S.A.L Steel Ltd Management Discussions.
INDUSTRY STRUCTURE AND DEVELOPMENTS
India is the largest producer of sponge iron in the world. The major factors for the growth of the Sponge Iron Industry has been the availability of iron ore and non-coking coal - inputs used in its manufacture and the demand for steel in the country. Sponge iron, also called Direct- Reduced Iron (DRI), is produced from direct reduction of iron ore (in the form of lumps, pellets or fines) by reducing gas produced from natural gas or coal.India has an estimated of 200 sponge - iron units, of which more than 100 are coal-based units.This industry has mastered the art of sponge iron making and utilizes indigenous raw materials like iron ore and non-coking coal unlike the blast furnace route which is heavily dependent on import of coking coal. The future of the industry will depend upon the government policies, raw materials security at affordable prices and finance cost.
The condition of the Indian sponge iron industry is deteriorating every quarter both on demand and financial fronts. There are many reasons which can be attributed for this state of affairs such as falling steel prices and dumping of cheaper steel particularly from China, higher electricity & interest cost, uncertainty in the availability and price of vital raw materials like iron ore & coal, increasing import of steel melting scrap etc. Coal based sponge iron production route have some issues because of the deteriorating quality of iron ore and coal and module size. Nevertheless, larger units having waste heat recovery system for power generation are better placed on both the fronts of energy efficiency and environment.
The industry requires massive investments. This sector provides direct & indirect employment to more than half a million people and is an important contributor in the induction furnace / electric arc furnace steel making route.
The minimum import price of steelis a good move to protect the Indian steel industry which will provide great relief to the Indian steel producers from the dumping of cheaper steel.
Your 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 are procured indigenously and sometime imported. Coal was sourced mostly from overseas markets.
Ferro chrome is a value - added intermediate product which imparts the non-corrosive property to stainless steel and special alloy steel.
OPPORTUNITIES AND THREAT:
As the financial crisis hit the global economy, the Direct Reduction Industry was hit as hard as other sectors. Though the slow down prospect cannot be defied, the growth of the industry is expected to remain robust in the coming future.Demand of sponge iron is synonymous with the secondary steel industry subjected to other factors remaining same and hence industry should logically be quite optimistic.
The depressed demand in sponge iron can be attributed to the overall weak demand for steel products. The demand for finished steel in India has been weak for the past couple of quarters and has, in turn, affected demand for sponge iron.With the opening up of key mines in Odisha, the top iron ore producing state, raw material rates would fall.
It needs no reiteration that the fortunes of ferro alloy industry saddled to that of the steel industry. In the current year, steel prices have been down by about 33% & consequently the fall in gross margins of steel producers, which has been alarming.
FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE
Production of sponge iron during the year was 1,57,065 MT as compared to 1,53,646 MT as compared in the previous year. Production of Ferro Chrome was 12,264 MT as compared to 12,339 MT in the previous year.
Accordingly, sales for sponge iron during the year was 1,56,939.75 MT as compared to 1,52,286.140 MT in the previous year. Sales of Ferro Chrome during the year were 12,408.95 MT as compared to 11,885.625 MT in the previous year.
Company has a power generation plant of 40 MW. During the year 99660.25 MWH of power was sold by way of Captive Consumption as against 71,717.750 MWH in the previous year.
During the year under review Net Turnover of the Company has been increased from Rs. 33819.36 lacs to Rs. 36298.13 as compared to previous years turnover. Company has registered a net profit of Rs. 689.25 as compared to loss of Rs. 2876.84 lacs during previous year.
The Indian economy has showed clear signs of recovery in FY 2016-17. The Govt. of India has centralized focus on ease of doing business. In this endeavor it has done away with various compliances in business and taking various reforms like the biggest historical tax reform in Indirect Taxation. The GST would be game changer and promises a lot to the Indian economy. It is expected to boost Indian GDP growth by1.5 - 2 %. The "Make in India" plan alongwith scheme of entry of Private Sector companies into various sectors will give a major boost to the Indian Industry. The Indian mines are under process of market development and would like to see some positive signs of demands raised for product development. The borrowing cost may not see rise this year owing to liquidity availability with bankers due to demonetization. Your company is expecting better results in the coming years.
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.
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.