Karma Industries Ltd Management Discussions

KARMA INDUSTRIES LIMITED (FORMERLY KNOWN AS KARMA ISPAT LIMITED) ANNUAL REPORT 2011-2012 MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW: Global Economy:- The global economy is witnessing another period of uncertainty due to the European Sovereign debt crisis. The increase in inflation in emerging economies has led to a sharp hike in interest rates, which has resulted in slowdown in demand. The global financial uncertainty has also resulted in volatility in exchange rates. The global Steel industry has witnessed reasonable demand growth and Steel making capacities have gradually shifted to emerging markets such as China and India. However, the high cost of raw materials and increased volatility in prices has put pressure on margins. The Indian Steel Industry:- The Steel industry in India has suffered due to non availability and high prices of Iron Ore which has impacted Steel production. The Iron Ore mining ban in Karnataka and subsequent impact in Iron Ore production in Goa and Odisha has forced many Steel Companies to operate at reduced capacities and even close down operations. It is expected that the raw material constraints shall ease towards second half of FY 2012-13 and mines will gradually get back to normal production. The Government of India has imposed an export tax of 30% on export of Iron Ore and Chrome Ore which should discourage exports and encourage value addition within the Country. The removal of 5% import duty on thermal coal is also a relief for the Sponge Iron based Steel producers. The Indian economy is expected to grow at 7.6% in 2012-13 against 6.9% in 2011-12. The economy is likely to grow significantly over the next decade driven by the infrastructure (power, road, railways, ports etc.) and consumption (automobile, real estate etc.) sectors which will result in sustained growth in demand for various Iron and Steel products. The States of Orissa, Chhattisgarh and Jharkhand which account for majority of the iron ore and coal reserves in the country will remain the most attractive locations for setting up iron and steel manufacturing capacity. The Odisha Government is currently reviewing the renewal of all expired mining leases which are operating under deemed extension, which will offer an opportunity for Steel producers in Odisha. Meanwhile, the draft MMDR Bill is also under discussion. OPPORTUNITIES, THREATS, RISKS, CONCERNS AND OUTLOOK: Opportunities & Threats:- The Company caters to construction, infrastructure, power, telecom and engineering industries. Though there are large no. steel factories across the length and breadth of the country, they are by and large concentrated in local level. Due to its reputation as traders of quality products and the companys plan to start manufacturing shortly, the Company has not only been able to retain its existing customers but is also adding new customers. Though there is competition not only from local players but also from un- organized sector, the company is fully geared to meet these challenges and move towards achieving its set goals. Three factors, however, will need to be watched carefully in order to ensure preparedness and to be able to take timely steps to manage risk are: a) Price Volatility b) Sourcing of key raw materials and c) cost of borrowing d) high interest costs and taxes & duties. Nonetheless, the Board continues to believe that this year is yet another year of opportunity to focus on further growth and consolidation. Risks and concerns: The cost of power (including fuel) and its availability continues to be a major concern. High power tariffs and volatility in input prices may adversely affect the profitability of the Company. However, it is not significant considering the level of operations of the Company and normal correlation in the price of raw material and finished goods. The economy continues to witness inflationary trends. The headline inflation has continued to be fuelled by high food inflation and rising prices of crude and commodities. The Reserve Bank of Indias action to consistently raise interest rates and suck liquidity out of the system to tame inflation together with high commodity prices is likely to make new investment less attractive, contract demand and lead to slow down in the industry. This remains a serious concern. Management has already identified these risks and taking necessary steps to mitigate the risks such as exploring the possibilities to having captive power plant to become self sufficient, linkage to coal and iron ore mines for uninterrupted production and to reduce cost of borrowing by various means. Outlook: The Indian Steel Industry plays a significant role in the countys economic growth. The industry continues to remain in growth mode. It continues to hold a strong hold in the traditional sectors such as infrastructure & constructions, automobile, transportation and industrial application. With the Governments pro-active incentive plans to boost economic growth by injecting funds in various industries such as construction, infrastructure, automobile and power will drive the steel industry in future. Steel consumption in India is expected to grow significantly in the coming years as per capita finished steel consumption is far less than its regional counterparts. PERFORMANCE OF THE COMPANY: The PAT of the Company has decreased by 19.04% to Rs.16,556,119 during the year ended March 31, 2012, due to increase in the cost of Raw Materials, high cost of borrowings. The current business of the company is trading in steel and iron products including C.R. Coils & Sheets, C.T.D. Bars, H.R. Sheets & Plates and Hot Rolled Steel Plates, Ingot irons M.S. Plates, Angles, Channels, Chequered Plates, Wires, T.M.T Bars, Rebars and Tor Steel, Stainless Steel and other Alloy Steels. The Company has established a Factory at Valsad, Gujarat during the year for manufacturing of Lead & Lead Alloys which will be operational shortly. This will help the Company for sustaining in the long run in the competitive steel industry. HUMAN RESOURCES: The Company considers the quality of its human resources to be its most important asset and focuses on attracting, motivating and retaining the best talent. Communication exercises are treated as continuous process to keep the employees in formed of the challenges being faced by the Company and also motivate them to take up higher responsibilities, in tune with the requirements of the Company. INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY: Internal Control accountability of executive action to the managements authorization. The Statutory Auditors have evaluated the system of internal controls of the Company and have reported that the same are adequate and commensurate with the size of the Company and nature of its business. The internal control systems are reviewed by the top Management and by the Audit Committee of the Board and proper follow up action ensured wherever required. CAUTIONARY STATEMENT: Statement in the Management Discussion and Analysis describing the Companys objectives, expectations, estimates or predictions may be forward looking within the meaning of applicable securities laws and regulations. Actual results may differ materially from those expressed in the statement. Important factors that could influence the Companys operations include global and domestic supply and demand conditions affecting selling prices off in is had goods, in put availability and prices, changes in Government regulations, tax laws, economic developments within the country and other incidental factors. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements, on the basis, of any subsequent developments, events or information.