REC Ltd Management Discussions

1.0 Introduction : NMDC STEEL LIMITED - An overview

Ministry of Corporate Affairs vide order dated 06.10.2022, had accorded approval of Scheme of Arrangement between NMDC Ltd. (Demerged Company) and NMDC Steel Ltd. (Resulting Company) and their respective shareholders and creditors involving demerger of 3 MTPA capacity greenfield Integrated Steel Plant in Nagarnar, located 16 km from Jagdalpur, Chhattisgarh. It is strategically located near NMDCs Bailadila mines consisting of high-grade iron ores. It is connected to Visakhapatnam seaport via rail & road and is around 300 km away from the capital of Chhattisgarh State, Raipur.

The plant is envisaged with Techno-Economic parameters comparable to global benchmark and envisages adherence to global benchmark for environmental protection and sustainability. Special care and focus have been maintained for making sure that every possible unit of energy could be saved by utilizing energy-efficient technologies such as Pulverized Coal Injection, Coke Dry Quenching and Top Recovery Turbine, recycling blast furnace slag, waste heat recovery options and efficient alternate fuel resources.

1.1 The Project and Its Commissioning

The company has declared August 31, 2023, as date of commencement of commercial operations. The upstream facilities such as sinter and blast furnace have witnessed ramp up to above 50% utilisation levels until March 2024, compared to the finished steel mill which is still at around 40% utilisation levels. This resulted in lower absorption of fixed costs as well as higher reliance on sale of semi-finished goods, such as pig iron, which have lower realization value, resulting in operating losses in fiscal 2024. That said, operating rates have been continuously improving and the company is expected to break-even at EBITDA level within the first half of fiscal 2025 and improve thereafter. CRISIL Ratings understands that the business and financial risk profiles of NSL are also expected to be supported by healthy domestic demand outlook, robust realizations despite moderations over the past fiscals, raw material security and low project debt.

2. Steel Sector Scenario

2.1 Global:

The global steel sector has remained largely

steady, experiencing a slight increase of 0.4% in crude steel production, rising to 1.892 billion tons in 2023 from 1.885 billion tons in 2022. China, which accounts for more than half of the worlds steel production, maintained flat output in 2023 due to the governments efforts to reduce carbon emissions. Meanwhile, India, the second-largest producer, showed robust growth in its steel sector, with production reaching 140 million tons, marking a 12% increase. The table below presents the global steel production scenario-

Country	Crude Steel Production 2023 (MT)	Crude Steel Production 2022 (MT)
China	1019	1018
India	140	125
Japan	87	89
United States	81	81
Russia	76	72
South Korea	67	66
Germany	35	37
Turkiye	34	35
Brazil	32	34
Iran	31	31
Others	290	297
World Total	1892	1885
Source: WSA

The global steel market is projected to reach 2.3 billion tonnes by 2030 with construction sector anticipated to record a CAGR of 2.6%, contributing to a total consumption of 1 billion tonnes of steel by 2030. Additionally, the steel consumption by the machinery sector is also expected to grow at a CAGR of 2.8%¹.

Considering a sustainable development scenario for steel industry to achieve the goals of the Paris Agreement (direct CO₂ emissions to fall by 50% by 2050), steel production is estimated to reach 2.5 billion tonnes in 2050 as per IEA. This will entail a transition in the steel production route, moving away from the traditional blast furnace-basic oxygen furnace (BF-BoF) route towards adopting scrap and direct reduced iron (DRI)-based electric routes. This shift is occurring within the context of

the broader energy transition landscape, reflecting an increasing focus on more sustainable and energy-efficient production methods.

2.2 Domestic Steel Sector

India has been and will remain a global hub for steel production with its robust economic growth. Finished steel consumption in FY24 stood at 136 million tonnes², witnessing over 14% year on year growth. The buildings, construction and infrastructure sectors are the primary demand driver, followed by the capital goods and automotive industry. The Indian governments initiatives and schemes, such as GatiShakti Master Plan, Make in India, Pradhan Mantri Awas Yojna - Housing for all, Urban infrastructure development scheme for small and medium towns, etc., have created prospects for significant consumption of steel.

In CY 2023, Indias per capita steel consumption stood at 93 kgs³, substantially lower than the global average of 219 kgs. However, Indias steel consumption is increasing at one of the fastest rates worldwide. This contrasts with other regions, where slower growth rates have contributed to a slight decline in overall global per capita steel consumption.

As per National Steel Policy 2017, India aims to achieve crude steel production of 255 million tonnes by 2030, with the crude steel capacity reaching 300 million tonnes. The domestic steel industry will continue to have BF-BOF route as the major route of production, which is expected increase from current share of ~46% to 60-65% by 2030⁴.

3.0. Opportunities & Threats

3.1 Opportunities

> Envisaged growth in domestic steel production on account of the factors mentioned below would lead to higher demand for iron ore and steel in the country:

- The Government envisages bringing Indias GDP to US$ 5 trillion by FY25 and achieve upper-middle income status on the back of digitization, globalization, favorable demographics, and reforms that will create demand for steel in the domestic market.

- Infrastructure stimulus of the government to drive the growth and growth potential of the construction,

automotive, consumer durables sectors

etc. will drive the demand for the iron and steel sector.

- Supply gap created for Steel & Iron ore in the international market due to steel production curb in China, sanctions on Russia and damage to Ukraine in the war.

- Government initiatives for Self-Reliant India creating new avenues to set-up new industries leading to demand in steel. Numerous foreign companies are setting up their facilities in India on account of various Government initiatives like Make in India and Digital India. This will further add up with the government initiatives for 100% FDI.

- Continuous thrust by the government to use domestically manufactured iron and steel products in government procurement. Further capacity addition by steel players in near future, along with planned commissioning of NMDCs steel plant in Nagarnar.

> Railways: The focus of Govt. of India for redevelopment of more than 50 existing railway stations and making them multi modal transit facilities will translate into robust domestic steel demand. This will provide scope for private sector CapEx opportunity.

> Logistics & Regional Connectivity: The announcement made related to creation of one hundred critical transport infrastructure projects that will ensure first and last mile connectivity for ports, coal, steel, fertilizer, and food grain sectors will also spur up

the domestic steel demand. Further, the announcement with regard to development of additional airports, heliports, water aerodromes and advance landing grounds for improving regional connectivity will also create opportunities for domestic steel demand.

> PM Awas Yojana: With the focus of the Government of India towards providing affordable Housing for All under the Pradhan Mantri Awas Yojana - Urban [PMAY-U]

and outlay of additional Rs. 1 lakh crore earmarked in the Budget for FY 2024-25, the demand for steel is expected to get a big fillip.

3.2 Threats

> Susceptibility to cyclicality associated with the steel industry and availability of key

raw materials - The inherent cyclicality in the steel industry exposes steelmakers to a high degree of volatility in operating margin and, in turn, to debt protection metrics. Demand for steel is sensitive to trends in key end-user industries, such as automobiles, infrastructure, construction and consumer durables. However, raw material security, by way of long-term contract with NMDC for procurement of iron ore, mitigates the risk to an extent.

> NMDC Steel Ltd business would continue to be affected by developments impacting the demand-supply scenario & price fluctuations of steels in both the global and domestic markets.

> Rising inflation can impact consumption and lead to fiscal tightening increasing the cost of borrowings affecting investments.

> Intensification of geopolitical tension in Europe can disrupt the whole market dynamics.

> Disturbances due to Maoist activities in Bailadila region from where the majority of NMDCs production comes. At the same time, the location of Bailadila has a logistic disadvantage.

> Shortage of metallurgical coal: Although India has huge deposits of high grade iron ore, her coal reserves, especially high grade coking coal for smelting iron are limited. Many steel plants are forces to import metallurgical coal. For example, steel plant at Vishakhapatnam has to import coal from Australia.

> Increasing regulatory pressure on environment, health & safety and sustainability.

4.0 Risks and Concerns

4.1 Harsh environment and accidents

The steel industry processes usually rely on high temperature thermal or chemical transformations in order to generate a desired final outcome.

This kind of scenario naturally results in a quite dangerous work environment for operators, making it very difficult to prevent unexpected accidents from happening to workers in the field.

And adding to this context, there is still difficulty in performing the inspection and maintenance of machinery and structures, which suffer a lot from the corrosion process, wear and tear, structural integrity, and are in places of difficult operation.

In addition, as will be explained later, the workers need to act in a very analogical way and usually without knowing the real priorities within the operation.

In other words, besides the physical degradation of the structural plant itself, the work environment is very unsafe and stressful for the workers as well. There are even cases in which, due to the high temperature of the processes, operators are not allowed to stay more than 20 minutes on-site, which limits their actions and efficiency.

4.2 Process monitoring

The inspection and monitoring process of steel mills usually follows specific procedures, requiring that workers operate in a typical analog way.

Since it is a critical environment, stopping production to execute corrective actions is unfeasible, and the current method for monitoring these problems is not able to predict failures in the same way as intelligent predictive models do, thus demonstrating an inevitable gap to errors.

4.3 Maintenance

Besides the difficulty in performing the inspection itself because of the hostile environment of steel industries, the maintenance of the encountered problems is also difficult. The corrosion of equipment and structures is also a common problem in these industries and the maintenance of these components is very complicated because of the hostile environment, as mentioned before. Besides, the diversity of complex processes in this industry also makes it difficult to understand the extracted data in the operation, and the improper management of this information in diffuse systems compromises the maintenance of the structures.

As a consequence of this lack of precise management tools, failure prediction in the operation is not usually achievable, leading to unplanned shutdowns and the extensive use of corrective maintenance methods.

4.4 Solid waste management and pollutant emissions

Another consequence of the various transformation processes in the steel industry is the generation of sub-products that are not reused in the operation. Because of that, there is a lot of waste disposal, with some of it being improperly released into the environment.

In addition, the main source of energy of these industries processes is the combustion of fossil fuels, which also is a direct contributor for the emission of pollutant gases into the atmosphere. Both cases generate serious environmental problems and rank this industrial sector as one of the most polluting.

4.5 General challenges faced for setting up a green field project are:

• Land Acquisition.

• Environmental Forest clearances.

• Resettlement & Rehabilitation policy of displaced persons.

• Poor logistics for transportation by Rail and Road.

• Scarcity of skilled and trained manpower in the area.

• Limited availability of quality education and medical facilities

• Delay in getting statutory clearance and permission

4.6 Constraint due to Employer

• Time lag between awarding of major contract for major as well as auxiliary packages

• Recruitment and retention of manpower by NMDC

• Integration and interfacing of different plants/ packages.

4.7 Constraint due to consultant

• Delay in finalization of design & engineering by consultant.

• Lack of coordination between consultants engineering, inspection and site supervision team.

• Incorrect assessment (increase) in scope of work by consultant and contractor while tendering.

• Outdated Vendor list in contract.

• Difference arising due interpretation of contract by Client, consultant and contractor.

• Price escalation due to delay in execution and non availability of adequate provision in contract for paying price variation before contract closing.

• Lack of foresight for planning essential facilities for starting of plant. [Sand Pit, ZLD, Coal Storage area etc.]

4.8 Constraint due to Consortium

• Lack of Coordination among the consortium members of various packages

• Financial problem of contractor and its subcontractor has caused delay in execution of ordering to vendor and reduced rate of progress at site.

• Different pace of work by various contractors in respective packages

• Ambiguity in plan during contingency (nonavailability of construction water/permanent water, emergency power and island facility)

• Sub-contracting of jobs to in-competent contractors by main contractors.

4.9 Constraint due to ambiguity of contract

• Inter consortium disputes between contractors due to non clarity in scope of work.

• Technical contract prepared by MECON having lot of discrepancies causing delay in execution.

4.10 Constraint due to Location

• Availability and retention of skilled labour by contractor in Bastar region.

• Poor infrastructural and logistic facility in region.

5.0 Segment wise or Product -wise performance:

5.1 Physical Performance

The company operates in single segment i.e. Steel Plant and the details of the actual production for the period from 31.08.2023 to 31.03.2024 are given below:

Items	2022-23	2023-24
Hot Rolled Coils	-	4,93,503
Liquid Steel	-	5,17,862
Hot Metal	-	9,66,468
Pig Iron	-	3,08,085
Gross Sinter	-	15,09,712
Gross Coke	1,94,314	10,63,173

* DCCO declared on 31.08.2023

5.2 Financial Performance

Sl. No.	Particulars		Amount (Rs. in crore) From 31.08.2023 to 31.03.2024
A.	INCOME
1.	Sale of HR Coils		1,731.10
2.	Other Sales		1,317.89
3.	Total Revenue from Operations		3,048.99
4.	Other Income		119.29
5.	TOTAL INCOME		3,168.28
B.	TOTAL EXPENDITURE		5,369.30
C.	Profit Before Tax (PBT)		(2,201.02)
D. Taxes		(640.70)
E. Profit/Loss after Tax		(1,560.32)

6.0 Outlook for NMDC Steel

NMDC Steel Limited is committed to focusing on maintaining cost competitiveness in the global and domestic markets. Further, the Company is taking various initiatives towards automation & digitization of its operation to further improve its cost competitiveness.

Along with robust strategic planning to support its growth agenda, NMDC Steel continues to enhance organizational capabilities and other enablers to achieve its short-term and long-term objectives.

7.0 Internal control systems and their adequacy

Necessary disclosure in respect of Internal Control Systems and their adequacy has been made in Annexure-C to the Independent Auditors Report dated 27^th May, 2024 which forms part of the

Annual Report.

8.0 Material Developments in Human Relations / Industrial Relations front

Human capital at NSL is a key driving factor and the greatest asset. The Company makes concerted efforts in keeping its workforce highly engaged and motivated. Further, continuous improvement is made to improve the quality of life of their employees.

9.0 Significant changes in key Financial ratios and changes in Net Worth.

The Company has started Commercial Operations for the Steel plant on 31^st August 2023. As such, the financial details have emerged for the first time during the financial year 2023-24 only. Further, since the corresponding figures for the period during FY 2022-23 are not available, the changes in key financial ratios have not been reported.

The Net worth as on 31^st March 2024 was Rs. 15,488.26 crore as compared to Rs. 17,048.58 crore during the previous year.