National Steel & Agro Industries Ltd Management Discussions.

A) Steel

I) Industry Structure and Developments

World Steel Scenario

The global steel industry has seen an accelerated growth over the years and is expected to grow even further in the times to come.

• The world crude steel production has increased to around 1808.6 Million Tonnes (MT) in the year 2018 as per the data provided by World Steel Association, China being the top-most steel producing nation.

• The world apparent steel use per capita reached the mark of 224.5 kilograms for the year 2018.

Steel consumption also shows a strong link with the economic growth, for steel has become an essential material in almost every aspect of the economy, right from infrastructure, transportation to food packaging and consumption.

Global steel sector has over the years seen a significant growth pattern, together with several challenges and shortcomings which are on the verge of becoming the strength of the industry in the near future.

Indian Steel Scenario

• As per the World Steel Association India gained second position among the major steel producing countries with a crude steel production of 106.5 MT in the year 2018 and based on the growth patterns in the industry over the years, it is expected to become the first largest producer of crude steel soon.

• The apparent steel use per capita has also increased, the same being 70.9 kilogrammes for the year 2018 as per the data provided by World Steel Association.

• The steel sector contributes to over 2% of the Countrys GDP.

Indian Export Related Data (For April-December 2018-19)

II) Opportunities and Threats

Opportunities

• India was a net exporter of total finished steel. Growth in exports ensures greater access to far out markets.

• Intention of Government to increase funding in infrastructure, affordable housing (Prime Minister Awas Yojana), strengthening of Real Estate norms through ‘Real Estate (Regulation and Development) Act, 2016 etc. will generate positive demand for steel.

• In line with Central Governments announcement of various road/rail infrastructure projects, the market for local manufacturers is expected to improve.

• Steel consumption is expected to grow 7.5 per cent year-on-year to 95.4 MT in 2018. Indias steel production is expected to increase from 103.13 MT in FY18 to 128.6 MT by 2021.

• The Government has taken various steps to boost the sector including the introduction of National Steel Policy 2017 and allowing 100 per cent Foreign Direct Investment (FDI) in the steel sector under the automatic route. Between April 2000 and December 2018, inflow of US$ 11.18 billion has been witnessed in the metallurgical industries as Foreign Direct Investment (FDI).

• Indias per capita consumption of steel grew to 68.9 kgs, during 2017-18. National Steel Policy 2017 aims to increase the per capita steel consumption to 160 kgs by 2030-31.

• Two National landmark policies have been rolled out by the government –

1) National Steel Policy 2017

Expected Impact:

a. India to be world leader in energy efficiency and sustainability.

b. Global standards in Industry safety and health.

c. Domestically meet the entire demand of high grade automotive steel, electrical steel, special steel and alloys.

2) Policy on Preference to Domestically Manufactured Steel Products

Objective:

a. To provide a level playing field for the domestic manufacturers.

b. Expansion of private sector in steel making industry would provide opportunity for medium scale industries.

c. The Company expects to hit on the opportunities provided by the economy.

Threats

• Improper supply-demand balance.

• Depletion of high quality raw materials required for production of steel.

• Environmental concerns.

• Dumping of excess inventory in other countries by countries producing steel in abundance.

III) Outlook – Steel Sector

• Post the rollout of new Steel Policy in 2017, forex of 5,000 crore was saved since last year while around 24 MT of crude steel capacity was added during past four years.

• At the current pace and outlook of the industry, steelmaking capacity is expected to reach 150 MT mark by 2020.

• The policy aims at generating additional employment for 36 lakh people directly or indirectly in the sector.

• Infrastructure, oil and gas and automotives are expected to drive the growth of the industry.

• Identification of the issue of Non-Performing Assets (NPAs) has helped in efficient steps to be taken to resolve them on timely basis.

• Ministry of Steel also plans to set up ‘Steel Research and Technology Mission in India to promote R&D activities in the sector.

• Government initiatives such as ‘Make in India and ‘Smart City Mission have further made the industrial environment favourable for the steel industry.

• There are opportunities available in the industry provided by the Indian economy to take advantage of and grow further.

IV) Risks and Concerns

Sr.No. Type Impact Mitigation Strategies
1. Macroeconomic Risk • Overcapacity and oversupply in global steel industry may affect steel prices. • Diversification of product portfolio.
• Newer developments in competitive global business. • Development of alternate techniques to ensure better capacity utilization.
• Cheaper imports and raw material deficiencies may lead to low capacity utilization despite of the ability of Indian steel sector to work at full capacity level.
2. Operational Risk • Risk of limitation or disruption in the supply of raw materials. • Establishing sources of supplies from alternate geographies.
3. Market Related Risk • Excess volatility in steel and raw material markets may affect financial condition. • Enhanced product development and focus on value addition.
• Competition from substitute materials may lead to change in demand pattern.
4. Environmental Risk • Share of iron and steel industry in CO 2 emissions is around 7%. • Innovation in products and methods to ensure sustainable development.
• Stringent international and domestic regulations relating to climate control. • Investment in environmental related projects.
5. Regulatory Risk • Non-compliance to increasing stringent regulatory norms. • Focus on compliance and fulfilling regulatory requirements.
• Removal of favourable trade measures.

B) Agro Business

I) About the Industry

India is an agriculture centred economy and one of the highest-ranking countries in production volume for various commodities like rice, cotton, spices, pulses etc. The agricultural sector plays a vital role in the Indian economy, its growth and development.

There has been a trend of global trade in agro commodities and the same has gained pace over time. The Company continues to be an importer of pulses and beans and trader of yellow peas and other pulses.

Agriculture sector all over the world has seen a lot of innovative developments including organic productions and the same has impacted the trading as well, resulting in increasing demand of quality products across the globe.

II) Outlook

Global demand for food is estimated to double by 2050.

However with overall market growth projected to be slow, agricultural trade is expected to expand at about half the rate of the previous decade.

For most commodities, a constant share of production continues to be traded on world markets. If a good monsoon happens, it adds to the benefit of the agro industry as better yields would foster agro trading at global level.

III) Risks and Concerns

The direction of commodity prices for trading purpose is difficult to predict.

Good weather and good growing seasons lead to excess supply while poor yields lead to increase in prices.

Agro trading is a cyclical business; every commodity having its own cyclical pattern.

There also arises a need for agricultural commodity risk to be managed properly. Naturally, agricultural commodities in general are prone to spoilage and their prices are affected by several factors including transportation and storage.

Thus all such factors are equally to be taken into consideration for agro trading. Government policies are concerned taking corrective steps as and when necessary. Due to back to back production boom, product prices have seen a sharp decline.

Government started procurement through agencies like ‘NAFED - National Agricultural Cooperative Marketing Federation of India Ltd and ‘FCI – Food Corporation of India in the last two years, which has resulted in piling up of large stock of pulses.

Further, government has in the recent past focused on restrictive trade and tariff policies to choke supplies from abroad by imposing heavy import duties. According the Company has suspended its agro business division. Also as a trader the company faces the fluctuation risk of price and currencies as well.

C) Segment Wise or Product Wise Performance

The Segments identified by the Company are as under :

1) Manufacturing Segment

2) Trading Segment

The Segment wise performance in detail is given in Note 42 to the audited accounts of the Company.

D) Internal control systems and their adequacy

The Company maintains an adequate and fair system of internal control based on well established policies and procedures designed for transparent operations. The management is regular in reviewing, on periodic basis, issues and concerns that have or could have an effect on the operations, functioning or performance of the Company.

Internal Audit is an ongoing activity in the Company and the internal audit team so formed regularly reports to the members of the Audit Committee in their meeting.

E) Material developments in Human Resources/ Industrial Relations front including Number of People employed

Human resource is considered as one of the key assets of an organisation as human resource is unique to a particular organisation and plays an active role in its growth.

The Company provides adequate opportunity for training and learning to the employees.

The Company takes responsibility for effective management of careers of individuals to make them expert in their respective fields.

The team is strongly motivated to work on their abilities and deliver better results.

The total number of permanent employees on roll as on 31st March, 2019 was 337.

F) Discussion on financial performance with respect to operational performance

During the year (2018-19) under review, on account of discontinuation of Agro Business Division, Companys revenue has came down to 1,08,172 Lacs from 4,24,190 Lacs for the previous year (2017-18).

The Loss Before Tax has been 32,713 Lacs (22,376 Lacs in the previous year) and Loss After tax is 24,044 Lacs (14,289 Lacs in the previous year).

During the year under review, on account of changes in the government policies of agro business, company has incurred huge losses including non-realization of debts. Accordingly, it has been decided to suspend the Agro Business Division and made Provision for doubtful debtors in the Books of Accounts. On account of non-realization of debts in time, working capital cycle of the company has disturbed and Letter of Credits (LC) established by the banks has remains un-paid. Accordingly, companys account has been classified as "Non Performing Asset" (NPA) by the bankers and Working Capital facilities has been freezed.

On account of freezing of working capital facilities by the banks, procurement of raw material for steel processing facility has taken a hit and capacity remains underutilized, which led to further losses to the company.

To overcome the situation, Board of Directors has initiated various steps, which includes rationalization of man power, close down of various branch offices, utilization of manufacturing facility (partial capacity for Job Work) etc. Also, company is in discussions with lender/banks for settlement/restructuring of its Account.

Company is hopeful that, all the corrective steps taken and proposed settlement/ restructuring of debts, company will come out of the problem very soon.

G) Health, Safety, Security and Environment

Health, safety, security and environment have always been an integral part of our value system. Our operations are driven by the value system so established and hence are in compliance with the norms of health, safety, security and environment.

The Company has been regularly putting efforts for conservation of energy and resources.

H) Cautionary Statement

This Management Discussion and Analysis Report, giving a brief profile of the Company along with its vision, mission, objectives, performance and future prospects and also reflecting the scenario of the industry at domestic and global level, may consist of "forward looking statements" which involve a number of risks and uncertainties that could cause actual results to differ materially from those stated. Important factors that could make a difference to the Companys operations include external economic conditions affecting demand/supply or influencing price conditions in the market in which the Company operates, changes in regulatory regime and other incidental factors.