Siddhartha Tubes Ltd Management Discussions

MACROECONOMIC SCENARIO AND AN OVERVIEW OF THE STEEL SECTOR

The Indian economy, supported by declining oil prices, increased FDI inflows and pro-growth reforms introduced by the new Government, saw a moderate improvement in its macroeconomic parameters. The Indian economic growth improved to 7.3% in FY14-15 as compared to 6.9% in FY13-14. In fact the growth is a shade below 7.4% recorded by China who lead the pack in CY14. Moreover, the IMF in its recent World Economic Outlook update, expects the Indian economy to overtake China in 2015 and 2016 with an improved growth rate of 7.5% in each year, while expecting the Chinese growth to fall to 6.8% and further to 6.3% in these years respectively (due to its structural reforms agenda and fixed assets investments slow initiated by them). The world economy also remained slow, recording a growth of 3.4% in CY2014, with the IMF estimating the growth to get still lowered to 3.3% in 2015 and improving to 3.8% in 2016.

The Domestic Steel Industry, however, has been passing through one of its most challenging phases since FY15. India retained its position as the 4th largest producer and 3rd largest consumer of crude steel globally in CY14. Production of crude steel grew by about 8% to 86.5MnT, while consumption of steel stood at 76.36 MnT a growth of 3.1% over previous year. However, the Industry faced serious challenges from a surge in Imports (by 72%) into the Country, especially from countries like China, Korea, Japan & CIS Countries (Korea & Japan enjoying reduced import traffic under the Free Trade Agreements with India). In fact, amidst the Global glut, the first two months of the current year (April & May.15) have also seen Imports rising 55% to 1.67 MnT with shipments from Japan soaring 111% and from South Korea by 51%. The Chinese are also reported to be sitting on close to 150 MnT of unutilized capacity (compared to Indian annual steel capacity of 85 MnT) posing a serious threat to Indian manufacturers during the whole of FY16. Therefore, although the Countrys steel demand is expected to grow a healthy 6% to 7% in FY16, the Indian manufacturers are likely to get unfairly impacted by low quality and below cost steel dumping from abroad. How much of the demand will be captured by the domestic industry remains to be seen.

IMPACT ON THE COMPANY

Your Company, being an intermediate player of the Steel Industry, also gets impacted by the Global dumping of steel and declining prices. However, with the prices of inputs (essentially HR Coils- which is a back stream intermediate product in itself) also moving down correspondingly, the net contributions of the Company are not affected as much as for the Integrated Steel producers. Your Companys operations during the year, have suffered from low contributions as well as on account of continuing severe liquidity constraints thereby resulting in very low operating levels at its plants.

RISKS, CONCERNS & INTERNAL CONTROL SYSTEMS:

Your Company continues to have and follow adequate control systems for meeting its corporate objectives. The same is ensured by the Senior Management through a mix of periodic audits, reviews, MIS, Information Technology, Implementation of Standard Operating procedures, Delegation of powers etc. The Internal control systems also inter-alia include ensuring complete compliance with laws, regulations, standards and internal procedures, ensuring the integrity of accounting systems, preparation and monitoring of annual budgets, periodic meetings of various committees like audit committee, remuneration committee etc.

Likewise, your Company has in place an appropriate Risk Management policy as required under the listing agreement. The common risks inter-alia are regulatory risks, competition, financial risk, technology obsolescence, human resources risks, political risks, product pricing risk etc.The main concern for the Company, as members are aware, remains the Financial Risk, arising from most lenders of the Company exiting from the Company over the last few years. Your Company has, settled & repaid most of the lenders and is in the process of exiting the remaining lenders also in due course.

OPERATIONAL AND FINANCIAL PERFORMANCE

Summarized performances of the Tube and CRM Divisions were as follows:

Operational and Financial performance: