Jai Balaji Industries Ltd Management Discussions.

Industry Structure & Development

Global Overview

In 2018, the global economy began its journey on a firm footing with estimated global economic growth of 3.6% [(Source: World Economic Outlook by International Monetary Fund (IMF)]. During the second half of 2018, this rate of development gradually declined owing to impending US-China trade dispute and some slowdown across developed markets.

Emerging and developing Economies maintained their steady progress at 4.5% during 2018. However, it’s important to note that India’s economy expanded at 7.1% in 2018 vis--vis 6.7% in 2017, whereas China’s growth deteriorated from 6.9% in 2017 to 6.6% in 2018 (Source: IMF).

Overview of the World Economic Performance and Outlook (Percentage Change unless otherwise stated)

Projections

2018 2019 2020
World Output 3.6 3.2 3.4
Advanced Economies 2.2 1.8 1.7
United States 2.9 2.3 1.9
Euro Area 1.8 1.3 1.5
Japan 0.8 1.0 0.5
United Kingdom 1.4 1.2 1.4
Emerging and Developing 4.5 4.4 4.8
Economies
Russia 2.3 1.6 1.7
China 6.6 6.3 6.1
India 7.1 7.3 7.5

Source: International Monetary Fund

The steel industry remains at the heart of global development. Steel is the world’s most important engineering and construction material. It is used in every aspect of our lives; in cars and construction products, refrigerators and washing machines, cargo ships and surgical scalpels. It can be recycled over and over again without loss of property.

As per World Steel Association, global crude steel production reached 1,808.6 million tonnes (Mt) for the year 2018, up by 4.6% compared to 2017. Crude steel production increased in all regions in 2018 except in the EU, which saw a 0.3% contraction.

The global steel demand continues to grow in slowing economic environment. As per World Steel Association, global steel demand increased by 2.1% in 2018, growing slightly slower than in 2017. In 2019 and 2020 growth is still expected, but in a less favourable economic environment. China’s deceleration, a slowing global economy, and uncertainty surrounding trade policies and the political situation in many regions suggest a possible moderation in business confidence and investment. Steel demand in the developed economies grew by 1.8% in 2018 following a resilient 3.1% growth in 2017. As per World Steel Association, demand to further decelerate to 0.3% in 2019 and 0.7% in 2020, reflecting a deteriorating trade environment. Steel demand in the emerging economies excluding China is expected to grow by 2.9% and 4.6% in 2019 and 2020 respectively.

Indian Overview

India continues to be one of the fastest growing major economies in the world and is expected to be among the world’s top three economic powers in the next 10-15 years. The Indian economy is expected to improve and close the year 2019 with a GDP growth of 7.3% (Source: IMF). Sustained real GDP growth of over 6% has led to a fundamental transformation of India’s economy. Today, India is the world’s seventh largest economy in real terms, backed by strong demand, positive consumption pattern and rising disposable income. In PPP terms, the economy is expected to be among the top five global economies by 2020.

The Indian steel industry has entered into a new development stage, post de-regulation, riding high on the resurgent economy and rising demand for steel. Rapid rise in production has resulted in India becoming the 2nd largest producer of crude steel during 2018, from its 3rd largest status in 2017. The country is also the largest producer of Sponge Iron or DRI in the world and the 3rd largest finished steel consumer in the world after China & USA.

Top 10 steel-producing countries

Rank Country 2018 (Mt) 2017 (Mt) %2018/2017
1 China 928.3 870.9 6.6
2 India 106.5 101.5 4.9
3 Japan 104.3 104.7 -0.3
4 United States 86.7 81.6 6.2
5 South Korea 72.5 71.0 2.0
6 Russia (e) 71.7 71.5 0.3
7 Germany (e) 42.4 43.3 -2.0
8 Turkey 37.3 37.5 -0.6
9 Brazil 34.7 34.4 1.1
10 Iran (e) 25.0 21.2 17.7

Source: Worldsteel.org

Production n India is currently the 2nd largest producer of crude steel in the world. n In 2018-19, production of total finished steel (alloy + non alloy) was 131.572 mt, a growth of 3.7% over last year. n Production of Pig Iron in 2018-19 was 6.055 mt, a growth of 5.7% over last year. n India is the largest producer of Sponge Iron in the world.

The coal based route accounted for 79% of total Sponge Iron production (33.040 mt) in the country in 2018-19. n Data on production of Pig Iron, Sponge Iron and Total Finished Steel (alloy/stainless + non-alloy) are given below for last five years:

Indian steel industry : Production for Sale (in million tonnes)
Category 2014-15 2015-16 2016-17 2017-18 2018-19
Pig Iron 10.23 10.24 10.34 5.73 6.06
Sponge Iron 24.24 22.43 28.76 30.51 33.04
Total Finished Steel 104.58 106.60 120.14 126.85 131.57

Source: Joint Plant Committee

Imports

• Iron & steel are freely importable.

• Data on import of total finished steel (alloy/stainless + non alloy) is given below for last five years:

Indian steel industry : Import of Total Finished Steel (in million tonnes)

Category 2014-15 2015-16 2016-17 2017-18 2018-19
Qty 9.32 11.71 7.23 7.48 7.83

Source: Joint Plant Committee

Exports

• Iron & steel are freely exportable.

• India emerged as a net exporter of total finished steel in 2016-17 and 2017-18 but is currently a net importer.

• Data on export of total finished steel (alloy/stainless + non alloy) is given below for last five years:

Indian steel industry : Exports of Total Finished Steel (in million tonnes)

Category 2014-15 2015-16 2016-17 2017-18 2018-19
Qty 5.59 4.08 8.24 9.62 6.36
Source: Joint Plant Committee

India’s capacity is projected to increase to about 300 MT by the year 2025. Huge scope for growth is offered by India’s comparatively low per capita steel consumption and the expected rise in consumption due to increased infrastructure construction and the thriving automobile and railways sectors.

Opportunities, threats, risks and concern

Opportunities

Steel is crucial to the development of any modern economy and is considered to be the backbone of human civilization. The level of per capita consumption of steel is treated as an important index of the level of socio-economic development and living standards of the people in any country. All major industrial economies are characterized by the existence of a strong steel industry and the growth of many of these economies has been largely shaped by the strength of their steel industries in their initial stages of development.

India was the second largest steel producer in 2018 with production standing at 106.5 million tones (Mt). India’s finished steel consumption grew at a CAGR of 5.69% during FY08 - FY18 to reach 90.68 Mt. In 2017-18, the country’s finished steel exports increased 17% year-on-year to 9.62 Mt as compared to 8.24 Mt in 2016-17, while it decreased to 6.36 Mt in 2018-19. Government of India’s focus on infrastructure and restarting road projects is aiding the boost in demand for steel. Also, further likely acceleration in rural economy and infrastructure is expected to lead to growth in demand for steel. The Government of India raised import duty on most steel items twice, each time by 2.5% and imposed measures including anti-dumping and safeguard duties on iron and steel items. The Government has released the National Steel Policy 2017, which has laid down the broad roadmap for encouraging long term growth for the Indian steel industry, both on demand and supply sides, by 2030-31. The Government has also announced a policy for providing preference to domestically manufactured Iron & Steel products in Government procurement.

The New Industrial policy opened up the Indian iron and steel industry for private investment by (a) removing it from the list of industries reserved for public sector and (b) exempting it from compulsory licensing. Imports of foreign technology as well as foreign direct investment are now freely permitted up to certain limits under an automatic route. The liberalization of industrial policy and other initiatives taken by the Government have given a definite impetus for entry, participation and growth of the private sector in the steel industry. While the existing units are being modernized/expanded, a large number of new steel plants have also come up in different parts of the country based on modern, cost effective, state of-the-art technologies. In the last few years, the rapid and stable growth of the demand side has also prompted domestic entrepreneurs to set up fresh greenfield projects in different states of the country.

Steel industry derives its demand from other important sectors like infrastructure, aviation, engineering, construction, automobile, pipes and tubes etc. With the Indian economy poised for its next wave of growth under the reforms being unleashed in the last one year, there lies tremendous opportunity for the Indian steel industry to prosper and grow exponentially.

Threats, risks and concern

Steel industry historically has been highly cyclical and is affected significantly by general economic conditions. Major customers for the steel industry include companies in the automotive, construction, appliance, machinery, equipment and transportation industries, which are industries that were negatively affected by the general economic downturn and the deterioration in financial markets, including severely restricted liquidity and credit availability, in the recent past.

In spite of clear signals of recovery today, it is important to keep in mind challenges of the past that plagued the industry. Over the past few years, the global steel industry has been reeling under the pressure of overcapacities, especially on account of those existing in China. With the growth in steel consumption slowing down in China in recent times, the Chinese steel producers have had no option but to rely on exports. This in turn has had an impact on high growth centres of steel consumption in "steel-non-mature" nations such as India. Additionally, depreciation of major currencies has led to a spurt in export by several countries like Russia and Ukraine. It was for these reasons that India saw an influx of imports beginning 2014-15 from several countries, including China. The surge in imports impacted the sentiment of the domestic steel market, with declining capacity utilisation rates of both the primary and secondary steel players. Additionally, erosion of margins, coupled with sluggish demand growth, made the Indian steel investors wary of returns on their investment. However, the Government of India came out proactively to provide a level playing field to Indian companies through imposition of anti-dumping and safeguard duties as well as minimum import prices, wherever injury to the industry was noteworthy.

The Indian Steel Industry continues to grapple with uncertainties pertaining to the availability and consistent supplies of raw materials i.e. both coal and iron ore still remain a challenge, with recent closure of mines in Goa adding to the woes of the industry. Even though the marked shift from an allocation process to an auction process of getting mining blocks has brought about considerable transparency; issues pertaining to transport logistics from the mining areas need to be sorted out to mitigate lag in evacuation of iron ore, coal and other minerals.

The industry by nature is capital intensive and requires high capital, by various modes, increasing cost of borrowing remains one of the major concerns for the group and industry as a whole. The steel industry is further challenged by dwindling investments, turbulence in the financial market and geopolitical conflicts in many developing regions.

Outlook

The steel industry in India is being talked about in all corners of the world. The Indian Steel Industry has sets its vision plan to scale up steel production to 300 MT by 2025. Indian Steel industry has a very bright future. The liberalization of industrial policy and other initiatives taken by the Government have given a definite impetus for entry, participation and growth of the steel industry. The government is working proactively to provide incentives for economic growth by injecting funds in construction, infrastructure, automotive and power, which will drive the steel industry in the future.

As per World Steel Association, steel demand in India is tipped to show an above 7% in both 2019 and 2020 on sustained infra spends with the economy expected to achieve faster growth in the second half of 2019 having overcome the shocks of demonetisation and the Goods & Services Tax (GST) implementation. While the fiscal deficit might weigh on public investment to an extent, the wide range of continuing infrastructure projects is likely to support growth in steel demand above 7% in both 2019 and 2020.

In 2018, global steel demand increased by 2.1%, growing slightly slower than in 2017 as per World Steel Association. In 2019 and 2020 growth is still expected, but in a less favourable economic environment. China’s deceleration, a slowing global economy, and uncertainty surrounding trade policies and the political situation in many regions suggest a possible moderation in business confidence and investment. Steel demand in developing Asia excluding China is expected to grow by 6.5% and 6.4% in 2019 and 2020 respectively, making it the fastest growing region in the global steel industry. In the ASEAN region, infrastructure development supports demand for steel.

Global steel demand is expected to continue to grow, but growth rates will moderate in tandem with a slowing global economy. Uncertainty over the trade environment and volatility in the financial markets have not yet subsided and could pose downside risks to this forecast.

Steel demand in the developed economies grew by 1.8% in 2018 following a resilient 3.1% growth in 2017. Demand is further expected to decelerate to 0.3% in 2019 and 0.7% in 2020, reflecting a deteriorating trade environment. In 2018, steel demand in the US benefitted from the strong growth of the economy driven by government-led fiscal stimulus, leading to high confidence and a robust job market. In 2019, the US growth pattern is expected to slow with the waning effect of fiscal stimulus and a monetary policy normalisation. Despite all odds, fact remains the same that Steel industry is the foundation industry of any economy, especially developing countries where material intensity is likely to increase significantly in the future. Further, Steel is a completely recyclable material making it ideal for achieving a circular economy in India. The Company will seize the opportunity to create an organised circular economy system for steel recycling.

Product wise Performance Analysis

Jai Balaji is an integrated steel manufacturer with five units in three mineral-rich states of eastern India; Your Company’s cumulative product wise actual production details are given hereunder: The actual production of Sponge Iron was 233,784 M.T. during the year 2018-19 as compared to 178,568 M.T. during the year 2017-18. For Pig Iron, the actual production was 390,925 M.T. and 370,271 M.T. during the year 2018-19 and 2017-18 respectively. The actual production of Steel Bars/Rods was 149,595 M.T. during the year 2018-19 as compared to 118,153 M.T. during the year 2017-18. For Billet/MS Ingot, the actual production was 156,845 M.T. and 105,056 M.T. during the year 2018-19 and 2017-18 respectively. The actual production of Ferro Alloys was 71,131 M.T. during the year 2018-19 as compared to 68,769 M.T. during the year 2017-18 (Ferro Alloy includes third party Conversion production of 13475 MT HC Ferro Chrome). In case of Ductile Iron Pipe, the actual production was 121,176 M.T. and 121,016 M.T. during the year 2018-19 and 2017-18 respectively. For Sinter, the actual production was 513,471 M.T. and 394,637 M.T. during the year 2018-19 and 2017-18 respectively. The actual production of Coke was 318,248 M.T. during the year 2018-19 as compared to 298,455 M.T. during the year 2017-18.

Financial Performance

Your company has been under financial stress since 2009 due to various external factors beyond the control of the Company and its management.

The Standalone Total Revenue of the Company (comprising of sales and other income) for the financial year under review was Rs. 311,742.98 lacs as compared to Rs. 2,44,298.38 lacs during the previous financial year.

The Consolidated Total Revenue of the Company (comprising of sales and other income) for the financial year under review was Rs. 311,742.98 lacs as compared to Rs. 2,44,298.38 lacs during the previous financial year.

Your company is committed to its vision to emerge as an efficient producer of iron and steel products. Your Company’s striving efforts for improvement in operational efficiency and reduction of production cost has resulted in increase in revenue from operations of the Company during the year. It seeks to enhance domestic steel consumption and ensure high quality steel production and create a technologically advanced and globally competitive steel industry. Your company is focused on increasing capacity utilisation of all units, reducing cost and improving operational efficiency.

Key Financial Ratio

Particulars 2018-19 2017-18
Debtors Turnover 7.76 5.39
Inventory Turnover 6.25 5.26
Interest Coverage Ratio -0.38 -5.40
Current Ratio 1.08 0.80
Debt Equity Ratio -2.15 -2.05
Operating Profit Margin -0.01 -0.08
Net profit Margin -0.05 -0.11
Return on Net Worth 0.09 0.17

Explanation : The company is passing through its worst times since year 2009. Even though steel industry in India is one of the fastest growing steel producing nations but is passing through ‘‘stress’’ for some time due to rising imports from other countries at cheaper rates, increase in prices of raw material, stalled projects in various sectors especially infrastructure and limited growth in steel demand. All the factors created further hardship on the Company. Despite all odds, fact remains the same that Steel industry is the foundation industry of any economy, especially developing countries where material intensity is likely to increase significantly inthe future. Further, Steel is a completely recyclable material making it ideal for achieving a circular in India. The Company will seize the opportunity to create an organised circular economy system for steel recycling.

Internal Control Systems and their Adequacy

Internal Control is a procedure or system designed to ensure that the Company’s financial results are reliable, its operations are effective and its activities complies with applicable laws and regulations.

Internal Control is a part of day to day management and administration of your Company. The Company has a proper and adequate system of Internal Control, commensurate with the size, scale and complexity of its operations to ensure orderly and efficient conduct of its business including adherence to corporate policies, safeguarding of assets, prevention of frauds and errors, accuracy and completeness of accounting records and preparation of reliable financial information.

The Internal Audit functions serve to provide independent and objective assurance on the adequacy and effectiveness of the organisation’s risk management, control and governance processes and assesses opportunities for improvement in business processes, systems and controls and provides recommendations designed to add value to the organisation and follows up on the implementation of the agreed audit committee recommendations.

The Company has an Audit Committee to continuously monitor the adequacy and effectiveness of the internal control environment across your company. The Audit Committee of your Company comprises of eminent professionals who are well versed with the financial management. The Internal Auditor submits detailed reports periodically to the management and the Audit Committee. The Management makes it a point that the Internal Control is brought under regular review and evaluations in consultation with the Internal Auditor. The Audit Committee actively reviews the adequacy and effectiveness of the internal audit functions of the Company and monitors the implementation of the same. The Committee also calls for comments of the internal auditors about the Company’s internal controls, scope of audit as and when required which gives them an additional insight on the assessment of such controls. Such adequate internal control system helps in identification of potential operation processes.

Human Resource

The Company is dedicated to have an optimum level of human resource and believes in the concept of right talent at the right job since it considers human capital to be the most valuable asset of your Company. Jai Balaji has always stepped up and reviewed its HR policies to ensure transparency, to incorporate in it the competitiveness in the globally dynamic business environment and to become more powerful and develop itself to be the standard and a successful one. The Human resource managers of the Company have the tools and the opportunity to leverage employee commitment to, and engagement in, the Company’s growth strategy.

The Company realises that workforce makes a fundamental difference to the organization goals. Without it there can be no clear vision and objectives and its resources full potential will remain woefully untapped. It considers the commitment and competence of the human resource as the levers of the organisation’s growth. It aligns the individual goal and organizational goal in order to utilize organizational resources effectively and efficiently.

Jai Balaji commits to excel in promoting and fostering equal opportunity in compensation, promotion, and career advancement for all employees in all levels and areas of the business, regardless of race, color, gender, religion, age, national origin, or disability, and to promote and foster an environment of inclusion, respect and freedom from retaliation. The Company recognizes that diversity is a fundamental and indispensable value and that the Company, its shareholders and all of its employees will benefit by striving to be a premier on diversity. The Company emphasis on the training and development of its human resource. The company strives to create an environment which helps its people take the initiative to experiment, innovate and develop a passion to set and achieve their goals. The company gives full room to its staff to nurture their intellect, exploit opportunities and make their own decisions while competing with the best, which thereby helps the company in its march towards progress.

The Company is proud to have a talented pool of around 2787 employees as on 31st March, 2019, comprising of professionals from different background with a mix of youth and experience, the leadership and knowledge of the senior management is aligned with the zeal and enthusiasm of the youth brigade. Building a bright career is as difficult as moulding something in the right shape. It’s the right combination of hard work, dedication, effort and above all the right atmosphere, which leads to the building of a brighter tomorrow for you. At Jai Balaji we make sure that one get all these which will help him in his journey towards success.

Cautionary Statement

Statements in the Management Discussion and Analysis Report describing the Company’s objectives, projections, estimates and/or expectations may be "forward-looking statements" within the meaning of applicable laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Company’s operations include, among others, domestic and international economic conditions affecting demand/supply and price conditions, changes in the government regulations, tax laws and other statutes and other incidental factor.

On behalf of the Board of Directors
Sd/-
Aditya Jajodia
Place : Kolkata Chairman & Managing Director
Date : 14th August, 2019 DIN : 00045114