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Shiva Cement Ltd Management Discussions

48.97
(-1.35%)
Jul 12, 2024|03:51:00 PM

Shiva Cement Ltd Share Price Management Discussions

1. Company Status and Performance

The Company was incorporated in the year 1985 and its first commercial production commenced in 1986. The manufacturing facility is located at a strategic location in Odisha, with raw material and ready markets in the vicinity. It>s natural marketing territory is Odisha, West Bengal, Jharkhand & Bihar. These states are historically in cement supply deficit, due to poor availability of limestone reserve. The Company also boasts of captive limestone mines with surplus reserve to ensure uninterrupted availability of quality raw material. The state of the art infrastructure facility coupled with surplus core equipment capacity provides SCL with the potential to expand.

2. Outlook & Future Prospects Global Industry

I n early 2022, the global economys steady growth, recovering from the pandemic, was affected by the Russia-Ukraine conflict, surging inflation, and supply chain delays. Inflation rose due to substantial pandemic stimulus, while central banks aimed to curb it by reducing excess liquidity, compounded by supply chain issues worsened by Russian sanctions and Chinas COVID-19 measures. This led to significant inflation spikes, mainly in advanced economies, driven by energy and commodity prices. Major central banks rapid interest rate hikes, coupled with weakening demand and investment sentiment, curtailed economic growth. Persistent core inflation, excluding energy and food, reflected energy price pass-through, strained supply chains, and tight labor markets. Global GDP grew 3.4% in 2022, down from 5.9% in 2021. Central banks assertive tightening started affecting demand, strengthening the US dollar due to reduced liquidity and its ‘safe haven status. Chinas ‘Zero COVID policy dented local and global demand, keeping supply pressure and inflation high. However, waning global demand led to easing commodity prices in Q3. Chinas early 2022 reopening spurred global economic rebound and commodity price recovery.

Outlook

In the coming months, economic trajectories hinge on inflation, central bank actions, Chinas recovery, and the Russia-Ukraine conflict in 2023. Despite eased headline inflation, core inflation persists. IMF predicts global inflation to decrease to 6.6% in 2023, yet surpass pre- pandemic levels. Central banks cautious rate hikes are expected as global GDP growth is estimated at 2.8% in 2023, driven by India, China, and developing economies, while advanced economies like the US and Eurozone face uncertain outlooks.

Indian Economy

The Indian economy exhibited resilience in the face of challenges, sustaining a growth trajectory amidst global volatility and high inflation. FY 2022-23 saw 7.2% growth driven by private consumption, manufacturing, and service sectors recovery.

Inflation, initially exceeding RBIs range, eased as the central bank hiked rates by 250 basis points. Despite conflict-induced growth revisions, manufacturing and services thrived, supported by Indias potential as a manufacturing hub. Exports and imports stayed stable, aided by service exports and capital inflows. The governments ‘Atmanirbhar vision emphasised incentives and policies. The Union Budget 2023-24 allocated 3.3% of GDP for infrastructure and 2.4 trillion for railways. The Production Linked Incentive Scheme aimed to reduce import dependence, reflecting Indias ongoing economic support.

Outlook

Indias economy stands resilient amid global deceleration, projected to grow 6.5% in FY 2023-24. Supported by domestic policies, easing inflation, and robust consumption, the governments investment-driven growth strategy focuses on fiscal consolidation and transparent infrastructure spending. Rural recovery, strong real estate, auto, and renewables sectors contribute optimism. Consumer and business confidence persist, while cooling inflation and RBIs pause on rate hikes are positives. Despite global slowdown risks, India maintains its high-growth trajectory, though monitoring El Ninos impact on monsoons and rural demand is crucial.

Cement Industry

India ranks as the worlds second-largest cement producer, commanding over 7% of global installed capacity. Cement output surged by 7.6% in FY 2023, reaching 368 million tonnes due to robust housing and infrastructure demand. Major cement consumption arises from housing, followed by infrastructure, and commercial/industrial building projects.

Outlook

The Indian government prioritises infrastructure for economic growth and smart cities, aiming to boost construction and cement demand. Railways and handling facilities expansion will cut transportation costs. Untapped markets in eastern India and potential for cement exports to Middle East, Africa, and developing nations are envisioned. Coastal cement plants hold export advantage. Indias cement capacity may reach 550 MT by 2025. Foreign players are drawn by profit margins and steady demand.

Opportunities:

Driven by strong optimism for the India story, the cement sector in India is poised for strong growth. At Shiva Cement, we are aligned with the opportunities and accordingly ramping up our capacities, expanding our presence, driving efficiencies and enhancing the sustainability quotient in our operation.

The outlook for cement sectors is favourable on the back of higher growth opportunities in the housing and infrastructure segment. Government in the Union Budget 2023-24 has allocated $11.4 billion for the creation of safe housing (rural and urban), sanitation and increasing road connectivity

3. Review of financial & Operational Performance

3.1 Highlights of FY 2022-23

During the year, the company has commissioned the new clinkerisation facility under ongoing expansion projects at kutra plant on 20.01.2023. As on 31.03.2023, the plant is under stabilisation/ trial run phase.

3.2 Way Forward

• The Project for setting up of 8.9 MW waste heat recovery power plant on the existing leased land is in progress and would be operationalise during FY 2023-24.

• Working permission from DGMS has been obtained. Surface right has been applied to start mining work in newly allotted Khatkurbahal North Block mining lease. The mine will be operationalised in FY 2023-24.

4. Financial Performance: 4.1 Highlights of FY 2022-23

Particulars FY 2022-23 FY 2021-22 Change
Gross Turnover - 346.55
Operating EBIDTA (1,310.30) (801.72) 63%
Depreciation & amortisation 5898.63 705.55 736%
Finance cost 1,285.30 879.26 46%
Loss before exceptional items (10,864.20) (3,451.75) 215%
PAT (8,047.03) (2,551.91) 215%
Trial run operation summary:
Particulars FY 2022-23 FY 2021-22 Change
Revenue from trial run operation 4,763.94 -
Total trial run expenses 6,002.00 -
Net Trial run expense transfer to CWIP 1,238.06 -

Since the plant is under trial run phase from 20.01.2023, the expenditure on account of trial run operation for C 6,002.00 lakhs has been adjusted with the revenue generated from trial run operation for C 4,763.94 lakhs. The net trial run expenditure for C 1,238.06 lakhs has been transferred to CWIP during the year.

The Companys operating EBIDTA is C (-) 1,310.30 lakhs as against C (-) 801.72 lakhs in FY 2021-22, reporting an increase in loss by 63% on Y-o-Y basis. The increase in loss is mainly on account of unabsorbed fixed cost incurred prior to the trial run operation without having any production volume.

4.2 Other Income

Other Income for the year is C 347.38 lakhs as compared to C 380.49 lakhs in FY 2021-22. The reduction primarily is on account of reduction in scrap sales and write back of provisions amounting to C 20.53 lakhs. Further there is a reduction in interest on bank deposits & others amounting C 11.82 lakhs in current year due to maturity of Term deposits.

4.3 Material Cost

The Companys expenditure on raw material consumption for FY 2022-23 has been reduced to C 31.57 lakhs from C 100.87 lakhs in FY 2021-22. The decrease is primarily on account of lower revenue production volume.

4.4 Employee benefits expense

Employee benefits expense decreased by 4% to C 265.31 lakhs from C 274.87 lakhs in FY 2021-22. The decrease is primarily due to use of manpower in trial run operation.

4.5 Power and fuel cost

Power and fuel cost has been reduced by 34% to C 212.54 lakhs from C 319.83 lakhs in FY 2021-22. The decrease in power and fuel cost is mainly due to power cost absorption in trial run operation.

4.6 Loss on Asset Write-off

The loss on asset write off has been increased by 103% to C 2,717.35 lakhs from C 1340.72 lakhs in FY 2021-22 is on account of dismantling of civil and mechanical structures in the plant in order to utilise the space for project expansion.

4.7 Other expenses

Other expenses have increased by 33% to C 785.29 lakhs from C 588.30 lakhs in FY 2021-22. The increase is primarily on account of increase in certain unabsorbed fixed costs charged under revenue.

4.8 Finance cost

The Companys finance cost increased by 46% to C 1285.30 lakhs from C 879.26 lakhs in FY 2021-22. The increase mainly due to charging unwinding of interest on financial instrument for C 337.80 lakhs and increase of unsecured loan amount resulting increase in interest amounting to C 153 lakhs.

4.9 Depreciation and amortization expenses

Depreciation and amortization expenses has been increased mainly due to impairment of certain existing assets which could not be reused or relocated amounting to C 5,321.32 lakhs has been charged to profit and loss account during the year.

4.10 Non-current assets:

Rs lakhs

Particulars 31.03.2023 31.03.2022 Change
Other non-current assets 14,220.30 13,805.67 3%

The increase is mainly on account of payment of upfront fee on mining lease and security deposits and compensated by reduction in advance payments to project suppliers.

4.11 Inventories:

Rs lakhs

Particulars 31.03.2023 31.03.2022 Change
Raw materials 83.16 49.86 67%
Semi-finished goods 907.27 922.84 -2%
Finished goods-Trial run Operation 1,006.15 -
Stores and spares 195.71 83.48 134%
Fuel 1,035.66 77.37 1,239%
3,227.92 1,133.55 185%

Raw Material inventory increased mainly due to stocking of limestone for uninterrupted future supply.

Increase of finished/semi finished inventory is on account of trial run operation which is not there in last year.

The increase in stores and spares on account procurement of materials to be used for plant maintenance. The increase of Fuel is on account of procurement of coal and HSD for maintaining stock for clinker production.

4.12 Trade receivables:

Rs lakhs

Particulars 31.03.2023 31.03.2022 Change
Trade receivables 799.24 2.50 796.74

The increase in trade receivable is mainly on account of receivables out of trial run clinker sale which is not due. In corresponding year the receivable was very low as there was no sales in that year.

4.1 Non-Current Liabilities:

Particulars 31.03.2023 31.03.2022 Change
Borrowings 1,14,756.03 80,176.11 34,579.89

The increase is on account of increase in term loan from bank for C 30,132.23 & balance unsecured long term loan for C 4,447.66 received from holding company.

4.14 Current Liabilities:

Rs lakhs

Particulars 31.03.2023 31.03.2022 Change
Borrowings 14,175.09 - 14,175.09

Increase in current unsecured borrowing is on account of loan taken from holding company for plant operation as well as plant expansion work disclosed under current liabilities and is due for payment within 12 months from 31.03.2023.

Rs lakhs

Particulars 31.03.2023 31.03.2022 Change
Other financial liabilities 11,371.72 12,057.24 -685.52

The decrease mainly on account of decrease in payable to project vendors.

4.15 Trade Payable

Rs lakhs

Particulars 31.03.2023 31.03.2022 Change
Trade Payables 5,073.93 509.69 4,564.24

The increase in Trade payable is on account of purchase of Raw material, fuel , inward & outward transportation service and other operational expenses incurred for trial run operation and further increase in payable on account of stores purchase for maintaining stores inventory to be used in plant maintenance.

Rs lakhs

Particulars 31.03.2023 31.03.2022 Change
Other current liabilities 485.72 321.04 164.68

The increase in other current liabilities is on account of payable of statutory dues accrued as on 31.03.2023.

4.16 Capital employed

Total capital employed including has increased to C 1,21,098.52 lakhs from C 75,903.99 lakhs in FY 2021-22. Average return on capital employed is (-ve) 0.08 % vis-a-vis C (-ve) 0.03 % in 2021-22

4.17 Own Funds

Total equity has been reduced to (-ve) C 7,832.59 lakhs vis-a-vis (-ve) C 4,272.13 lakhs in 2021-22.

4.18 Other key financial indicators

SL No Particulars Ratios For the year ended Variance (%) Change in ratio in excess of 25% compared to preceding year
31.03.2023 31.03.2022
1 Current Ratio (times) 0.63 0.79 -19.21%
2 Net Debt Equity Ratio (times) -16.46 -18.77 -12.29% Debt has increased due to availment of fresh term loan for project activity and erosion of equity is due to additional loss on suspension of operation.
3 Debt service coverage ratio (times) -0.06 -0.76 -91.70% Primarily due to operating loss in both the year
4 Return on Equity (%age) 81% 85% -4.74% Increase in loss during the year due to temporary suspension of operation
5 Inventory Turnover ratio (Days) - 1.60 -100.00% Nil as there is no operational sales occurred during the year
6 Trade Receivable Turnover ratio (Days) - 4.68 -100.00% Nil as there is no operational sales occurred during the year
7 Trade Payable turnover ratio (Days) - 2.92 -100.00% Nil as there is no operational sales occurred during the year
8 Net Capital Turnover ratio (times) - -0.12 -100.00% Revenue is Nil as the company yet to generate operational revenue from its new plant.
9 Net Profit Ratio (%age) -7.33 -3.01 143.40% Loss has been increased as the company is yet to generate operational revenue from its new plant.

*Capital employed is negative, hence #NA **Operating EBIDTA is negative, hence #NA

5. Risk and areas of Concern Risk Management

The Company has a Risk Management Policy which is approved by the Board of Directors. The Policy is tailored to appropriately appraise the state of the Companys business risks. Management is responsible for identification, assessment, management & reporting risks effectively and leveraging business opportunities.

The Company recognizes that the emerging and identified risks need to be managed and mitigated to protect its shareholders and other stakeholders interest, achieve its business objective and enable sustainable growth. The Company has deployed bottom up and top down approach to drive Enterprise Risk Management (ERM).

The Board oversees the Enterprise Risk Management framework to ensure:

• Intended risks are taken prudently so as to plan for the best and be prepared for the worst

• Execution of decided strategies and plan with focus on action

• Unintended risks such as performance, incident, process and transaction risks are avoided, mitigated, transferred (as in insurance) or shared (like through sub-contracting). The probability or impact thereof is reduced through tactical and executive management, policies, processes, inbuilt systems controls, MIS and internal audit reviews, among others.

Further, major risks have been identified by the Company and its mitigation process/measures have been formulated in the areas such as business, production, raw material, infrastructure & logistics, operational, financial, environment, safety and statutory compliance. These process/ measures are reviewed and updated on a periodical basis.

The Risk Management Committee constituted comprises of the 4 members namely: Mr. Jagdish Toshniwal, Independent Director(Chairman), Mr Sanjay Sharma, Independent Director, Mr. Narinder Singh Kahlon, Non-Executive Director & Mr. Manoj Kumar Rustagi, Whole-Time Director.

At Shiva Cement, we have identified the following key risks and deployed mitigation strategies for each of them:

Sr. No. Risk Domain Response Strategies
1 Demand supply dynamics Company de-risks by:
The Governments thrust on infrastructure development through a capex outlay of C 10 lakh crore, as announced in the Union Budget 2023.
For regional air connectivity, a budget outlay of C 3,100 crore will be allocated to build 50 additional airports, helipads, water aerodromes, and advanced landing fields.
Investment of C 75,000 crore, including C 15,000 crore from private sources, for one hundred critical transport infrastructure projects, for last and first mile connectivity for ports, coal, steel, fertilizer, and food grains sectors.
• Widening market base and focusing on quality and customer relationship.
• Better market intelligence with inputs from marketing team.
• Continued focus on cost.
2 Raw material Company de-risk by -
• Tracking Commodity markets
• Options to broad base sourcing
• Relationship management for regular supply & timely signals about future
• Tracking govt. policies/developments in sourcing countries
3 Infrastructure & Logistics It is de-risk by
• Ensuring the logistic cost is optimum and by adopting the most economical mode of transport.
• Additional railway siding for enhanced volumes under construction
• Overhead belt conveyor for transportation of limestone is planned
• Appropriate budget allocation and resource prioritization to meet the demand of present and future infrastructure set up.
4 Environment, Health & safety Company de-risk by:
• Monthly apex safety meetings are held for review of safety aspect, fatal accidents / near miss accidents, if any.
• Closely monitoring compliance with environmental norms.
• Company regularly tracks changes in technology & future norms
• Safety has been added as a Mandatory Key Result Area (KRA) for employees.
• Coordinating Safety training, mock drill, best practices, safety audit.
• Establishing fire prevention and handling processes.
• Strong Security arrangements like security check-post, entry pass / identity cards, access control system, CCTVs at critical locations.
• Providing the medical facilities & medi-claim policy cover for employees & their families.
• Safety Walk down with all HODs & Evaluation of Road Safety through reward and recognition
• Pre-Qualification assessment and CARES (Contractor Assessment and Rating for Excellence in Safety) (Validation) for contractors is being done.
• Annual health check up of all employees
5. Finance Company de-risks by
• The project loans are linked to 1 year MCLR rate with reset every year.
• Tracking and monitoring external events that has impact on financial performance.
• Regularly reviewing financing, pricing and procurement policy considering exposure, emerging scenario, track record, etc.
• Effective monitoring of internal performance & cash flows through internal meetings.

6. Internal Controls, Audit and Internal Financial Controls Overview

A robust system of internal controls, commensurate with the size and nature of its business, forms an integral part of the Companys corporate governance policies.

Internal Control

The Company has a proper and adequate system of internal controls, commensurate with the size and nature of its business. Internal control systems are integral to corporate governance. Some significant features of the internal control systems are:

• Adequate documentation of policies, guidelines, authorities and approval procedures covering all the important functions of the Company.

• Ensuring complete compliance with laws, regulations, standards and internal procedures and systems.

• De-risking the Companys assets/ resources and protecting them from any loss.

• Ensuring the integrity of the accounting system and a proper and authorised recording and reporting of all transactions.

• Preparation and monitoring of annual budgets.

• Ensuring a reliability of all financial and operational information. Audit Committee, a sub-committee of the Board of Directors, comprising of Independent Directors. The Audit Committee regularly reviews audit plans, significant audit findings, adequacy of internal controls, compliance with Accounting Standards, etc.

• The internal control systems and procedures are designed to assist in the identification and management of risks, the procedure-led verification of all compliances as well as an enhanced control consciousness.

Internal Audit

Shiva Cement Limited has an internal audit function that inculcates global best standards and practices of international measures into the Indian operations. The Company has a strong internal audit department reporting to the Audit Committee comprising Independent Directors who are experts in their fields. The Company extensively practices delegation of authority across its team, which creates effective checks and balances within the system to arrest all possible gaps. The internal audit team has access to all information in the organization. The scope and authority of the Internal Audit function is defined in the Internal Audit Charter. To maintain its objectivity and independence, the Internal Audit function reports to the Chairman of the Audit Committee.

The Internal Audit Department prepares a riskbased audit plan, which is approved by the Audit Committee. The frequency of the audit is decided by risk ratings of areas/functions. The audit plan is carried out by the internal team and reviewed periodically to include areas that have assumed significant importance in line with the emerging industry trend and the aggressive growth of the Company. In addition, the Audit Committee also places reliance on internal feedback and other external events for inclusion into the audit plan. Based on the report of internal audit function, process owners undertake corrective action(s) in their respective area(s) and thereby strengthen the controls. Significant audit observations and corrective action(s) thereon are presented to the Audit Committee. Also, the Audit Committee at frequent intervals has independent sessions with the statutory auditor and the management to discuss the adequacy and effectiveness of internal financial controls.

Internal financial controls

As per Section 134(5)(e) of the Companies Act, 2013, the Directors have an overall responsibility for ensuring that the Company has implemented a robust system and framework of internal financial controls. This provides the Directors with reasonable assurance regarding the adequacy and operating effectiveness of controls with regards to reporting, operational and compliance risks. The Company has devised appropriate systems and framework, including proper delegation of authority, policies and procedures; effective IT systems aligned to business requirements; risk-based internal audits; risk management framework and a whistle blower mechanism. The Company had already developed and implemented a framework for ensuring internal controls over financial reporting. This framework includes entity-level policies, processes and Standard Operating Procedures (SOP). The entity-level policies include antifraud policies (such as code of conduct, confidentiality and whistle blower policy) and other polices (such as organisation structure, insider trading policy, HR policy, etc.). The Company has also prepared

SOP for each of its processes. During the year, controls were tested and no reportable material weakness in design and effectiveness was observed.

7. Material Developments in Human Resources

The role of Human Resources has evolved over a period of years. The Company is focused on having least manpower at its location and has been continuously reducing the workforce through multitasking, automation etc. Our employees are imperative in undertaking all of our business operations and our human resource policies focus on attracting, developing and retaining talent. As on March 31, 2023, the Company had 141 permanent employees. In addition, the Company also engages with third party personnel companies for the supply of contract labourers to facilitate operations at the manufacturing facility. The Company provides training to all employees for manufacturing operations, including machine utilization, operations flow, quality management and work safety.

8. Forward Looking and Cautionary Statements

The Directors Report and the Management Discussion and Analysis are describing the Companys objectives, expectations or predictions, which involve a number of risks and uncertainties. Actual results may differ materially from those expressed in the statement. Important risks and uncertainties that could influence the Companys operations include: domestic demand and supply, conditions affecting selling prices, new capacity additions, availability of critical materials and their cost, changes in government policies and tax laws, economic development of the country, and other factors which are material to the business operations of the Company.

This MDA should not be considered as a recommendation that any investor should subscribe for or purchase any of the Companys shares. The Company makes no representation or warranty, express or implied, as to and does not accept any responsibility or liability with respect to the fairness, accuracy, completeness or correctness of any information or opinions contained herein. Investors are advised to exercise due care and caution while interpreting these statements.

For and on behalf of the Board
Shiva Cement Limited
Manoj Kumar Rustagi Rajendra Prasad Gupta
Date: 16.05.2023 Whole-Time Director Director
Place: Kutra, Sundargarh DIN:07742914 DIN: 01325989

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