Simplex Castings Ltd Management Discussions.

Simplex Castings Limited (SCL) is premier manufacturing organisation in India with global business presence. SCL possess well equipped manufacturing facilities such as Cast Iron Foundry , and Heavy Engineering & Fabrication Plant. Each plant is associated with modern machining facilities and a central machine shop with several machine tools including large number of CNCs, EPC Division to take up Turn-Key Projects, Design wing with modern computer setup and aided tools. SCL is complete one stop shop for all engineering components manufacturing needs, castings, forging, fabrication, machining, assembly, equipment building, in-house testing, EPC division and Designing facility. SCL Units are situated in Bhilai, & Rajnandgaon, state of Chhattisgarh, the central part of India, most mineral rich & densely industrialized province in India. SCL is catering to various industrial sectors like Steel, Railways, Power, Mining , Cement, Sugar, Chemicals, Earthmovers, Machines Tools, Ship Building , Oil & Gas and Defense. Your Company believes in developing new products in line with changing technology and requirement of customer.

Simplex has been pioneer in its filed for several landmark activities:

• Pioneer to Export steel plant equipments to Russia.

• Pioneer to Enter into tech tie-up with Tyazhprom Export Russia for Turnkey Projects in India.

• Pioneer to bring advance Japanese Technology for Sinter Plant in India for SAIL - Bhilai Steel Plant for complete Sinter Plant -III, executed on Turnkey basis in consortium with Mitsui/Kawasaki & Hitachi Zosen of Japan.

• Pioneer to install on turnkey basis, Mini Blast Furnace of 350 Cubs. Mt for Southern Iron Steel Company at Salem (India) with Chinese Technology.

• Pioneer to Design, engineering and supply of equipment for hot rolling stackle mill, executed for Salem Steel Plant as per SMS/Germanys design.

• Pioneer in manufacturing undercarriage (bogie) for Railway Locomotives.

• Pioneer in manufacturing Sucker rod pumping units for Oil & Gas, for ONGC, India

ECONOMY OVERVIEW GLOBAL ECONOMY

The global economy grew by 2.9% in 2019, recording its weakest pace since the global financial crisis of 2008. The slowdown in the global economy was primarily due to rising trade barriers and associated uncertainty weighing down business sentiment and activity globally. These developments were magnified in some advanced economies and China, leading to a structural slowdown. Additionally, country-specific weakness in large emerging market and developing economies (EMEDs) such as Brazil, India, Mexico, and Russia added to the pressure.

Worsening macroeconomic stress related to tighter financial conditions in Argentina, geopolitical tensions in Iran, and social unrest in Venezuela, Libya, and Yemen continued to stress the global economy. Firms, globally, turned cautious on long-range spending and purchase of machinery and equipment due to a weakening and uncertain economic environment. Household demand for durable goods also weakened, despite a pick-up witnessed in the second quarter of 2019. This was particularly evident with automobiles, where regulatory changes, new emission standards, and the shift to ride-shares impacted sales in several countries.

The recent outbreak of Covid-19 has also added fuel to the current global slowdown.The pandemic is inflicting high and rising human costs worldwide and the necessary protection measures in the form of stimulus packages are severely impacting economic activity. The global economy is projected to contract sharply by -3% in 2020, much worse than during the 2008- 09 financial crisis. In a baseline scenario-- which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound—the global economy is projected to grow by 5.8 % in 2021 as economic activity normalizes, helped by policy support.

(Source: World Economic Outlook, April 2020)

INDIAN ECONOMY

Indian economy is emerging as an economic powerhouse among the developing countries and today it is the 5th largest economy in the world, in terms of GDP. The economy is estimated to have grown by around 4.2% in FY 2019-20, which is lower in comparison to the previous year. Despite this slowdown in the economy, the country has improved its ranking in World Banks Ease of Doing Business and stood at 63rd position in CY 2019 as compared to 142nd position in CY 2014. This improvement was backed by reforms introduced by the Government of India such as corporate tax rate cuts, ease in manufacturing policies to boost the Make in India campaign, infusion of funds in public sector banks, etc. With these initiatives, the PMI for the month of January 2020 rose to 55.3, taking it to an eight-year high.

However, the recent outbreak of Covid-19, which led to a country wide lockdown to curtail the spread of the virus, has posed a challenge and altered the outlook of the Indian economy and growth is likely to remain subdued in FY 2020-21. Other factors such as the credit crisis in the NBFC sector and demand- supply disruption are likely to aggravate this slowdown. Nevertheless, India and China appear to be the only two major economies likely to register growth while all other major economies are expected to contract. However, the Government of India and the Reserve Bank of India have been working in tandem to revive the economy and address the demand side contraction. Fiscal as well as monetary measures worth Rs 20 lakh crore have been introduced and are expected to counter this slowdown and will help the economy to grow in future. Looking ahead, the Indian economy is expected to grow by 7.4% by FY 202122

OUTLOOK

GLOBAL

Just as CY 2020 started on a good note with the US and China reaching phase-1 agreement and uncertainty around Brexit waning, the world was hit hard by the COVID-19 pandemic. The virus spread rapidly across the world, compelling governments to impose national lockdowns to break the chain of transmission, which brought economic activities to a near halt.

The International Monetary Fund (IMF) has warned that the coronavirus-induced downturn could snowball into a global recession, which could see the world economy record its steepest decline since the Great Depression of the 1930s. The impact is expected to be more pronounced in low income households, threatening to roll back the progress made in poverty alleviation in the past few decades. Towards this end, the IMF has called for strong multilateral cooperation on various fronts to help the world navigate through this crisis like no other. It has also provided blanket guidelines in terms of financial assistance, healthcare support, and economic policy.

The IMF estimates the global economy to contract by 4.9% in CY 2020. The recovery is expected to be gradual, with growth estimated at 5.4% in CY 2021, which reflects the disruptions to economic activity, policy countermeasures and commodity prices.

However, a few bright spots have emerged. Timely actions and significant stimulus measures have somewhat cushioned the blow. Several central banks have also adopted quantitative easing and scaled asset purchases to infuse liquidity. Oil prices have remained stable, and emerging market currencies have strengthened against the dollar, which point to stabilisation.

REGION-WISE GROWTH OUTLOOK ESTIMATES(%)

Country/Region 2018 2019 2020 (P) 2021 (P)
World 3.6 2.9 -4.9 5.4
AMEs 2.2 1.7 -8.0 4.8
EMEs 4.5 3.7 -3.0 5.9
ASEAN 5.3 4.9 -2.0 6.2
United States 2.9 2.3 -8.0 4.5
Euro Area 1.9 1.3 -10.2 6.3
China 6.7 6.1 1.0 8.2
Japan 0.3 0.7 -5.8 2.4
Russia 2.5 1.3 -6.5 4.1
India 6.1 4.2 -4.5 6.0

Source: International Monetary fund(IMF)

INDIA

The IMF estimates Indian GDP to contract by 4.5% in FY 2020-21. However, the economy is likely to rebound by 6.0% in FY 2021-22, supported by the synchronized fiscal and monetary policy stimulus.

INDUSTRY STRUCTURE & DEVELOPMENT

The steel industry has been one of the primary beneficiaries of Indias rapid economic growth over the past couple of decades. However, steel demand remained subdued in CY 2019, largely due to lower consumption from construction, auto, infrastructure, real estate, and manufacturing industries. Further, the slowdown in the governments infrastructure investments and credit tightness impacted demand and consequently weighed on pricing.

DEMAND

India became the second-largest consumer of finished steel products in the world, surpassing the US in CY 2019. While the governments thrust on infrastructure development provided a boost, it was largely offset by the continued weakness in the auto and real estate sectors. Finished steel consumption grew by 1.4% to 100.01 MnT during FY 2019-20, non-alloy steel accounting for 94% (94.06 MnT) and the rest being alloy steel (5.95 MnT). Within the nonalloy, non-flat segment, bars and rods consumption was up 9.6% y-o-y to 39.72 MnT, while the non-alloy flats were led by hot rolled coils (HRCs) which was 40.63 MnT, down by 2.7% during FY 2019-20.

Indias per capita steel consumption, which has a direct correlation with economic growth, grew at a CAGR of 4.12% to 68.9 kg between FY 2007-08 and FY 2017-18, driven by rapid growth in the industrial sector and robust infrastructure development (railways, roads and highways). However, compared with the global average of 208 kg, there exists a significant growth potential. Keeping this in mind, the National Steel Policy (NSP) was introduced in CY 2017 to increase per capita steel consumption to 160 kg by FY 2030-31. The NSP also set a target of achieving 300 MnT of production capacity, which translates into additional investments of Rs 10 lakh crore (US$ 156.08 billion).

PRODUCTION

According to the Joint Plant Committee, crude steel production declined by 1.5% y-o-y to 109.22 MnT in FY 2019-20, with a sharp contraction of 20% in March 2020 due to COVID-19 containment measures. Finished steel production grew 0.8% y-o-y to 102.06 MnT; non-alloy steel accounted for 96% (up from 93%), or 97.66 MnT, while alloy steel contributed the balance 4.4 MnT. In the non-alloy, nonflat finished steel segment, bars and rods grew by 3.6% y-o-y to 40.48 MnT, whereas in non-alloy flats, HRC grew by 2.6% y-o-y to 43.29 MnT

India remained a net exporter of finished steel during FY 2019-20, with exports of 8.36 MnT, up 31.4% y-o-y. Nonalloy HRC was the most exported product at 4.82 MnT, while bars and rods led the non-alloy, non-flat segment exports with 0.51 MnT. Meanwhile, India imported 6.77 MnT of finished steel, down 13.6% y-o-y, with non-alloy HRC accounting for 34% of the total imports. Imports from Korea accounted for 40% of the total imports.

Top 10 steel-producing countries:

RANK COUNTRY 2019 (MnT) 2018 (MnT) % CHANGE
1 China 996.3 920.0 8.3
2 India 111.2 109.3 1.8
3 Japan 99.3 104.3 -4.8
4 United States 87.9 86.6 1.5
5 South Korea 71.4 72.5 -1.40
6 Russia 71.6 72.0 -0.7
7 Germany 39.7 42.4 -6.5
8 Turkey 33.7 37.3 -9.6
9 Brazil 32.2 35.40 -9.00
10 Iran 31.9 24.5 30.10

NEW GOVERNMENT INITIATIVE

The Institute of Indian Foundrymen (IIF) has chalked a vision Plan 2020 to recommend the needed initiatives for rapid growth as to emerge as a leading Supplier of Quality Castings in the global market . An implementing Agency for the India Foundry Mission (IFM) will assist the industry in monitoring market growth efficiently. To some extent, it will help Company to meet its customers requirements of Products that goes into the manufacturing of Castings.

GOVERNMENT INITIATIVES FOR STEEL INDUSTRY

(Source: IBEF)

One of the designated core industries, steel is key to the governments focus on driving growth in the infrastructure segment. Towards this end, the following initiatives have rolled out in support of the steel industry:

(a) Implemented Steel Import Monitoring System (SIMS), which aids in monitoring real-time import data on, quality and value; the system helps detect misclassification and mis-declaration regarding over/ under-invoicing, preventing import of defective steel

(b) Imposed anti-dumping duty on galvalume products, ranging from US$ 28-200/tonne; imports from China, South Korea and Vietnam are subject to duties.

(c) To ensure iron ore availability for domestic manufacturing, it introduced a 30% export duty on export of high grade iron ore (lumps and fines).

(d) Other measures are underway like the proposed steel scrap policy, safety codes, proposal to reduce royalty to 5% on low grade iron ore fines; Remission of Duties or Taxes on Export Products (RoDTEP) to replace existing Merchandise Export from India Scheme (MEIS); and engagement with international agencies to promote steel intensive design for roads, bridges and commercial and residential housing.

OPPORTUNITIES & THREATS

The thrust on infrastructure development, road construction, coal production, power generation, housing policies is driving the demand for castings from the foundry industry. Besides, the Governments focus on manufacturing in India and other policies will also drive demand for castings. The Company is in a position to grab the opportunity in the years to come and confident to improvise the growth of turnover and profitability. The Company has necessary and well equipped production facilities to reap the benefits of the growth opportunities.

The Economic demand slow down presents a real challenge to growing volumes. The inflation figures, and recent emerging developments across the world, like Corona virus has potential to de stabilize existing business model of the Industry.

Automotive

The automotive industry is forecasted to grow in size by US$ 74 billion in 2015 to US$ 260-300 billion by 2026.With increasing capacity addition in the automotive industry, demand for steel from the sector is expected to be robust.

Capital Goods

The capital goods sector accounts for 11 per cent of steel consumption and expected to increase 14/15 per cent by 2025-26 and has the potential to increase in tonnage and market share . Corporate Indias capex is expected to grow and generate greater demand for steel.

Infrastructure

The infrastructure sector accounts for 9 per cent of steel consumption and expected to increase 11 per cent by 2025-26. Due to such a huge investment in infrastructure the demand for long steel products would increase in the years ahead.

Airport

More and more modern and private airports are expected to be set up. Development of Tier-II city airports would sustain consumption growth and estimated steel consumption in airport building is likely to grow more than 20 per cent over next few years.

Railways

The Dedicated Rail Freight Corridor (DRFC) network expansion would be enhanced in future .Gauge conversion, setting up of new lines and electrification would drive steel demand .

Oil and Gas

Indias primary energy consumption of oil and gas is expected to increase to 10 mbpd and 14 bcfd, respectively, by 2040.This would lead to an increase in demand of steel tubes and pipes, providing a lucrative opportunity to the steel industry.

IMPACT OF COVID-19

The country witnessed lockdown being implemented in India in the second fortnight of March 2020. There were also restrictions of varying extent across larger part of the world, due to the COVID-19 pandemic.

The companys operations were effected from 24th March 2020 to 23rd April, 2020 due to suspension of production across all plants following nationwide lockdown imposed by Government of India, In view of pandemic COVID-19. Government permitted certain activities in the month of April 2020 subject to certain restrictions. Accordingly the Company has re-started operations in phased manner from 23rd April 2020 & from May 2020 all the plants are operating normally. Three months moratorium for deferral on payment of loan and other Credit facility taken from Company Bankers and NBFC falling due in March - May 2020 are availed. The Company has further avail the moratorium facility from June 2020 to August 2020.

The Company has taken several measures to ensure their well-being including leveraging the power of technology to enable them to work from home. For those employees who are working in sales offices and manufacturing locations, their safety is being ensured by stringent use of protective gear, abiding by social distancing norms and taking all safety precautions. Standing by its core commitment, the Company is navigating through these unprecedented times by building stronger and deeper relationships with consumers and its partners.

OPERATIONAL AND FINANCIAL PERFORMANCE

During the year ended 31 March, 2020, the Company had registered a revenue from operations (from Continuing operations) of Rs 5442.51 Lacs as against Rs 10712.76 Lacs during the year FY 2018-19.The Profit Before Tax (PBT) and Profit After Tax (PAT) (from Continuing operations) for the year 2019-20 were Rs (5676.38) Lacs and Rs (4535.55) Lacs respectively, as against Rs (1862.72) Lacs and Rs (1449.86) respectively during the previous year ended 31 March, 2019.

The Profit Before Tax (PBT) and Profit After Tax (PAT) (from Discontinuing operations) for the year 2019-20 were Rs 1680.17 Lacs and Rs 1680.17 Lacs respectively, as against Rs (631.44) Lacs and Rs (132.33) respectively during the previous year ended 31 March, 2019.

The Profit for the year 2019-20 were Rs (2855.38) Lacs respectively, as against Rs (1582.18) Lacs respectively during the previous year ended 31 March, 2019.

KEY FINANCIAL RATIOS:

In accordance with the amended SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015, the Company is required to give details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations thereof:

The Company has identified following ratios as key financial ratios for Continuing Operations:

Particulars 2019-20 2018-19 Change in %
Debtors turnover ratio(No of Days 223 315 (29.20)%
Payables Turnover Ration (No of Days) 336 639 (47.42)%
Inventory Turnover Ratio (No of Days) 319 178 79.21%
Interest Service coverage ratio (5.52) (166) 232.53%
Current Ratio 0.97 1.03 (5.82)%
Debt Equity Ratio 0.43 0.28 53.57%
EBIDTA to net sales (%) (73.46)% 4.72% (1656.36)%
Net Profit Margin (%) (83.33)% (13.54)% (515.43)%
Return on Net Worth (103.07)% (21.46)% (380.28)%

CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial results of the Company included results from the operations of Subsidiary Companies i.e. Simplex Castings International Pte Ltd. The Company does not have any associate or joint venture company.

On a Consolidated basis, During the year ended 31 March, 2020, the Company had registered a revenue from operations (from Continuing operations) of Rs 7804.62 Lacs as against Rs 13727.93 Lacs during the year FY 2018- 19.The Profit Before Tax (PBT) and Profit After Tax (PAT) (from Continuing operations) for the year 2019-20 were Rs (5679.35) Lacs and Rs (4537.69) Lacs respectively, as against Rs (993.77) Lacs and Rs (580.90) respectively during the previous year ended 31 March, 2019.

The Profit Before Tax (PBT) and Profit After Tax (PAT) (from Discontinuing operations) for the year 2019-20 were Rs 1680.17 Lacs and Rs 1680.17 Lacs respectively, as against Rs (1509.58) Lacs and Rs (1010.47) respectively during the previous year ended 31 March, 2019.

The Profit for the year 2019-20 were Rs (2857.52) Lacs respectively, as against Rs (1591.37) Lacs respectively during the previous year ended 31 March, 2019.

RISK CONCERN

Business risks exist for any enterprise having national and international exposure. Your Company also faces some such risks, the key ones being - a longer than anticipated delay in economic revival, unfavorable exchange rate fluctuations, emergence of inflationary conditions, Competition in Indian and Global market and any unexpected changes in regulatory framework.

The Company is well aware of these risks and challenges and has put in place mechanisms to ensure that they are managed and mitigated with adequate timely actions.

LONG-TERM AND MEDIUM-TERM STRATEGY

The Company has strategies for business development to cop up with the dynamic situation evolving everyday globally. Your Company is subject to all the positive & negative effects of the change in the global scenario. Your Company works on long term and medium term strategies to deal with the challenges:

a. Long-term Strategy:

a) Widening of customer base

b) Entry into new industry segments

c) Development of new casting products for existing customers

b. Medium-term Strategy:

a) Improvement in product quality

b) Control & minimising rejections

c) Cost reduction

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

The Company has adequate internal audit and control systems. Internal auditors comprising of professional firms of Chartered Accountants have been entrusted the job to conduct regular internal audits at all units/ locations and report to the management the lapses, if any. Both internal auditors and statutory auditors independently evaluate the adequacy of internal control system. Based on the audit observations and suggestions, follow up, remedial measures are being taken including review and increase in the scope of coverage, if necessary. The Audit Committee of Directors, in its periodical meetings, review the adequacy of internal control systems and procedures and suggest areas of improvements.

The internal control system ensures compliance with all applicable laws and regulations, facilitates in optimum utilisation of resources and protect the Companys assets and investors interests. The Company has a clearly defined organisational structure, decision rights, manuals and operating procedures for its business units to ensure orderly and efficient conduct of its business.

The Company has a whistle blower policy so that Directors and Senior personal can report their genuine concern. The Audit Committee of the Board on Quarterly basis reviews significant audit findings covering operational, financial and other areas and provides guidance on further strengthening the internal controls framework.

HUMAN RESOURCES DEVELOPMENT AND INDUSTRIAL RELATIONS

Human resource is considered as key to the future growth strategy of the Company and looks upon to focus its efforts to further align human resource policies, processes and initiatives to meet its business needs. In order to focus on keeping employees abreast of technological and technical developments, the Company provides opportunity for training and learning. Industrial relations at all the units and locations are cordial. As on March 2020, the company had 357 employees on its rolls.

Cautionary Statement

Statements in the Management Discussion and Analysis describng the Companys objectives, expectations or predictions may be forward looking within the meaning of applicable securities, laws and regulations. Actual results may differ materially from those expressed in the statement. Important factors that would influence the Companys operations include cost of raw materials, tax laws, interest and power cost and economic developments and such other factors within the country and the international economic and financial developments.