Metal Coatings (India) Ltd Management Discussions

INDUSTRY STRUCTURE

The company is engaged in the manufacture and sale of Cold Rolled Steel Strips and HRPO (Hot Rolled Pickled and Oiled) steel strips/coils, operating within the steel sector. Its product line serves diverse industries including Auto Components, Consumer Durables, Electrical, Telecom equipment, and more.

OPPORTUNITIES AND OUTLOOK

The objective of this report is to share the managements perspective on the outlook of the business of the company and the industry in which the company operates with reference to the external environment; as well as operating and financial performance, risks and opportunities and the adequacy of the internal control systems during the financial year 2023-24. This report should be read in conjunction with the companys financial statements together with the schedules and the notes thereto.

MACROECONOMIC ENVIRONMENT

The global economy has shown remarkable resilience despite facing numerous challenges, including the Middle East crisis, Russias invasion of Ukraine, high inflation, rising costs, and declining household purchasing power. Additionally, geopolitical uncertainties and forced monetary tightening have posed significant threats. The economy is in a better position now compared to the same period in 2023, with the risk of a global recession diminishing. By late 2023, headline inflation in most economies approached pre-pandemic levels for the first time since the global inflation surge began. As global inflation receded from its peak, economic activity increased steadily, defying predictions of stagflation and global recession.

The United States and some middle-income economies demonstrated strong economic performance, supported by robust private consumption amid still tight but easing labor markets. However, ongoing geopolitical tensions, including the Middle East crisis, the Russia-Ukraine war, and the upcoming US presidential elections, pose risks to growth in 2024. The US is expected to grow by 2.4% in 2024, while the Eurozone is projected to see a modest recovery of 0.7%, driven by declining inflation and normalizing energy prices. China experienced stronger-than-expected growth of 5.2% in 2023, with 2024 growth projected at 4.65%. However, China will face significant challenges in 2024, including industrial overcapacity, a continued slowdown in domestic demand, deepening deflation, and heightened trade tensions with the West.

The International Monetary Fund (IMF) in their latest projections have suggested global growth that will hold steady at around 3.2% for 2024 and 2025, with median headline inflation declining from 2.8% at the end of 2024 to 2.4% by the end of 2025.The growth forecast for 2024 has been revised upward from the IMFs earlier estimate of 2.9%, reflecting stronger-than-expected economic growth in the US and several major emerging markets and developing economies in the latter half of 2023, fueled by both government and private spending. Despite these positive developments, the momentum is not uniform across regions. The Euro Area is expected to experience subdued growth due to weak consumer sentiment, high energy prices, and elevated benchmark interest rates. Overall, annual average real GDP growth is expected to be 0.9% in 2024, and to strengthen to 1.4% in 2025 and 1.6% in 2026. Low-income economies will continue to face significant output losses compared to their pre-pandemic trajectories amid high borrowing costs. Although the global financial system has largely withstood unprecedented monetary tightening, with emerging market economies displaying notable resilience, the global economy still faces challenges. Growth forecasts for 2024 and 2025 remain below the historical average of 3.8% from 2000-2019.

INDIAN ECONOMY

Indias economic growth has shown impressive resilience against global challenges for the past three fiscal years, driven by prudent policies, regulatory support, and a revitalized private sector. The countrys appeal as an investment destination is strong due to its vast operational scale, skilled workforce, and technological prowess. The industrial manufacturing sector has attracted global tech giants, supported by state policies and significant investments in infrastructure. Despite global economic headwinds, Indias GDP growth rate in the quarter ending March 31, 2024 grew by 7.8 per cent, according to the data released by the National Statistical Office (NSO) of Ministry of Statistics and Programme Implementation (MoSPI). The government continues to focus on fiscal consolidation and capital expenditure, aiming to make India a developed nation by 2047. Real GDP has been estimated to grow by 8.2% in FY 2023-24 as compared to the growth rate of 7.0% in FY 2022-23. Nominal GDP has witnessed a growth rate of 9.6% in FY 2023-24 over the growth rate of 14.2% in FY 2022-23.

Indias composite purchasing managers index (PMI) stood at 60.6 in February, significantly above the global average of 52.1, signaling expansion. Inflation has remained within the Reserve Bank of Indias (RBI) target range, and financial conditions h ave been accommodating. India has outpaced major advanced and emerging market economies, achieving the highest growth rate during this period. The International Monetary Fund (IMF) projects that India is poised to become the third-largest economy by 2027 in terms of USD at market exchange rates. Furthermore, it anticipates a significant increase of 200 basis points in Indias contribution to global growth over the next five years.

Macroeconomic stability, coupled with improvements in Indias external position, including a notable moderation in the current account deficit and a resurgence of capital flows supported by comfortable foreign exchange reserves, has led to stability in the Indian rupee throughout FY 2023-24.

STEEL INDUSTRY

The steel industry has faced challenges due to high inflation, rising interest rates, and increasing geo-economic fragmentation. In 2023, steel-consuming sectors, particularly in the EU and US, experienced a slowdown as investment and consumption weakened. The delayed effects of monetary policy tightening may allow for a slow recovery in advanced economies in 2024, while emerging economies, especially in Asia, are expected to grow more rapidly. Persistent core inflation, high oil prices, and a tight job market remain downside risks to stabilizing inflation.

Steel, renowned as the worlds primary alloy, serves as the cornerstone of essential sectors l ike infrastructure, consumer durables and other manufacturing. Despite ongoing efforts to develop alternatives such as aluminum and titanium, steel remains irreplaceable due to the abundance of its primary raw material, iron ore. China stands as the largest global producer and consumer of steel, driven by rapid urbanization and infrastructure growth, while India follows as the second largest producer, alongside Japan and the US. However, the global steel industry confronts numerous challenges, including overcapacity in countries like China, leading to price pressures, trade disputes, and market distortions. Additional challenges arise from unilateral decisions such as the EUs forthcoming carbon tax on carbon dioxide-emitting products, effective from January 2026, which could significantly impact global trade dynamics. For instance, in 2022, 27% of Indias exports of iron ore pellets, iron, steel, and aluminum products valued at US $8.2 billion were destined for the EU, highlighting potential economic ramifications.

INDIA OUTLOOK

India has emerged as a leading driver of steel demand growth since 2021, propelled by a thriving construction sector supported by robust private consumption and substantial government infrastructure spending. While the automotive sector performed well, consumer durables lagged amid inflationary pressures. Towards the end of the financial year, coking coal prices softened, but imports from China squeezed margins for domestic players and reduced international steel prices. India is expected to maintain its position as the fastest-growing large economy, with steel demand forecasted to grow approximately 8% in 2024, reaching 144 million tonnes. The interim budget signals robust demand with an 11% increase in the infrastructure budget. Indias domestic steel industry is especially vulnerable to cheaper imports and demand fluctuation. According to Fitch Ratings finished steel consumption in India is expected to increase by 9% in FY25, following a 12% rise in FY24. Utilization levels are projected to remain healthy around 80%, and a strengthening net export position is anticipated as global demand improves.

During Financial Year 2023-24 (FY 24), Indian Steel sector has demonstrated unprecedented performance, achieving its highest levels of production and consumption as compared to analogous periods in previous financial years. The production of crude steel was 143.6 million tonnes (MT), while finished steel production reached 138.5 MT, and consumption of finished steel stood at 135.9 MT during FY 24, indicating a growth of 12.9%, 12.4%, and 13.4% respectively over the preceding financial year, i.e. FY 23. There has been an overall upward trend in steel production and consumption during FY 24, despite some month -to-month fluctuations. In March 24, there was an uptrend in the production of crude steel, finished steel and the consumption of finished steel compared to the previous month. The Government continues spending in infrastructure projects such as airport, metro-rail projects, highways which will drive steel demand in India.

RISK, THREATS & CONCERNS

The Cold Rolled steel sector in India faces intense competition, exacerbated by new challenges from larger Hot Rolled Coil manufacturers expanding into downstream Cold Rolled manufacturing. This shift presents significant threats to standalone Cold Rolled steel producers, who also contend with rising fuel costs and stringent regulatory restrictions on Diesel Generating sets, leading to increased energy expenses. The companys profit margins are vulnerable to volatility in raw material costs, energy prices, and other direct expenditures. To manage these risks, the company closely monitors market price fluctuations and implements adaptive strategies, including adjusting business models. However, the companys diversified business approach helps mitigate these risks to a considerable extent. Ongoing, proactive reviews and strategic measures are continually undertaken to safeguard operational efficiency against these challenges.

FINANCIAL PERFORMANCE

HUMAN RESOURCES

Human resources are integral to our steel industry operations, playing a pivotal role in driving our success. At Metal Coatings (India) Limited, we recognize that our workforce is our greatest asset, essential for achieving our strategic objectives and maintaining operational excellence. Our commitment to attracting, developing, and retaining top talent ensures that we have skilled professionals who uphold our values of innovation, safety, and efficiency. By fostering a diverse and inclusive workplace, we harness the collective strengths of our team to navigate challenges, seize opportunities, and deliver sustainable growth.

Our Whistle Blower Policy acts as a vigilant safeguard. Recognizing the significance of human resources, we prioritize talent development. Our human resource strategies are aligned with our business goals, aiming to build a motivated and engaged workforce that drives our companys success in a competitive global market. The Companys total permanent employee strength as on 31^st March, 2024 stood at 68. The Company continues to maintain open and cordial employee relations.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Your Company has laid down the set of standards, processes and structure which enables to implement internal financial control across the organization and ensure that the same are adequate & operating effectively. Internal financial control also provides reasonable assurance regarding the reliability of financial reporting and preparation of financial statement. The company has devised such systems, policies and procedures which ensure orderly and efficient conduct of its business, including adherence to the companys policies, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records, and timely preparation of reliable financial disclosures. To maintain the objectivity and independence of Internal Audit, the Internal Auditor report is directly submitted to the Chairman of the Audit Committee and the Board.

KEY FINANCIAL RATIOS

SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE

The Company operates in only one segment, i.e. iron & steel. During the Financial Year 2023-24 the companys turnover of its main products was Rs. 163.61 Crores as compared to last year of Rs. 164.25 Crores.

CAUTIONARY STATEMENT

The Management Discussion and Analysis outlines the Companys objectives, projections, estimates, and expectations. It is important to note that some statements in this report may be considered "forward-looking statements" under applicable securities laws and regulations. However, actual outcomes may differ significantly from these statements. External economic conditions impacting supply and demand, market price fluctuations, shifts in government regulations and tax laws, climatic variations, and other incidental factors can significantly impact the companys operational performance. These factors should be considered as potential risks and uncertainties that could affect future business results and should be approached with caution.