kiocl ltd Management discussions

BUSINESS OVERVIEW

India, is the worlds second largest producer of crude steel with the production of about 124.7 million tons crude steel in 2022, while finished steel production stood at 117.80 million tons.

In Calendar year 2023, crude steel production is expected to touch nearly 134 million tons and finished production to reach around 127-128 million tons. In 2022, Indias domestic finished steel consumption stood around 110 million tons, which was about 2 million tons less than what was envisaged.

However, in calendar year 2023, we expect robust domestic demand growth, of around 7%. Currently in 2022, crude steel capacity in India stood around 154 million tons per annum. The Indian steel sector roughly contributes around 2% to Indias GDP.

The government aims to double the countrys annual crude steel making capacity to 300 million tons from 150 million tons at present. Words crude steel production decreased by about 4.20% to 1,878.5 million tons in 2022 from 1960.4 million tons in 2021. As per World Steel Association report, in 2023, steel demand will see further growth of 2.2% to reach about 1881.4 million tons.

IMPACT OF RUSSIAN-UKRAINIAN WAR

The year 2022 was a tumultuous year for the steel industry. Globally, the industry started well on the back of a strong post-Covid recovery and the infrastructure investments that many governments across the world had announced to support this recovery.

However, the conflict in Ukraine made worse the inflationary pressures being felt due to supply chain bottlenecks in the post Covid world. Gas prices shot up as did coal prices which led to steel prices shooting up. Economic crisis induced by war has caused decreasing steel demand and redirection of trade flows. For example, in 9 months of 2022, India decreased steel exports to EU by 45% and increased steel exports to MENA by 16%. Low-cost steel suppliers like Russia, China, India have decreased steel prices to expand exports and this has resulted in negative margins for steelmakers. The war worsened current economic situation globally.

The war can reveal additional disbalances, in the real estate market throughout the world, in the sovereign debt market. This makes it optimistic about the future despite a challenging year. Year 2023 is expected to be a better year than 2022 for the steel industry globally.

INDIAN ECONOMIC OVERVIEW

Amid the uncertain global economic scenario, India continues to stand out for its economic recovery and infrastructure investment-led growth. The construction sector, which includes both infrastructure and real estate, is the largest consumer of steel, constituting around 61% of domestic steel demand. The capital goods sector comes next constituting around 10% of steel consumption and this sector is followed by the automotive sector that constitutes around 9% of domestic steel demand.

INDIA THE SAVIOUR FOR FLAGGING GLOBAL STEEL DEMAND

India has emerged as a saviour for flagging global steel demand. With Chinas massive construction sector still in a funk and the US and Europe likely heading into recessions, it is India that is driving steel usage. Honble Prime Minister of India Shri Narendra Modi is seeking to modernise roads, rail networks and ports in an attempt to vie with China as a manufacturing hub. Thats set to translate into a 6.7 percent jump in steel demand to around 120 million tons in 2023, according to the World Steel Association, the highest growth among major economies. The nation-building phase of any economy requires a lot of steel and commodities. The country is going through that phase in this decade, and it could boost the countrys steel consumption to more than 200 million tons by 2030. This is dependent on the success of Honble Prime Ministers construction roll-out, with the Ministry of Finance estimating $1.4 trillion of funding will be needed for the National Infrastructure Pipeline through 2025.

ECONOMIC GROWTH RATE & STATISTICS

INDIA THE 5^TH LARGEST ECONOMY

Strong economic growth in the first quarter of FY 2022-23 helped India overcome the UK to become the fifth-largest economy after it recovered from repeated waves of COVID-19 pandemic shock. Real GDP in the first quarter of 2022–23 is currently about 4% higher than its corresponding 2019-20, indicating a strong start for Indias recovery from the pandemic.

Rising employment and substantially increasing private consumption, supported by rising consumer sentiment, will support GDP growth in the coming months.

Future capital spending of the government in the economy is expected to be supported by factors such as tax buoyancy, the streamlined tax system with low rates, a thorough assessment and rationalisation of the tariff structure, and the digitization of tax filing. India has emerged as the fastest-growing major economy in the world and is expected to be one of the top three economic powers in the world over the next 10-15 years, backed by its robust democracy and strong partnerships.

Indias nominal gross domestic product (GDP) at current prices is estimated to be at H 232.15 trillion (US$ 3.12 trillion) in FY22. With more than 100 unicorns valued at US$ 332.7 billion, India has the third-largest unicorn base in the world. The government is also focusing on renewable sources to generate energy and is planning to achieve 40% of its energy from non-fossil sources by 2030. India needs to boost its rate of employment growth and create 90 million non-farm jobs between 2023 and 2030 in order to increase productivity and economic growth. The net employment rate needs to grow by 1.5% per annum from 2023 to 2030 to achieve 8-8.5% GDP growth between 2023 and 2030.

Exports fared remarkably well during the pandemic and aided recovery when all other growth engines were losing steam in terms of their contribution to GDP. Going forward, the contribution of merchandise exports may waver as several of Indias trade partners witness an economic slowdown. Indian exports are expected to reach US$ 1 trillion by 2030.

IRON ORE AND IRON ORE PELLET MARKET SCENARIO:

Seaborne Iron ore prices were highly volatile during FY 2022-23 and ended the year 2022 at their lowest in last 3 or 4 years. COVID-19 & property sector slowdown continued to weigh down steel demand in China. Prices in the western countries remained subdued because of weak demand, high inflation and fear of recession. The fallout from Ukraine conflict is still hobbling markets, by drying up ore supplies, while growing energy crunch hampers Europes steel output. The international iron ore pellets price movement during the FY 2022-23 is given in the following graphs:

FUTURE OUTLOOK FOR IRON ORE & IRON ORE PELLET INDUSTRY

The current downward trend being witnessed in the international iron ore and iron ore pellets market is expected to languish in 2023 as well, with China & Europe cutting steel output, while pressure is mounting from additional supplies. Chinas real estate problems and the lingering impact of COVID-19 will keep its steel demand suppressed during 2023 and over the long term, it would depend on the recovery of the property sector on the one hand, and the governments policy of an infrastructure-led economic growth model in China.

The Iron Ore Pellets market is expected to register fluctuating growth trends in the long term, while inflation and supply chain concerns are expected to continue in 2023. Shifting consumer preferences in a projected economic downturn scenario, amendments to industrial policies to align with growing environmental concerns, huge fluctuations in raw material costs triggered by prevailing geo-political tensions, and expected economic turbulences are noted as key challenges to be addressed by the Iron Ore Pellets industry players during the short and medium term. Concerns of global economic slowdown, the Impact of war in Ukraine, lockdowns in China with resurging COVID cases and the Risks of stagflation envisaging numerous market scenarios are pressing the need for Iron Ore Pellets industry players to be more vigilant and forward-looking. Robust changes brought in by the pandemic COVID-19 in the Iron Ore Pellets supply chain and the burgeoning drive for a cleaner and sustainable environment are necessitating companies to alter their strategies.

LEVY OF 45% OF EXPORT DUTY ON EXPORT OF IRON ORE PELLETS

Govt. of India vide Customs Notice No. 29/2022 - Customs dated 21-05-2022 imposed 45% Export Duty on Export of pellets, w.e.f., 22-05-2022. The imposition of a steep 45% export duty on pellets was a major dampener for merchant pellet players in general and KIOCL in particular in the back drop of KIOCL being 100% EoU. The steep hike in export duty coupled with high cost of production due to higher logistics cost have rendered KIOCL pellet exports unviable and KIOCL had stopped its pellet plant operations at Mangalore in view of unviable operation due to levy of Export Duty.

Imposition of export duty on the steel sector led to a number of consequences for the sector and the country. India lost out on the opportunity to sell surplus quantities and thus the country faced adverse balance of trade. As per Indian Steel Association (ISA), exports of steel, which fell around 55 per cent in April-October, 2022 compared to the year-ago period. Export duty on steel have also made exports unviable. This was done as commodity price inflation was very high in India. Thus, there was a double whammy of muted domestic demand and unviable exports. The Indian Government finally removed the export duty on November 19, 2022, but by then global steel prices had headed south. Moreover, Europe, one of Indias export markets, witnessed low steel demand and hardly imported. Vietnam, Indias other major export market, also had excess supply and hardly imported. However, the silver lining was that domestic demand picked up by the end of the year. Iron Ore pellet export became unviable for KIOCL due to imposition of 45% of export duty on export of pellets, and KIOCL could not export iron ore pellets. Because of higher production cost, even iron ore pellets were not viable in domestic market. However, KIOCL started focusing on selling its iron ore pellets in domestic market both through road and sea mode of dispatches for maximizing sales during the current financial year. Pellet Exports from India stood at about 6.26 million tons during 2022-23 as against 11.14 million tons in the previous year, down by about 43.77 % on Year – on -Year. Pellet Exports from KIOCL stood at about 1.273 million tons during 2022-23 as against 2.032 million tons in the previous year, down by about 37.36 % on Year – on -Year. KIOCLs market share in export of pellets from India is given in the following graph:

During the FY: 2022-23, KIOCL registered upward trend in DTA sale of pellets, which stood at 14.72% as against 2.0% during the previous year 2021-22. KIOCL is facing competition from merchant pellet manufacturers in India whose capacity has increase over the year. Domestic pellet manufacturers are based in and around mining areas and nearer to end users. Hence, they are able to offer pellets in the domestic market at a competitive price in comparison with KIOCLs pellets. Because of higher production cost, even iron ore pellets were not viable in domestic market.

For the Financial Year 2022-23, the cumulative sales for iron ore pellets was 14,59,997 MT against cumulative production of 15,10,000 MT. The performance in the backdrop of the global economic slowdown, Russia-Ukraine war impact, pandemic after effects and also imposition of 45% export duty by the Government of India, was commendable. Against the above international market scenario for pellets, KIOCL did well during the last Quarters and against the target of 6,20,000 MT, actual sales were 6,88,014 MT, i.e., 110.97% of target achievement. During March, 2023 a total of 7 shipments of quantity 3,72,210 MT was sold in the export market. The March, 2023 dispatch of 3,72,210 MT were the second highest ever monthly dispatches after closure of captive mines, i.e., from 2006-07 onwards. The maximum sales volume was recorded during March, 2022 at 3,79,150 MT.

EXPANSION OF MARKET BASE:

China, being the consumer of more than 50% of the iron ore produced in the world has been the major market for KIOCL pellets. In continuation with its efforts to sell pellets in the non-Chinese Market to minimize dependency on the Chinese market and to expand its Market presence, about 54.38 % of the total exports made were to markets other than China in comparison with about 57.93 % during the previous year. Efforts Continued for market share diversification by reaching end-users in Oman, Indonesia, Italy, Turkey, and Netherlands. China controls about 70-80% of sea borne iron ore trade and hence finding market alternative to China for KIOCL pellets is in line with Companys expansion of business plan.

FINANCIAL PERFORMANCE OF OPERATION

a) The Financial performance of the Company for the year 2022-23 in brief is furnished below:

(Rs in Crores)

Particulars	2022-23	2021-22
Revenue from Operations	1543.42	3006.45
Profit /(Loss) Before Tax for the year	(122.76)	411.03
Profit /(Loss) After Tax	(97.67)	313.41

b) Cash Flow information: - An abstract of Cash Flow statement for the year ended on March 31, 2023 is as under:

(Rs in Crores)

A)	Cash and Cash Equivalents as at 01-04-2022	351.71
B)	Net Cash from Operating Activities	(309.36)
C)	Net Cash from Investing Activities	129.19
D)	Net Cash used in Financing Activities	337.04
E)	Cash and Cash Equivalent as at 31-03-2023	508.58

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	Actual	Capacity
	Target	Production	Utilization (%)
2022-23	NIL*	1.510	43
2021-22	2.800	2.030	58
2020-21	2.500	2.210	63
2019-20	2.300	2.375	68
2018-19	2.170	2.238	64

(Installed capacity of Pellet Plant is 3.500 million Tons / Annum). * The Company was exempted from signing MoU.

SWOT ANALYSIS

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

STRENGTHS

• Mining Lease Deed executed between Govt. of Karnataka and KIOCL on 02-01-2023 for the grant of mining lease of

Iron Ore and Manganese Ore over an extent of 388 ha for a period of 50 years

• 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

• 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. 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 non-availability 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

• Mining Lease Deed executed between Govt. of Karnataka and KIOCL on 02-01-2023 for the grant of mining lease of Iron Ore and Manganese Ore over an extent of 388 ha for a period 50 years

• Export duty on Pellets levied by Govt. of India vide Customs Notice No. 29/2022 - Customs dated 21-05-2022 withdrawn on 19-11-2022

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

• Production-linked incentive for steel manufacturing.

• Sustained Demand for value added products like Pellet, DISP etc.

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

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

THREATS

• Change in Govt. of India policy on export duty on pellets.

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

• Severe competition in the Pellet Industry.

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

• Inflow of Pellet and high-grade lump from overseas at lower rates.

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

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

• Threat of substitutes viz., use of sinter or lumps in place of Pellets.

• Highly dependent on China for selling of Pellets.

INTERNAL CONTROL SYSTEMS

The Risk Based Internal Audit (RBIA) is in place in the Company since 2011. 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.

MATERIAL DEVELOPMENT IN HUMAN RESOURCE / INDUSTRIAL RELATION

During the year, focus of Human Resource Development continued to be in creating a performance driven culture with specific emphasis on developing Technical and Behavioural competencies of Employees. In order to enhance the functional and behavioural competency of employees and to align the individual need with the business objective of the organization towards increasing production and productivity as well as to improve business culture in the organization, there has been a generous effort to impart skill and behavioural training to its employees. In its commitment to good corporate governance, the Company also imparts skill development training to contract workers, apprentices, students from managerial and technical institutes as well as for local population. During the year 2022-23 No.6085 of man days of training was imparted to the employees.

The Employee Relations Scenario in the Company has been peaceful & cordial during the year. Cordial relations were maintained between the Management and the Unions / Associations by effective communication, to eliminate any scope for conflicts & misunderstandings and thus facilitate maintenance of Industrial Harmony. In line with Companys Policy of encouraging Employees Participation in Management, regular Meetings with the representatives of the Recognized Unions / Officers Associations were held to discuss issues. Plant Level & Shop Level Committees comprising of representatives of Management / Union are functioning in the plant to discuss & resolve production related matters. In order to address Employee / Public Grievance / Representations, Grievance Redressal Mechanisms are also in place in the Company.

SUCCESSION PLANNING

As Companies move through various stages in their life cycle and build growth strategies to deal with changing business environments, the issue of leadership becomes critical and with it, the related issue of Succession Planning is the process of identifying and tracking high-potential employees who will be able to fill the management positions when it is required. While the dynamics may differ between companies, a succession strategy essentially needs to look ahead and plan appropriately to ensure that there is continuity and the right kind of leadership to be provided in the business at all levels. Accordingly, the Company has devised a Board approved succession planning policy. The policy is available on Company website. The key objectives for succession planning at KIOCL are:

Build leadership pipeline / talent pool to ensure leadership continuity and help in gearing up for any unexpected eventuality

Provides framework to align leadership with strategic needs of the organization

Identify high-potential employees who are capable of moving into senior positions with higher responsibility than those they presently occupy and train them to gear up for the future

To provide career path for high potentials leading to retention of key talent

To ensure systematic and long-term development of High Potentials in the organization Efficiently transfer responsibility from older to younger generations To pass control of the business in a way that will ensure effective business leadership.

KEY FINANCIAL RATIOS:

Ratios	2022-23	2021-22	% Variance	Reason for variance
Current Ratio (in times)	2.65	6.57	-59.67%	Increase in current liability due to current borrowings.
Debt - Equity Ratio (in times)	0.206	0.004	4797.41%	During the current year, the Company availed Overdraft and additional Term Loan.
Debt Service Coverage Ratio (in times)	-5	28	-116.90%	Operating Loss during the year.
Return on Equity Ratio (in %)	-4.71%	15.18%	-131.04%	Operating Loss during the year.
Inventory Turnover Ratio (in times)	4.47	9.16	-51.18%	Sales reduced due to imposition of export duty on pellets
Trade receivables turnover ratio (in times)	4.41	11.05	-60.13%	Sales reduced due to imposition of export duty on pellets and trade receivable increased due to higher credit sales in March, 2023.
Trade payables turnover ratio (in times)	3.84	4.91	-21.83%	Credit purchase reduced and average trade payable increased.
Net Capital Turnover Ratio (in times)	1.06	1.69	-36.97%	Sales reduced due to imposition of export duty on pellets.
Net Profit Ratio (in %)	-6.33%	10.42%	-160.70%	Incurred operating loss due to imposition of export duty on pellets.
Return on Capital Employed (in %)	-5.81%	21.51%	-127.02%	Incurred operating loss due to imposition of export duty on pellets.
Return on Investment- Liquid Mutual Fund (in %)	5.60%	3.28%	70.73%	Increase in rate of interest.

DETAILS OF ANY CHANGE IN RETURN ON NET WORTH

The return on Average Net-worth during the year was (4.71) % as compared to 15.18% during the previous year. The dip in return was due to operating loss during the year.

FUTURE OUTLOOK

The following projects are in different stages of implementation: -

DEVELOPMENT OF DEVADARI IRON ORE BLOCK

Brief of Project	• Develop Iron ore Mine of capacity 2.0 MTPA.
	• Set up 2.0 MTPA capacity Beneficiation Plant.
Time Schedule	Commencement of iron ore production by Mid-April 2024 and 24 months from the date of placement of order on the Main technological package supplier for Beneficiation Plant.
CAPEX	Rs 1500 Crores
Status	MoEF&CC, GoI accorded Stage II Final FC on 16-12-2022 for Devadari Iron Ore Mine. On obtaining Statutory
	Clearance viz Mining Plan approval, Environment Clearance, Forest Clearance and Consent for Establishment,
	KIOCL executed Mining Lease Deed of Devadari Iron Ore Mine with Director, Mines and Geology, Govt. of
	Karnataka on 02-01-2023 for 388 ha area for a period of 50 years for Iron Ore and Manganese Ore (ML No.
	020 of 2023). Mining Lease Deed registered in the Sub-Registrar Office, Sandur on 18-01-2023 and paid
	H 329.18 crores towards Stamp Duty Fees. Govt. of Karnataka issued Government Order on 11-04-2023 for diversion of forest land for Devadari Iron Ore Mine. On entering into an agreement with Dy. Conservator of
	Forest, Ballari Dist, KIOCL will commence the activities at site for detailed exploration, mine development and production. KIOCL has appointed M/s MECON as Consultant for Devadari Iron Ore Mine for various packages.

SETTING UP OF COKE OVEN PLANT & 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	Coke Oven Plant- March, 2024 and DISP- 24 months from the date of placement of order on the Main technological package supplier.
CAPEX	H 836.90 Crores
Status	M/s MECON has been appointed as EPCM consultant for the project. Main technological packages envisaged are NRHR type Coke Oven Plant, Waste heat recovery Power Plant, Ductile Iron Spun Pipe, Pulverised Coal
	Injection Plant (PCI), Oxygen and Nitrogen Plants. Captive coke oven and PCI System will reduce the input raw material cost of Blast furnace operation. The Coke Oven Plant agreement was signed with M/s Tuaman
	Engg. Ltd, Kolkata on 22-11-2021 and Tripartite agreement was entered among KIOCL, M/s Tuaman Engg.
	Ltd and M/s. CIMFR, Dhanbad, Technology provider under Atmanirbhar Bharath Initiative. The total project cost for Coke Oven is H 218.00 Crores. Detail Engineering is under progress. Civil works for Battery- 1 and Battery-2 are completed and civil works of balance buildings, structures are under progress. Major coke oven Machines are being manufactured by vendors and expected to reach site by September 2023. The Coke Oven Plant is expected to be commissioned by March, 2024.
	The tenders floated for DISP Plant, Power Plant, Pulverized Coal Injection (PCI), Oxygen and Nitrogen plants have been cancelled due to high price and change in procurement policy of GoI. Further process of re-tendering is being reviewed by company as per the guidelines of Ministry of Steel.

MODERNIZATION OF PELLET PLANT UNIT, MANGALURU

Brief of Project	Installation of 4 Nos. of Vertical Pressure Filters
Time Schedule	Expected to be completed by Dec 2023
CAPEX	H 158.60 Crores

 

Status

The existing vacuum disc filters at Pellet Plant are not suitable to filter the iron ore having high Alumina content and slimy in nature. Accordingly, the Board approved the project in its 257th Meeting held on 26-03-2019 with the estimated cost of H 158.60 Crores. Four (04) Nos of vertical Pressure filters supplied by M/s METSO have been installed at Pellet Plant to have flexibility to utilize the ore received from any part of the country at a competitive price. Auxiliary equipments are also being supplied by various vendors and commissioning of Vertical Pressure filters is expected to be completed by Dec, 2023. Company appointed M/s MECON as consultant for installation of vertical pressure filters. The total savings in production cost by installation of vertical pressure filters is expected to be H 45.3 Crores per annum and it would enable the plant to improve capacity utilization with flexibility in using Ores of different sources with different characteristics.

DIGITAL TRANSFORMATION

Brief of Project	ERP Implementation
Time Schedule	24 months for ERP
CAPEX	H 20.31 Crores for ERP [Est.]
Status	The SAP S/4 HANA project named as "ASHWA MEGHA" have gone live on April 1, 2023 with the following modules: -
	1. Procurement and Inventory
	2. HR and Payroll with ESS
	3. Project Management
	4. Financial Management
	5. Plant Maintenance
	6. Production and Quality control
	7. Reporting management / MIS / Analytics /BI
	8. Document Management System
	• File Management
	• Master data Management
	• Document Repository
	The project is under stabilization period.

CAUTIONARY STATEMENT

Certain statements in this report regarding our business operations may constitute forward-looking statements. These include all statements other than statements of historical fact, including those regarding the financial position, business strategy, management plans and objectives for future operations. Forward looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and that may be incapable of being realised, and as such, are not intended to be a guarantee of future results, but constitute our current expectations based on reasonable assumptions. Actual results could differ materially from those projected in any forward-looking statements due to various events, risks, uncertainties and other factors. We neither intend to nor assume any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.