KIOCL Ltd Management Discussions.

A. BUSINESS OVERVIEW

India - The second largest Steel Producer

India was the world’s second-largest steel producer with production standing at 99.60 million tonnes (MT) during 2020, down by 10.60% in comparison to 2019. India was also the third largest producer of coal and fourth largest producer of iron ore during 2020. The Indian steel industry had entered into a new development stage, post de-regulation and is riding high on the resurgent economy with rising demand for steel. India was also the largest producer of Sponge Iron or DRI in the world and was the 2nd largest finished steel consumer in the world during 2019.

India’s finished steel consumption grew at a CAGR of 5.2% during 2016 to 2020 to reach 100 MT. The National Steel Policy, 2017 envisaged 300 million tonnes of production capacity by 2030-31. The per capita consumption of steel had increased from 57.6 kgs to 74.1 kgs during the last five years. The Government has fixed objective of increasing rural consumption of steel from the current 19.6 kg/per capita to 38 kg/per capita by 2030-31. 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.

India’s current steel producing capacity is 140 mtpa and the figure is anticipated to rise to 300 mtpa by 2030-31. The growth in the Indian steel sector was driven by domestic availability of raw materials such as iron ore and cost-effective labour. Consequently, the steel sector had been a major contributor to India’s manufacturing output. The Indian steel industry is modern with state-of-the-art steel mills. It has always strived for continuous modernisation of older plants and up-gradation to higher energy efficiency levels. India holds a fair advantage in production and conversion costs in steel. Its strategic location enables export opportunities to developed as well as fast-developing Asian markets. India produces about 95 minerals 4 fuel-related minerals, 10 metallic minerals, 23 nonmetallic minerals, 3 atomic minerals and 55 minor minerals (including building and other minerals). Rise in infrastructure development and automotive production were driving growth. Power and cement industries were also aiding growth for the sector. Demand for iron and steel is set to continue given the strong growth expectations for the residential and commercial building industry.

Outbreak of COVID-19 Pandemic during January 30, 2020 has caused irreparable damage to the people and economy of the country. Union Government was forced to declare nationwide lock down during March 2020 to contain the spread of virus, with localized containment measures extended to April 2021 in some states in the latest announcement. Prior to March 24, 2020 announcement, numerous containment measures had already been imposed with varying intensity across

the country. The economic impact of COVID-19 had been substantial and broad-based. GDP contracted sharply in Q2 of 2020 (-24.4 percent year-on-year) due to the unprecedented lockdowns to control the spread of COVID-19. The contraction moderated to -7.5 percent year-on-year in Q3 of 2020, with growth returned to positive territory in Q4 of 2020, at 0.4 percent. The National Statistical Office released the second advance estimate for FY: 2 02 0-21 GDP growth to be -8%, in line with the January WEO projection. The Government’s crisis response had mitigated the damage, with a fiscal stimulus of 20 trillion rupees, almost 10 percent of GDP. The domestic steel demand in India had recovered in the past three months and was back at the pre-COVID levels largely due to an increase in demand from automotive and white goods.

Steel Demand Scenario

Though the demand for steel from the construction segment remained low, it was also likely to recover post monsoons. With higher steel prices and lower coking coal prices, margins of primary steel producers in India remained strong and there were signs of domestic steel demand recovering gradually in the country. The report also highlights that India’s finished steel consumption was recovering gradually, after witnessing 85 percent YoY decline in April 2020. At the same time domestic consumption had been improving gradually, supported by the unlocking of the economy post lockdown in the month of March 2020.

Domestic Steel Production

Domestic steel production had also been on the rise due to improved capacity utilization. The crude steel production had been improving in line with domestic demand, following 64 percent YoY decline to 3.1 metric tonne in April 2020. It improved by 5 percent MoM to 8.5mt in August 2020 and was down just 4 percent YoY, supported by higher exports. Interestingly, India turned to a net exporter of steel during April-August 2020 with net exports of 4.0mt vs net imports of 0.9mt during same period in the previous year. However, with improving domestic demand and higher steel prices, domestic producers have lowered exports. It was expected that there may be a dip in steel exports in the coming months. It was reported that India had turned net exporter of steel to China for the first time in several years, with 69 percent of semi-finished steel and 28 percent of finished steel exported between April and August 2020.

Ministry of Steels initiative

The Steel Ministry had proposed incentives of around ^ 3,345 crore to boost the domestic production ofvarious grades of steel that were largely imported to meet the local shortfall. While few sectors, such as automotive and domestic appliances, were showing encouraging signs of demand revival, going forward, infrastructure, construction, and real estate would play a crucial role in further driving demand. Larger steel players

had made good progress on the digital front with technologies such as the digital twin of a blast furnace for the optimization of operations in real time, but smaller units were still lagging behind and need to adopt digitization as a key driver for sustainable growth.

Indias economic recovery and Pandemic

The scars left by the first wave of the COVID-19 pandemic have hardly healed and India is already facing a nastier second round of infections. The resurgence of COVID-19 cases had not only posed a fresh challenge to the healthcare system but had also battered economy that had hardly recovered after exiting a recessionary phase a few months ago. This second wave could not have hit country at a worse time. It had disrupted hiring plans of corporates, increased business uncertainty and crippled operations. All of these factors could aggravate problems for Indias working class, especially low-income earners and migrant labourers.

Indias economic recovery path had been disturbed by the second wave of pandemic. The second wave of COVID-19 infections is credit-negative and poses threat to economic recovery in India. The second wave of infections presents a risk to growth forecast as the reimposition of virus management measures would curb economic activity and would dampen market and consumer sentiment. However, given the focus on "micro-containment zones" to deal with the current wave of infections, as opposed to a nationwide lockdown, the impact on economic activity may be less severe than that seen during 2020.

The Gross Domestic Product (GDP) was likely to grow in double digits in 2021 given the low level of activity in 2020. The International Monetary Fund (IMF) had upgraded its FY:22 growth projection for India to 12.5% from 11.5% estimated in January but cautioned that the forecast hasnt factored in the severe downside risks arising from the countrys ongoing second wave of COVID-19.

Despite the disastrous impact of the pandemic on lives and livelihoods, the global steel industry was fortunate enough to end 2020 with only a minor contraction in steel demand. This was due to a surprisingly robust recovery in China, with growth of 9.1%. In the rest of the world steel demand contracted by 10.0%. In the coming years, steel demand may recover firmly, both in the developed and developing economies, supported by pent-up demand and Governments recovery programmes. However, for most developed economies a return to the prepandemic levels of steel demand would take a few years.

World steel forecasts that steel demand would grow by 5.8% in 2021 to reach 1,874.0 million tonnes (Mt), after declining by

0.2% in 2020. In 2022 steel demand will see further growth of 2.7% to reach 1,924.6 Mt. The current forecast assumes that the ongoing second or third waves of infections will stabilise in the second quarter and that steady progress on vaccinations will be made, allowing a gradual return to normality in major

steel-using countries. While it is hoped that the worst of the pandemic was passing, there was still considerable uncertainty for the rest of 2021.

The evolution of the virus and progress of vaccinations, withdrawal of supportive fiscal and monetary policies, geopolitics and trade tensions could all affect the recovery envisaged in this forecast. Chinas economy quickly rebounded from the lockdown in late February, and almost all economic activity except retailing resumed full productivity by May, 2020. Since then, despite sporadic small, localised waves of COVID-19, economic activity has not been affected by the pandemic, unlike the rest of the world. Chinas steel demand is expected to grow by 3.0% in 2021. Steel demand in the developing economies is expected to show a relatively quick rebound in 2021 and 2022, with growth of 10.2% and 5.2% respectively. Steel demand in the MENA region declined by 9.5% in 2020 and is expected to recover moderately with the resumption of infrastructure investments. India suffered severely from an extended period of severe lockdown, which brought most industrial and construction activities to a standstill. However, the economy has been recovering strongly since August, much sharper than expected, with the resumption of government projects and pent-up consumption demand. Indias steel demand fell by 13.7% in 2020 but is expected to rebound by 19.8% to exceed the 2019 level in 2021. The growth-oriented government agenda will drive Indias steel demand up, while private investment will take longer to recover.

For the future, structural changes in a post-pandemic world will bring about shifts in steel demand shape. The steel industry will see exciting opportunities from rapid developments through digitisation and automation, infrastructure initiatives, re-organisation of urban centres, and energy transformation. All at the same time as the industry is responding to the need to produce low-carbon steel.

B. PELLET SCENARIO

The global Iron Ore Pellets market is anticipated to rise at a considerable rate between 2021 and 2025. In 2021, the market is expected to grow at a steady rate and with the rising adoption of strategies by key players, the market is expected to rise over the projected horizon.

The pellets industry is witnessing a structural change in demand supply scenario led by shift in iron and steel industry towards higher quality raw material. This trend is further strengthened by the Chinese government rationalisation of steel industry as well as implementation of environmental controls to reduce emissions from the local production of pig iron and sintering. On the back of these drivers, the global iron ore pellets demand is expected to register a CAGR of 4% till 2030. Further, the pellet premiums, which have recorded the highest levels last seen in 2008, are going to benefit large pellets players.

The restoration of Blast Furnace utilization rates in Europe, North Asia and North America took pellet supply away from China, reversing the trend seen earlier in 2020 when all the unwanted pellet supply was diverted to China. There was subsequentlg little high grade pellet availability, and China premiums bounced back strongly. India exported fewer pellets as they were needed for domestic steel consumption, particularly as there were delaysin accessing mines following mining area auctions. New production capacity in Southeast Asia, along with end-users restarting operations, was also seen ask demand eriver. Marketsources expect stronger gemand for Indian pellets in Q1 as a replacement for European high- grade Pellets, given the lack of spot availability.

The Pellet production in the Country during 2020-21 was about 63.14 million tone rnd KIOCL prodtced 2.21 million tons of Pellets. Around 50% of pellet capacity is by integrated steel mills which use pellets for captive consumption and the rest is trom merchantpelletmanufacturers.

Pellet Exports from India stood at about 13.255 million tons during 2020-21 as against 12.62 million tons in the previous year, up by 5% on Y-O-Y. KIOCL with exjmrlt voltme of 1.f!43 million tons achieved 13.90% o. totul Exports ftom India. However, KIOCLs export share has reduced from 15.80% in the FY: 201 9-2t to 13.90% during ehe current FY: 2020-21. The decrease in Export volumeir due to increased demand from the DTA Market and better realization in the DTA Market. [Source: World Steel, MOS Website, Indian Steel Industry Website]

C. EXPANSION OF MARKET BASE

China, being the consumer of more than 50% of the iron ore produced in tire world had been the major market for KIOCL pellets. However, in order to minimize the risk of overdependence, KIOCL had been actively exploring other markets for pellets like Europe, Middle East, South Korea, Brazil, Malaysia Japan etc. With a view to diversify the market

bato and to avoid dependence on single market, KIOCL had been consistently making efforts to make inroads into markets other than China. Significant aspect of the dispatches during the year 2020-21 was about 56 % of the total exports made were to Steel Mills in Middle Etst, Bahrain, f raziland Malaysia, in comparison with about 43% during the year 2019-20. DTA Market share has also increased from 15.55% to 20.20% during the year 2020-21

F. FINANCIAL PERFORMANCE OF OPERATION

(a) The Financial performance of the Company for the year 2020-21 in brief is furnished below:

(T in Crores)

Particulars 2020-21 2019-20
Revenue from Operations 2383.61 1937.65
Profit /(Loss) Before Tax for the year 410.23 63.68
Profit /(Loss) After Tax 301.17 43.48

(b) Cash Flow information: - An abstract of Cash Flow statement for the year ended on 31st March 2021 is as under:

(T in Crores)

A) Cash and Cash Equivalents as at 01.04.2020 429.80
B) Net Cash from Operating Activities 110.55
C) Net Cash from Investing Activities 298.53
D) Net Cash used in Financing Activities (245.07)
E) Cash and Cash Equivalent as at 31.03.2021 593.81

G. PRODUCT-WISE PERFORMANCE

The production target vis-a-vis actual achievement with capacity utilization during last five years including current year is depicted as under: -

(Qty. In Million Tons)

Year MoU Target Actual Production Utilization of installed Capacity in %
2020-21 2.500 2.210 63
2019-20 2.300 2.375 68
2018-19 2.170 2.238 64
2017-18 1.925 2.327 66
2016-17 1.300 1.460 42

(Installed capacity of Pellet Plant is 3.500 Million Tons / Annum).

H. SWOT ANALYSIS

In the ever-changing business environment, your Company has identified the following Strengths, Weakness, Opportunities and Threats:

Strengths

Sound financial and credit worthiness

• Debt free company with surplus funds that can be invested for its growth

• Land that can be potentially monetized

Notification of 470.40 ha of Iron & Manganese ore mine by Govt. of Karnataka.

Niche Expertise

• Expertise in handling iron ore from different sources (Magnetite/ Hematite) with different ore characteristics in pellet making.

Expertise in Mining, Beneficiation, Pelletization & Exploration

Material Handling advantage

• Proximity to National Highway, Railway line & Port.

• Shore based Plant with dedicated berth & mechanical ship loading facility.

• Qualified, skilled and experienced manpower.

• Well defined HR policies.

• Authorized Economic Operator Export Oriented Unit

• Strong environmental and social commitment

• Committed Management team with high professional acumen

• Diversified Board having vast professional expertise

• Risk Management Plan and its mitigation in place

Weakness

Raw Material Sourcing

• Lack of an operative captive mine since 2006.

• Due to high basic price and stiff competition, uneconomical to procure IOF from Karnataka through e-auction.

• Restriction on Export of Pellets produced out of IOF sourced from Karnataka.

• Plant located away from mine head as well as domestic consumer locations.

• High logistics cost for transportation of Iron Ore Fines.

• Restricted to produce only BF Grade Pellets due to nonavailability of high-grade ore indigenously and absence of beneficiation facilities.

• Single product portfolio since BFU operation is suspended.

• Lack of forward or backward integration for its Blast Furnace Unit.

• Non availability of deep draft berths/ facilities to handle cape size vessels.

Opportunities

Anticipated strong growth in the Indian Steel Industry driven by the Govt. focus on manufacturing and infrastructure.

Sustained Demand for value added products like Pellet, Ductile Iron Ore Pipe etc.

Expected Early Resolution of mining licensing issues, and initiation of steps for revival.

Availability of assets and manpower for new deployment or services contracts.

Opportunity to secure new Captive mining leases or JV projects with other SMDCs or PSUs.

Potential growth through JVs with other steel majors in India and overseas.

A committed and active management, actively engaged in securing raw material sources on long-term arrangements with other state-owned organizations and sourcing from spot markets.

Best located for serving Steel plants in Middle East, China under Make in India.

Threats

1. Fluctuations in IOF price due to monthly pricing under LTC with NMDC.

2. Constrained development due to continuation of policy, regulatory and environmental limitations.

3. Severe competition in the Pellet Industry both in domestic and international markets.

4. Commissioning of captive pellet plants by all integrated steel plants.

5. Inflow of Pellet and high-grade lump from overseas at lower rates given global supply conditions especially with new mines scheduled to open up.

6. Volatility in raw material prices on account of policy and regulatory actions

7. Threat of substitute’s viz., use of sinter or lumps in place of Pellets.

8. Highly dependent on China for selling of Pellets.

I. INTERNAL CONTROL SYSTEMS

The Risk Based Internal Audit (RBIA) in is in place in the Company since 2011. Risk Based Internal Audit (RBIA) was conducted in all the departments, unit wise during the year 2019-20. It helps to strengthen the Internal Control Systems of the Company which is very important to ensure compliance of audit related regulatory guidelines, to bring the desired improvement and give timely feedback to the Top Management for taking-up immediate corrective steps. The report of Internal Auditor is placed before the Audit Committee on quarterly basis.

J. MATERIAL DEVELOPMENT IN HUMAN RESOURCES/ INDUSTRIAL RELATION FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED

The Company aims at providing motivation and growth opportunities for its employees. It also encourages them and creates an environment for best utilization of their skills in achieving the Company’s objectives. In this direction, during the year, 2247 man-days training was provided.

Industrial Relations situation remained peaceful throughout the year. As on March 31, 2021, the Company had 746 employees on its rolls comprising of Executives including NonUnionized Supervisors and Non-Executive Employees.

K. KEY FINANCIAL RATIOS:

Particulars 2020-21 2019-20
Current Ratio 7.34 7.90
Operating profit as a % of Revenue from Operations 13.26 (2.85)
Net Profit Margin (%) 12.63 2.24
PAT / Average Net Worth (%) 15.44 2.22
Return on Assets (%) 12.13 1.83
Return on Average Net Worth (%) 15.44 2.22
Return (EBITDA) on Average Capital Employed (%) 21.03 4.81
Market to Book Ratio 4.40 1.92

L. DETAILS OF ANY CHANGE IN RETURN ON NET WORTH AS COMPARED TO THE IMMEDIATELY PREVIOUS FINANCIAL YEAR ALONG WITH A DETAILED EXPLANATION THEREOF

Return on Average Networth has been increased by 13.22 % as compared to the previous Financial Year. The increase is on account of increase of contribution in Pellets sales.

M. FUTURE OUTLOOK

Worldsteel forecast that in 2021 steel demand is expected to recover to 1,717 Mt, an increase of 3.8 % over 2020. This year’s reduction in global steel demand will be mitigated by an expected faster recovery in China than in the rest of the world. The forecast assumes that most countries’ lockdown measures continue to be eased during June and July, with social distancing controls remaining in place, and that the major steelmaking economies do not suffer from substantial secondary waves of the pandemic.

The COVID-19 crisis, with its disastrous consequences for public health, also represents an enormous crisis for the world economy. Steel makers have been hit by a general freeze in consumption, by shutdowns and by disrupted supply chains. Therefore, it is expected that steel demand will decline significantly in most countries, especially during the second quarter. With the easing of restrictions that started in May, the situation is expected to gradually improve, but the recovery path will be slow.

Most countries have been gradually reopening from their lockdowns since mid-May and recovery of economic activities is expected in the third quarter. As economies are reopening without a vaccine or cure in place, significant downside risks exist. Coming out of the lockdown ahead of other countries, China’s economic recovery started in late February. Its economy is fast approaching normalisation, except for the hospitality and tourism sectors. Chinese steel demand is expected to increase by 1.0% in 2020. Also, the benefit from infrastructure projects initiated in 2020 is

expected to carry over and support steel demand in 2021.

Steel demand in the developed economies expected to have declined by 17.1% in 2020 and steel demand in India is expected to have contracted by 18% in 2020.

[Source: World Steel & Indian Steel Industry Report]

Further, being a zero debt Company with satisfactory equity base and pool of technical manpower, your Company has envisaged various long term / short term expansion / diversifications. The following projects are in different stages of implementation: -

Development of Devadari Iron Ore Block
• Develop Iron ore Mine of capacity 2.0 MTPA on execution of mining lease deed.
Brief of Project • Set up 2.0 MTPA capacity Beneficiation Plant.
• Set up 2.0 MTPA capacity Pellet Plant
Time Schedule Commencement of mining activities by end of December 2021 and 24 months from the date of placement of order on the Main technological package supplier for Beneficiation Plant.
CAPEX ^ 1500 - 2000 Crores
Status Mine plan for the project approved by IBM. Stage I Forest clearance proposal will be placed before the Forest Advisory Committee, MoEF&CC, GoI in the ensuing meeting during May-June 2021. On receipt of Stage I forest clearance, the same will be submitted to Environmental Appraisal Committee, MoEF &CC, GoI for grant of Environment Clearance.
Setting up of Coke oven plant and DISP Plant with Modernization of BFU
Brief of Project Setting up of 2.0 LTPA DISP Plant under forward & 1.80 LTPA Coke Oven Plant under backward integration projects by KIOCL Limited and carrying out the necessary modifications to the Blast Furnace Unit of KIOCL to make the unit economically viable.
Time Schedule 24 months from the date of placement of order on the Main technological package supplier.
CAPEX ^ 836.90 Crores
Status The project is divided into various packages of Turnkey, Discrete turnkey and item rate contract for attracting the maximum bidders. Main packages like DISP Plant, Power Plant, Oxygen plant, Nitrogen plant, Pulverized Coal Injection and Blast Furnace Unit upgradation are under tendering stage. Coke Oven plant tender is at finalization stage for fixing the contractor. Tendering process is delayed due to COVID-19 pandemic, subsequent travel restrictions and changes in public procurement policy, GFR and mandatory registration of DPIIT, GoI by foreign bidders, sharing the country border.
Setting up of 5 MW Solar Power Plant in Karnataka
Brief of Project Setting up of 5.0 MWac Captive Solar Power Plant - To support GoIs National Solar Mission and also to meet the power requirement partly for plants at Mangalore, KIOCL intends to set up a 5 MWac (6.5 MWp) solar power plant in the State of Karnataka.
Time Schedule 6 months from the date of placement of order.
CAPEX ^ 24.44 Crores
Status Plant is commissioned, pending evaluation of performance of the plant and power generation started.
Modernization of Pellet Plant Unit, Mangaluru
• Installation of Barrel Type Blender Reclaimer
Brief of Project • Installation of 4 Nos. of Vertical Pressure Filters
• ERP Implementation
• 9 months for Reclaimer
Time Schedule • 18 months for Vertical Pressure Filters
• 24 months for ERP
• ^ 17.60 Crores for Reclaimer
CAPEX • ^ 158.60 Crores for Vertical Pressure Filters
• ^ 20.31 Crores for ERP [Est.]
Status Barrel type blender reclaimer has been installed. Order for 04 nos. of vertical pressure filters has been placed to M/s METSO. Dismantling of part of SPF building, Civil & structural work is under process. The work order for implementation of SAP S4/HANA ERP system has been placed to M/s Tech Mahindra. Work is under progress.
Setting up of Pellet Plant with M/s RINL at Vizag under Joint Venture
Brief of Project Setting up of 2.0 MTPA capacity Pellet Plant - High fluxed BF grade pellets will be produced in the plant keeping in line with the requirement in Blast Furnaces of RINL.
Time Schedule 24 months from the date of placement of order on the Main technological package supplier.
CAPEX ^ 1032.80 Crores
Status As requested by M/s RINL work on base line data collection for Environment Clearance has been halted/ stopped.