Steel Exchange Management Discussions


GLOBAL ECONOMY

By early 2023, the prospects of the global economys gentle landing have dimmed due to elevated inflation and banking sector turbulence. While inflation has moderated, pricing pressures remain high, and labour markets are constrained. In response to shifts in sentiment and evolving financial conditions, policymakers have taken measures to stabilize the banking system. The global economic trajectory in 2022 is expected to continue this year, marked by high debt levels, decreasing commodity prices, and escalating geopolitical tensions. Although Chinas recovery from COVID-19 outbreaks has reduced supply-chain interruptions, risks remain due to mounting uncertainties stemming from the financial sector upheaval.

The baseline forecast indicates that growth will dip from 3.4% in 2022 to 2.8% in 2023 before gradually returning to 3.0% five years later. Advanced economies are poised to face significant slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. In an alternate scenario, global growth could plummet to 2.5% in 2023, the lowest level since 2001, with advanced economies growing at less than 1 %. The outlook remains grim due to tight policy stances, financial conditions, the Russia- Ukraine war, and geoeconomic fragmentation. The global headline inflation rate is predicted to reduce from 8.7% in 2022 to 7.0% in 2023, but core inflation will fall more slowly. The odds are overwhelmingly stacked against a hard landing, with financial sector stress increasing. This might harm the real economy and force central banks to reassess their policy options. Sovereign debt distress might expand, the war in Ukraine could worsen, resulting in further food and energy price spikes and higher inflation, and geopolitical bloc fragmentation could result in huge output losses, including foreign direct investment.

Source: World Economic Outlook - A Rocky Recovery - IMF 2023

INDIAN ECONOMY

Indias economic performance was impacted by global economic slowdown, high inflation, and the ongoing war between Russia and Ukraine. The countrys real GDP growth was estimated at 7.0% in 2022-23 in comparison to 9.1% in the prior year, but demand indicators like passenger vehicle sales, tractor sales, and domestic air travel support growth. In 2023, India is predicted to be a major growth destination, owing to high domestic demand and government spending.

Indias high unemployment rate of 7.5% in February 2023 remains a source of concern, while inflation rose to 6.5% in January 2023 as a result of high food prices.The Reserve Bank of India (RBI) raised policy repo rates six times since May 2022 in order to contain inflation. Commodity prices will be affected by global geopolitical tensions and increased demand from countries that have lifted mobility restrictions. Lower input costs are predicted to have an impact on core inflation, with inflation forecast to gradually decline at 6.5% in 2022-23 and 5.3% in 2023-24. A healthy domestic demand and favourable government efforts are projected to help India maintain its position as one of the worlds fastest growing major economies. External challenges, such as a global economic downturn and monetary tightening in advanced economies, could, nonetheless, have an impact on the countrys progress.

The Union Budget 2023-24 is expected to enhance disposable income, increase discretionary spending, and raise capital expenditure, resulting in increased growth, investments, and job creation. The governments efforts to reduce compliance and decriminalise will also benefit business. Investments will be aided by strong credit growth and financial market stability.

Source: KPMG Global Economic Outlook 2023

GLOBAL STEEL INDUSTRY AND DEVELOPMENTS

Steel is an iron-based alloy, which might contain carbon, silicon, manganese, and other minerals.The process of steelmaking involves the production of steel from iron ore and/or scrap. Due to its high durability and malleability, steel is a preferred choice of raw material in several industries like the manufacturing, automotive, and consumer products.

Steel demand is predicted to rise 1.7% to 1,854.0 Mt in 2024. Manufacturing is expected to lead the recovery, however high loan rates may hinder steel demand. Most regions are expected to see faster growth next year, but China is expected to decelerate.

High inflation and rising interest rates, the Russian invasion of Ukraine, and Chinese lockdowns halted the rebound momentum following the pandemic shock in 2022. As a result, activity in steel-consuming industries fell in the fourth quarter of 2022. Steel demand fell less than projected due to this, as well as the impact of stock changes. Despite hopeful variables such

as Chinas reopening, Europes resilience in the face of the energy crisis, and the removal of supply chain bottlenecks, continuing inflation and high interest rates in most countries will limit steel demand recovery in 2023. Other areas will boost demand growth in 2024, but there will be a global slowdown due to Chinas predicted 0% growth, which will overshadow the improved environment.

Chinas contribution to global steel demand growth will decline as its population declines and the country transitions to consumption-driven growth. Fewer factors will fuel future global steel demand growth, notably in Asia. Even if Chinas contribution to global GDP diminishes, investments in decarbonization and dynamic developing economies will keep global steel demand growing.

Steel demand in developed economies fell significantly in 2022 as a result of monetary tightening and high energy prices. After falling by 6.2% in 2022, steel demand is expected to rise by 1.3% in 2023. In 2024, a 3.2% recovery is projected. Steel demand patterns varied between emerging and developing countries, with developing Asia excluding China demonstrating higher resilience than elsewhere. Steel demand in emerging and developing nations excluding China will expand by 3.6% in 2023 and 3.9% in 2024, following a 0.3% fall in 2022.

In FY2022-23, the steel raw materials market remained volatile, particularly in coal markets, due to irregular weather events in Eastern Australia, while trade flows altered dramatically due to the Russian-Ukraine war. One of the most important elements influencing steel pricing was the cost of production, particularly energy expenses. Sanctions imposed on Russia, which exports oil, coal, and gas, resulted in the hydrocarbon market undergoing a considerable shift in commodity flows and has yet to achieve equilibrium. The 43% year-on-year (y-o-y) increase in oil prices in 2022 reflects rising inflation in general and global energy costs in particular. The coking coal (top energy material for steel for flat goods) index increased 68% year on year in 2022, reaching the highest value of all pricing indices analysed in December. Natural gas and coal shortages in Europe have resulted in yearly energy price rises of roughly 125% through 2022.This has a significant impact on steel companies who use electric furnaces, given power is a major cost issue.

Source: Worldsteel Short Range Outlook April 2023, Raw Material Outlook 2023

INDIAN STEEL INDUSTRY

In 2022, India remained a shining star in the global steel industry. Indias economic prospects and steel industry outlook are encouraging. Recent adjustments in steel export and import charges, together with increased demand for affordable housing, infrastructure development, and building projects, have resulted in a pan-India demand for steel metal. Furthermore, the governments goal to make India self-sufficient has created space for sustainable urban development, the construction of envisaged logistics parks, and the development of industrial corridors, all of which have contributed to the rising demand for finished steel and steel as a raw material.

After successfully managing inflation, the Indian economy is on a solid development path, with a rising percentage of GDP investment due to increased government spending on infrastructure. The residential sector is likely to expand as well, fuelled by inexpensive housing initiatives and urban demand. Private investment is increasing as a result of Production Linked Investment (PLI) Schemes.

The momentum in infrastructure and investment in renewable energy is also predicted to assist Indias capital goods sector. Automotive and consumer durables are likely to rise at a robust rate, owing to continued growth in private spending. After growing by 8.2% in 2022, demand is predicted to expand by 7.3% in 2023 and 6.2% in 2024.

Steel prices in India have been volatile in recent months, particularly following the worldwide economic crisis triggered by the epidemic. Steel prices in India increased by 5% in February 2023.The daily steel price has been influenced by a number of factors, including an increase in raw material prices (particularly iron ore and coking coal) and an increase in infrastructure and engineering projects. Steel prices, however, are expected to rise above pre-pandemic levels by March 2023, reaching 60,000 per tonne.

The Asia Pacific region comprises of a number of emerging economies that are some of the major producers of steel globally. Within the Asia Pacific, India is one of the major regional markets for steel. In India, the iron and steel industry is experiencing a robust demand from sectors like infrastructure, oil and gas, and automotive, which has been driving the growth of the steel industry in the region.The Indian steel industry is further being driven by the easy availability of low-cost manpower and the presence of abundant iron ore reserves in the country. The implementation of schemes by the Government of India like the Jal Jiban Mission, Pradhan Mantri Awaas Yojana -Gramin and Urban (PMAY-G & U), Bharatmala and Sagarmala, and the National Steel Policy have provided favourable prospects for public and foreign investments, further leading to the growth of the steel industry. The launch of various projects like the construction of metro railways and new airports and irrigation projects are anticipated to catalyse the market growth in India, thus, aiding the overall growth of the

steel industry.

Under the PLI scheme (Production Linked Incentive), the Ministry of Steel signed 57 MoUs with 27 businesses for speciality steel. The government has approved a total of 6322 crore for steel sector growth under the plan. Aside from producing new jobs and helping India become the worlds third largest economy (by 2030-31), the project seeks to add 25 MT of speciality steel capacity over the next five years.

Source: Worldsteel Short Range Outlook April 2023, Indian Steel Industry Outlook 2023

ABOUT SEIL

Steel Exchange India Limited (SEIL) is the flagship company of the Vizag Profiles Group. Established in 1999, SEIL is a leading manufacturer of TMT Rebars underthe brand SIMHADRI TMT.The firm is primarily engaged in the manufacturing of steel products and allied activities at its Integrated Steel Plant located close to Visakhapatnam, Andhra Pradesh. It has the largest private integrated steel plant in Andhra Pradesh. It manufactures sponge iron, billets, and TMT bars.

TRADING DIVISION

Apart from its manufacturing operations, the corporation also trades a few products to improve its top and bottom line. Currently, the trading division deals in a wide range of products ranging from finished steel products to supplementary products such as semis, coal, scrap, and sponge iron.The division has been largely responsible for expanding the companys marketing and sales base throughout Andhra Pradeshs coastal region.The trading section handles items manufactured by the Company, RINL (Vizag Steel), and other producers.

The steel trading division reported a turnover of Rs.291.68 crores for the year ended 31st March 2023 compared to Rs 134.08 crores in the previous year ended 31 st March 2022.

STEEL INGOT DIVISION

This division produces ingots from sponge iron and scrap/pig iron. For captive consumption, the unit also includes a power producing unit that runs on natural gas.

The division reported a turnover of Rs.4.73 Crs (previous year Rs. 5.80 Cr) of which Rs.1.89 Cr came from resale of gas and Rs. 2.84 Cr from power sale respectively.

INTEGRATED STEEL PLANT

The main Integrated Steel Plant (ISP) of the Company located at Sreerampuram Village, L. Kota Mandal, Vizianagaram District consists of the following units:

1. Sponge Iron Unit - 2,20,000 TPA

2. SMS Billet Unit - 2,50,000 TPA

3. Rolling Unit-2,25,000TPA

4. Captive Thermal Power Plant- 60 MW

The total revenue for the period 2022-23 under review from ISP stood at Rs.1056.59 crores as against Rs.896.36 crores in the previous year 2021 -22. The division reported increase in turnover on year to year compared to previous year and TMT bars produced are sold under the well-established brand name Simhadri TMT Bars. The total revenue from the sale of surplus Power for the period under review from Power Division stood at Rs.35.32 crores compared to Rs.36.11 crores in the previous year. The division reported increase in turnover on year-to-year basis and the power plant was operated at 54% PLF compared to 52% in the previous year.

FINANCIAL PERFORMANCE OF THE COMPANY FOR THE YEAR ENDED 31.03.2023

(Amount in Crores, unless otherwise stated)

FY23 FY22

Total Income

1,393.36 1,120.87

EBITDA

99.50 124.43

EBITDA Margin

7.14% 11.11%

Profit before tax (PBT)

(28.32) 14.48

Deferred Tax Liability (Asset)

30.53 (102.00)

Profit after tax (PAT)

(58.85) 116.48

PAT Margin

NA 10.40%

1) Share Capital

The Authorized share capital of the Company is Rs. 332 Cr and the paid-up share capital stood at Rs 103.96 Cr. The increase in Paid Up Capital is on account of allotment of 15,88,00,000 equity shares with Face Value of Rs 1 each at a premium of Rs 6.25 per share on preferential basis to Promoters and Non-Promoters of the Company.

2) Reserves and Surplus

For the year ended 31 st March 2023, the Reserves and Surplus have increased from Rs. 402.99 crores to Rs.413.20 crores, Equity component of compounded financial instruments i.e., CCDs [Rs.14.42 Cr], Share Warrants [Rs.10.55 Cr], Share Premium [Rs.224.11 Cr] and reduction of Revaluation Reserves [Rs.208.14 Cr] & Others [Rs.(44.02) Cr],

3) Secured Loans

Secured loans was Rs.289.13 crores as on March 31,2023 as compared to Rs.304.35 crores as on March 31,2022.

4) Unsecured Loans

Unsecured loans was Rs.41.26 crores as on March 31,2023 as compared to Rs. 125.46 crores as on March 31,2022.

5) Fixed Assets

During the year under review, the Fixed Assets, and the total Fixed Assets (net Block) stands at Rs. 592.16 crores as against Rs. 602.80 crores in the previous year.

OPERATIONAL PERFORMANCE OF THE COMPANY FOR THE YEAR ENDED 31.03.2023

1) Income

The total income of the company stood at Rs. 1,393.36 Crfor FY 2022-23 against Rs. 1,120.88 Crfor FY 2021-22. During the year, the total operational revenue of the company increased by 24.3% compared to the previous financial year.

2) Di rect Cost & Other expenses

The Direct Costs comprising of cost material consumed, changes in inventories of finished goods, stock in trade & work-in-progress and purchases of traded goods was to Rs. 1167.27 Cr for FY 2022-23 against Rs. 882.61 Cr for FY 2021-22 due to the increase in the prices.

Other expenses comprise of other manufacturing expenses, staff costs, administration and selling & distribution expenses etc. The same was increased to Rs. 94.21 crores for FY 2022-23 against Rs. 83.83 Cr for FY 2021-22 due to discounts given to customers.

3) Interest Cost

For the year under review, the interest and financial charges were Rs. 105.63 Crores representing 7.58 % of the turnover as against Rs. 88.12 crores representing 7.87% of the turnover in the previous year. The increase in finance cost / interest cost is on account of payment of interest on CCDs and NCDs.The company is taking various initiatives to reduce the financial costs in the coming year to make the company more sustainable in the long run.

4) Depreciation

The company has provided a sum of Rs. 24.37 crores towards depreciation for the year under review as against Rs. 23.75 crores in the previous year.

5) Provision for Tax

There was no current tax due to loss incurred in FY2022-23.

6) T otal Comprehensive income/Loss (Net Prof it/Loss)

The operations for FY 2022-23 resulted in a net loss of Rs. 58.85 Cr as against Rs. 116.36 Cr profit in FY 2021-22.

7) Dividend

No Dividend is recommended on the Equity Shares for the year ended 31st March 2023.

Details of significant changes in Key Financial Ratios

FY23 FY22

Debt Equity Ratio

0.58 0.68

Debt Service Coverage Ratio

0.77 0.65

Interest Service Coverage Ratio #

0.92 1.41

Current Ratio

1.34 1.43

Long Term debt to working capital ##

1.52 2.08

Total debts to Total Assets

0.26 0.27

Debtors Turnover (no. of days)

27 24

Inventory Turnover (no. of days)###

43 30

Detailed explanation on significant changes (i.e., change of 25% or more as compared to FY22) in the above key ratios:

# Repayment of principle on borrowings (Reduction of Debt)

## Repayment of partial long term borrowings to NCD holders of the company ### due to increase of finished stock as on 31st March 2023

Environmental, Social and Governance (ESG) & Corporate Social Responsibility (CSR) - Safety, Health, Sustainability

The 60 MW captive power plant includes 16 MW of power generated by Waste Heat Recovery Boilers (WHRB) that use flue gases from DRI Kilns, boosting energy efficiency, lowering costs, and addressing pollution concerns. Air Cooled Condensers have been built at the power plant to reduce water usage for cooling purposes, resulting in water consumption reductions of 1000 KL per day. Slag (waste material) produced by the Steel Melt Shop is utilised as a foundational element for road construction, and crushed slag is used as a substitute to concrete aggregate and sand. The power plants fly ash (waste material) is delivered to local brick production plants.

The Company provided electric buggies to inhabitants in ISP neighbouring villages for smooth mobility. In partnership with hospitals in Visakhapatnam, the company holds medical camps for the surrounding communities on a regular basis. Dedicated 24x7 primary care centre at ISP staffed by a full-time doctor and nurses give free supplies of essential medicines to conduct testing for neighbouring villages. In addition, ISP offers a completely sanitised medical bed ward for isolation and minimal intervention therapies. The Company has provided a dedicated ambulance at the ISP primary care centre for patients to be transferred to a full-service medical centre if necessary.

The Company has arranged for water to be delivered to ISPs neighbouring villages by underground pipeline and water tankers. The Company collaborated in the installation of solar streetlights in adjacent villages. The Company has supported The Gurudeva Charitable Trust funded the purchase and distribution of artificial limbs and supported tricycles in the Vizianagaram District. Improved government school infrastructure in collaboration with local Roundtable chapters. During the COVID-19 pandemic, worked with the district administration to buy and distribute medical supplies to the local population. During the COVID-19 epidemic, migrant staff and other ISP nearby impacted migrants were given access to food and shelter.

Risks, Concerns and Mitigation Strategies

Geopolitical uncertainty, the macroeconomic outlook, trade barriers, and protectionist trade policies all have an impact on

steel demand. Prolonged inflationary pressures, particularly from disruptions in the energy and commodity supply chains, may have a negative influence on global demand. Adoption of innovative steel grades and sustainable steel products causes a shift in client preferences. During this decade, the Indian steel industry is predicted to increase at a rate of 6% to 7%. However, the steel industrys rising trajectory would present its own set of obstacles. Due to geopolitical developments, changing trade patterns, and increased emphasis on Environment, Social, and Governance (ESG) elements, the regulatory framework in the metals and mining business is getting more demanding. Noncompliance with such demanding regulatory regimes may have an impact on corporate operations and reputation. Steel, an energy-intensive and difficult-to-abate sector, must transition to low-emission steel, and the government of India may implement taxes and fines to accelerate the ESG trip.

Risk is an important component in almost all sorts of businesses and must be mitigated. Steel Exchange India Limited manages risks by properly identifying, estimating, and mitigating them. The Company has implemented adequate risk- mitigation measures in all business verticals and activities in operations, finance, and human resources by leveraging its indepth knowledge of the business acquired over the last 20 years by understanding market trends, competitors, and steel sector policies and responding accordingly to risk management. However, despite the risk precautions taken by the company, unanticipated problems such as inflation, liquidity crisis, slower industrial growth, weakening rupee, political instability, and variable commodity prices are likely to impair industry performance in the future.

With a focused approach, the Company took initiatives in value chain excellence, overall operational excellence, pandemic & crisis management, throughput maximisation, enriching product mix, customer centricity with diversification of customer base, sustainable initiatives, employee engagement, synergy & integration, and leveraging IT & digital to sustain the most critical situation in pandemic times. The Company is prioritising a long-term initiative for sound robust liquidity management and working capital optimisation with superior planning that takes into account all risk indicators.

Human Resource Management, Industrial Relations

The Company regards the quality and commitment of its human resources as its most valuable asset and places a high priority on training and development of human resources at all levels, as well as providing a pleasant working environment. The management team is adamant that the company cannot grow until its human resources are fully utilised.

As of March 31,2023, the total number of employees is 995 including Trainees. The Company maintains a cordial relationship with its employees and cherishes their safety by guaranteeing safe work practises, and the Board of Directors and Management express their gratitude to all of its employees for their vital contribution to the Companys growth.

Internal Financial Control Systems and Internal Audit

The Company has suitable internal control measures in place that are proportionate to its size and kind of operation.

These internal controls are intended to provide reasonable assurance that all corporate operational and financial processes are adequate to safeguard and defend against any loss from unauthorised use or disposition, and that all transactions are properly authorised, documented, and reported.

The Audit Committee reviews the internal control systems on a regular basis and initiates remedial actions where necessary. The Audit Committee also meets with the Companys Internal Auditors and Statutory Auditors to obtain their perspectives on the adequacy of the Companys internal control systems, and it keeps management informed of its significant findings.

Cautionary Statement

Statements in the Management Discussion and Analysis describing the Companys estimates and expectations may be "forward-looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied.