Shah Alloys Ltd Management Discussions.

MANAGEMENT DISCUSSION AND ANALYSIS

INDUSTRY STRUCTURE AND DEVELOPMENTS:

World Economic Environment

A year and a half since the onset of the COVID-19 pandemic, the global economy is poised to stage its most robust postrecession recovery in 80 years in 2021. But the rebound is expected to be uneven across countries, as major economies look set to register strong growth even as many developing economies lag.

Global growth is expected to accelerate to 5.6% this year, largely on the strength in major economies such as the United States and China. And while growth for almost every region of the world has been revised upward for 2021, many continue to grapple with COVID-19 and what is likely to be its long shadow. Despite this years pickup, the level of global GDP in 2021 is expected to be 3.2% below pre-pandemic projections, and per capita GDP among many emerging market and developing economies is anticipated to remain below pre-COVID-19 peaks for an extended period. As the pandemic continues to flare, it will shape the path of global economic activity.

The United States and China are each expected to contribute about one quarter of global growth in 2021. The U.S. economy has been bolstered by massive fiscal support, vaccination is expected to become widespread by mid-2021, and growth is expected to reach 6.8% this year, the fastest pace since 1984. Chinas economy - which did not contract last year - is expected to grow a solid 8.5% and moderate as the countrys focus shifts to reducing financial stability risks.

World Steel Scenario

Asia produced 1,374.9 Mt of crude steel in 2020, an increase of 1.5% compared to 2019. Chinas crude steel production in 2020 reached 1,053.0 Mt, up by 5.2% on 2019. Chinas share of global crude steel production increased from 53.3% in 2019 to 56.5% in 2020. Japan produced 83.2 Mt in 2020, down 16.2% on 2019. South Korea produced 67.1 Mt, down 6.0% on 2019.

The EU produced 138.8 Mt of crude steel in 2020, a decrease of 11.8% compared to 2019. Germany produced 35.7 Mt of crude steel in 2020, down 10.0% on 2019.

In the CIS, production was 102.0 Mt in 2020, up by 1.5% on 2019. Russia is estimated to have produced 73.4 Mt in 2020, up 2.6% on 2019. Ukraine produced 20.6 Mt in 2020, down 1.1% on 2019.

Crude steel production in North America was 101.1 Mt in 2020, down 15.5% on 2019. The United States produced 72.7 Mt in 2020, down 17.2% on 2019.

The Middle East produced 45.4 Mt of crude steel in 2020, an increase of 2.5% on 2019. Iran is estimated to have produced 29.0 Mt in 2020, up 13.4% on 2019.

Annual crude steel production for South America was 38.2 Mt in 2020, a decrease of 8.4% on 2019. Brazil produced 31.0 Mt in 2020, down by 4.9% compared to 2019.

Indian Steel Scenario

India was the worlds second-largest steel producer in 2019. India surpassed Japan to become the worlds second-largest steel producer in 2019, with crude steel production of 111.2 million tonnes (MT).

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 tonnes), an increase of 8-9% YoY in FY22. The consumption of finished steel stood at 93.43 MT in FY21.

Steel companies are looking to restart expansion projects on the back of burgeoning steel processes with a capacity addition of 29 MT. In April 2021, Indias finished steel consumption stood at 6.78 MT.

Export and import of finished steel stood at 8.42 MT and 6.69 MT, respectively, in FY20.

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

Government has taken various steps to boost the sector including the introduction of National Steel Policy 2017 and allowing 100% Foreign Direct Investment (FDI) in the steel sector under the automatic route. According to the data released by Department for Promotion of Industry and Internal Trade (DPIIT), between April 2000 and March 2021, Indian metallurgical industries attracted FDI inflow of US$ 14.74 billion.

The Governments National Steel Policy 2017 aims to increase the per capita steel consumption to 160 kgs by 2030-31. The Government has also promoted policy which provides a minimum value addition of 15% in notified steel products covered under preferential procurement.

The industry is also benefitting from the developments happening across various industries. The new Vehicle Scrappage policy will help in reducing the steel prices since the policy enables recycling the materials used in old vehicles. In the healthcare

front, major steel producers are now exceeding their production capacities to produce oxygen cylinders for COVID patients. In 2021, Indian Railways is planning to procure over 11 lakh tons of steel from Steel Authority of India Limited (SAIL) for the track renewal and laying new lines across the country.

OPPORTUNITIES THREATS:

Opportunities:

The biggest opportunity before Indian steel sector is that there is enormous scope for increasing consumption of steel in almost all sectors in India. The Indian rural sector remains fairly unexposed to their Multi-faceted use of steel. The usage of steel in cost effective manner is possible in the area of housing, fencing, structures and other possible applications where steel can substitute other materials which not only could bring about Advantages to users but is also desirable for conservation of forest resources. Excellent potential exist for enhancing steel consumption in other sectors such as automobiles, packaging, engineering industries, irrigation and water supply in India. The key areas of opportunities can be summarized as:

Huge Infrastructure demand Rapid urbanization

Increasing demand for consumer durables Untapped rural demand

Increasing interest of foreign steel producers in India

Numerous foreign companies are setting up their facilities in India on account of various government initiatives like Make in India, Digital India and Aatmanirbhar Bharat Abhiyan. The Government of India launched Atmanirbhar Bharat Abhiyan, which translates to self-reliant India or self-sufficient India, is the vision of making India "a bigger and more important part of the global economy", pursuing policies that are efficient, competitive and resilient, and being self-sustaining and self-generating. Atmanirbhar Bharat does not mean "self-containment", "isolating away from the world" or being "protectionist". The first mention of this came in the form of the Atmanirbhar Bharat Abhiyan or Self-Reliant India Mission during the announcement of Indias COVID-19 pandemic related economic package on 12 May 2020. The five pillars of Atmanirbhar Bharat are stated as economy, infrastructure, technology-driven systems, vibrant demography and demand.

Huge scope for growth is offered by Indias comparatively low per capita steel consumption and the expected rise in consumption due to increased infrastructure construction and the thriving automobile and railways sectors.

Threats:

Steel is a capital-intensive sector. Nearly INR 700 crore is required to set up 1 tonne of steel-making capacity through the greenfield route. Naturally, the cost of financing any expansion or new steel capacity is usually through borrowed capital. And in India the cost of finance is extremely high compared to the cost of finance in developed countries such as China, Japan and Korea. This adds about USD 30-35 USD to the final cost of steel. Moreover, steel demand is cyclical. So, during a downturn, the return on investments gets eroded. From 2004-2011, steel demand increased at a fast pace. This prompted most steel makers to expand existing capacities. However, the Indian steel industry faced a severe downturn between 2014 and 2016. This eventually resulted in many steel makers facing bankruptcy proceedings in 2018. The industry, in fact, is yet to resolve all the bankruptcy cases. Today, financial institutions have become wary of lending to the sector. In conclusion, therefore, a large share of the challenges that the steel industry has faced since 2014 can be traced to the extremely high finance costs or cost of borrowed capital. Although Indias Reserve Bank has lowered the policy repo rate five times and by 135 basis points in 2019 alone, the cost of capital in India still remains significantly high and Indian steel makers continue to face a relative disadvantage vis-a-vis their competitors from the developed world.

If the Indian steel industry is to fulfil the vision outlined in the National Steel Policy, 2017, financing capacity addition of 100-150 million tonnes will be the biggest challenge. The policy document acknowledges that additional investment of INR 10 lakh crore will be required and financing it is the primary challenge

OUTLOOK:

Indian Steel Industry in the post-COVID-19 World

The COVID-19 has disrupted operations globally is well-known. Moreover, the new normal that will emerge is likely to witness a realignment of power centres in different domains. The coronavirus crisis has impacted almost all supply chains dependent on China, which includes the steel sector.

The pandemic and subsequent waves have eroded demand as a result of reduced consumption in end-user industries. Steel demand dropped 54 percent YoY in May, and capacity utilization in crude steel production dropped to 26.5 percent in April. The pandemic is also impeding plans to add capacity due to the crunched liquidity of Indian producers pre-COVID, which worsened amid falling demand. Additionally, high debt is expected to lead to higher interest expenses and labor shortages preventing economical production. The steel ministry has invited request for proposal (RFP) from consulting firms for developing an action plan to mitigate the impact of slowdown induced by the Covid-19 pandemic.

Apart from identifying the current challenges of both the integrated and secondary steel producers, the preferred consultancy firm will have to assess their impact on the steel sector as a whole including their bearings on the supply-chain, logistics, cost of raw materials and pricing of products, availability and cost of labour, international trade-related issues, demand in both domestic and international markets, external and internal threat analysis and cost and availability of finance.

RISKS AND CONCERNS:

Your Company continuously monitors and revisits the risks associated with its business. It has institutionalized the procedure for identifying, minimizing and mitigating risks and the same are reviewed periodically. The Companys Structured Risk Management Process attempts to provide confidence to the stakeholders that the Companys risks are known and well managed. The company management has a Risk Management Team comprising of Functional heads as Champions and accountable for risks associated in their areas. The company has review mechanism of risks at regular intervals. The management of the Company has identified some of the major areas of concern having inherent risk, viz. Foreign Currency Fluctuation, Client Concentration, Technology Risks and Credit Control. The processes relating to minimizing the above risks have already been put in place at different levels of management. The management of the Company reviews the risk management processes and implementation of risk mitigation plans. The processes are continuously improved.

Risk Management comprises three key components which are as below:

i. Risk identification

ii. Risk assessment and mitigation

iii. Risk monitoring and assurance

Your Company has identified the following aspects as the major risks for its operations:

i. Market Risk - in terms of Price increase of Raw Material

ii. Foreign Exchange Risk

The risk mitigation plans are reviewed regularly by the Management and Audit Committee of your Company.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

Company has in place internal control systems and procedures commensurate with the size and nature of its operations. Internal control processes which consist of adopting appropriate management systems and implementing them are followed. These are aimed at giving the Audit Committee a reasonable assurance on the reliability of financial reporting and statutory S regulatory compliances, effectiveness and efficiency of your Companys operations. The Internal Control Systems are reviewed periodically and revised to keep in tune with the changing business environment.

FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

During the year under review company concentrated on manufacturing of Bars, beams, flats, plate, coil, slab, billets etc. Production of bars, beams etc. during the year was 2638 MT. and sale was 2731 MT. Production of plate S coil during the year was 51527 MT and sales were 56347 MT. Production of Slab, billets etc. was 19372 MT and sales was 17640 MT. Likewise, production of Stainless Steel Flat was 10676 MT and sales was 11567 MT. Total production of all items taken together during the year decreased from 96473 MT to 84212 MT whereas total sales decreased from 96193 MT to 88285 MT.

During the year under review Total revenue from Operations and from other operating income increased from Rs. 490.31 crores in the previous year to Rs. 530.77 crores. Company has registered a loss of Rs. 51.65 crores in comparison to the loss of Rs. 14.49 crores during previous year.

DEVELOPMENTS IN HUMAN RESOURCES/INDUSTRIAL RELATIONS FRONT:

The human resource philosophy and strategy of your Company have been designed to attract and retain the best talent, creating a workplace environment that keeps employees engaged, motivated and encourages innovation. Your Company has fostered a culture that rewards continuous learning, collaboration and development, making it future ready with respect to the challenges posed by ever- changing market realities. Employees are your Companys most valuable asset and your Companys processes are designed to empower employees and support creative approaches in order to create enduring value. Your Company maintains a cordial relationship with its employees. Its emphasis on safe work practices and productivity improvement is unrelenting. Your Company has more than 650 employees on its permanent rolls as on 31st March, 2021.

DISCLOSURE OF ACCOUNTING TREATMENT:

The Company has followed all relevant Indian Accounting Standards while preparing the financial statements.

CAUTIONARY STATEMENT:

Statement in this "Management Discussion and Analysis" describing the Companys objectives, projections, estimates, expectations or predictions 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 Companys operations include global and Indian demand and supply conditions, finished goods prices, input materials availability and prices, cyclical demand and pricing in the Companys principal markets, changes in Government regulations, tax regimes, economic developments within India and the countries within which the Company conducts business and other factors such as litigation and labour negotiations. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent development, information or events or otherwise.