Rathi Steel & Power Ltd Management Discussions.

Industry Structure and Development

Steel market fundamentals continued to worsen in 2019. Steel production growth turned negative in all regions, with the exception of Asia and the Middle East. Weakening global economic activity, uncertain prospects for steel demand growth, and the upturn in new capacity investments in some regions risking to exacerbate supply-demand imbalances are long-term factors that have been weighing on steel markets. The first half of 2020 was dramatically impacted by the COVID-19 outbreak, which started in the Peoples Republic of China (hereafter "China") but quickly spread to the whole world, causing large demand and production shocks that impacted all economic sectors including steel. Steel production declined in all regions (in aggregate terms) during the first half of 2020. The reduction in steel production was however uneven across jurisdictions as production even grew in a number of some jurisdictions, such as China and Viet Nam. Although the demand and production shocks caused by the COVID-19 outbreak began to abate in the second half of 2020, the crisis risks resulting in long-lasting and significant impacts on the steel sector.

Below is the impact of the COVID-19 pandemic on the steel industry during the first half of 2020. The following key developments are

1. The economic situation: In June 2020, OECD forecasts that world GDP will drop by 6%-7.6% in 2020 and rebound by 2.8%-5.2% in 2021, depending on whether the global economy faces a second wave of the COVID-19 epidemic by the end of 2020. In addition, downside risks to GDP include a further escalation of trade and cross-border investment restrictions, and financial vulnerabilities stemming from slowing economic growth and high corporate indebtedness with deteriorating credit quality.

2. Steel consumption: According to the World Steel Association (worldsteel)s, global steel consumption picked up by 3.4% in 2019. The largest increases were recorded in Viet Nam (9.0%), China (8.5%) and Russia (5.0%). The largest decreases were observed in Turkey (-15.4%) and Germany (-12.0%). Steel consumption growth turned negative in the first three months of 2020 due to the initial impact of COVID-19 on the global economy. Total steel consumption decreased by 2.4% in this period compared to the same period one year earlier, with the largest drop year-over-year being in March 2020 (7.7%). Assessments of the impacts of COVID-19 on steel consumption suggest that the steel market could face a prolonged period of weak demand.

3. Steel Production: All regions saw declining steel production during the first half of 2020. Compared to the first half of

2019, crude steel production was more resilient in the Middle East region (-0.5%), in Asia (-2.3%), in Oceania (-3.3%), in the CIS (-4.1%) and in Other Europe (-6.3%). In contrast, steel production dropped sharply in the European Union (17.9%), in North America (-17.6%), in South America (-19.9%), in Africa (-20.9%).

4. World Steel Trade: Steel exports continued to decline for most economies in 2019. Steel export decreases were observed in the United States (-15.7%), Russia (-11.7%), and Japan (-7.6%) during this period. On the other hand, steel export growth in India remained strong in 2019 (+21.6%).

5. Steel and Steelmaking Raw Material Prices: Steel prices continued to decline during the first half of 2020, and in July 2020 world average prices for both flat and long (rebar) products were 16% below their levels one year earlier. As of July

2020, iron ore, coking coal and scrap prices were 9%, 4% and 3%, respectively, lower than one year earlier. Coking coal prices might currently face more upside than downside risks, because producers successfully downsized their production. Iron ore prices are driven to a large extent by Chinese demand. Scrap prices are expected to remain volatile.

6. Capacity: Global steelmaking capacity could increase to 2 455.8 mmt at the end of 2020, i.e. by 1.7% (41.8 mmt) from the level at the end of 2019, according to the available information as of June 2020. World steel production as a share of capacity is expected to fall from 76.6% in 2019 to 71.2% in 2020.

7. Steel demand outlook: The June 2020 forecasts of worldsteel points to a decrease in global steel consumption of 6.4% in 2020, erasing the 3.4% increase registered in 2019 and most of the gains of 2018.1 Steel demand is expected to decline significantly across most economies in 2020, as a result of the COVID-19 crisis. Chinese steel demand could increase by 1.0% due the faster-than-expected recovery, according to worldsteel. Other major steel consuming economies like India, Japan, the European Union and the United States however are projected to experience demand declines of 18.0%, 19.1%, 15.8% and 22.9%,

INDIAN STEEL INDUSTRY IN THE POST-COVID-19 WORLD

Steel consumption outpaces production:

Domestic consumption of finished steel has outpaced production for third straight month ended January 2021, giving way to imports. While production of finished steel rose by 4.1% to 9.5 million tonnes, consumption grew by 8.7% to 9.97 million tonnes. Steel consumption returned to y-o-y growth in October 2020 and continued to extend in January 2021 on the back of higher demand from the auto, white goods and construction segments. The continuous increase in consumption has also led to absorption of inventories with the steel producing companies and closing stock of finished steel was 3.8% lower at 10.6 million tonnes at the end of December 2020 than that in the previous month and 18% lower than December 2019.

India turns net importer of finished steel in Jan 2021:

In January 2021, India turned into a net importer of finished steel from a being a net exporter during April-December 2020 and deficit stood at 59 thousand tonnes, as consumption grew faster than domestic production. During the current fiscal (April - Jan FY21), export of finished steel from India grew by 22.5% while imports fell by 36.8%. India was a net exporter of finished steel until December 2020. However, the gradual unlocking of the economy has led to improvement in overall economic activities leading to improvement in domestic demand for steel. This has resulted in moderation in export whereas imports have risen, in recent months.

Financial performance:

The iron & steel industry has seen boost in their gross margins ever since the lifting of lockdown. Higher automotive sales, higher rural consumption on the back of good monsoon and government spending on infrastructure has boosted gross margins of steel companies. The RM cost curve started to taper from Q2FY21 onwards and the industrys sales returned to yoy growth which led to expansion in OPM. We expect expansion in margins to persist on the back of recovery in domestic demand and higher steel prices in Q4FY21. The margins of large integrated steel players would be even better on account of self-sufficiency in iron ore, lower coking coal costs and better fixed-cost absorption due to near-normal utilisation rates.

Trend in prices

Domestic steel prices have seen unprecedented rise over the last seven months. HRC (Hot Rolled Coils) prices have risen to multiyear highs on the back of higher demand for flat products from auto and white goods segment. Domestic steelmakers have raised HRC prices by around 55% since June 2020 to average Rs 54,867 per tonne in January 2021. Long product prices have also picked up in anticipation of pick-up in construction activities post monsoon and festive season. Domestic rebar prices have risen to Rs 37,100 per tonne in Q3 from an average of Rs 32,000 per tonne in the second quarter of FY21. A sharp correction was seen in long steel prices in first week of February 2021 of about Rs 8,000 per tonne however prices have recovered by Rs 3,000 per tonne on the back of strong demand. Internationally while a correction was seen in Chinese steel prices, in US and UK prices surged in January and February 2021 due to demand recovery. World HRB export prices have risen 74% since June 2020 to average $730 per tonne during the first week of February 2021.

Iron ore prices at 10-year high, volatile coking coal prices:

Iron ore prices have leapt to 10-year high in January 2021 to average $ 169.6 per and are up 55% since June 2020. Chinas rapid recovery from the Pandemic led a sharp rise in its iron ore and steel consumption. Chinas crude steel production grew by 5.2% to 1,053 million tonnes in the pandemic-struck year 2020. Chinas steel exports fell by 17% on year in CY20 while imports surged 64% on year. Chinas customs data also showed that the country imported a record 1.17 billion tonnes of iron ore in 2020 as compared to 1.07 billion tonnes in 2019. While demand for iron ore from China remained strong, supply of iron ore from Brazil, largest supplier was constrained due to severe weather conditions and covid induced restrictions which led to a sharp spike in iron ore prices which in turn led to a surge in steel prices. While iron ore prices rose to 10-year high, coking coal prices fell to 4-year low in December 2020. Hard coking coal prices declined steadily from $ 159 per tonne in March 2020 to $ 102 per tonne in December 2020 due to China restricting imports from Australia. This benefitted India as India imports almost 70% of total coking coal from Australia. However, in January 2021, hard coking coal prices remained quite volatile hitting a high of USD 150 per tonne and a low of USD 114 per tonne as a category Two Tropical Cyclone Kimi emerged near Queensland, Australia which raised supply concerns.

OPPORTUNITIES AND RISKS

OPPORTUNITIES

The Company continues to adapt to the ever changing business environment to take advantage of the opportunities to deliver sustainable value for all its stakeholders. With increasing migration, newer centres of development and government programmes such as the Smart City Mission, the rate of urbanisation in India is expected to rise significantly in the near future. A young demography tends to propel demand for housing, transportation and public infrastructure. Despite a significantly growing urban population, Indias per capita steel consumption is considerably low compared to China and other Developed Countries. This clearly shows that there is significant headroom for consumption growth. The Company expects to take advantage of the growth opportunity provided by the Indian economy, by enhancing its steel producing capacity. The Company expects the demand for steel products to be strong in the developing economies and the Company proposes to utilize it to meet this increased demand.

RISKS

The Company is exposed to risks arising out of the dynamic macro-economic environment as well as from internal business drivers. These could adversely impact its ability to create value over the short, medium and long-term. The key risks and Companys mitigation plans are given below:

1. Macroeconomic risks

Overcapacity and oversupply in the global steel industry and high levels of imports may negatively affect steel prices and demand thereby reducing the Companys profitability. Developments in the competitive environment in the steel industry, such as consolidation among the Companys competitors, could have a material adverse effect on the Companys competitive position. This could potentially impact the Companys business, financial condition, results of operations and future prospects. Any downgrading of Indias sovereign rating by independent agency (ies) may harm the Companys ability to raise finance.

2. Financial risks

The Company has substantial amount of debt, which may adversely affect its cash flow and its ability to operate the business. Any changes in assumptions underlying the carrying value of certain assets, including as a result of adverse market conditions, could result in impairment of such assets.

3. Regulatory risks

The Company faces regulatory risk from predatory pricing and surge in steel imports. The Company may benefit from certain protective trade restrictions, including anti-dumping laws, countervailing duties and tariffs, which if not available, may adversely affect its operations and financial condition. The Companys business could be affected by potential regulatory and judicial actions.

4. Operational risks

The industry is highly cyclical and a decrease in steel prices may adversely impact its financial condition. The Companys operations and financial condition could be adversely affected if it is unable to successfully implement its growth strategies. The Companys business is prone to high proportion of fixed costs and volatility in the prices of raw materials and energy. Mismatches between trends in prices of raw materials and steel, as well as limitations on or disruptions in the supply of raw materials, could adversely affect its profitability.

5. Market related risks

Competition from other materials, or changes in the products or manufacturing processes of the Companys customers who use steel products, could reduce market prices and demand for the Companys products, thereby reducing its cash flow and profitability. Product liability claims may adversely affect the Companys operations and finance.

6. People risk

The Companys success depends on the continued services of its senior management team and business and prospects could suffer if it loses one or more key personnel or if it is unable to attract and retain its employees. Any labour unrest could adversely affect the Companys operations and financial condition.

The Companys mitigation strategies are enumerated as under:

The macroeconomic and market related risks are addressed through diversification of the Companys product portfolio and development of value added products.

The Company works with policy makers to curb predatory pricing and surge in steel imports to create a level playing field. The operational risks are mitigated through development of well-structured processes for effective project planning &management.

To mitigate the risk of climate change and to be sustainable, the Company is focussing on innovative technologies that can significantly lower emissions

GOVERNMENT INITIATIVES

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

• Under the Union Budget 2020-21, the government allocated Rs. 39.25 crore (US$ 5.4 million) to the Ministry of Steel.

• In January 2021, the Ministry of Steel, Government of India, signed a Memorandum of Cooperation (MoC) with the Ministry of Economy, Trade and Industry, Government of Japan, to boost the steel sector through joint activities under the framework of India-Japan Steel Dialogue.

• In December 2020, the Minister for Petroleum & Natural Gas and Steel, Mr. Dharmendra Pradhan, has appealed to the scientific community to Innovate for India (I4I) and create competitive advantages to make India ‘Aatmanirbhar.

• In September 2020, the Ministry of Steel prepared a draft framework policy for development of steel clusters in the country.

• On October 1, 2020, Directorate General of Foreign Trade (DGFT) announced that steel manufacturers in the country can avail duty drawback benefits on steel supplied through their service centres, distributors, dealers and stock yards.

• Government introduced Steel Scrap Recycling Policy to reduce import.

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

• Government of Indias focus on infrastructure and restarting road projects is aiding the 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 approved the National Steel Policy (NSP) 2017, as it intend to create a globally competitive steel industry in India. NSP 2017 envisage 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% and imposed measures including anti-dumping and safeguard duties on iron and steel items.

Road ahead

The National Steel Policy, 2017 envisage 300 million tonnes of production capacity by 2030-31. The per capita consumption of steel has increased from 57.6 kgs to 74.1 kgs during the last five years. The government has a fixed objective of increasing rural consumption of steel from the current 19.6 kg/per capita to 38 kg/per capita by 2030-31.

As per Indian Steel Association (ISA), steel demand will grow by 7.2% in 2019-20 and 2020-21.

Huge scope for growth is offered by Indias comparatively low per capita steel consumption and the expected rise in consumption due to increased infrastructure construction and the thriving automobile and railways sectors.

FUTURE OUTLOOK

Domestic crude steel production is likely to be about 102 MTs and de-growth estimated to reduce to around 7% amid continuous ramp up in production levels by steel players.

• Similarly, fall in steel consumption is estimated to be around 8% to about 92 MTs considering that Jan-March is a seasonally heavy quarter for the industry.

• We expect governments thrust on improving the infrastructure of the country and investment in projects such as affordable housing, railway line, metro rail, shipbuilding and oil & gas distribution pipeline projects would boost steel consumption.

• Higher international steel prices and iron ore prices on the back of strong demand from China as well as recovery in domestic demand will keep steel prices firm in Q4FY21.

• After a sharp drop in Q1FY21, the domestic steel industry has reported sharp rebound in margins in the September 2020 and December 2020 quarter benefiting from improving demand and realizations on the one hand and softer coking coal costs on the other hand. Margins of steel companies are expected to show further expansion in the March FY21 quarter.

Risk & Concerns

The Company on regular basis reviews its Risk Management Policy and takes proactive steps to safeguard and minimize any adversity related to the Market, Technology, People, Environment/Regulatory, Financial and Opportunity Risks. Wherever necessary, the Company takes adequate insurance coverage of its assets for safeguarding from unforeseen risks.

Internal Control System and their adequacy

The Company has adequate internal control system and well laid-down policies and procedures for all its operations and financial functions. The procedures are aligned to provide assurance for maintaining proper accounting controls, monitoring efficient and proper usage of all its assets and reliability of financial and operational reports. The internal control system is ably supported by the Internal Audit Department which carries out extensive audit of various functions throughout the Company. The Companys Board has an Audit Committee which comprises of three members, all of whom are Independent Directors. The Audit Committee reviews significant findings of the internal audit.

Financial Performance

During the year under review, the Company has achieved Total Revenue of Rs. 43749.69 Lacs as against previous year of Rs. 10000.65 Lacs The Company has incurred loss of Rs. 35.74 Lacs against previous year loss of Rs. 2562.70 Lacs. Company expects to do better if there is an improvement in overall industrial scenario.

Human Resources and Industrial Relation

The Company takes pride in the commitment, competence and dedication shown by its employees in all areas of business. Various Human Resource initiatives are taken to align the HR Policies to the growing requirements of the business.

The Company has a structured induction process and management development programmes to upgrade skills of managers. Technical and safety training programmes are given periodically to workers.

Industrial relations in the organization continued to be cordial during the year under review.