Sarthak Metals Ltd Management Discussions

Indian Economy

The Indian economy has shown significant resilience and growth in the fiscal year 2023-24, driven by robust policy measures and strategic investments. Indias GDP growth for the fiscal year 2023-24 has been robust, with the government targeting a growth rate of around 7.6% to 7.8%. The Union Budget 2023-24, proposed a total expenditure of A 45.03 Lakh Crores, with a significant focus on capital expenditure, which saw a 37.4% increase from the revised estimates of 2022-23, amounting to A 10.01 Lakh Crores. This increase is primarily driven by higher outlays on transport infrastructure and capital loans to states. The fiscal deficit for 2023-24 is targeted at 5.9% of GDP, a reduction from the revised fiscal deficit of 6.4% in 2022-23. The revenue deficit is also targeted to decrease to 2.9% of GDP from 4.1% in the previous fiscal year.

The Indian economy is poised to maintain its robust growth trajectory, with projections indicating a growth rate of around 7% for the current fiscal year 2023-24 (FY24) and a similar pace in the following fiscal year 2024-25 (FY25). This remarkable achievement of sustaining a growth rate at or above 7% for four consecutive years post-pandemic underscores the resilience and immense potential of the Indian economy, auguring well for its future prospects.

Achieving a 7% growth rate in the current global environment, where the world economy is grappling with challenges, is qualitatively superior to attaining higher growth rates when the global economic conditions are more favourable. The global economy is currently navigating through multiple shocks in the post-COVID era, including renewed supply chain disruptions in 2024, which have impacted trade flows, transportation costs, economic output, and inflation worldwide. While India is not immune to these global disturbances, its experience in managing the COVID-19 pandemic and the energy and commodity price shocks of 2022 has provided a solid foundation for confidence in weathering emerging challenges.

Three key trends are expected to shape the Indian economy in the coming years. Firstly, the era of hyper-globalisation in global manufacturing is drawing to a close, leading to an increased emphasis on onshoring and friend-shoring of production. This shift will impact transportation and logistics costs, consequently affecting the final prices of products. Secondly, the advent of Artificial Intelligence (AI) presents both opportunities and challenges. AI raises profound questions for growth in services trade and employment, as it could erode the cost competitiveness that countries exporting digital services currently enjoy. Thirdly, and arguably the most crucial, the global focus on reducing carbon emissions amidst rising temperatures has led to persistent demands for developing nations to transition from fossil fuels to greener energy sources. While there is a trade-off between economic growth and energy transition in the short term, India has managed this balance more adeptly than many other nations.

In conclusion, despite global economic headwinds, Indias economy continues to exhibit strength and adaptability. The countrys strategic focus on infrastructure development, fiscal management, and navigating global trends positions it favourably for sustained growth and development in the coming years.

Overview

In 2024, the Indian steel industry continues to be a bright spot in the global steel sector, demonstrating resilience and growth amidst challenging global economic conditions. According to the latest Short Range Outlook of the World Steel Association, Indias steel demand is expected to show a healthy growth of 8.2% in 2024, significantly outpacing the global growth rate of 1.7%. This robust performance is driven by several factors, including government spending on infrastructure, recovery in private investment, and healthy growth momentum in the automotive sector.

Production and Consumption Trends

India has solidified its position as the 2^nd largest producer of crude steel globally. In the January-March 2024 period, India produced 37.33 million tonnes (MT) of crude steel, showing a YoY growth of 9.7%. This impressive growth rate is particularly noteworthy when compared to the global crude steel production, which stood at 469.06 MT for the same period, registering a modest growth of 0.5% YoY. Indias share in global crude steel production during this period was 8%, highlighting its growing importance in the global steel landscape.

The countrys steel consumption has also shown robust growth. Total finished steel consumption in India reached 136.25 MT during 2023-24, marking a significant increase of 13.6% compared to the previous year. This growth in consumption is broad-based, with both flat and non-flat steel products showing strong demand. Non-flat products, which include items like bars and rods, accounted for 55% of consumption and grew by 14.1%, while flat steel products, used in industries like automotive and white goods, made up 45% of consumption and grew by 13.1%.

Production Dynamics

The Indian steel industrys production capabilities have shown remarkable improvement. Crude steel production reached 144.04 MT in 2023-24, up by 13.2% compared to the previous year. This growth was supported by increases in hot metal production (87.02 MT, up 7.2%), pig iron production (7.32 MT, up 24.8%), and sponge iron production (51.50 MT, up 18.1%).

In terms of finished steel, production stood at 138.83 MT, showing a growth of 12.7%. The non-alloy steel segment dominated production, accounting for 93% of the total and growing by 14.0%. Within this segment, bars and rods were the major contributors in the non-flat category, while hot rolled coil (HRC) led growth in the flat segment.

Trade Dynamics

Indias position in the global steel trade has seen some shifts in 2024. Exports of finished steel products reached 7.49 MT, showing an increase of 11.5%.

Hot rolled coil/strip was the most exported item, accounting for 39% of total finished steel exports. Italy emerged as the largest export market for Indian steel.

On the import front, India became a net importer of finished steel in 2023-24, with imports reaching 8.32 MT, a significant increase of 38.2%. This shift was primarily due to the initial price disparity between domestic and import prices, which has since been corrected. China remained the largest source of steel imports for India, accounting for 32% of the total.

Market Dynamics and Pricing Trends

The Indian steel market has shown resilience in pricing, although there have been some fluctuations. While global steel prices were on a declining trend in April 2024, the Indian market saw some products, particularly in the long products category, showing a sharp uptick month-on-month. However, on a YoY basis, prices in April 2024 were generally below the levels achieved in April 2023, reflecting global trends.

The pricing dynamics are influenced by various factors, including raw material costs, global economic conditions, and domestic demand. The rise in prices of key raw materials like iron ore and coking coal in recent months is expected to play a significant role in steel price movements going forward.

Sectoral Drivers of Demand

The robust performance of the Indian steel industry in 2024 is underpinned by strong demand from key sectors:

1. Infrastructure: Government spending on infrastructure, which accounts for 25-30% of steel demand, is expected to increase by 11% YoY in 2024-25. This continued focus on infrastructure development is a key driver for steel demand.

2. Construction: The recovery in private investment and the ongoing push for affordable housing are contributing to increased steel demand in the construction sector.

3. Automotive: The automotive sector has shown healthy growth momentum, driving demand for both flat and long steel products.

4. Manufacturing: The governments push for domestic manufacturing through initiatives like "Make in India" and the Production Linked Incentive (PLI) scheme is expected to boost steel demand in various manufacturing sectors.

Challenges and Outlook

Despite the overall positive performance, the Indian steel industry faces some challenges. The global economic uncertainties, including the slowdown in Chinas construction sector and the subdued outlook for the European steel market, could impact export opportunities. Additionally, the rising costs of raw materials and energy pose challenges to maintaining profit margins.

However, the outlookfor the Indian steel industry remains positive. The World Steel Association forecasts that India will continue to be a major driver of global steel demand growth, with an expected 8.2% rise in steel demand in both 2024 and 2025.

This growth is supported by the countrys strong economic fundamentals, ongoing urbanisation, and the governments focus on infrastructure development.

Conclusion

The Indian steel industrys performance in 2024 demonstrates its resilience and growth potential.

With strong domestic demand, improving production capabilities, and a supportive policy environment, India is well-positioned to play an increasingly important role in the global steel landscape. As the industry navigates challenges such as raw material costs and global market uncertainties, its focus on meeting growing domestic demand while enhancing its global competitiveness will be crucial for sustained success in the coming years. The industrys ability to balance growth with sustainability and technological advancements will be key factors in shaping its longterm trajectory in the global steel market.

Company Overview

Sarthak Metals Limited, the flagship entity within the prestigious Desraj Bansal Group, stands as Indias leading manufacturer and exporter of Cored Wires, Aluminium Flipping Coils, and the newly introduced product category of Flux Cored Wires. The Company is renowned for its focus on precision metallurgy, enhancing steel manufacturing processes, and providing advanced industrial welding consumables.

Headquartered in Bhilai, Chhattisgarh, Sarthak Metals benefitsfrom its strategic location near a major steel production hub, facilitating seamless collaboration and fostering strong industry partnerships. The Companys commitment to excellence is evident in its state-of-the-art manufacturing facilities, which are ISO 9001-2000 certified. These facilities leverage the latest technological advancements to ensure rigorous testing and inspection, consistently delivering superior quality products.

Sarthak Metals has earned a reputation asthe preferred supplier to some of Indias largest steel manufacturers, thanks to its focus on quality and manufacturing expertise. The Company is now extending its success in the steel industry to the fabrication and industrial welding sectors.

Recognizing the importance of diversification,

Sarthak Metals has expanded its product portfolio to strengthen its core capabilities. In addition to its well- known Cored Wires and Aluminium Flipping Coils, the Company also offers Cored Wire Feeder Systems and has recently ventured into the production of Flux Cored Wires. This strategic diversification not only broadens revenue streams but also enhances the Companys market presence beyond the metallurgical industry.

By pursuing these prudent diversification strategies, Sarthak Metals is well-positioned to capitalise on emerging market trends and establish a strong foothold in multiple industries, driving sustained growth and reinforcing its market leadership.

Key Financial Ratios

Segment-Wise Performance

The Company has only one reportable business segment viz. "Cored Wires".

Outlook

In the face of industry headwinds affecting our core business of Cored Wires and Aluminium Flipping Coils, Sarthak Metals has demonstrated resilience by maintaining its market position despite challenges in demand from the steel industry, subdued product realisations, and price-sensitive competition. We have strategically chosen to focus on higher value- add products and selectively engage in price competition, safeguarding our profitability in this challenging environment. Our venture into new

product categories, particularly Flux Cored Wires, has shown promising results, with strong market acceptance for our product quality. Encouraged by this positive initial response, we are expanding our production capacity to capitalise on the growing demand in this segment. Looking ahead, our outlook remains cautiously optimistic. While we acknowledge the ongoing challenges in our core business, we are buoyed by the positive reception of our new product offerings. Furthermore, our strong balance sheet and healthy cash reserves provide a solid foundation for navigating future uncertainties and pursuing growth opportunities. Sarthak Metals is well-positioned to adapt to evolving market conditions and leverage emerging prospects in the coming year.

Risks & Concerns

Effectiveness of Internal Control Systems

The Company maintains robust and comprehensive internal control systems to safeguard its assets, prevent unauthorised use or disposal, and ensure the proper authorization, recording, and reporting of transactions. These internal controls are designed to optimise resource utilisation, enhance operational efficiency, monitor operations, and ensure compliance with relevant laws and regulations. Additionally, the auditors have affirmed the adequacy and effectiveness of the Companys internal control systems, providing further assurance of their reliability and integrity. These measures contribute to the Companys overall governance framework and instil confidence in the accuracy and transparency of its financial and operational activities.

Human Resource Development and Industrial Relations

Sarthak Metals deeply value its employees as a fundamental asset and a key driver of its growth. Recognizing their immense importance, we actively invest in honing their skills and knowledge through comprehensive training and development programs. Our goal is not only to attract the best talent in the market but also to retain them by establishing ourselves as an employer of choice. We foster a supportive and collaborative work environment that encourages open communication and mutual respect. Moving forward, we are committed to maintaining these positive relationships with our employees. As of March 31, 2024, our dedicated workforce exceeded 148 individuals, and we continue to strengthen our human capital. We firmly believe that investing in our employees and fostering strong industrial relations will contribute to our continued success and growth.

Cautionary Statement

Statements in the Management Discussion and Analysis and other parts of the report describing the Companys objectives, projections, estimates and expectations may be forward-looking statements. Actual results may differ materiallyfrom those expressed or implied due to various risks and uncertainties. Important factors that could make a difference to the Companys operations include economic and political conditions in India and other countries, in which the Company may operate. Other factors that may impact the Companys operations include volatility in interest rates, changes in government regulations and policies, tax laws, statutes, and other incidental factors.

The Company does not intend to update these statements.