Sarthak Metals Ltd Management Discussions.

Overall Indian Economy Outlook

The year 2017 was marked by a number of key structural initiatives to build strength across macro-economic parameters for sustainable growth in the future. The growth in the first half of the year suffered despite global tailwinds. However, the weakness seen at the beginning of 2017, seems to have bottomed out as 2018 set in. Currently, the economy seems to be on the path to recovery, with indicators of industrial production, stock market index, auto sales and exports having shown uptick.

The Indian economy is expected to grow at an annual rate of 7.4% in 2018 and 7.8% in 2019, according to a recently released IMF Economic Outlook. Indias economy is "lifted by strong private consumption as well as fading transitory effects of the currency exchange initiative and implementation of the national goods and services tax," notes the report. "Over the medium term, growth is expected to gradually rise with continued implementation of structural reforms that raise productivity and incentivize private investment."

Steel Sector Outlook

India has maintained its position as the third largest producer of Seel in the world. In FY18, India produced 104.98 million tonnes (MT) of finished steel. Crude Steel production during 2017-18 stood at 102.34 MT. Steel consumption is expected to grow 5.7 per cent year-on-year to 92.1 MT in 2018. Indias steel production is expected to increase from 102.34 MT in FY18 to 128.6 MT by 2021. Indias per capita consumption of steel grew at a CAGR of 3.96 per cent from 46 kgs in FY08 to 65.25 kgs in FY17. The figure stood at 68 kgs during April-February 2017-18. National Steel Policy 2017 seeks to increase per capita steel consumption to the level of 160 kgs.

Opportunities

Steel demand is currently going strong mimicking previous years trend. With coming of Goods & Service Tax, cost of many products has come down making India more competitive in the exports market. Further, strong push by government on Make in India and various infrastructure investments has added to the demand of steel in India. Following policies of GoI are adding luster to the sector:

Government of Indias focus on infrastructure and restarting road projects is aiding the boost in demand for steel. Also, further likely acceleration in rural economy and infrastructure is expected to lead to growth in demand for steel.

The Union Cabinet, Government of India has approved the National Steel Policy (NSP) 2017, as it seeks to create a globally competitive steel industry in India. NSP 2017 targets 300 million tonnes (MT) steel-making in capacity and 160 kgs per capita steel consumption by 2030.

The on-going trade war between EU, USA and China adds a slew of opportunities for Indian steel as well as Indian raw materials. India expects to keep its MFN status with US thereby boosting exports. With the current increase in capacity additions by various steel plants going online India is poised to overtake Japan as the second largest steel producer by FY 2020 behind only China which is projecting a decline in Steel consumption by 2% in 2019 fiscal.

Threats

The main threat to the Indian steel industry is from cheap steel imports which the Chinese companies are dumping in India. With the Chinese steel facing closed doors in USA, they only have India to look towards in light of waning domestic steel demand. The current government has put safeguard duties for the same and protected the local industries. However, it is not clear for how long these duties shall prevail.

Further, USA and EU might impose tariffs on Indian steel as they have on Chinese steel if the situations for their local industries do not improve. The only case in point for these economies maybe that the Indian steel still makes economic sense for the downstream industries.

The GoIs IBC has been effective in resolving the stressed assets of Banks in the Bhushan Steel and Monnet Ispat cases. However, decisions on assets like Essar and BPSL still remain in limbo. Tata Steel & JSW Steel the companies who have acquired the stressed assets mentioned earlier have also stretched their balance sheets to buy these assets making situations questionable for the only two profitable steel plants in India. Indian steel companies like JSPL and JSL continue to face pressure from banks, as most of them are still overleveraged. The FY 2018 results of most steel companies are definitely a breath of fresh air but continuous achievement of such performance is questionable.

Product Wise Performance

Sarthak Metals Limited has three manufacturing divisions as on 31st March 2018 i.e. industrial oxygen manufacturing, cored wire manufacturing plant and Ferro Aluminum manufacturing plant. The industrial oxygen plant is of 200 Cubic Meter per hour capacity. It has been giving steady performance and catering to nearby steel fabrication companies. The cored wire division of the company manufactures various cored wires and aluminum flipping coils for the Iron & Steel companies. Your company has commissioned the Ferro Aluminum and Iron Powder plants in FY 2019. Further, your company has also started the commissioning of Aluminum wire rod manufacturing plant, which shall be the raw material for Aluminum flipping coil. We are hopeful of bringing the aluminium wire rod plant online by October 2018.

The product wise performance of the both cored wires, aluminum flipping coil and Ferro Aluminium has been briefed in the table below:

Table: Capacity Utilisation for Primary Products

Product Name

Contribution to Turnover

Quantity

Capacity Utilisation

(Rs in Crores)

(in Metric Tonnes)

Cored Wires

107.71

5951.393

60%

Aluminum Flipping Coil

53.97

3170.097

64%

Ferro Aluminum

4.96

1569.535

32.70%

Outlook

Recovering fundamentals of steel companies and strong domestic demand of steel shall be a major contributor to the companys growth in the coming fiscals. The two factors, which shall keep our company competitive, is quality and cost control. There seems to be no reason for not growing if we live by these two covenants.

Cautionary Statement

Statements made in this Management Discussions and Analysis describing companys objective and predictions may be "Forward looking statements" within the meaning of applicable laws and regulations. Actual results may differ from those expressed therein. Important factors that could make difference to the operations include Government regulations, tax structures and countrys economic development, availability of input and their prices and other incidental factors.