Maharashtra Elektrosmelt Ltd merged Management Discussions

MAHARASHTRA ELEKTROSMELT LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS The Management of Maharashtra Elektrosmelt Limited presents its analysis report covering performance and outlook of the Company. INDUSTRY STRUCTURE & DEVELOPMENT: General Economic Environment: Recovery in the global economy picked up momentum in the fourth quarter of 2009. The speed of recovery however remains significantly divergent a tepid recovery in many advanced countries and a much stronger one in most emerging and developing economies. World output growth for 2010 projected at 4.2%, signals a strong recovery compared to recessionary trend in 2009 when the global output shrank by 0.6%. The reason for optimism is attributable to - expected strong performance by the merging economies, recovery in the developed world, restocking of inventories and rebound in global trade which had shrunk by 10.7% in 2009. During 2010 and 2011, the world trade volume of goods and services is expected to increase by more than 6% per annum. While the emerging and developing economies are performing strongly, emerging and developing nations registered a growth of 2.4% during 2009 which is expected to increase to 6.3% and 6.5% respectively for 2010 & 2011. The challenge to the emerging economies is mainly management of inflation. The Indian economy has maintained the path of momentum in recovery for 2009-10. RBI has projected a GDP growth of 7.2% compared to 6.7% for the previous year. The impact of bad monsoon is visible on performance of agriculture sector which has declined by 0.2%, however, strong growth of 8.2% for industry and 8.7% for services have led to the recovery of overall GDP. IMF has projected a growth of 8.8% of Indian economy for 2010 and 8.5% for 2011. The recovery in the global steel industry became evident from June 2009 when the crude steel production crossed 100 million tonnes after a gap of eight months. The capacity utilization which had dropped from 86% in July 2008 to 58% in December 2008, recovered to 80% in February 2010. World Steel Association (WSA) in its latest demand forecast has projected a world wide steel consumption growth of 10.7% during 2010 and 5.3% in 2011. The emerging economies which remained positive in growth through the crises will be driving the world growth. The year 2011 is projected to take the global steel consumption to a new peak of 1.3 billion tonnes. The consumption of finished carbon steel in India 2009-10 has been estimated at 53 million tonnes - a growth of 7.8% over the previous year. Overall saleable carbon steel production has been estimated at 56.8 million tonnes for the year 2009-10. WSA has projected a growth of more than 13% for India during 2010 and 2011, with the overall consumption reaching 72 million tonnes by 2011. Since ferro alloys are exclusively utilized as raw materials in steel making, the growth in ferro alloy consumption is directly related to the growth in steel consumption. Demand for ferro alloys in India: The demand for ferro alloys largely depends on the production of steel in the country and export potential. With the present production level of 55 million tonnes of crude steel in the country, the demand of manganese based ferro alloys hovers around 8,50,000 tonnes. The production of manganese based ferro alloys is, however, more to meet the requirement of export market also. The steel industry in Asian region is poised for growth in immediate future and the trend may continue for some more years. The impacts of the current global financial crisis on India shows that our economy is not decoupled from the mature market economies of the West. However, the Indian Steel Industry is poised for a massive growth in production capacity to cater to the growing transportation, infrastructure, capital goods and consumer goods sector in the country. Thus, assuming that Indias steel production capacity will grow at much higher rate than indicated in the National Steel Policy, the growth potential for manganese based ferro alloys is expected to be high. Capacity for ferro alloys production: As on date, there exists over capacity in the ferro alloys production. With the gradual increase in requirement of ferro alloys in the domestic market as well as export market, the industry is likely to operate at its rated capacity utilization level only if no raw material constraints are faced. Exports: Since export of ferro alloys is not profitable, export of ferro alloys was not carried out during the year 2009-10. Position of MEL: MEL continues to be one the largest producers of manganese based ferro alloys in the country with about 15% share in the domestic market. It caters mainly to the requirement of its Holding Company viz. SAIL. OPPORTUNITIES & THREATS FOR MEL: Opportunities: MEL has integrated large-scale facilities for the production of manganese based Ferro-alloys. It has, therefore, competitive edge in terms of specific consumption of inputs and operational efficiency. MEL has a track record of achieving furnace capacity utilization of more than 100% of its rated capacity and achieved capacity utilization of 135% in 2009-10. In order to meet the growing requirement of Ferro alloys at SAIL, MEL has taken up an ambitious project for installation of another 45 MVA capacity Submerged Arc Furnace to cater the requirement of SAIL Plants. MEL has 4.2 MW Power Plant using furnace waste gas as a fuel. This has provided good scope for savings on account of power and fuel expenses. To reduce increasing power tariff, MEL has taken up with NSPCL for installation of Captive Power Plant and wheeling of power from BSP, Bhilai, MEL has taken up cost reduction measures particularly through waste utilization, improvement in productivity, reduction in purchase price, right sizing of manpower and electrical power management through load management. Threats: MEL has no captive power plant. There has been steep hike in power tariff. The company may face adversity affecting the techno-economics. MEL has no captive mines for basic input like Manganese Ore and it has to depend mainly on MOIL for high grade ore. SEGMENT WISE OR PRODUCTWISE PERFORMANCE: The production has been increased during the year and the capacity utilization was 135%. The production performance of ferro alloys viz. HC FeMn, MC FeMn, SiMn and other areas like Mn Ore Sinter, Power Generation, etc. was satisfactory. OUT LOOK: With the increase in production of steel in the country, the domestic demand of Ferro alloys is expected to increase. The company has a good potential with motivated and dedicated workforce. It has maintained its quality standard. It has the capacity to cater to the SAIL Plants in addition to supply to non-SAIL customers including exports. However, it needs help from State Government by allocating prospecting licenses for Iron Ore & Manganese Ore, which are the major raw materials for ferro alloys production. RISK AND CONCERNS: Availability and quality of raw materials particularly Manganese Ore is the major concern for MEL. The Companys operation may get adversely affected due to scarcity of Manganese Ore and deterioration in its quality. Also area of concern for MEL is high power tariff and dependence on Maharashtra State Electricity Distribution Company Limited. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE. MEL has conversion contract with SAIL. Major raw materials i.e. Manganese Ore and Coke are provided by SAIL for conversion of the same into Ferro Alloys. Conversion charges are paid by SAIL to MEL based on negotiated rate on yearly basis. During the year the company has achieved a turnover of Rs.382.06 crores as against Rs.425.06 crores in the previous year. Value of sales through conversion arrangement was Rs.310.61 crores as against Rs.353.02 crores during the previous year. On the operational front, company has achieved a capacity utilization of 135%. Sales of ferro alloys (all sizes) during the year were 114332 tonnes as against 99978 tonnes during the previous year. The company has achieved improved performance and earned a post tax net profit of Rs.47.90 crores as against the profit of Rs.40.88 crores in the previous year. This is due to strategic measures taken by the Management viz. increase in production and sales, better product mix, improved techno- economic parameters, optimization in procurement and continuous emphasis on cost reduction, prudent funds management, etc. MATERIAL DEVELOPMENT IN HUMAN RESOURCES / INDUSTRIAL RELATIONS: The Human Resource at MEL has always been the foundation behind its success. During the year the thrust has been on increasing the production and productivity through optimum manpower utilization. The Human Resource Development (HRD) activities have been focused on enhancement of Technical and Managerial skills with thrust on multi-skill training and exposure to modern management techniques. During the year 353 employees were trained in various areas. MEL continued its contribution to the society as a socially responsive organisation through various initiatives. MEL in association with National AIDS Control Organisation (NACO) has actively participated and promoted the Information, Education and Communication (IEC) under the campaign for HIV/Aids awareness programmes. The manpower employed by MEL as on 31st March, 2010 was comprising of 125 Executives and 589 Non-executives out of which 13.45% were Scheduled Caste, 7.84% Scheduled Tribes and 56.61% Other Backward Castes. CARPORATE SOCIAL RESPONSIBILITY: MEL has been carrying out activities under caption Reaching out to the Society in the area of Corporate Social Responsibility (CSR). It has been structuring and implementing the CSR initiatives in line with Holding Company viz. SAIL with the underlying philosophy and credo to make a meaningful difference in the lives of people. The Companies business philosophy encompasses in triple bottom line approach covering the economic, environmental and social dimensions reflecting MELs commitment to building natural, human and societal capital. The focus of the activities remained on benefit to the community at large for long and healthy life, having a decent standard of living. By systematically addressing issues such as village upliftment in terms of education, health and medical welfare, access to water, sanitation, power and roads, womens empowerment, self employment, generation of local employment and infrastructural facilities, etc., MEL has contributed to the development of neighbouring villages and communities in and around MEL at Chandrapur. INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY: The Company has an adequate system of internal controls for achieving the following business objectives of the Company. * Efficiency of operations. * Protection of resources. * Accuracy and promptness of financial reporting. * Compliance with laid down policies and procedures. * Compliance with laws and regulations. In MEL, Internal Audit is a multi disciplinary function which reviews, evaluates and appraises the various systems, procedures/ policies laid down by the Company and suggests meaningful and useful improvements. It helps management to accomplish its objectives by bringing a systematic and disciplined approach to improve the effectiveness of management towards good corporate governance. The Company has taken a number of steps to make the audit function more effective. The Internal Audit is subjected to overall control environment supervised by Board Level Audit Committee, providing independence to the Internal Audit function, emphasizing transparency in the systems and internal controls. Annual Audit Plans are based on identification of key- risk areas with thrust on system/process audits and bench marking of the best practices followed in the Plants so as to achieve over all efficiency improvement including cost reduction in operation of the Company. Development of Internal Audit Executives, bringing awareness amongst Auditees, converging on the pro-active role of Internal Audit remained other focused area during the year. The Internal Audit system is supplemented by well-documented policies, guidelines and procedures and regular reviews are being earned out by our Internal Audit Department. The reports containing significant audit findings are periodically submitted to the management and Audit Committee of the Company. CAUTIONARY STATEMENT: Statement in the Management Discussion and Analysis, describing the Companys objective, projections and estimates are forward looking statement and progressive within the meaning of applicable security laws and regulations. Actual results may vary from those expressed or implied, depending upon economic conditions, Government Policies and other incidental factors.