S.A.L Steel Ltd Management Discussions.

INDUSTRY STRUCTURE AND DEVELOPMENTS

Indias sponge iron industry has sustained secondary steel producers who use electric arc furnaces or induction furnaces to make steel. Sponge iron has in fact become a perfect substitute for scrap. This route of steel making has led to multiple manufacturing units of steel in small capacities across the country as against conventional integrated steel plants.

Country has about 500 coal based sponge iron plants with a capacity ranging from 30000 tpa to 1.3 million tons per annum. SAL sponge iron is a coal based plant. Sponge iron plants capacity utilization levels has been low this year due to poor demand for steel. During the year iron ore availability of sponge iron increased considerably, as a few iron ore mines restarted. This has resulted in keeping iron ore prices low.

The company operates two rotary kilns with installed capacity of 100 TPD and 500 TPD. Company has its customer base mainly in western Region in India and export market. The waste gas from sponge making kilns has significant energy in the form of heat. This energy is recovered in waste heat recovery boilers to generate steam, which then passes through generator for producing power. Company has two waster heat recovery boilers of 53.2 TPH and 10.3 TPH. Combined capacity of power plant is 40 MW. Surplus power is sold by way of wheeling to Shah Alloys Ltd. being promoter of SAL Steel.

Iron ore and coal are two important raw materials in production of sponge iron. Iron ore and pellets was procured indigenously and some time imported. Coal was sourced mostly from overseas markets.

Sponge iron industry appears to be in a state of stress for financial reasons as well as demand slowdown. Slowdown in growth rate of steel and addition of capacities by integrated steel plant will keep the demand of sponge iron subdued. Measures taken by the Government to encourage infrastructure development and housing will impact favourably to sponge iron and steel industry together.

Ferro chrome is a value - added intermediate product which imparts the non-corrosive property to stainless steel and special alloy steel.

OPPORTUNITIES AND THREAT

Opportunities:

The secondary steel industry consisting of IF (Induction Furnace) & EAF (Electric Arc Furnace) constitute almost 57% of the steel produced during 2015-16. As steel demand in the country grows, it is expected that the share of secondary steel industry will stay above 50% due to issues related to land acquisition and long gestation period in putting up big steel plants. As per Joint Parliamentary Committee ("JPC") the projected sponge iron requirement during 2019-20 is expected at 32.0 Million tonnes. It is also expected that more merchant sponge iron plants will plan for forward integration and move up the value chain.

Threats:

Iron ore and coal constitute more than 75% of cost of production. Therefore the profitability of the Company depends on market price of these raw materials vis-a-vis price of sponge iron. Slowdown in the world steel industry, increase in import of steel melting scrap on account of lower import duty and capacity addition of integrated steel plants, have resulted in pressure on margins. Sluggish demand for finished steel products amid stubborn iron ore rates in the domestic market is giving sponge iron producers a tough time.

FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

Production of sponge iron during the year was 1,53,646 MT as compared to 1,34,076 MT in the previous year. Production of Ferro Chrome was 12,339 MT as compared to 8,211.490 MT in the previous year.

Accordingly, sales for sponge iron during the year was 1,52,286.140 MT as compared to 1,33,277.790 MT in the previous year. Production and sales quantity was increased by 14.60% and 14.26% respectively compared to previous year. Sales for Ferro Chrome during the year was 11,885.625 MT as compared to 8,248.010 MT in the previous year. Production and sales quantity was increased by 50.27% and 44.10% respectively compared to previous year.

Company has a power generation plant of 40 MW. During the year 71,717.750 MWH of power was sold by way of wheeling as against 50,485.495 in the previous year.

During the year under review Net Turnover of the Company has been decreased from Rs. 36604.09 lacs to Rs. 33819.36 lacs as compared to previous years turnover. Company has registered a net loss of Rs 2876.84 lacs in comparison to the loss of Rs. 7583.90 lacs during previous year.

Company had approached Honble BIFR for declaring it sick undertaking pursuant to provisions of Section 3 (1) (o) of SICA. Application of the company has been registered in August 2015. Matter is pending before Honble Bench of BIFR. All banks have transferred their debts to ARCs and Company is in the process of settling debts with ARCs.

OUTLOOK

The industry appears to be in a state of stress for financial reasons as well as for demand slowdown. Slowdown in growth rate of steel and addition of capacities by integrated steel plant will keep the demand of sponge iron subdued. The Government of India has announced measures to encourage infrastructure development and housing. These measures and resultant investments is expected to impact favourably the sponge iron and steel industry together.

The Company is currently engaged in sustenance and improvement of current operations by enhancing operating efficiencies.

RISK AND CONCERNS

The process of Risk Management in the company identifies inherent risks in its operations and records residual risk after taking specific risk mitigation steps. The company has identified and categorized risks in the areas of Operations, Finance, Marketing, Regulatory Compliances and Corporate matter.

The volatility in price of sponge iron, excess supply of sponge iron in the market will have an effect of squeezing margins and poses risk to the profitability. New customers, new market and cost reduction have been identified as the mitigation measures.

Also, the enforcement of recent Tariff policy guidelines on power by Government of India that requires the State Electricity Regulatory Commission to ascertain sale price of power based on cost of generation will have an impact on the revenue from export of power.

Fluctuation of import coal price, increase in USD-INR exchange rate, may lead to increase in cost of production. This is mitigated by continuous evaluation of international coal price vis-a-vis Indian coal price and accordingly the action plan for procurement has been formulated.

INTERNAL CONTROL SYSTEM AND ITS ADEQUACY

The Company has adequate internal control procedures commensurate with its size and nature of its business. The objectives of these procedures are to ensure efficient use and protection of the Companys resources, accuracy in financial statements and due compliance of statutes and Companys policies and procedures.

HUMAN RESOURCES AND INDUSTRIAL RELATIONS

The Company is working on enhancing its competencies to take care of current and future business. Its employee strength as on March 31, 2016 was 330. Human Resource and Industrial Relations departments have developed systems and policies on recruitment, performance management, learning and development, and employee engagement. The Workers union of the Company has maintained healthy and cordial industrial relations, and has been an equal partner in implementing Companys policies and achieving stretched operational targets, year on year.

CAUTIONARY NOTE

Statements in Management Discussion and Analysis Report describing the Companys expectations or predictions may be forward looking within the meaning of applicable securities laws and regulations. Actual results may differ materially from those expressed in the statement. Important factors that could influence Companys operations include global and domestic supply & demand conditions affecting selling prices of finished goods, input availability and prices, changes in the government regulations, tax laws, economic development within the country and other factors such as litigations and industrial relations.