budgets are discussed at senior levels, with regular monitoring of cash flows. Market risks are addressed by reviewing interest rate movements, ensuring adequate liquidity, and avoiding foreign currency exposure. The company remains committed to high standards of corporate governance, compliance with evolving laws, and preventing corporate accounting fraud through rigorous internal controls and a whistleblower mechanism. Human resource risks are managed by assigning the right jobs, maintaining a proper recruitment policy, and fostering employee welfare and development. Environmental risks are mitigated through efficient operation of environment protection systems, and legal risks are managed by relying on professional guidance to ensure total compliance with laws and regulations.

For more details of our risk management policy https:// www.hariompipes.com/investor-relations-policies.php

Human Resources

With strong leadership and a people-focused approach, we ensured business continuity while prioritizing our workforces health, safety, and engagement. We foster an inclusive environment that promotes growth and innovation, attract top talent through comprehensive recruitment, and empower employees with ongoing training. Committed to meritocracy and employee welfare, we build a motivated workforce that drives our organizations sustainable growth and success. As on March 31, 2024, the company has 848 employees.

Internal Control Systems

The Company has established robust internal control systems to ensure operational efficiency, reliability of financial reporting, and compliance with applicable laws and regulations. These systems include well- defined policies and procedures that facilitate the timely availability of accurate information, thereby enabling proactive risk management. Regular internal audits and reviews are conducted to assess the effectiveness of these controls, ensuring that any deviations are promptly addressed. The Audit Committee and Board of Directors of the Company oversees the internal control framework, ensuring its adequacy and alignment with the organisations strategic objectives, thereby fostering a disciplined and constructive control environment across all levels of the organisation.

CAUTIONARY STATEMENT:

Statements in this report describing the Companys objectives, projections, estimates, exceptions or predictions may be forward looking statements and are based on certain assumptions and exception of future events. Actual result could however differ materially from those expressed or implied based on reasonable assumptions. The Company assumes no responsibility in respect of forward looking statement herein which may undergo changes in future on the basis of subsequent developments, information and events.