S.A.L Steel Ltd Management Discussions.

The objective of this report is to convey the Management’s perspective on the external environment and steel industry, as well as strategy, operating and financial performance, material developments in human resources and industrial relations, risks and opportunities, and internal control systems and their adequacy in the Company during the Financial Year 2020-21. This should be read in conjunction with the Company’s financial statements, the schedules and notes thereto and other information included elsewhere in the Integrated Report. The Company’s financial statements have been prepared in accordance with Indian Accounting Standards (‘Ind AS’) complying with the requirements of the Companies Act, 2013, as amended and regulations issued by the Securities and Exchange Board of India (‘SEBI’) from time to time.

INSIGHTS ON GLOBAL ECONOMY

The global economy is projected to grow 6.0 percent in 2021 and 4.9 percent in 2022.The 2021 global forecast is unchanged from the April 2021 WEO, but with offsetting revisions. Prospects for emerging market and developing economies have been marked down for 2021, especially for Emerging Asia.

Recent price pressures for the most part reflect unusual pandemic-related developments and transitory supply-demand mismatches. Inflation is expected to return to its pre-pandemic ranges in most countries in 2022 once these disturbances work their way through prices, though uncertainty remains high. Elevated inflation is also expected in some emerging market and developing economies related in part to high food prices.

These revisions reflect pandemic developments and changes in policy support. The 0.5 percentage-point upgrade for 2022 derives largely from the forecast upgrade for advanced economies, particularly the United States, reflecting the anticipated legislation of additional fiscal support in the second half of 2021 and improved health metrics more broadly across the group.

A double hit to emerging market and developing economies from worsening pandemic dynamics and tighter external financial conditions would severely set back their recovery and drag global growth below this outlook’s baseline.

The growth for H1 was roughly the same as the 14.5% on-year growth for the first five months of 2021, and for June alone, the output grew 11.6% on year to nearly 168 million tons among the 64 countries, or down 3.7% on month.

China, though still the world’s top steelmaking country, posted the lowest on-year gain for the second month in June among the top ten steelmaking countries, or up 1.5% on year but down 5.6% on month to 93.9 million tons, the WSA data showed, with was in line with WSA’s projection in April that for 2021 the other steelmaking countries would probably post stronger gains than China.

India, the world’s second largest steel-producing country, posted the greatest gain among the top ten in steel output over January-June, up 31.3% on year though its steel output for June swelled just 21.4% on year, ranked the fifth in growth among the top ten, and three others posted surges by over 40% on year for June with Brazil scoring the highest 45.2% gain from a year ago.

For the first half of 2021, crude steel production among 64 countries worldwide under the monthly survey of World Steel Association (WSA) maintained its momentum in growth, up 14.4% on year to slightly above 1 billion tones.

INDIAN ECONOMIC OVERVIEW

The Indian economy was forecast to record an 11.3% growth in 2021-22, based on prevailing conditions in March 2021.

Since then, however, the economic outlook has changed with the start of the 2nd wave of COVID-19. Consequently, a 9.4% growth is anticipated in 2021-22. However, this forecast is subject to changes based on the evolution of the 2nd wave, government responses to the same, and the performance of the economy in the post-lockdown period.

One of the important ramifications of the global pandemic has been the shift in global supply chains. Chinas position as a go-to manufacturing location has weakened, and producers are looking to diversify outside the country. India has emerged as an alternative, and this will fuel the governments vision of boosting domestic production.

In this regard, the government launched the PLI Scheme in 2020, which aims to attract foreign supply chains. However, Indias attractiveness as an investment destination has been dented in the short term due to a 2nd wave of the virus; nevertheless, investor interest in the country will grow as the number of cases reduces, as central and state governments offer incentives to support manufacturing, and as structural reforms are implemented.

Structural reforms are a priority for the government - evidenced by reforms such as disinvestment and the establishment of bad banks (announced in the recent budget). Mining reforms were also cleared, and they will augment mining production and curtail imports. The government is also working on a national logistics policy that will slash logistics costs.

Some of the key industries that have received a boost from the pandemic include eCommerce and EdTech. eCommerce growth will soon spill over into the B2B space. Furthermore, the cold-chain industry stands to benefit from India’s e-Groceries boom and the potential large-scale vaccination program.

Investors should look out for new government incentives to spur manufacturing. It is important to drive economic recovery after the second wave subsides and lockdowns are eased. Opportunities for privatization will open up as the government has indicated a longterm vision of industry-wide privatization, barring a few strategic sectors.

This research service is designed to provide insight into Indias growth trajectory for the next 4 quarters and shed light on the implications of the 2021-22 Budget, the recently launched Production Linked Incentive (PLI) Scheme, and ongoing and impending structural reforms, among other aspects that will highlight the countrys near-term economic prospects and outlook.

Market Size

In FY21, the production of crude steel and finished steel stood a 102.49 MT and 94.66 MT, respectively. According to CARE Ratings, crude steel production is expected to reach 112-114 MT (million tonne), an increase of 8-9% YoY in FY22. The consumption of finished steel stood at 93.43 MT in FY21.

Exports and imports of finished steel stood at 10.79 MT and 4.75 MT, respectively, in FY21. In April 2021, India’s export rose by 121.6% YoY, compared with 2020. In FY20, India exported 8.24 MT of finished steel.

Government Initiatives

The Cabinet recently approved the Production Linked Incentive (PLI) Scheme for "Specialty Steel" in India to be implemented over FY23-24 to FY29-30 with a budgetary outlay of INR 6,322 crore.

The aim of the scheme is to promote manufacturing of such steel grades within India. At present, the country operates at the low end of the value chain in steel manufacturing, with an average realisation of INR 51,000-58,000/tonne (t) only. In contrast, Indias steel imports have an average value per tonne of INR 146,000-183,000.

The PLI incentive will boost domestic production of "Specialty Steel" and attract significant investment for production of the same in the country.

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 India’s comparatively low per capita steel consumption and the expected rise in consumption due to increased infrastructure construction and the thriving automobile and railways sectors.

Opportunities

There is a significant growth being witnessed in Construction sector as the government is spending on Infrastructure projects and the sector is considered to maintain the same level of momentum and demand with a gradual rise in Investment resulting in creating market for the Steel Industries in the Country.

Further the Capital goods market has also improved with rising manufacturing capacity utilization and infrastructure investment which has boosted demand for Construction and earthmoving equipment.

Also Consumer durable growth is driven by segments like Air-conditioner, Refrigerators and furniture supported by lowering of GST and hike in Import Duty and indirectly giving a good demand to steel industries

As per the National steel policy crafted during FY 2018-19, the crude steel production target for India is set at 300 MT by 2030. Share of sponge iron in steel making will be 80MT, which will create huge opportunity for sponge iron industry.

Threats

Presently there are no visible threats in the short and medium term in the sponge iron industry. However availability of key raw materials and environmental concerns might pose significant challenge in the future.

Outlook

The domestic consumption is considered to move at a same momentum as is evident in the demand pull visible in infrastructure, automobile and other sectors. Government is also driving the economy by investing in housing, roads, and ports and in other infrastructure projects.

Favourable domestic demand and remunerative prices in both domestic and international markets are likely to bolster steel production further in the years to come, resulting into more demand for sponge iron.

FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

Production of sponge iron during the year was 85,306 MT as compared to 1,29,294 MT as compared in the previous year. Production of Ferro Chrome was 11,667 MT as compared to 17,854 MT in the previous year.

Accordingly, sales for sponge iron during the year was 87,377 MT as compared to 1,28,270 MT in the previous year. Sales of Ferro Chrome during the year were 11,280 MT as compared to 18,000 MT in the previous year.

Company has a power generation plant of 40 MW. During the year 68,006 MWH of power was sold by way of Captive Consumption as against 88113.75 MWH in the previous year.

During the year under review Total Revenue from operation has decreased from 40783.91 lacs to 30091.20 lacs as compared to previous year’s turnover. Company has registered a net profit of 1155.40 lacs in comparison of net Profit of 1587.00 lacs during previous year.

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--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 Company’s resources, accuracy in financial statements and due compliance of statutes and Company’s 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, 2021 was 441. 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 Company’s policies and achieving stretched operational targets, year on year.

CAUTIONARY NOTE

Cautionary Statement The above Management Discussion and Analysis describing the Company’s objectives, projections, estimates and expectations may be "forward looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Company’s operations include external economic conditions affecting demand/supply influencing price conditions in the market in which the Company operates, changes in Government regulations, tax laws, and other incidental factors.