Prakash Industries Ltd Management Discussions.

Industry Structure & Developments

The domestic iron & steel industry continues to be on growth path on account of improvement in global growth outlook and improvement in steel demand supply scenario due to various environmental protection measures taken by Chinese Government like phasing out of high polluting steel plants etc. Overall also, the global macro-economic situation looks promising. Indias crude steel production grew 5% y-o-y to 106.5 mt in 2018. India has surpassed Japan to become the second largest producer of steel in 2018. Indias steel production is expected to increase to 128.6 million tonnes by 2021. The Government of India has allowed 100 per cent foreign direct investment (F DI) in the steel sector under the automatic route. Although Indias per capita consumption of steel grew from 45 kgs in FY09 to 68 kgs in FY18, it is much lower in comparison to average steel consumption in advanced countries, thereby indicating potential growth prospects for the industry. Rapid urban population growth, substantial government investment in infrastructure, expansion of housing and manufacturing sector will aid steel consumption growth in India. Government of Indias focus on infrastructure and road projects is aiding the boost in demand for steel. The National Steel Policy (NSP) 2017, envisages that by the year 2030, the domestic per capita steel consumption will be at 160 kg & the total steel capacity will be close to 300 Million tonnes.

Opportunities and Threats

Government of Indias focus on infrastructure investments, including roads, airports, shipping, power, logistics, railways and telecom, will significantly boost the demand for steel. Further, the acceleration in rural economy and comparatively low per capita steel consumption in India will also lead to growth in steel demand. The Government of India vide its National Steel Policy (NSP) 2017 also seeks to create a globally competitive steel industry in India by achieving higher per capita steel consumption through urbanization of rural areas.

As regards any threat to the domestic steel industry, India may be a destination for imported steel flows diverted from global trade, consequent to trade protection measures adopted by many importing countries. Particularly, steel imports from South Korea and Japan may surge due to the imposition of duty by US. Steel demand is slowing down in China and exports to the US are restricted, Chinese exports may seek to re-enter a growing Indian market, directly or indirectly. Also, smooth availability of key raw materials and environmental concerns might pose significant challenge in the future. However, your Company has insulated itself against these possible threats with its strong manufacturing base, developed infrastructure, sufficient land parcels, environmental approvals, and long term raw material tie ups.

Segment Wise / Product Wise Performance

The steel division showcased phenomenal performance during the year under review. The sales volumes grew by more than 20% during the year in comparison to last financial year. Replacement and modernization of existing furnaces enabled the Steel Melting Shop to achieve record production volumes during the year. The production in the Sponge Iron division was also higher by 20% over last year. The commissioning of the sixth 0.2 mn tpa Sponge Iron Rotary kiln alongwith 15 MW power co-generation is complete and the commercial production is expected to commence from end of July, 2019. The enhanced sponge iron production and power generation will translate into significant cost savings. The operations in the power division were also satisfactory during the year and the generation was sufficient to meet the requirement of power in the steelmaking operations.

Outlook

The current growth witnessed in the steel production in the country is backed by fast-growing steel demand. It is likely that India will also become second largest steel consumer by the end of 2019 as its steel demand is expected to grow by 7.3% . Indias current steel use per capita for finished steel products stood at 68 kg, which is much below the world average of 212 kg, which suggests that India has a huge unrealised potential for steel demand growth. Recently, India has been trying to unleash this through major push for infrastructure development in the country. A world steel study of India, conducted in collaboration with the Indian Steel Association and the support of Indian member companies, identifies the construction sector as a pan-India steel demand driver on the back of strong infrastructure development and housing demand, especially affordable housing. Projects like industrial corridors (connecting existing industrial cities and develop manufacturing sectors) and Sagarmala (connecting states through waterways) will also boost the demand for steel. Also, the Smart Cities initiatives will further boost urban infrastructure investment, thereby contributing to the growth in demand for steel.

Risks and Concerns

Risk is an uncertain event, which, on its occurrence can cause negative impact on the performance of any business entity. Our company has adequate risk management system, which, identifies, analyses, and evaluates the risks to its business and thereafter treats and then monitors and reviews these risks. Risk management is a continuous process and the Risk Management Committee formed by the Company is actively involved in identifying the risks and the means to mitigate them.

Keeping in view the core business of steel making, the assured availability of the key inputs like coal and iron ore remain to be the key area of concern and risk for the Company. The Indian Steel Industry is grappling hard with uncertainties pertaining to the availability and consistent supplies of raw materials i.e. both coal and iron ore. Even though the marked shift from "Allocation process" to "Auction process" for allotment of mining blocks has brought about considerable transparency; issues pertaining to transport logistics from the mining areas need to be sorted out to mitigate lag in evacuation of iron ore, coal and other minerals. However, our company, has safeguarded itself against these risks to a significant extent by securing Long Term Fuel Supply of Coal from Coal India Limited requirements at stable prices. Also, regarding iron ore, the Sirkaguttu Iron Ore Mine of the Company in Odisha is likely to open very soon.

Internal Control System and their Adequacy

Your Company has an adequate internal control system commensurate with the size, scale and complexity of its operations, which ensures providing financial and operational information, statutory compliances, protection of assets of the Company and ensuring compliance with corporate policies. Your Company avails the services of independent professional firm for Internal Audit, which checks the effectiveness of the internal controls with an objective to provide an independent, objective and reasonable assurance of the adequacy and effectiveness of your Companys risk management, control and governance processes. The scope and authority of the Internal Audit activity is approved by the Audit Committee. Internal Auditor reports directly to the Audit Committee of the Board of Directors of the Company. Based on the report of the Internal Auditors, process owners undertake corrective actions in their respective areas and thereby strengthen the controls.

Material developments in human resources/industrial relations front, including number of people employed

Human Resource Management (HRM) deals with issues related to compensation, performance management, safety, wellness, benefits, employee motivation, training among others. HRM plays a strategic role in managing people, attracting and retaining the best talents and minimizing attrition. The Human Resource (HR) practices are geared towards creating a performance driven organization. On the whole, the HRMs vision is to minimize the costs and build internal capabilities through use of technology, innovation and automation.

Our company also emphasizes on the adoption of best HR practices for the employees which includes providing good working conditions, health management workshops, health check-up camps, wellness programs, feedback initiatives from the employees and Labor unions and knowledge sharing sessions to build workforce capability. The Company also ensures well equipped first aid centers, ambulance facilities, etc across all the plants. Air pollution control devises have been installed at the plants to reduce dust levels. Other initiatives instituted by the Company include celebrations of professional and personal milestones, reward and recognition events and team get-togethers to promote employee friendly and healthy environment.

Ratio Analysis

S.No. Particular Units FY 2019 FY 2018
1. Debt-Equity Ratio Times 0.15 0.22
2. Current Ratio Times 1.00 1.01
3. Operating Profit Margin % 22.08 20.20
4. Net Profit Margin % 14.89 13.01
5. Interest Coverage Ratio Times 7.76 6.86
6. Debtors Turnover Ratio Times 23.85 30.42
7. Inventory Turnover Ratio Times 15.38 11.99