OCL Iron & Steel Ltd Management Discussions.

ABOUT OCL IRON & STEEL LTD Steel Plant:

OCL Iron & Steel Ltd. (OISL) is engaged in the process of manufacturing MS Billets from the sponge iron and produces captively through direct reduction iron process and induction furnace in Orissa.

The steel plant is engaged in the process of manufacturing of Sponge Iron, Billets, Power generation (captive use) and Finished Steel (TMT).

The Company is having a operational manufacturing facilities of Sponge Iron , Billets and captive Power at Village- Lamloi, P.O- Garvana, Rajgangpur, Odisha and Rolling Mill (TMT Bar) at Village- Gopalpur, P.O- Badaposi, Dist: Keonjhar, Odisha.

OISL has also set up 2 state of the art plants to cater to the automotive sector, catering to both the domestic and the international markets.The first plant specializes in Profile Rolling (Steel Bar) for automotive Ring Gear market based at Chopanki, Dist.-Alwar, Rajansthan. The second facility is an Automotive Alloy Casting Foundryproducing a variety of critical components like Hub Swivels, Axle Arm , Fly Wheels, Brake Piston Housings, Cylinder Blocks, Master Clutch Housing for Passenger Cars, Tractors, Earth Moving Equipments.A specialized machine shop dedicated for Rail Products has also been set up.

Ardhagram Coal Mine:

OCL Iron & Steel Ltd. (OISL) has also a coal mine which is located in the south eastern part of Raniganj Coalfield on the Southern Bank of the Damodar River which provides full coal security for the integrated Steel & Power Plant of the Company for more than 45 years.

Captive Iron Ore Mine:

The company is also allotted an iron ore mine located at Village-Kundaposi, Block-Barbil, District Keonjhar, (Odisha) by Steel & Mine Department of Government of Odisha.The Companys proposal for grant of forest clearance is under consideration with Forest Advisory Committee (FAC). Iron ore mine is expected to start in Year 2019/20.

1. ECONOMIC OVERVIEW

The global economy will continue to grow at a steady pace of around 3.2 percent in calendar years 2019 and picking up to 3.5 percent in 2020, after an expansion of 3.6 per cent in 2018 amid signs that global growth has peaked. However, a worrisome combination of development challenges could further undermine growth, according to the United Nations World Economic Situation and Prospects (WESP) 2019.

Further global financial conditions tighten an unexpectedly rapid rise in interest rates or a significant strengthening of the US dollar could exacerbate emerging market fragilities, leading to heightened risk of debt distress. This risk can be further aggravated by global trade tensions, monetary policy adjustment in developed economies, commodity price shocks, or domestic political or economic disruptions. Many low-income countries have already experienced a substantial rise in interest burdens. Countries with a substantial amount of dollar-denominated debt, high current account or fiscal deficits, large external financing needs and limited policy buffers are particularly vulnerable to financial stress.

As global trade weakened towards the end of 2018 partly due to the impact of tariff increases in the United States and China and higher energy prices. The global trade slowdown was led by a sharp deceleration in import demand in emerging markets. Given relatively weaker growth outlook, China is implementing a stimulus package and the United States Fed has indicated a pause in the monetary policy tightening cycle. These policy support measures could potentially help offset growth weakness in the European Union, and be supportive for global demand and commodity prices .

BRENT CRUDE OIL PRICE

Amidst growing concerns over US sanctions against Iran, oil prices surpassed its highest level of $80 since November 2014. However, oil prices plummeted to their lowest level since second half of 2017, mainly due to record US oil production growth, weaker global economic growth and temporary waivers for Iran oil imports.

INDIAN ECONOMY

India is moving towards realizing a New India by 2022, when we celebrate 75 years of Indias independence. Promoting inclusive employment-intensive industry and building resilient infrastructure are vital factors for economic growth and development.

India continues to remain the fastest growing major economy in the world in 2018-19, despite a slight moderation in its GDP growth from 7.2 per cent in 2017-18 to 6.8 per cent in 201819 according to the Central Statistics Organisation (CSO).

Though the World Bank report said, "Growth in India is projected to accelerate to 7.5 percent in FY 2019-20" it is quite apparent that the Indian economy is slipping into a recession. The real GDP growth has gone down from a peak of 8.2% in 2016-17 to 6.8% in 2018-19, with the fourth quarter of 2018-19 dipping to 5.8%. The first quarter of 2019-20 is expected to dip further to 5.6%.

This moderation in growth momentum is mainly on account of lower growth in Agriculture & allied, Trade, hotel, transport, storage, communication and services related to broadcasting and Public administration & defence sectors.

The foreign exchange reserves in nominal terms (including the valuation effects) decreased by US$ 11.6 billion end-March 2019 over end-March 2018.

Net Foreign Direct Investment (FDI) inflows grew by 14.2 per cent in 2018-19. Among the top sectors attracting FDI equity inflows, services, automobiles and chemicals were the major categories.

According to Department for Promotion of Industry and Internal Trade (DPIIT), FDI equity inflows in India in 2018-19 stood at US$ 44.37 billion, indicating that governments effort to improve ease of doing business and relaxation in FDI norms is yielding results.

Currently, India is the fastest-growing trillion-dollar economy in the world and is expected to reach US$ 6 trillion by Fiscal 2027 and achieve upper-middle income status on the back of digitization, globalization, favourable demographics, and reforms. India is expected to be third largest consumer economy as its consumption is expected to triple to US$4 trillion by 2025. The World Bank expects, Indias GDP growth to accelerate moderately to 7.5% in Fiscal 2020, driven by continued investment, improved export performance, and resilient consumption. India is likely to become the worlds second largest economy by 2030, next only to China.

Government Initiatives

The Union Budget for 2019-20 was announced by Ms Nirmala Sitharaman, Minister for Finance and Corporate Affairs, Government of India, in Parliament on July 05, 2019. India is all set to become US$ 3 trillion economy by the end of FY20. The budget focusses on reducing red tape, making best use of technology, building social infrastructure, digital India, pollution free India, make in India, job creation in Micro, Small and Medium Enterprises (MSMEs) and investing heavily in infrastructure.

Total expenditure for 2019-20 is budgeted at Rs 2,786,349 crore (US$ 417.95 billion), an increase of 14.09 per cent from 2018-19 (budget estimates).

Vision for the Next Decade

• The become a US$ 3 trillion economy by the end of 2019

• Make in India with emphasis on MSMEs, Start-ups, defence manufacturing, automobiles, electronics, fabs and batteries, and medical devices

• Building physical and social infrastructure

• Digital India reaching every sector of the economy

• India plans electricity, clean cooking facilities for all Indian families by 2022.

• To ensure Har Ghar Jal by 2024

• 125,000 km of road to be upgraded over next 5 years at a cost of Rs 80,250 crore (US$ 12.03 billion)

• Aims to achieve housing for all by 2022

• Blue Economy

• Healthy society - Ayushman Bharat, well-nourished women & children. Safety of citizens

• Team India with Jan Bhagidari. Minimum Government Maximum Governance.

• 19.5 million household to be built in rural areas.

2. INDUSTRY OVERVIEW

World Steel Scenario In 2018, Global Crude Steel production as reported by World Steel Association, increased by 4.6% to reach 1808.6 million tonnes(MT) compared to 2017. Crude Steel production increased in all regions in 2018 except in the Europe, where output was flat. Asia accounted for 1271.1 MT of Crude Steel production in 2018, an increase of 5.6% compared to 2017. China continued to dominate World Crude Steel production with an output of 928.3 MT, at a growth of 6.6% over 2017. In 2018, Chinas share of Global Crude Steel production increased to 51.3% compared to 50.3% in 2017.

Indias Crude Steel production in 2018 increasedby 4.9% to reach 106.5 MT, thereby replacing Japan as the Worlds second largest steel producing Country.

Japan produced 104.3 MT in 2018, a decline of 0.3% compared to 2017. South Koreas Output of Crude Steel stood at 72.5 MT in 2018, a growth of 2% over 2017. The US also saw growth in Crude Steel output by 6.2% to reach 86.7 MT in 2018.

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Rank Country 20 T8 (MT) 2017 (MT) % Change
1 China 920.3 070.9 6,6
2 India 106.5 101 5 4 9
3 Japan 1D4.3 104.7 -0.3
4 United Slater B6.7 31.6 6 2
5 5ouU> Korea 72.5 71-0 2 0
fc Russia 71.7 71.5 0 3
7 Germany 42.4 43.3 -2 0
3 Turkey 37 3 37.5 -6.6
0 Brazil 34.7 34.4 11
IQ Iran 25.0 21.2 17.7

Source (World Steel Association)

Outlook

As per the World Steel Association, the Indian economy would continue to grow at 7% in next couple of years. Gradual rise in investments is expected with continuation of ongoing projects, while pre-election measures will boost the consumption in FY20.

Industry growth is likely to moderate marginally in FY20 due to high base, and manufacturing capacity utilization likely to remain at ~75% levels. Initiatives such as cash transfer for small and marginal farmers are likely to boost rural economy.

India is likely to remain a preferred destination for foreign direct investment (FDI) with consistent improvements in Ease of Doing Business (EoDB) ranking.

US

Budget stimulus is supportive of 2019 but further fiscal and monetary tightening will lean down the economy. Policy uncertainty is the prime concern at the moment. Fed funds forecast to peak at 3.25% in 2020, marginally and temporarily above its estimated long-run equilibrium of 2.75%.

China

As per consensus, Chinas economic situation in 2019 is likely to worsen due to accumulated problems in real estate, manufacturing and financial sectors. It is expected that stimulus measures will likely be introduced to sustain the economy and cope with the trade war impact. Further, machinery output is likely to remain at mild growth.

Crude steel demand in real terms (assuming no unreported steel production) is expected to be flat in 2019 and to decline 2.0% in 2020. Upside risks remain if the stimulus measures are stronger than anticipated.

SECTORS DRIVING GROWTH Oil & Gas

The oil and gas sector is among the eight core industries in India and plays a major role in influencing decision making for all the other important sections of the economy. The government has allowed 100 per cent Foreign Direct Investment (FDI) in many segments of the sector, including natural gas, petroleum products, and refineries, among others.

India is expected to be one of the largest contributors to non-OECD petroleum consumption growth globally. Oil imports rose sharply to US$ 87.37 billion in 2017-18 from US$ 70.72 billion in 2016-17. India retained its spot as the third largest consumer of oil in the world in 2017 with consumption of 4.69 mbpd of oil in 2017, compared to 4.56 mbpd in 2016.

India was the fourth-largest Liquefied Natural Gas (LNG) importer in 2017 after Japan, South Korea and China. LNG imports increased to 26.11 bcm in 2017-18 from 24.48 bcm in 2016-17.

Gas pipeline infrastructure in the country stood at 16,226 km at the beginning of February 2019.

According to data released by the Department for Promotion of Industry and Internal Trade Policy (DPIIT), the petroleum and natural gas sector attracted FDI worth US$ 7.018 billion between April 2000 and March 2019.

Metals and Mining

Rise in infrastructure development and automotive production are driving growth in the sector. Power and cement industries are also aiding growth in the metals and mining sector. Demand for iron and steel is set to continue, given the strong growth expectations for the residential and commercial building industry.

According to Ministry of Mines, India has the 7th largest bauxite reserves- around 2,908.85 million tonnes in FY17. Aluminium production stood at 1.33 million metric tonnes during Apr- Aug 2018 and is forecasted to grow to 3.33 million tonnes in FY20.

Infrastructure

Infrastructure sector is a key driver for the Indian economy. The sector is highly responsible for propelling Indias overall development and enjoys intense focus from Government for initiating policies that would ensure time-bound creation of world class infrastructure in the country. Infrastructure sector includes power, bridges, dams, roads and urban infrastructure development. In 2018, India ranked 44th out of 167 countries in World Banks Logistics Performance Index (LPI) 2018.

Foreign Direct Investment (FDI) received in Construction Development sector (townships, housing, built up infrastructure and construction development projects) from April 2000 to March 2019 stood at US$ 25.05 billion, according to the Department of Industrial Policy and Promotion (DIPP). The logistics sector in India is growing at a CAGR of 10.5 per cent annually and is expected to reach US$ 215 billion in 2020.

Capital Goods

Upswing in commodity prices, broad-based improvement in economic growth and positive outlook for automotive and construction sectors are likely to aid prospects of global capital goods companies. S&P Global Ratings expects the credit metrics of capital goods companies to improve on the strength of rising capital expenditure by private sector companies. Steel is the primary input to manufacture equipment and machinery; and hence stands to benefit from improving prospects of the capital goods sector.

Indian Steel Sector

India was the worlds second-largest steel producer@ with production standing at 106.5 MT in 2018. The growth in the Indian steel sector has been driven by domestic availability of raw materials such as iron ore and cost-effective labour. Consequently, the steel sector has been a major contributor to Indias manufacturing output.

The Indian steel industry is very modern with state-of-the-art steel mills. It has always strived for continuous modernisation and up-gradation of older plants and higher energy efficiency levels

Market Size

Indias finished steel consumption grew at a CAGR of 5.69 per cent during FY08-FY18 to reach 90.68 MT.

Indias crude steel and finished steel production increased to 103.13 MT and 104.98 MT in 2017-18, respectively.

In 2017-18, the countrys finished steel exports increased 17 per cent year-on-year to 9.62 million tonnes (MT), as compared to 8.24 MT in 2016-17. Exports and imports of finished steel stood at 0.72 MT and 1.12 MT, respectively, in FY 20P (up to May).

According to the data released by Department for Promotion of Industry and Internal Trade (DPIIT), the Indian metallurgical industries attracted Foreign Direct Investments (FDI) to the tune of US$ 11.30 billion in the period April 2000-March 2019.

Government Initiatives

Some of the other recent government initiatives in this sector are as follows:

• An export duty of 30 per cent has been levied on iron ore (lumps and fines) to ensure supply to domestic steel industry.

• Government of Indias focus on infrastructure and restarting road projects is aiding the boost in demand for steel. Also, further likely acceleration in rural economy and infrastructure is expected to lead to growth in demand for steel.

• The Union Cabinet, Government of India has approved the National Steel Policy (NSP) 2017, as it seeks to create a globally competitive steel industry in India. NSP 2017 envisages 300 million tonnes (MT) steel-making capacity and 160 kgs per capita steel consumption by 2030-31.

• The Ministry of Steel is facilitating setting up of an industry driven Steel Research and Technology Mission of India (SRTMI) in association with the public and private sector steel companies to spearhead research and development activities in the iron and steel industry at an initial corpus of Rs 200 crore (US$ 30 million).

• The Government of India raised import duty on most steel items twice, each time by 2.5 per cent and imposed measures including anti-dumping and safeguard duties on iron and steel items.

Domestic Growth Enablers

Rural Steel Demand

Rural India is expected to reach a per capita consumption from 12.11 kg to 14 kg for finished steel by CY20. The policies like Food for Work Programme (FWP) and Indira Awaas Yojana, Pradhan Mantri Gram Sadak Yojana and Affordable Housing, among others are expected to drive the demand.

Housing Demand

The allocation towards building houses in rural and urban areas under the PMAY scheme stood at 275 billion in the Union Budget 2018-19. Rising transparency in the real-estate sector following the implementation of The Real Estate (Regulation and Development) Act has bolstered the confidence of both investors and home buyers. In this scenario, housing demand is likely to accelerate going forward, leading to higher steel demand in the domestic market.

Renewable Energy

The Indian renewable energy sector is the fourth most attractive1 renewable energy market in the world. As of October 2018, India ranked 5th in installed renewable energy capacity. According to 2018 Climatescope report India ranked second among the emerging economies to lead to transition to clean energy.

Installed renewable power generation capacity has increased at a fast pace over the past few years, posting a CAGR of 19.78 per cent between FY14-18. The focus of Government of India has shifted to clean energy after it ratified the Paris Agreement. With the increased support of government and improved economics, the sector has become attractive from investors perspective. As India looks to meet its energy demand on its own, which is expected to reach 15,820 TWh by 2040, renewable energy is set to play an important role.

Automobile

The Indian auto industry became the 4th largest in the world with sales increasing 9.5 per cent year-on-year to 4.02 million units (excluding two wheelers) in 2017. It was the 7th largest manufacturer of commercial vehicles in 2018.

India is also a prominent auto exporter and has strong export growth expectations for the near future. Automobile exports grew 14.5 per cent during FY 2019. It is expected to grow at a CAGR of 3.05 per cent during 2016-2026. In addition, several initiatives by the Government of India and the major automobile players in the Indian market are expected to make India a leader in the two-wheeler and four wheeler market in the world by 2020.

Outlook

As per the World Steel Association, the Indian economy would continue to grow at 7% in next couple of years. Gradual rise in investments is expected with continuation of ongoing projects, while pre-election measures will boost the consumption in FY20.

Industry growth is likely to moderate marginally in FY20 due to high base, and manufacturing capacity utilization likely to remain at ~75% levels. Initiatives such as cash transfer for small and marginal farmers are likely to boost rural economy. India is likely to remain a preferred destination for foreign direct investment (FDI) with consistent improvements in Ease of Doing Business (EoDB) ranking.

3. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has an internal control system which monitors compliance to internal processes. It ensures that all transactions are authorised, recorded and reported correctly. The systems are routinely tested and certified by Statutory as well as Internal Auditors and cover all offices, plant facilities and key areas of business. The Internal Auditors independently evaluate the adequacy of internal controls and concurrently audit the majority of the transactions in value terms.

To further strengthen the internal control process, the Risk Management Committee has documented control procedures covering all aspects of key financial and operating functions. The Companys internal control systems provide for:

• Adherence to applicable accounting standards and policies

• Accurate recording of transactions with internal checks, prompt reporting and timely action

• Compliance with applicable statues, policies, listing requirements and management policies and procedures

• Review of capital investments and long term business plans

• Periodic review meetings to guide optimum utilization of resources

• Effective use of resources and safeguarding of assets

The Audit Committee reviews the effectiveness of internal control systems, and also provides timely updates on operating effectiveness and controls to senior management team. A CEO and CFO Certificate, forming part of the Corporate Governance Report, reinforce the effectiveness of internal controls and reiterate their responsibilities to report deficiencies to the Audit Committee and rectify any issues.

The auditors carry out periodic audits as per an agreed internal audit programme. They bring to the notice of management, issues which require their attention and also highlight the severity of the issue. Corrective actions are then set in place. The internal auditors report is reviewed by the Audit Committee and placed before the Board of Directors for their consideration.

4. FINANCIAL OVERVIEW

During the period under review, the Companys revenue stood at Rs.47,249.02 Lakhs compared to Rs. 41,903.45 Lakhs in the previous year. EBITDA stood at Rs. 204.26 Lakhs as compared to Rs.(7627.59) Lakhs in previous year.

The increase in turnover is mainly due to uptrend in steel sectors, the Companys steel divisions performance has turned around with its operations and Increased in Selling Prices of finished goods. The operation of Plant has been gradually increasing its capacity utilization.

The capital employed in the business stood at Rs. 99,695.81 Lakhs as on 31st March, 2019 as compared to Rs. 1,13,184.54 Lakhs as on 31st March, 2018.

The authorized share capital of the Company as at 31st March 2019 stood at Rs. 10,400 Lakhs divided into 3,400 Lakhs equity shares of Rs. 1/- each and 700 Lakhs Preference shares of Rs.10/- each.

During the year under review, there was no change in the authorised and paid up capital of the Company. As at 31st March, 2019 the reserves and surplus of the Company stood at Rs. (31,475.61) Lakhs and the net worth stood at Rs. (30,134.18) Lakhs.

5. DEBT POSITION

As of 31st March 2019, the Company had a total debt of Rs. 1,74,724.78 Lakhs. This includes long term debt including current maturities of Rs. 1,51,824.16 Lakhs and short term debt of Rs. 5,217.20 Lakhs.

6. HUMAN RESOURCES AND INDUSTRIAL RELATIONS

During the year, the Company delivered value to its customers and investors. This was made possible by the relentless efforts of each and every employee. The Company has developed a robust and diverse talent pipeline which enhances OISLs organizational capabilities for future readiness, further driving greater employee engagement. Our human resource program is focused on attracting the right talent, providing excellent on the job training opportunities, and finally giving them the growth opportunities consistent with their aspirations. In addition, the trust our employees place in us is evident in our ability to retain key employees and senior executives during a challenging FY2019.

OISL has always enjoyed strong industrial relations. The company has a systematic grievance redressal system to further strengthen these relationships. This system encourages employees to share their views and opinion with the management. The Company reflects on this feedback and incorporates relevant changes into the existing policies, systems and processes.

During the period under review, the Company maintained a cordial relationship with its workforce. The Directors would like to place on record their appreciation and recognition towards all its employees who continue to exude confidence and commitment toward the Company

7. STATUTORY COMPLIANCE

The Managing Director makes a declaration to the Board of Directors every quarter regarding compliance with provisions of various statutes as applicable. The Company Secretary ensures compliance with the Companies Act, SEBI regulations and provisions of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 and compliance with the guidelines on insider trading for prevention of the same.

8. CAUTION STATEMENT

The above mentioned statements are only forward looking statements based on certain assumptions and expectations. The Companys actual performance could differ materially from those expressed/ projected depending upon changes in various factors. The Company does not assume any responsibility to any change(s) in forward looking statements, on the basis of subsequent developments, information or events etc.

Important developments that could affect the Companys operations include a downward trend in the domestic automotive industry, competition, rise in input costs, exchange rate fluctuations, and significant changes in the political and economic environment in India, environmental standards, tax laws, litigation and labour relations.