hariyana ship breakers ltd Management discussions

Ship breaking is the process of dismantling decommissioned ships and similar vessels to extract scrap metal and demolish the huge ship structure. It is also known as ship demolition, ship cracking, or even ship recycling, at times. Global trade and shipping has consistently increased over the past years due to globalization and industrialization, which has led to substantial rise in ship building. However, the average life of a ship is quoted to be around 25 to 30 years. Post this age, the ship needs to be decommissioned for safety and economic concerns, may be sometimes due to accidents and mishaps of the ship. The process of decommissioning is usually followed by an auction of the ship, after which it is moved to the breaking yards to break it down. The breakdown is labour intensive, and the time required for breaking the ship down varies according to the size and type of vessel.

Indias economic growth is contingent upon the growth of the Indian steel industry. Consumption of steel is taken to be an indicator of economic development. While steel continues to have a stronghold in traditional sectors such as construction, housing and ground transportation, special steels are increasingly being used in engineering industries such as power generation, petrochemicals and fertilizers. India occupies a central position on the global steel map, with the establishment of new state-of-the-art steel mills, acquisition of global scale capacities by players, continuous modernization and upgradation of older plants, improving energy efficiency and backward integration into global raw material sources.

• Global Overview:

Global ship recycling activities fell into choppy waters, diving down a steep 49% in 2022-23, against a 14% increase in 2021-22. Total tonnage scrapped last year amounted to 3.19 mnt light displacement tonnage (LDT) against 6.27 mnt LDT in 2021. LTD refers to the weight of a ship excluding cargo, fuel, water, ballast, stores, passengers, crew etc but with water in boilers to a steaming level.

In terms of the number of vessels scrapped, these were at 438 in 2022 compared to 766 in 2021, down 43% y-o-y. The three countries that receive the highest number of ships globally for breaking are India, Bangladesh and Pakistan, together contributing over 90% of the dismantling volumes.

In terms of geography, the global ship breaking market can be segmented into Asia Pacific, Europe, North America, Latin America, and Middle East & Africa. The dynamics of the ship breaking market differ from developing and underdeveloped countries to developed countries. In developed regions, such as Europe and North America, the breaking of a ship is cost intensive and stringent rules, regulations, and standard operating procedures need to be followed, making the entire process economically unviable. On the other hand, in developing countries such as, China, India, and Bangladesh, the scenario is quite the opposite, the ship breaking market is expanding due to lack of regulations. Hence, Asia Pacific is a prominent market for ship breaking globally, with India, China, Bangladesh, and Pakistan topping the market. Turkey is also a major market outside Asia Pacific.

India displaced Bangladesh as the leading ship-dismantler in 2022. India ended last year with a ship-breaking tonnage of 1.08 mnt LDT against Bangladeshs 0.95 mnt LDT. Pakistan closed last year in third slot with 0.44 mnt LDT.

All three showed a y-o-y drop with Bangladesh and Pakistan floundering on the deepest side. Bangladesh was down a steep 64% (2.63 mnt LDT in 2021), while Pakistan also showed a sharp 56% y-o-y drop (1.00 mnt LDT). India, despite steaming up to the top slot, ended y-o-y down 30% against 1.54 mnt LDT in 2021. In terms of the number of vessels beached for breaking, India revealed a 40% decrease to 126 (211 in 2021). Bangladesh was down 57% to 122 vessels (254). Turkey took third slot but also showed a 38% decrease to 48 vessels (77) and Pakistan recorded the steepest drop at 64% to 43 (119).

As per World Steel Short-Range Outlook, global steel demand declined by 1.7% in 2022 after recovering 16.4% in 2021 from the pandemic dip of 12.3%11. The reason for the downward revision is the impact of consistently high inflation and increasing interest rates worldwide. In 2022, recovery momentum after the pandemic shock was hampered by high inflation and increasing interest rates, the Russian invasion of Ukraine, and the lockdowns in China. Accordingly, prices in China, India, Turkey, and other major steel exporting countries also saw an increase. Coupled with sanctions imposed by the United States and Europe on Russia, energy prices soared up, inflation climbed high, and production costs pulled up, prompting European steel mills to reduce output, thereby pushing up prices. According to the World Steel Association (WSA), global steel demand will rebound in the current year by 2.3%, mainly due to a recovery in manufacturing activity. The outlook for the steel industry is projected to improve in 2023-24 on the back of infrastructure-related demand.

•Domestic Overview & Market Size:

According to the Gujarat Maritime Board, the regulator for all the maritime activities in the state, the Alang did 1.09 million tonnes of Light Weight Displacement (LDT) recycling in 202223 financial year as against the capacity of 4.5 million LDT, its worst since 2007-08 when Alang managed 0.64 million LDT. The worlds biggest ship breaking yard Alang in Gujarat, has not received a ship for recycling in the past 20 months.

Alang yard caters to 98% of ship recycling activities in India. The Rs.5,000 crore annual ship breaking industry employs more than 15,000 workers directly and several thousands indirectly.

In 2020-21, Alang scrapped 1.78 million LDT as compared to 1.62 million LDT in 2019-20, with the global economy opening up post Covid and the Russia-Ukraine war along with unrest in Syria and Turkey, the freight rates have nearly tripled in the last year or so.

However, India remains the bright spot for global steel demand. After growth of 8.2% in 2022, demand is expected to show healthy growth of 7.3% in 2023 backed by consumption led demand. Having managed inflation well, the Indian economy is on a healthy growth track, with a rising share of investment in GDP, appropriate budget allocations and expenditure by the Government in the infrastructure segment. India also faced supply disruptions due to raw material constraints and volatility of prices.

• Government Initiatives

To overcome the downturn being faced in Alang, the Centre and state government are "diligently formulating strategies" and "implementing measures" to ensure the yards

sustainability and ongoing operation. The central government has chalked out a plan to double the capacity of Alang from 4.5 million LDT to 9 million LDT in the next few years to become Indias biggest vehicle recycling hub. It aims to revitalize the yard, effectively navigate the challenges posed by the industry slowdown, and address the competitive landscape, ensuring its long-term viability.

The Gujarat government came up with financial package of Rs.28 crore for the revival of Alang- Sosiya Ship Recycling Yard. This includes waiver in housing cess of Rs.200 per sq metres, waiver in development charges by 50% and to waive Rs.35 per LDT for Indian flagged ships to be recycled, from Rs.135 per LDT to Rs.100 per LDT.

While the customs duty has already been reduced to zero from earlier 2.5%, the industrys demand for BIS is being actively considered by the Centre. Bangladesh does not have enough steel manufacturing units and is heavily dependent on ship recycling industry for its raw materials required for construction. Presently there is a ban on the production of rods in rerolling mills using plates recycled from ships at Alang as raw material. With BIS approval, the recycled materials from scrapped ships can be used for high rise buildings and other such construction works. Alang is set to emerge as the countrys hub for vehicle scrappage.

OPPORTUNITY AND THREAT

With increasing infrastructure development, growing urbanisation and a drive towards sustainable solutions, the steel industry is poised to unlock significant opportunities, creating a favourable outlook for the sector. India, one of the fastest growing major economies, is likely to become the third-largest economy in the world by 2030. The steel industry will have a major role to support this growth. Increased investments in infrastructure will be a major contributor to the growth of Indias domestic steel demand. Infrastructure investment will not only increase steel consumption but also bring the supply chain cost down for steel, thereby creating a virtuous cycle.

The domestic manufacturing push under Atmanirbhar Bharat is also expected to aid the growth of steel industry in India. Additionally, Indias demographic dividend coupled with rapid urbanisation will stimulate the steel demand in the Country. As a result, the current low per capita steel consumption is expected to grow rapidly. At our company, we continuously evaluate the evolving trends and respond proactively to capitalise on the emerging opportunities.

With large raw material reserves, strong base of technically skilled manpower and one of the fastest growing markets in the world, India has definite structural advantages for a successful steel industry. The National Steel Policy 2017 seeks to create a globally competitive steel industry in India with 300 million tonne steelmaking capacity and 158 kg per capita steel consumption by FY 2030-31. The growth in demand will come from traditional, as well as emerging consuming sectors focusing on changing needs of customers. Government-led investment in infrastructure, rapid urbanisation, rising preference for personal mobility, growth in capital goods sector, and government focus on making India Aatmanirbhar are expected to stimulate steel demand in India. The acceleration of the rural economy is also emerging as a potential demand driver for steel. The Government has taken an objective of increasing rural per capita consumption of steel from current 19.6 kg to 38 kg by FY 2030-31.

Opportunities abound in growing economies and opening of economy in India has created opportunities for India enterprise to move beyond national boundaries as well to create productive assets. Presently, the Company is consolidating its gains out of creating additional production capabilities. While climate change is a key risk for a hard to abate sector such as steel, it also provides an opportunity to take a leadership role in the steel industry by reducing our environmental footprint. Evolving consumer needs and growing focus on sustainability will require innovation in process, product, and business models supported by a strong technology management process.

SEGMENT WISE PERFORMANCE

• Segmental Review

The Groups business segments are identified based on the geographic locations of its units and the internal business reporting system as per Ind AS 108. Business segments of the company are primarily categorized as: Mumbai and Bhavnagar.

This Consolidated Segment Information includes Industrial Oxygen & Trading Segment pertains to subsidiary of the company.

Rs. In Lakhs

Particulars	Mumbai	Bhavnagar	Industrial Oxygen & Trading	Total
Segment Assets	15,709.71	10,588.30	0.94	26,298.95
Segment Liabilities	2,607.07	9,511.50	-	12,118.58
Revenue from External Source (Excluding Inter Segment Revenue)	3,916.45	2,280.82	(0.03)	6,197.24
Segment Results Before Interest and Taxes	745.85	36.25	(0.38)	781.72

i. Mumbai:

During the year under review, the Mumbai Unit has performed well in term of sales turnover and net profit margin, this segment has achieved revenue of Rs. 3,916.45 Lakhs and result achieved Rs. 745.85 Lakhs.

ii. Bhavnagar:

During the financial year 2022-23, ship-breaking unit at Alang Ship Breaking Yard, Bhavnagar has performed well in term of sales turnover and net profit margin. In spite of volatile prices of old Ships, Iron and Steel products coupled with fluctuations in value of Indian Rupee vis-a-vis US Dollar during the year, this segment has achieved revenue of Rs. 2,280.82/- Lakhs and result of Rs. 36.25/- Lakhs. Though the year under review saw fluctuation in the international market of old ships coming for breaking, the management was very cautious and purchased ships at proper time and built a good level of inventories to earn better profits in coming years. During the year under review, Trading activities were also carried out in Bhavnagar. Moreover, the management is of the view that, in the coming years the ship breaking industry will be stable and with expected boost in the economy the requirement of iron and steel will increase which will help the company to move towards its sustained path of growth.

iii. Industrial Oxygen & Trading:

This segment of the company pertains to the subsidiary of the company. This segment has not achieved revenue during the year and incurred loss of Rs.0.38 Lakhs during the year under review.

OUTLOOK

India remains the biggest ship breaking market, with the Alang ship breaking yard in Gujarat handling at least 450 ships every year. By making the countrys ship recycling sector more environmentally sound, the government expects to increase ship recycling capacity by 2024 to more than nine million gross tonnage.

Ship breaking industry in India is a part of the global ship recycling practices. This industry, like others, has many challenges and opportunities. With the back drop of sustainability issues, this industry has the potential to be the prime economic activity in India. There are many opportunities in this industry, if one practices innovative strategies using a sustainable collaboration among technicians, regulating authorities and ship breakers. Implementation of internationally accepted guidelines for waste handling, workers health protection etc. would lead Ship breaking industry towards sustainable development. However, establishment of recycling industries for the bulk wastes would be able to cater the increasing cost of obsolete vessels due to competitions from other countries and cost of environmental protection.

The growth can be attributed to higher rates for steel scrap and increased availability of condemned vessels. Indian steel demand is expected to be robust and growing by 6.2% in FY 2023-24 supported by strong GDP growth forecast, private consumption and Government expenditure. Indias capital goods sector is also expected to benefit from the momentum in infrastructure and investment in renewable energy. Integrated Steel Players will continue to add capacity in FY 2023-24, and utilisation levels are expected to remain healthy at ~80%.

Your directors see a staying positive and are having bright future prospects ahead for the company looking to the prevailing upward trend in the Iron and Steel sector in India and internationally. The management is of the view that, in the coming years the ship breaking industry will be stable and with expected boost in the economy the requirement of iron and steel will increase which will help the company to move towards its sustained path of growth.

RISK AND CONCERN

Over and above the economic risks the shipping industry is impacted by numerous short term and regional factors, like weather changes, Oxygen Supply problems etc. This results in great amount of volatility in the freight market, which in turn impacts your Companys earnings. The global economy is in uncertain territory, and not showing signs of picking up sharply in shorter span of time.

Global economic uncertainties have affected Indias economy, Key risks synonymous to industry include the global recessionary trend, economic slowdown, increase in financial charges, non-availability (or undue increase in cost) of raw materials, such as, steel and labour etc., coupled with market fluctuations. The Company does not apprehend any inherent risk in the long run, with the exception of certain primary concerns that have afflicted the progress of our industry in general, like:

• Shortage of Labour

• Rising manpower and material costs,

• Approvals and procedural difficulties.

• Lack of adequate sources of finance.

The risks for the Company arise from the inherent nature of the shipbuilding industry. The commercial shipbuilding industry prospects are dependent on world trade and the cyclicity of oil, natural gas, shipping, transportation and other trade related industries. Offshore Industry continues to be in the trough.

• Macroeconomic Risks

Overcapacity and oversupply in the global steel industry as well as increased levels of imports may adversely affect steel prices, impacting profitability.

• Operational Risks

Steel industry is capital-intensive and maintenance of critical assets is vital. industry is also prone to high proportion of fixed costs and volatility in the prices of raw materials and energy. Limitations or disruptions in the supply of raw materials could adversely affect the Companys profitability. Failure of critical information systems/ servers that control the Companys manufacturing plants may adversely impact business operations. Conventional maintenance practices may be inadequate to deliver highest standards of equipment reliability leading to unplanned interruptions of operational processes.

• Supply Chain Risk

The supply chain network is subjected to physical and environmental destructions, trade restrictions due to geopolitical tensions and disruptions at suppliers. The developing rail, road, port infrastructure, handling facilities and dependence on outsourced partners may lead to disruption of operations.

• Safety Risk

Non-adherence to process and workforce safety requirements, safety laws and regulations may impact business continuity and reputation.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

Internal financial control systems of the Company are commensurate with its size and nature of its operations. These have been designed to provide reasonable assurance with regard to the orderly and efficient conduct of its business including adherence to the Companys policies, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records and the timely preparation of reliable financial information and disclosures.

Systems and procedures are periodically reviewed and these are routinely tested by Statutory as well as Internal Auditors and cover all functions and business areas. The Audit Committee reviews adequacy and effectiveness of the Companys internal control environment and monitors the implementation of audit recommendations, including those relating to strengthening of the Companys risk management policies and systems. During the year under

review, no material or serious observation has been received from the Statutory Auditors and the Internal Auditors of the Company on the inefficiency or inadequacy of such controls.

FINANCIAL PERFORMANCE & ANALYSIS

The Companys financial performance for the year ended March 31, 2023 is summarized below: Standalone & Consolidated Ind AS Financial Results: Review and Analysis

(Rs. In Lakhs)

Particular	Stand	alone	Consolidated
	For the financial year ended 31.03.2023	For the financial year ended 31.03.2022	For the financial year ended 31.03.2023	For the financial year ended 31.03.2022
Revenue from operations	5,407.23	16,848.64	5,407.23	16,860.14
Other Income	798.88	811.37	790.02	811.74
Total Revenue	6,206.10	17,660.00	6,197.25	17,671.88
Cost of raw materials consumed	1,941.72	8,319.45	1,941.72	8,319.45
Purchase of Stock - in - trade	3,029.73	1,853.65	3,029.73	1,864.56
Changes in inventories of finished goods, stock - in - trade, work - in - process		5,608.87		5,608.87
Employee benefits expenses	117.53	290.99	117.53	291.39
Finance costs	221.49	158.29	221.67	158.29
Excise Duty	-	-	-	-
Depreciation and amortization expenses	80.51	87.43	80.51	89.11
Other expenses	148.28	763.97	147.05	293.04
Total Expenses	5,639.34	17,229.46	5,638.28	16,771.77
Share of profit/ (loss) from associates	-	-	1.09	(492.28)
Profit / (Loss) before tax	566.76	430.54	560.05	407.84
Less: Current Tax	143.07	235.54	142.98	235.54
Less: Deferred Tax	5.35	-5.94	6.54	-11.88
Profit / (Loss) after tax	418.34	200.94	410.54	184.18
Other Comprehensive Income	-1.03	5.31	-1.03	5.31
Total Comprehensive Income for the year	417.31	206.25	409.50	189.48
Earnings Per Share (Face Value of Rs. 10/- each) -Basic -Diluted	6.78 6.78	3.26 3.26	6.66 6.66	2.99 2.99

• Standalone Cash Flow Analysis

Particular	For the financial year ended 31.03.2023	For the financial year ended 31.03.2022
Net Cash Flow from Operating Activities	(4,846.71)	(273.08)
Net Cash Outflow from Investing Activities	69.78	9.12
Net Cash Outflow from Financing Activities	767.98	146.95
Net Cash Inform/(Outflow)	97.30	4,106.24

• Business Overview

The company is in the business of ship breaking, trading and investment activities. During the financial year 2022-23, the sales turnover of the company for FY 2022-23 and FY 2021-22 were Rs. 5,407.23/- Lakhs and Rs. 16,848.64/- Lakhs respectively. Due to frequent fluctuation in the prices of old ship in the international market and also heavy dollar exchange rate fluctuations, the company was unable to perform well in terms of sales turnover. However, the prices in Iron and steel industry are gradually getting stabilized, but foreign currency and fluctuations in value of Indian Rupee vis-a-vis US Dollar remains a concerning area for the company even in the current year.

Surplus funds are also invested in new avenues of earnings in the form of partnership with other entities like in Real Estate and Redeveloping firms. At present the Company has partnership in Hariyana Air Products with 95% share, Orchid Lakeview Developers with 33.33% share, Goyal Hariyana Realty with 50% share, Whitefield Projects with 40% share and Swastik Developers with 33.33% share. The management is hopeful that the Company can earn reasonable return on these investments.

Standalone

F.Y 22-23 closed with Revenues of Rs. 6,206.10/- lakhs, PBT Rs. 566.76 /- lakhs and PAT of Rs 418.34 /- lakhs.

Consolidated

F.Y 22-23 closed with Revenues of Rs. 6,197.25/- lakhs, PBT Rs. 560.05/- lakhs and PAT of Rs. 410.54/- lakhs.

Revenue

Your Company reported Revenue of Rs. 6,206.10/- lakhs during the year as compared to Rs. 17,660/- lakhs of the previous year. Revenue of current year has decreased by 64.86% as compared to previous year.

Finance Cost

Finance cost has increased from Rs. 158.29/- lakhs in the previous year to Rs. 221.49/- lakhs.

Depreciation

Depreciation during the year decreased to Rs. 80.51/- lakhs from Rs. 87.43/- lakhs in previous year.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES

Your Company treats its "human resources" as one of its most important assets. We continuously invest in attraction, retention and development of talent on an ongoing basis. Our thrust is on the promotion of talent internally through job rotation and job enlargement. We believe in harnessing its leadership and people capabilities through sharp focus and initiatives on talent development. The total number of permanent employees as on March 31, 2023 were 36.

We review our talent based on their performance and potential to assess their readiness for future roles of higher scale and complexity. We believe in developing our employees through multiple experiences requiring them to handle scale and complexity. We have instituted this through varied job rotation and project roles. We have put in place various recognition initiatives for our employees to reward them on their noteworthy performance and contribution. Social awareness and cultural/sports programs are arranged regularly to create interest in living a meaningful life and release tensions.

Our Company is committed to providing work environment that ensures every employee is treated with dignity and respect and afforded equitable treatment. The Company is also dedicated at promoting a work environment that is conducive to the professional growth of its employees and encourages equality of opportunity. To foster a positive workplace environment, free from harassment of any nature, we have institutionalized the Anti-Sexual Harassment Framework through which we address complaints of sexual harassment at the workplace. We follow a gender-neutral approach in handling complaints of sexual harassment and we are compliant with the law of the land where we operate. We have also constituted Complaints Committee to consider and address sexual harassment complaints in accordance with Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.

SIGNIFICANT KEY FINANCIAL INDICATORS

Not applicable as there are no changes of 25% or more in key financial indicators as compared to the immediately previous financial year.

CHANGE IN NET WORTH

The Companys Net worth stood at Rs. 13,304.38 Lakhs for the financial year 2022-23 as compared to Net worth of Rs. 12,887.07 Lakhs for the previous financial year 2021-22. In the current year, the Company earned a profit and hence change in return on Networth of Company is 3.24 % compared to previous financial year.

CAUTIONARY STATEMENT

Statements in the Boards Report and the Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations or predictions may be "forward looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to your Companys operations include global and Indian demand supply conditions, finished goods prices, feed stock availability and prices, cyclical demand and pricing in your Companys principal markets, changes in Government regulations, tax regimes, economic developments within India and the countries within which your Company conducts business and other factors such as litigation and your Company is not obliged to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent development, information or events or otherwise. The "Managements Discussion and Analysis" does not constitute a prospectus, offering circular or offering memorandum or an offer to acquire any shares and should not be considered as a recommendation that any investor should subscribe for or purchase any of the Companys securities.

CONCLUSION

At Hariyana Ship-Breakers Limited, innovation and responsibility have been at the core of building a sustainable enterprise and exploring possibilities towards creating a better future. We also deploy best available technologies and processes to drive resource efficiency and develop materials of the future which are superior, sustainable and affordable. We have focused on strengthening our balance sheet, upholding the highest standards in ethical and responsible business practices and striving towards a shared future of prosperity.