Manaksia Steels Management Discussions

Global economic review Overview: The global economic growth was estimated at a slower 3.2% in 2022, compared to 6% in 2021 (which was on a smaller base of 2020 on account of the pandemic effect). The relatively slow global growth of 2022 was marked by the Russian invasion of Ukraine, unprecedented inflation, pandemic-induced slowdown in China, higher interest rates, global liquidity squeeze and quantitative tightening by the US Federal Reserve.

The challenges of 2022 translated into moderated spending, disrupted trade and increased energy costs. Global inflation was 8.7% in 2022, among the highest in decades. US consumer prices increased about 6.5% in 2022, the highest in four decades. The Federal Reserve raised its benchmark interest rate to its highest in 15 years. The result is that the world ended in 2022 concerned that the following year would be slower.

Gross FDI inflows - equity, reinvested earnings and other capital - declined 8.4% to USD 55.3 Billion in April-December 2022.

The decline was even sharper in the case of FDI inflows as equity: these fell 15% to USD 36.75 Billion between April and December 2022. Global trade expanded by 2.7% in 2022 (expected to slow to 1.7% in 2023).

The S&P GSCI TR(Global benchmark for commodity performance) fell from a peak of 4,319.55 in June 2022 to 3495.76 in December 2022. There was a decline in crude oil, natural gas, coal, lithium, lumber, cobalt, nickel and urea realisations. Brent crude oil dropped from a peak of around USD 120 per barrel in June 2022 to USD 80 per barrel at the end of the calendar year following the enhanced availability of low-cost Russian oil.

Regional growth (%) 2022 2021
World output 3.2 6.1
Advanced economies 2.5 5
Emerging and developing economies 3.8 6.3

Performance of major economies

United States: Reported GDP growth of 2.1% compared to 5.9% in 2021

China: GDP growth was 3% in 2022 compared to 8.1% in 2021.

United Kingdom: GDP grew by 4.1% in 2022 compared to 7.6% in 2021

Japan: GDP grew 1.7% in 2022 compared to 1.6% in 2021

Germany: GDP grew 1.8% compared to 2.6% in 2021

[Source: PWC report, EY report, IMF data, OECD data]

Outlook: The global economy is expected to grow 2.8% in 2023, influenced by the ongoing Russia- Ukraine conflict. Concurrently, global inflation is projected to fall marginally to 7%. Despite these challenges, there are positive elements within the global economic landscape. The largest economies like China, the US, the European Union, India, Japan, the UK and South Korea are not in a recession. Approximately 70% of the global economy demonstrates resilience, with no major financial distress observed in large emerging economies. The energy shock in Europe did not result in a recession and significant developments, including Chinas progressive departure from its strict zero- covid policy and the resolution of the European energy crisis, fostered optimism for an improved global trade performance. Despite high inflation, the US economy demonstrated robust consumer demand in 2022. Driven by these positive factors, global inflation is likely to be still relatively high at 4.9% in 2024. Interestingly, even as the global economy is projected to grow less than 3% for the next five years, India and China are projected to account for half the global growth (Source: IMF).

Indian economic review Overview: Even as the global conflict remained geographically distant from India, ripples comprised increased oil import bills, inflation, cautious government and a sluggish equity market.

Indias economic growth was 7.2% in FY 2022-23. India emerged as the second fastest-growing G20 economy in FY 2022-23. India overtook UK to become the fifth- largest global economy. India surpassed China to become the worlds most populous nation (Source: IMF, World Bank)

Growth of the Indian economy

1 FY 2019-20 FY 2020-21 FY 2021-22 FY 2022-23
Real GDP growth(%) 3.7 -6.6% 9.1 7.2

Growth of the Indian economy quarter by quarter, FY 2022-23

Q1FY23 Q2FY23 Q3FY23 Q4FY23
Real GDP growth (%) 13.1 6.2 4.5

According to the India Meteorological Department, the financial year 2023 delivered 8% higher rainfall over the long-period average. Due to unseasonal rains, Indias wheat harvest was expected to fall to around 102 Million metric Tonnes (MMT) in FY2022-23 from 107 MMT in the preceding year.

Rice production at 132 Million metric Tonnes (MMT) was almost at par with the previous year. Pulses acreage grew to 31 Million hectares from 28 Million hectares. Due to a renewed focus, oilseed area increased by 7.31% from 102.36 Lakh hectares in FY2021-22 to 109.84 Lakh hectares in FY2022-23.

Indias auto industry grew 21% in FY23; passenger vehicle (UVs, cars and vans) retail sales touched a record 3.9 Million units, crossing the previous high of 3.2 Million units in FY19. The commercial vehicles segment grew by 33%. Two-wheeler sales fell to a seven- year low; the three-wheeler category grew 84%.

Till the end of Q3FY23, the banking systems total gross non performing assets (NPAs) fell to 4.5% from 6.5% a year ago. Gross NPA for FY23 was expected to be 4.2% and a further drop is predicted to be 3.8% in FY2023-24.

As Indias domestic demand remained steady amidst a global slowdown, import growth in FY23 was estimated at 16.5% to USD 714 Billion as against USD 613 Billion in FY22. Indias merchandise exports were up 6% to USD 447 Billion. Indias total exports (merchandise and services) grew 14% to a record of USD 775 Billion and is expected to touch USD 900 Billion in FY2023-24. Till Q3 FY23, Indias current account deficit, a crucial sindicator of the countrys balance of payments position, decreased to USD 18.2 Billion or 2.2% of GDP. Indias fiscal deficit was in nominal terms at ~ H17.55 Lakh Crore, which is 6.4% of the countrys GDP for the year ending March 31, 2023.

Indias headline foreign direct investment (FDI) numbers rose to a record USD 84.8 Billion in FY2021- 22, However, during the fiscal year 2022-23, the country experienced a 16% decrease in foreign direct investment (FDI) inflows, amounting to USD 71 Billion on a gross basis. This decline can be attributed to the unfavourable global economic conditions and stands as the first contraction in FDI in the past ten years.

Indias foreign exchange reserves, which had witnessed three consecutive years of growth, experienced a decline of approximately USD 70 Billion in FY2022-23, primarily influenced by rising inflation and interest rates. Starting from USD 606.47 Billion on April 1, 2022, reserves decreased to USD 578.44 Billion by March 31, 2023. The Indian currency also weakened during this period, with the exchange rate weakening from H75.91 to a US dollar to H82.34 by March 31, 2023, driven by a stronger dollar and an increasing current account deficit. Despite these factors, India continued to attract investable capital.

The countrys retail inflation, measured by the consumer price index (CPI), eased to 5.66% in March 2023. Inflation data on the Wholesale Price Index, WPI (calculates the overall price of goods before retail) eased to 1.3% during the period. In 2022, CPI hit its highest of 7.79% in April; WPI reached its highest of 15.88% in May 2022. By the close of the year under review, inflation had begun trending down and in April 2023 declined below 5%, its lowest in months.

Indias total industrial output for FY23, as measured by the Index of Industrial Production or IIP, grew 5.1% year-on-year as against a growth of 11.4% in FY2021-22.

India moved up in the Ease of Doing Business (EoDB) rankings from 100th in 2017 to 63rd in FY23. As of March 2023, Indias unemployment rate was 7.8%.

In FY2022-23, total receipts (other than borrowings) were estimated at 6.5% higher than the Budget estimates. Tax-GDP ratio was estimated to have improved by 11.1% Y-o-Y in RE 2022-23. The government is also estimated to have addressed 77% of its disinvestment target in FY23 (H50,000 Crore against a target of H65,000 Crore).

The total gross collection for FY23 was H18.10 Lakh Crore, an average of H1.51 Lakh a month and up 22% from FY22, Indias monthly goods and services tax (GST) collections hit the second highest ever in March 2023 to H1.6 Lakh Crore.

For FY2022-23, the government collected H16.61 Lakh Crore in direct taxes, according to data from the Finance Ministry. This amount was 17.6% more than what was collected in the previous fiscal.

Per capita income almost doubled in nine years to H172,000 during the year under review, a rise of 15.8% over the previous year. Indias GDP per capita was 2,320 USD (March 2023), close to the magic figure of USD 2500 when consumption spikes across countries. Despite headline inflation, private consumption in India witnessed continued momentum and was estimated to have grown 7.3% in 2022-23..

Outlook: There are green shoots of economic revival, marked by an increase in rural growth during the last quarter and an appreciable decline in consumer price index inflation to less than 5% in April 2023. India is expected to grow around 6-6.5% (as per various sources) in FY2024, catalyzed in no small measure by the governments 35% capital expenditure. The growth could also be driven by broad-based credit expansion, better capacity utilisation and improving trade deficit. Headline and core inflation could trend down. Private sector investments could revive. What provides optimism is that even as the global structural shifts are creating a wider berth for Indias exports, the country is making its largest infrastructure investment. This unprecedented investment is

expected to translate into a robust building block that, going ahead, moderates logistics costs, facilitates a quicker transfer of products and empowers the country to become increasingly competitive. This can benefit Indias exports in general, benefiting several sectors. The construction of national highways in 2022-23 was 10,993 Kms; the Ministry of Road Transport and Highways awarded highway contracts of 12,375 Km in the last financial year

The global landscape favours India: Europe is moving towards a probable recession, the US economy is slowing, Chinas GDP growth forecast of 4.4% is less than Indias GDP growth of 7.2% and America and Europe is experiencing its highest inflation in 40 years.

Indias production-linked incentive appears to catalyse the downstream sectors. Inflation is steady. India is at the cusp of making significant investments in various sectors and emerge as a suitable industrial supplement to China. India is poised to outpace Germany and Japan and emerge as the third- largest economy by the end of the decade. The outlook for private business investment remains positive despite an increase in interest rates. India is less exposed to Chinese economic weakness, with much less direct trade with China than many Asian peers.

Broad-based credit growth, improving capacity utilisation, governments thrust on capital spending and infrastructure should bolster investment activity. According to our surveys, manufacturing, services and infrastructure sector firms are optimistic about the business outlook. The downside risks are protracted geopolitical tensions, tightening global financial conditions and slowing external demand.

(Source: IMF data, RBI data, Union budget 2023-24 data, CRISIL report, Ministry of Trade & Commerce, NSO data)

Union Budget FY 2023-24 provisions

The Budget 2023-24 sought to lay the foundation for the future of the Indian economy by raising capital investment outlay by 33% to H10 Lakh crores, equivalent to 3.3% of GDP and almost three times the 2019-20 outlay, through various projects like PM Gati- shakti, Inclusive Development, Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition and Climate Action, as well as Financing of Investments. An outlay of H5.94 Lakh Crore was made to the Ministry of Defence (13.18% of the total Budget outlay). An announcement of nearly H20,000 crores was made for the PM Gati- Shakti National Master Plan to catalyse the infrastructure sector. An outlay of H1.97 Lakh Crore was announced for Production Linked Incentive schemes across 13 sectors. The Indian government intends to accelerate road construction in FY24 by 16-21% to 12,000-12,500 Km. The overall road construction project pipeline remains robust at 55,000 Km across various execution stages. These realities indicate that a structural shift is underway that could strengthen Indias positioning as a long-term provider of manufactured products and its emergence as a credible global supplier of goods and services

Indian steel industry review During FY 2022-23, India produced 125.32 Million Tonnes of steel, representing a 4.2% increase over the previous year. The growth in the Indian steel sector can be attributed to factors such as rising consumer demand, access to domestic sources of raw materials such as iron ore and cost-effective labour. Steel consumption in India reached 119.17 Million Tonnes during the same period. India also exported 13.5million Tonnes of finished steel worth H1 Lakh Crore and imported steel of around H46,000 Crore in FY 2022-23.

The construction sector, encompassing both infrastructure and real estate, is the largest consumer of steel in India, accounting for approximately 61% of domestic steel demand. It is followed by the capital goods sector, which constitutes around 10% of steel consumption and then the automotive sector, which constitutes around 9% of domestic steel demand. As of 2022, the crude steel capacity in India stood at approximately 154 Million Tonnes per annum. The Indian steel sector contributes roughly 2% to Indias GDP.

India set several goals for the steel sector, including becoming a net exporter of steel by 2025-26, increasing crude steel capacity to 300 Million Tonnes, raising per capita steel consumption to 160 Kg by 2030-31, fulfilling the domestic demand for high- grade automotive steel, special steels and alloys and electrical steel for strategic applications by 2030-31 and reducing the import dependence on coking coal to 50% by 2030-31. To achieve these objectives, the government must incentivize private sector investment in the steel industry, facilitate the acquisition of technology and know-how for advanced steel production, focus on increasing the demand for steel through infrastructure development and urbanization, and develop quality standards for domestic steel products. Moreover, the government should support the industry in becoming a global leader in energy and raw material- efficient steel production by 203031.

Growth drivers

Capital goods industry: The capital goods industry currently consumes 11% of the total steel production, and it is anticipated to grow by 14-15% by the financial year 2025-26. This sector has the potential to increase its tonnage and market share in the coming years.

Automotive industry: In India, the automotive sector represents approximately 10% of the steel demand. It is projected to expand to a size of USD 260-300 Billion by 2026 and the demand for steel from this sector is expected to remain strong.

Infrastructure sector: The infrastructure industry currently consumes 9% of the total steel production and is anticipated to grow by 11% by the financial year 2025-26. With the increasing investments in infrastructure projects, the demand for long steel products is expected to rise in the coming years.

Railways: The budget outlay of H2.40 Lakh Crore for the railways in the Union Budget 2023-24 is the largest in history and is around nine times the amount given in 2013- 14.The demand for steel will also be driven by the construction of foot over bridges, railway stations, and the laying of tracks and the manufacturing of rail coaches.

Airport: The number of operational airports stood at 140 in FY 202223. Under union budget 2023, Government proposed revival of fifty additional airports, heliports, waterdromes and advance landing grounds for improving regional air connectivity.

Oil and gas: Indias primary energy consumption from oil and gas is expected to increase to 10 Million barrels per day (mbpd) and 14 Billion cubic feet per day (bcfd) by 2040.

As part of the 2023 budget, the government has planned to expand the National Gas Grid from 17,500 Km to 34,500 Km. This expansion is expected to lead to a surge in demand, which presents a lucrative opportunity for the steel industry.

PM Awas Yojana: The Union Budget 2023-24 has increased the budget allocation for PMAY by 66%, indicating the governments commitment to achieve the goal of housing for all by 2022. The credit-linked subsidy scheme, which provides interest subsidies to homebuyers, will be extended until 2027. This will create a higher demand for building materials, such as cement and steel.

Monsoon health: Indias monsoon, which accounts for 70% of the countrys annual rainfall and irrigates 60% of its net sown area, may be below-normal in 2023 due to an increasing likelihood of El- Nino, which could impact monsoon rainfall in the second half of the season. However, favourable factors such as Indian Ocean Dipole sea temperature changes are expected to drive good rainfall, which will increase rural income, benefiting the steel industry.

MSP of crops: The Government of India has raised the Minimum Support Price (MSP) for Rabi Crops in the Marketing Season 2023-24 to ensure that growers receive remunerative prices for their produce. The highest increase in MSP has been approved for lentil (Masur) at H500/- per quintal, followed by rapeseed and mustard at H400/- per quintal. Safflower sees an increase of H209/- per quintal, while wheat, gram and barley have been approved for an increase of H110/-, H100/-, and H100/- per quintal respectively. These changes are expected to have a positive impact on the rural income which will benefit the steel industry.


Government initiatives

• The Union cabinet has approved the production-linked incentive (PLI) scheme for specialty steel, which is expected to attract investments worth H400 Billion and increase steel capacity by 25 Million Tonnes by the financial year 202627.

• The Indian government has signed a Memorandum of Understanding (MoU) with Russia to collaborate on research and development in the steel sector.

The partnership will also involve the production of coking coal, a key ingredient in steel making.

• The Indian government has recently entered into a Memorandum of Cooperation (MoC) with the Ministry of Economy, Trade and Industry of the Government of Japan, aimed at strengthening the steel sector through collaborative initiatives under the India-Japan steel dialogue framework.

• The government allocated H70.15 Crore to the Ministry of Steel under the Union Budget 2023-24.

• The Indian Government has approved the National Steel Policy (NSP) 2017, which aims to establish a globally competitive steel industry in India.

• The Ministry of Steel in India has established the Steel Research and Technology Mission of India (SRTMI) in collaboration with public and private sector steel companies. The mission is industry-driven and aimed at leading research and development activities in the steel sector.

• The governments goal is to increase the current annual crude steel-making capacity of 150MT to 300MT, effectively doubling it.