Shah Alloys Ltd Management Discussions.

INDUSTRY STRUCTURE AND DEVELOPMENTS:

World Economic Environment

After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half of last year, reflecting a confluence of factors affecting major economies. Chinas growth declined following a combination of needed regulatory tightening to rein in shadow banking and an increase in trade tensions with the United States. The euro area economy lost more momentum than expected as consumer and business confidence weakened and automobile production in Germany was disrupted by the introduction of new emission standards; investment dropped in Italy as sovereign spreads widened; and external demand, especially from emerging Asia, softened. Elsewhere, natural disasters hurt activity in Japan. Trade tensions increasingly took a toll on business confidence and, so, financial market sentiment worsened, with financial conditions tightened for vulnerable emerging markets in the mid of 2018 and then in advanced economies later in the year, weighing on global demand.

Following a broad-based upswing in cyclical growth that lasted nearly two years, the global economic expansion decelerated in the second half of 2018. Activity softened amid an increase in trade tensions and tariff hikes between the United States and China, a decline in business confidence, a tightening of financial conditions, and higher policy uncertainty across many economies. Against this global backdrop, a combination of country- and sector-specific factors further reduced momentum. After peaking at close to 4 percent in 2017, global growth remained strong, at 3.8 percent in the first half of 2018, but dropped to 3.2 percent in the second half of the year.

World Steel Scenario

Global crude steel production reached 1,808.6 million tonnes (Mt) for the year 2018, up by 4.6% compared to 2017. Crude steel production increased in all regions in 2018 except in the EU, which saw a 0.3% contraction.

Asia produced 1,271.1 Mt of crude steel in 2018, an increase of 5.6% compared to 2017. Chinas crude steel production in 2018 reached 928.3 Mt, up by 6.6% on 2017. Chinas share of global crude steel production increased from 50.3% in 2017 to 51.3% in 2018. Indias crude steel production for 2018 was 106.5 Mt, up by 4.9% on 2017, meaning India has replaced Japan as the worlds second largest steel producing country. Japan produced 104.3 Mt in 2018, down 0.3% compared to 2017. South Korea produced 72.5 Mt of crude steel in 2018, an increase of 2.0% compared to 2017.

The EU produced 168.1 Mt of crude steel in 2018, a decrease of 0.3% compared to 2017. Germany produced 42.4 Mt of crude steel in 2018, a decrease of 2.0% on 2017. Italy produced 24.5 Mt in 2018, up by 1.7% on 2017. France produced 15.4 Mt of crude steel, a decrease of 0.7% on 2017. Spain produced 14.3 Mt of crude steel in 2018, a decrease of 0.1% on 2017.

Crude steel production in North America was 120.5 Mt in 2018, 4.1% higher than in 2017. The US produced 86.7 Mt of crude steel, up by 6.2% on 2017. The CIS produced 101.3 Mt, an increase of 0.3%. Russia produced 71.7 Mt of crude steel in 2018, up by 0.3% on 2017. Ukraine produced 21.1 Mt of crude steel in 2018, a decrease of -1.1% compared to 2017.

Annual crude steel production for South America was 44.3 Mt in 2018, an increase of 1.3% on 2017. Brazil produced 34.7 Mt in 2018, up by 1.1% compared to 2017. The Middle East produced 38.5 Mt of crude steel in 2018, an increase of 11.7% on 2017. Iran produced 25.0 Mt in 2018, up 17.7% on 2017. Turkeys crude steel production for 2018 was 37.3 Mt, down by 0.6% on 2017.

Indian Steel Scenario

India was the worlds second-largest steel producer with production standing at 106.5 MT in 2018. The growth in the Indian steel sector has been driven by domestic availability of raw materials such as iron ore and cost-effective labour. Consequently, the steel sector has been a major contributor to Indias manufacturing output. The Indian steel industry is very modern with state-of-the-art steel mills. It has always strived for continuous modernisation and up-gradation of older plants and higher energy efficiency levels.

Indias finished steel consumption grew at a CAGR of 5.69 per cent during FY08-FY18 to reach 90.68 MT. Indias crude steel and finished steel production increased to 103.13 MT and 104.98 MT in 2017-18, respectively. In 2017-18, the countrys finished steel exports increased 17 per cent year-on-year to 9.62 million tonnes (MT), as compared to 8.24 MT in 2016-17. Exports and imports of finished steel stood at 0.72 MT and 1.12 MT, respectively, in FY20 (up to May).

According to the data released by Department for Promotion of Industry and Internal Trade (DPIIT), the Indian metallurgical industries attracted Foreign Direct Investments (FDI) to the tune of US$ 11.30 billion in the period April 2000-March 2019.

Some of the other recent government initiatives in this sector are as follows:

• An export duty of 30 per cent has been levied on iron oreA (lumps and fines) to ensure supply to domestic steel industry.

• 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 envisages 300 million tonnes (MT) steel-making capacity and 160 kgs per capita steel consumption by 2030-31.

• The Ministry of Steel is facilitating setting up of an industry driven Steel Research and Technology Mission of India (SRTMI) in association with the public and private sector steel companies to spearhead research and development activities in the iron and steel industry at an initial corpus of Rs 200 crore (US$ 30 million).

• The Government of India raised import duty on most steel items twice, each time by 2.5 per cent and imposed measures including anti-dumping and safeguard duties on iron and steel items.

OPPORTUNITIES THREATS:

Opportunities:

The interim Union Budget for 2019-20 focused on supporting the needy farmers, economically less privileged, workers in the unorganised sector and salaried employees, while continuing the Government of Indias push towards better physical and social infrastructure.

Total expenditure for 2019-20 is budgeted at Rs 2,784,200 crore (US$ 391.53 billion), an increase of 13.30 per cent from 2018-19.

Numerous foreign companies are setting up their facilities in India on account of various government initiatives like Make in India and Digital India. The Government of Indian launched Make in India initiative with an aim to boost the manufacturing sector of Indian economy, to increase the purchasing power of an average Indian consumer, which would further boost demand, and hence spur development, in addition to benefiting investors. The Government of India, under the Make in India initiative, is trying to give boost to the contribution made by the manufacturing sector and aims to take it up to 25 per cent of the GDP from the current 17 per cent. Besides, the Government has also come up with Digital India initiative, which focuses on three core components: creation of digital infrastructure, delivering services digitally and to increase the digital literacy.

Indias gross domestic product (GDP) is expected to reach US$ 6 trillion by FY 27 and achieve upper-middle income status on the back of digitisation, globalisation, favourable demographics, and reforms.

Indias revenue receipts are estimated to touch Rs 28-30 trillion (US$ 385-412 billion) by 2020, owing to Government of Indias measures to strengthen infrastructure and reforms like demonetisation and Goods and Services Tax (GST).

India is expected to be the third largest consumer economy as its consumption may triple to US$ 4 trillion by 2025, owing to shift in consumer behaviour and expenditure pattern, according to a Boston Consulting Group (BCG) report; and is estimated to surpass USA to become the second largest economy in terms of purchasing power parity (PPP) by the year 2040, according to a report by Pricewaterhouse Coopers.

Threats:

The glut in the global steel market, which led to an influx of cheap imports into India and a series of steps by the government to protect the domestic steel industry, might not end anytime soon. In what indicates that threats of low-priced imports are here to stay, the world capacity utilization ratio of the alloy climbed upwards in the current year. So only structural reforms that will help cut costs and improve productivity could enable the domestic steelmakers to acquire competitiveness in the domestic and global markets. Rising cost of raw material, fuel, power prices coupled with unforeseen general macro economic factors may affect the industry adversely. Your Company may face unfavorable foreign exchange rate fluctuations this year as well as increase in raw material prices thus putting a pressure on margins.

OUTLOOK:

While the single-party majority mandate has set the foundation for a stable central government for another five years, significant headwinds potentially lie ahead. Domestic risks, such as slowing demand and poor health of the banking sector, together with external risks from uncertainties around global trade, will likely impact business investment and credit growth, and thereby, growth.

In the coming months, monsoon will play a crucial role in calibrating monetary policy. This years monsoon is predicted to be lower than average, which will likely have implications for both inflation and growth. Besides, if global uncertainties intensify, there could be pressure on the currency and trade balance.

Over the past five years, the government took myriad steps and implemented several groundbreaking reforms, such as implementing the landmark tax reform, allowing foreign investment in restricted sectors, and reforming the bankruptcy law. By presenting a visionary budget with mid- to long-term benefits, the finance minister committed to continuity of previous policies. However, the budget lacked details on implementation, and all eyes will now be on the specific steps the government takes to execute its proposals.

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 and flats during the year was 12509 MT. and sale was 11580 MT. Production of plate S coil during the year was 115033 MT and sales was 111229 MT. Likewise production of Slab, billets etc. was 2776 MT and sales was 1460 MT. Total production of all items taken together during the year increased from 123721 MT to 130318 MT whereas total sales decreased from 137049 MT to 124269 MT.

During the year under review Total revenue from Operations and from other operating income increased from Rs. 480.53 crores in the previous year to Rs. 576.66 crores. Company has registered a profit of Rs. 0.75 crores in comparison to the profit of Rs. 42.09 crores during previous year.

Further, for the Financial Year 2019-20 the company is also focusing on manufacturing and sales of Stainless Steel which is having huge demand in both domestic as well as International markets. Since the company is already having experience in Stainless Steel segment marketing and sales of the same will not be an issue for the company.

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, 2019.

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.