PSL Ltd Management Discussions.

ECONOMIC SCENARIO IN GENERAL

The economy of India is a developing mixed economy. Since 2014 India’s economy has been the world’s fastest growing economy surpassing China. The long term growth perspective of Indian Economy is positive. India topped the World Bank’s Growth Outlook for the first time in fiscal year 2015-16 during which the economy grew at the rate of 7.6%. Indian economy grew at 7.6% and at 7.1% respectively in the FY 2015-16 and 2016-17 as major reforms which have been undertaken by the Government like demonetisation and implementation of GST in the FY 2016-17. However, the economy growth slowed down in Financial Year 2017-18 at 6.7% and was expected to grow near to 8.2% in Financial Year 2018-19. The annual GDP growth has been falling during the past 2 years from 7.6% in FY 2015-16 to 7.1% in FY 2016-17 and further reduced to 6.6% in FY 2017-18. The first quarter of 2018-19 saw a growth rate of 8.2% which fell to 7.1% in 3rd quarter much lower than the expected growth. However, higher contribution to GDP by manufacturing sector, higher FDI’s and introduction of water transport, better road and rail network are expected to make Indian economy to grow faster in future.

INDUSTRY STRUCTURE & DEVELOPMENT

Asia Pacific is estimated to have a major share in the global steel pipe market. China has many manufacturers in the steel pipe industry, which makes it a dominating player in the Asia Pacific market. The countries in North America, such as the U.S. and Canada with developed steel manufacturing industries, represent as prominent regional markets. Moreover, the U.S. has produced a wide range of products related to carbon and stainless steel. The U.S. president Mr. Donald Trump also signed a memo for new steel pipelines with the use of U.S.-manufactured raw steel. Based on these factors, the U.S. is estimated to have a hefty market share in the steel pipe market globally. The replacement of ageing pipelines in Europe is expected to gain high market growth over the coming years.

At present Indian steel industry enjoys growth through demand not only from oil and gas sector but also new projects awarded infrastructure development in India. Indian Government is signing various MOU with various countries for providing enough Gas and Oil in the country. This is really appreciable step and this would boost the Indian Steel Pipe Industry too. As the oil and gas industry is growing rapidly, the demand for steel pipes is also increasing. The scope of Steel pipes have become very large now as they are used in the automotive, mining and construction industries, which drives the manufacturing steel pipe industry. The available range of steel pipes becomes one of the reasons surpassing the demand of residential and non-residential sector of steel pipes. The replacement of ageing pipelines also increases the global demand of steel pipes. Various steps have been initiated by Government of India to boost the production of the pipeline industry for all these three segments. While on one hand approval has been granted for awarding the contracts for onshore & offshore areas of discovered small oil and gas fields, on the other adequate importance is being given to increase Country’s crude oil refining capacity in next two decades.

Similarly demand for steel pipes for water sector is also likely to grow in next 2-3 years for meeting water supply and sanitation requirements

OPPORTUNITIES & THREATS

Opportunities:

As per IMF’s World Economic Outlook – April, 2019 Indian economy grew at 6.8 percent which means India is the world’s fastest growing economy and now-a-days government‘s infrastructure development is visible across the country. PSL Ltd. is the flagship company in manufacturing of Large Dia Steel Pipes and had played an important role in infrastructure development in past and can repeat the history again

Threats:

Impressive figures earmarked for different projects announced by different government agencies result into adequate optimistic thinking in the minds of various pipeline industry players, however, on the basis of past experience in all probability the practical situation works out to be much different unwanted delays are generally experienced in implementation of the Government projects due to slow decision making at bureaucratic level.

Manufacturing of pipes, providing anti-corrosion treatment on the same and thereafter laying those pipelines for ultimate consumers in oil, gas and water sector was considered as extremely profit making business in India till few years ago. Due to generally prevailing optimistic trend in pipeline industry many players started setting up their units in this business ultimately resulting into building up of excessive pipe making installed capacity. Such a rush eventually resulted into supply far exceeding the demand as a direct consequence of which most of the pipeline manufactures including your Company started facing high competition in the market to survive.

OUTLOOK

India’s density of pipeline either on a per capita index or on a per square meter index is at level 1/50th of that prevailing in advanced countries. Therefore although in the future, the scope of growth for India’s Pipeline Industry in general is healthy and positive but your company in particular does not have very high outlook due to Insolvency and Bankruptcy Code proceedings of the company.

RISK AND CONCERNS

Every industry witnesses growth and slowdown and our company is not exception to this. Growth mostly depends on Government plans for expansion of pipeline network in the country, the future of the pipeline industry cannot be predicted as delay in government projects can prove a serious risk and concern to the said prediction. In the case of an Industry pertaining to a typical consumer product, the growth can be very easily predicted as a result of which the systematic planning to get in the benefits of such growth can be put in practice.

Substitutes such as iron and plastic pipes, which create diversions for the manufacturer towards other material pipes, are estimated to restrain the market growth. The corrosive behaviour of carbon steel pipes is one of the restraining factors, and the high cost of stainless steel also hinders the growth of the global steel pipe market

Inspite of as stated above generally in pipeline industry, your Company is presently suffering from additional disadvantage vis-a-vis the industry in general. This is so because of consequential effect of few external and some internal factors, the Company suffered a severe financial crunch in 2013 forcing your management to go through CDR process in accordance with RBI guidelines on the subject, and the said CDR did not succeed and company exited from that mechanism. The Company is presently in vulnerable position since in the absence of comfortable financial position and admission of company’s application in NCLT, the Company is unable to venture into bidding process of large sized business projects arising in the market. The Hon’ble NCLT suspended the powers of Board of Directors and appointed an Interim Resolution Professional (IRP) to prepare a Resolution Plan for your company.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY:

Your Company’s Internal Control System is commensurate with its scale of operations. Roles and responsibility are clearly defined and assigned. The company has designed and implemented a process driven framework for internal financial controls in accordance with the Companies Act, 2013. These controls have been established at the entity and process levels to comply with internal control requirements. The process adopted by your Company is best in class and commensurate with its size and scale of operations. These are strengthened as per the business need from time to time. The system of internal controls ensures timely and accurate financial reporting in accordance with the applicable accounting standards and compliance with applicable laws, regulations, listing agreements and management policies. The Company has also adopted risk based framework which is more transparency and accountability.

FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

The company and its Indian subsidiaries have prepared the financial statements for the financial year 2018-19 in accordance with Companies Act, 2013 and the rules made there under and the applicable accounting standards issued by Institute of Chartered Accountants of India. The company is currently engaged in keeping is plants busy by executing smaller projects procured by the company from its trusted customers for conversion of steel provided by them into pipes. Such limited operations are enabling the company to meet its fixed operating costs, although the company is not in a position to pay back to its lenders.

The consolidated income of the Company and its subsidiaries for the FY 2018-19 is Rs. 228.69 crores while as standalone income recorded by the Company is Rs.92 Crores which was 51% more than the said income in the previous financial year.

Consequent upon efforts to generate more and more revenue on one hand and reduce company’s cost on all fronts the company was in a position to reduce its losses from Rs.152.75 Crores in the previous year to Rs.98.08 crores in the year under review.

HUMAN RESOURCE DEVELOPMENT

Time and again it is being recognized by Senior Management of the Company that Human Resources of the company are its real assets. Company developed a performance driven environment where performance recognized and also nurture work place challenges that keep employees motivated to realize their potential. However, unfortunately due to financial crises and to reduce the financial burden on the company, company reduced manpower in the past to limit pay roll expenses.

CAUTIONARY STATEMENT

Some of the statements in this Management and Discussion and Analysis, describing the Company’s objectives, projections, estimates, expectations and predictions may be "forward-looking statements" within the meaning of applicable laws and regulations. However, actual results could differ materially from those expressed or implied. Important factor that could make a difference to the Company’s operations include the attitude that the lenders would adopt towards the Company particularly because the Company’s application has now been admitted in NCLT and an Interim Resolution Professional is appointed to initiate process of resolution of its current financial crises and to find a suitable resolution plan of company’s production facilities.