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Southern Ispat & Energy Ltd Management Discussions

0.15
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Jan 29, 2015|12:00:00 AM

Southern Ispat & Energy Ltd Share Price Management Discussions

The Board takes pleasure in presenting your Companys 20th Annual Report for the year 2014-15 along with the Compliance Report on Corporate Governance. This chapter on Management Discussion and Analysis forms a part of the Compliance Report on Corporate Governance.

Global Economy

As per IMF, World GDP growth remained moderate. It is projected to be 3.5% in 2015 as compared to 3.4% in 2014. The growth forecast for near future is optimistic with World GDP expected to grow at 3.7% in 2016 and accelerate further to 6.5% in 2017.

Advanced Economies

The uptrend in the global economy is primarily due to recovery from advanced economies. A major impulse to the global growth has come from United States where annual growth in 2015 & 2016 is expected to be substantially higher than that in 2014.

Similarly, the Euro area has also turned positive with signs of growth in Germany, France, United Kingdom and Italy. Japan is also expected to get a boost from some underlying growth drivers, notably private investment and exports. But Japans overall economic activity is projected to slow down moderately in response to the governments stance to tighten the fiscal policy in 2015-16.

Emerging Markets & Developing Economies

Emerging Markets & Developing Economies continue to contribute more than two-thirds of global growth. The GDP growth in these countries is expected to increase marginally from 4.4% in 2014 to 5.2% and 5.4% in 2016 and 2017 respectively. In particular, China is expected to keep its momentum whereas India is expected to strengthen its GDP growth.

Indian Economy

As per the Planning Commission, Government of Indias provisional estimates, Indias GDP has grown at 5.6% in FY 2014-15 as compared to 3.3% in FY 2013-14.

However, it is worthwhile to note that this increase in headline GDP growth masks the underlying weakness in the economy as the growth is primarily driven by stronger agriculture due to a good monsoon in 2014.

In FY 2014-15, Agriculture Sector has declined at 1.1% whereas, in contrast, Industry Sector has increased to 3.4%.

Also, slowdown in Industrial growth and slow recovery in advanced economies caused Services Sectors growth rate to improve by 7.3% in FY 2014-15.

Weaknesses such as persistent high inflation, fiscal imbalances and bottlenecks to investment still loom large in the economy. However, industry and research organizations opine that a normal monsoon and a stable Government with a strong reform agenda should result into overall GDP growth of 7.4-7.6% in FY 2015-16.

World Steel Industry

In 2014, World Crude Steel production reached 1,662 Million Tonnes, with a growth of 1.2% over that in 2013.

China, the leading producer of steel, contributed 49.5% of the global output at 822.7 Million Tonnes, showing a 0.9% annual growth.

The European Union (EU) recorded an increase of 1.7% over 2013, producing 169.2 Million Tonnes of crude steel in 2014.

Japan produced 110.7 Million Tonnes, a 0.1% increase from 2013.

United States produced 88.3 Million Tonnes of crude steel, which is 1.7% higher than its production level a year earlier.

In 2014, Indias crude steel production increased by 0.8% producing 6.7 Million Tonnes.

With Chinese Governments focus expected to shift from infrastructure spending to stimulating domestic consumption, Chinese demand for steel is unlikely to grow at the historical high rates, we have seen in the past.

Consequently, the World Steel Association predicted a slower growth rate of around 2.1% in 2015 for the global crude steel production.

Global Crude Steel Capacity Utilization

Globally, the crude steel capacity utilization has seen an overall downward trend from January, 2014 till December, 2014 due to capacity additions against modest growth in demand.

Indian Steel Industry

The domestic steel industry has gone through a downturn due to weak demand from downstream industries and higher cost of production due to weak rupee and higher domestic raw material prices.

As per World Steel Association, crude steel production growth in India has slowed down from 5.1 % in FY 2013 to 3.9% in FY 2014.

Steel demand growth in India is expected to be 6.2% in FY 2015 and 7.3% in FY 2016.

On the supply side, there are many players who are having serious expansion plans adding to the overall capacity.

Also, with a stable Government at the center, industry is optimistic about a revival in the overall economy and hence, in steel industry in the coming years.

COMPANY OVERVIEW

Your Company is focused on its vision to emerge as a low cost producer of value added Steel products with captive mineral resources and captive power. The Company is also focused on mining its own iron ore in order to improve margins & also to setup a Beneficiation Plant to exploit the resources.

STRATEGIC INITIATIVES

IRON ORE MINES

Your Company had entered into mining activity in Buxwaha Iron Ore mine spread over 150 Hectares in Chattarpur area of Madhya Pradesh, India. The mining division has its iron ore operations in the mineral rich Chattarpur belt of Madhya Pradesh. The mines have a substantial resource base of superior quality iron ore with high Fe (iron) content and bulk density. The Fe content varies between 63 to 66 per cent, which makes it one of the best quality materials available in the country. SIEL Mining will hold a leading position in the Indian mining industry for its superior mining techniques, equipment, and scale and flexibility of operations and systems. The potential of the proven deposit, as well as the quality and quantity of reserves, are good enough to sustain the mining operations for the next 20 years at the current operating capacity. The main products are:

* Calibrated Iron Ore Lump-inputs for steel making through the DRI/BF process

* Iron Ore Fines-inputs for sinters and pellets, used for making steel

The mining operations are mechanized, adopting state-of-the-art technology and equipment namely hydraulic drifter, in-pit crusher, cone crushers and mobile crushers. Flexibility in operations enables the division to maximize the utilization of resources, as well as cater to the needs of diverse customers.

BENEFICIATION & PELLETIZATION PLANT

Your Company is planning to set up a Beneficiated & Pelletizing plant with an installed capacity of 12,00,000 TPA in India for Agglomeration of beneficiated and ground iron ore into spherical shaped green balls and subsequent heat hardening them is termed as Pelletizing. Pellets thus produced to desired physical and chemical properties are much superior to the conventionally sized iron ore lumps. Iron ore Pellets are in very high demand. No difficulties are foreseen regarding its marketability. Indeed, Iron Ore Pellet fills a long standing demand and supply gap in the steel industry by use of abundant and easily available iron ore fines which otherwise find no buyer in India. The demand of high quality sized iron ore is ever increasing and constantly echoed at various apex bodies. Moreover, Pelletizing units are using low grade iron ore available in abundance. The Company has also acquired adequate land near to mines for setting up of a Beneficiation & Pellatization plant for exploiting the mining operations & maximizing profits.

DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

SIEL saw through this challenging period has achieved healthy growth in sales and profitability and is poised to emerge as a stronger Company to deliver enhanced shareholder value over the coming years. Your Company registered a stable performance during 2014-15 with revenues to Rs. 6703.13 millions, EBIDTA to Rs. 252.37 millions and PAT to Rs. 255.37 millions.

SEGMENT-WISE PERFORMANCE AND OUTCOME

The Company is in the business of Manufacturing & Trading of Steel Items and hence operates in a single business segment. Performance of the Company has been dealt with in the Directors Report.

OPPORTUNITIES, THREATS AND FUTURE OUTLOOK

Your Company will continue to maintain & grow its presence in the Export Markets while retaining its focus on value added products in Domestic Market. Your Company is ready to cater to customers stringent specifications and demands which will ultimately improve the bottom-line. The overall presence in the Conventional, Construction & Infrastructure Segments will continue. The domestic flat steel consumption in the relevant business segments is estimated to grow at 6%-8%. The need, however, for value added and niche products are likely to surge and have been identified as major focus area for the Company.

Global steel consumption is expected to rise by 2%. Non-tariff barriers (like Anti-Dumping Duty on low priced, low quality suppliers) introduced recently by some of the emerging economies is expected to open additional markets and opportunities for your Company to increase its market share in international business.

RISKS PERCEPTION

Your Directors have put in place critical risk management framework across the Company. Your Company is continuously evolving and improving systems and measures to take care of all the risk exigencies involved in the business.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Effective internal operational control systems and regular internal audit mechanisms to monitor and review the same under the overall control and supervision of the Audit Committee of Directors are in place and functioning well. Efforts for continued improvements are being consistently made in this regard.

DEVELOPMENTS IN HUMAN RES OURCES & INDUSTRIAL RELATI ONS

Your Company recognizes the fact that manpower is one of the vital constituents of a successful organization. The growth of your Company and execution of new projects places emphasis on the recruitment process and your Company has been successful in attracting professional talent.

HEALTH & SAFETY

The Company continuously focuses on the health and safety of all its workers and staff. Adequate safety measures have been taken at all the plants for the prevention of accidents or other untoward incident. The necessary medical facilities are available for the workers, staff and their family members to enable them to maintain good health. The Company has also obtained Group Medical Policy for its employee’s and their families.

CORPORATE SOCIAL RESPONSIBILITY

The Company is as good as its people. Your Company is privileged to have an excellent pool of human resources working for it. The Company considers the quality of its human resources to be its most important asset and places great emphasis on training and development of employees at all levels.

The Company has put a lot of stress on employee welfare and development:

• The Company has an open-door policy whereby any employee can directly share new ideas/ views/ thoughts directly with the top management without any hierarchical constraints.

• The Company regularly organizes knowledge sharing sessions for better knowledge management and to enhance employee capabilities.

• Quarterly meetings are held to give employees a platform to share their ideas and to discuss new initiatives/ strategies of the Company.

CAUTIONARY STATEMENT

Statements in this "Management Discussion & 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 supply conditions, finished goods prices, input 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.

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