Mukesh Steels Ltd Management Discussions

MUKESH STEELS LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS Business Overview: Mukesh Steels Limited, the flagship company of Mukesh Group of Industries, is in the business of manufacture of steel ingots, flats and re-rolled products, i.e. Mild Steel & Carbon Steel Rounds which are broadly categorized as Long Products in the Steel Industry. The main application of products manufactured by us is in the bicycle, auto parts, scaffolding, forging and hand tool industries. We also sell ingots manufactured in our furnace division to various industries including other rolling mills. Economic Overview Having fallen into the most severe recession since World War Two, the world economy is on the way to recovery. Following a contraction of 2.0 per cent in 2009, world gross product (WGP) is expected to grow by 3.0 per cent in 2010 and 3.1 per cent in 2011. The pace of the recovery remains subdued, however. The baseline forecast assumes that the multi-year policy stimulus measures put in place in the major economies will be implemented as envisaged, implying that in most countries government stimulus will continue at least during 2010, and that private sector confidence will pick up gradually. Buttressed by unprecedented government support worldwide, global financial markets have progressively stabilized. Capital inflows are gradually returning to many developing economies, and prices of primary commodities have rebounded after steep declines from the start of the crisis to the second quarter of 2009. The recovery in the real economy has also gained more traction. Propelled by fiscal stimulus packages and expansionary monetary policies, most economies registered positive growth in late 2009 and early 2010. While developing Asia, particularly China and India, is leading the way among developing countries, the recovery is much more subdued in many economies in Africa and Latin America. Following the severe downturn in late 2008 and early 2009, East Asias economies have rebounded strongly over the past year and the outlook for 2010 and 2011 is favourable as industrial production and exports continue to expand while improved labour market conditions will support household demand. Led by strong growth in China, regional GDP is expected to increase by 7.3 per cent in 2010, up from 4.7 per cent in 2009.China will again be the regions fastest-growing economy in 2010 and 2011 with GDP estimated to rise by 9.2 per cent and 8.8 per cent, respectively. Growth has picked up in India and Sri Lanka, but economic conditions have remained relatively weak in the Islamic Republic of Iran and Pakistan. GDP growth declined to 5.1 per cent in 2009 from 6.5 per cent in 2008. Average growth is expected to accelerate to 6.5 per cent in 2010 and 6.9 per cent in 2011 as exports continue to recover and domestic conditions improve in most countries. The recovery is led by India, where growth accelerated to 7 per cent in the second half of 2009 due to a rapid expansion in manufacturing and in services. A recovery of exports and a further strengthening of investment and consumption demand are expected to lift growth in India to 7.9 per cent in 2010 and 8.1 percent in 2011. Steel Industry Global Overview Steel being at the core of economic progress witnessed an unprecedented downturn in 2009. Advanced economies buckled under pressure of large inventories coupled with stand still demand; the rest of the world (excluding China and India) .suffocated under low domestic demand; their high degree of export dependency on the advanced world added to their woes. This reconfirmed the concept of increasing global integration and global trade coupling (except China and India). Crude Steel Production World crude steel production declined 8% from 1,329 million tonnes in 2008 to 1,223 million tonnes for the year of 2009. Steel production declined in nearly all the major steel producing countries and regions including the EU, North America, South America and the CIS in 2009. However, Asia, in particular China and India, and the Middle East showed positive growth in 2009. Asia produced 799 million tonnes of crude steel in 2009, an increase of 3.6% compared to 2008; its share of world steel production increased to 65% in 2009 from 58% in 2008. Production (Mn tonnes) Year North South EU-27 CIS Asia China America America (except China) 2008 1245 47.4 198.0 114.3 270.1 500.3 2009 82.5 37.8 138.9 97.5 231.2 567.8 Variance (33.7) (20.1) (29.8) (14.7) (14.4) 13.5 (%) (Source: world steel) Steel Consumption: The global economic and financial crisis impacted steel consumption. The consumption declined 6.7% from 1,202 mn tonnes in 2008 to 1,121 mn tonnes in 2009. Of the consumption, 50% was flats (largely consumption led demand) and 50% was long products (largely infrastructure driven demand). World consumption of finished steel excluding BRIG countries registered a decline of 26.8% in 2009. Steel consumption of BRIC countries grew 18% largely due to the massive consumption of steel from China to satiate stimulated domestic demand. Consumption (Mn tonnes) Year North Central & EU-27 CIS Asia China America South (except China) America 2008 129.2 44.3 182.70 49.8 258.90 434.60 2009 80.9 33.6 118.4 35.8 213.1 542.4 Variance (37.4) (24.1) (35.2) (28.2) (17.7) 24.8 (%) (Source: world steel) Indian Overview Indian Steel Industry: Indian steel industry stood out in the global steel industry due to its resilience during the downturn. While the steel production in the world dipped by 8% in 2009, it registered a growth of around 4% in this period. This clearly demonstrates Indias strong domestic consumption story. Even though the real estate and housing sector showed marked decline during this period, the same was compensated by sustained growth in sectors like infrastructure, manufacturing and automobile. Government intervention in the form of fiscal stimulus helped to propel growth in the end user industry. India is the 5th Largest producer of steel in the world and it was expected that it will become 2nd largest by 2015 on the back of the capacity addition. India is also the worlds largest producer of DRI with around 21 Mn tonnes of production during 2009-10. Indias per capita steel consumption is 48 kg in FY. 2009-10 compared to the world average of 190 kg. Within the country the semi-urban and rural sector has significant growth opportunities due to its low per capita consumption as compared to urban area. Indias Steel Equation (mn tonnes) Particulars 2006-07 2007-08 2008-09 2009-10 Production 52.5 55.2 57.2 59.5 Imports 4.9 6.9 5.8 7.2 Import Pep. (%) 10.5% 13.5% 11.2% 12.7% Consumption 46.7 51.5 52.3 56.3 Exports 5.2 5.0 4.4 3.2 Export Pep. (%) 10.0% 9.0% 7.8% 5.3% (Source: JPC) The growth in demand for steel has outpaced the growth in production, leading to increased import dependency The CAGR for production during the given period is 6.5% and CAGR for consumption is 9.1%. Slow pace in creation of incremental capacities and rising demand made the country a net importer of steel. The net import of steel stood at 4.0 million tonnes that grew at a CAGR of 26% from 2004-05 to 2009-10, and export registered a declining trend of 8% from 2004-05 to 2009-10. Financial analysis with respect to operational performance of Mukesh Steels Limited Revenues During the year ended March 31st, 2010 the sales of your company has decreased by 27.75% to Rs. 5587.35 Lakhs as against 7733.39 Lakhs on March 31st, 2009.The decrease in the total revenues of your company is on account of decrease in sales consideration due to recession in the market. Expenditure Raw Material Cost: Raw materials represent the largest component of total expenditure, decreasing by 33.05% percent to Rs.3851.89 Lakhs in absolute terms in FY 2009-10 as against Rs.5752.60 Lakhs in FY 2008-09.The decrease in raw material cost is predominantly due to the increase In prices of raw material during the financial year 2009-10. Manufacturing Expenditure: The manufacturing expense has increased to Rs.1214.16 Lakhs in FY 2009-2010 from Rs. 108473 Lakhs in FY 2008-2009. Manpower Cost: The employees cost has increased from Rs. 43.15 Lakhs in FY 2008-09 to 49.07 Lakhs in FY 2009-2010 Administrative Cost: Administrative Expenses for the year has decreased from Rs 81.25 Lakhs in FY 2008-2009 to Rs.45.00 Lakhs for the year ended 31s1 March, 2010. Decrease in administrative expenses is mainly due to decrease in amount paid for building repairs, fines and penalties, insurance charges etc. Selling & Distribution Expenses: Selling expenses for the year has decreased from Rs. 8.73 Lakhs for year ended 31st March 2009 to Rs 3.56 lakhs for the year ended 31st March 2010. The decrease in selling expenses is mainly due to decrease in rebate and discounts and brokerage. Depreciation: Depreciation for year ended 31st March, 2010 is at Rs 14.53 Lakhs against Rs 14.48 Lakhs for the year ended 31st March, 2009. The Increase in Depreciation is towards addition in assets of the company i.e land and building. Interest Charges: Interest Expense on working capital has decreased to Rs.77.48 Lakhs for the year ended 31st March, 2010 as compared to Rs.78.34 Lakhs for year ended 31st March, 2009 due to less utilization of working capital limits during the year. Income Tax: Income Tax provision for the year ended 31st March, 2010 was at Rs 13.03 Lakhs as against tax provision of Rs.16 55 Lakhs for financial year ended 31st March 2009. Decrease in tax liability is on account of decrease in Fringe Benefit Tax. Profits & Profitability: PAT for the year ended 31st March, 2010 was at Rs 32.77 Lakhs as against Rs 19.80 Lakhs for financial year ended 31st March, 2009. Increase in profitability is on account of decreased expenditure. Balance Sheet Review: The Companys balance sheet size increased to Rs 1729.63 Lakhs, as compared with Rs 1219.41 Lakhs during the preceding fiscal year owing to an increase in inventories and sundry debtors. Share Capital: The Companys total paid-up share capital increased to Rs 6,97,29,660.00 during the FY 2009-10 from Rs.6,96,80,160.00. The increase in paid up capital of the company is on account of amount received against unpaid calls. Each equity share of the Company possessed a paid-up value of Rs. 10/-. Reserves & Surplus: The profit after tax during the year was Rs. 32.77 Lakhs; the entire profit was ploughed back into the business. The Companys reserves stood at Rs 465.55 Lakhs as on March 31, 2010 against Rs. 432.77 Lakhs in the preceding year. Secured & Unsecured Loans: The Companys total borrowings increased from Rs 56.56 Lakhs in FY 2008-9 to Rs 533.24 Lakhs in FY 2009-10. There being no unsecured loans during the year, secured loans only formed a part of the total borrowings. Internal Control Systems: The Company has in place adequate internal control systems and procedures commensurate with the size and nature of its business. The objective of the internal control system is to bring a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. The effectiveness of the internal controls is continuously monitored by the Corporate Audit Division of the Company, Safety and Environment Risk: In the developed world, industries have been facing rising environmental costs due to the increased concerns on Global Warming. It is, therefore, a challenge and responsibility for the Steel industry to be the trustee in conservation of nature for future generations. We have developed Safety programme to ensure Safety of our employees. Human Resource Management and Industrial Relations: Industrial relations remain cordial all over the year. The Company is providing continuous training to its employees for better utilization of its human resources. Cautionary Statement: Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations may be forward- looking statements within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and incidental factors. Market data and product information contained in this report is gathered from published and unpublished reports and their accuracy cannot be assured.