Shah Alloys Ltd Management Discussions.

INDUSTRY STRUCTURE AND DEVELOPMENTS:

FY 2016-17 was a year of mixed developments. India is currently the worlds 3rd largest producer of crude steel against its 8th position in 2003 and is expected to become the 2nd largest producer of crude steel in the world soon. The country is also the 3rd largest consumer of finished steel in the world preceded by China and USA. Capacity for domestic crude steel production expanded from 90.87 MTPA in 2011-12 to 121.97 MTPA in 2015-16, a CAGR growth of 9% during this five years period. The Steel Sector contributes to over 2% of countrys GDP and employs around 20 lakhs employed in steel/allied sector. Pig iron production for sale was 7.072 MT after accounting for own consumption/ IPT. The Private Sector accounted for 94% of the same, the rest 6% being share of the public sector.

India continued to remain a bright spot with growth remaining strong amidst global headwinds and major policy reforms in the country. The economy grew at 7.1% in FY 2017, dragged down by the effects of weak private investment and demonetization. However, World Bank predicts that growth will accelerate progressively in the coming years. In PPP terms, India is the third largest economy in the world with a GDP of USD 9.49 trillion. FY 2017 was marked by bold policy moves on the part of the government. Passage of the constitutional amendment to introduce GST will help avoid cascading tax burden, ease of doing business and create a pan-India market place. It will also improve formalisation of the shadow economy, improve tax compliance as well as tax base and boost growth in the long run. The sudden and unexpected measure of demonetisation seemingly affected growth in the later part of the year. But it has the potential to boost tax compliance, improve formal system liquidity and economic growth in the long run. Governments initiatives on direct benefit transfer will also reduce leakages in the system and support efficient development of the targeted sectors. The budget laid considerable emphasis on infrastructure growth to accelerate economic and social activities.

OPPORTUNITIES & THREATS:

Opportunities:

The Indian economy has showed clear signs of recovery in FY 2016-17. The Govt. of India has centralized focus on ease of doing business. In this endeavor it has done away with various compliances in business and taking various reforms like the biggest historical tax reform in Indirect Taxation. The GST would be game changer and promises a lot to the Indian economy. It is expected to boost Indian GDP growth by 1.5 – 2 %. The "Make in India" plan alongwith scheme of entry of Private Sector companies into various sectors will give a major boost to the Indian Industry. The Indian mines are under process of market development and would like to see some positive signs of demands raised for product development. The borrowing cost may not see rise this year owing to liquidity availability with bankers due to demonetization. Due to Governments continued efforts, India has maintained the "Ease of Doing Business Rank" at 130th place in 2017 as compared to 131st in 2016 as per the World Bank. Further Indian Government has set an aggressive target to achieve 90th rank in Ease of Doing Business in 2018.

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 threat of low-priced imports are here to stay, the world capacity utilisation 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:

Financial year 2016-17 has been a challenging year for Indian Steel Industry with continued low profitability due to sluggish demand, steel imports and highly leveraged balance sheets. Steel industry derives its demand from other important sectors like infrastructure, aviation, engineering, construction, automobile, pipes and tubes etc. With the Indian economy poised for its next wave of growth under the reforms being unleashed during recent past, there lies tremendous opportunity for the Indian steel industry to prosper and grow exponentially. The present governments ‘Make in India campaign is aimed at transforming the country into a global manufacturing hub and creating millions of jobs for those who will join the workforce in the coming years. Besides ‘Make in India, present governments flagship programmes, such as the ‘Smart Cities Mission and the ‘Housing for All by 2022 will boost the industry

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 & 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 was61.172 MT. and sale was 1241.81 MT. Production of plate & coil during the year was 90582.68 MT and sales was 83064.75 MT. Likewise production of Slab, billets etc. was 20532.31 MT and sales was 15390.59 MT. Total production of all items taken together during the year increased from 91754.79 MT to 1,11,176.16 MT whereas total sales increased from 90,485.724 MT to 99,697.15 MT.

During the year under review Total revenue from Operation and from other operating income increased from Rs. 262.37 crores to Rs. 312.28 crores as compared to previous year. Company has registered a profit of Rs. 42.36 in comparison to the profit of Rs. 124.38 crores during previous year. Profit during the year under review is shown on account of settlement of dues with ARCs resulting reversal of Interest and waiver of principal debt.

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 acordial relationship with its employees. Its emphasis on safe work practices and productivity improvement is unrelenting. Your Company has more than 360 employees on its rolls as on 31stMarch, 2017.

DISCLOSURE OF ACCOUNTING TREATMENT:

The Company has followed all relevant 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.