Steel Exchange India Ltd Management Discussions.

Global economic overview

The global economy grew 2.9% in 2019 compared to 3.6% in 2018. This sharp decline was precipitated by an increase in global trade disputes that affected the cross-border movement of products and services, a slowdown in the global manufacturing sector, weak growth coming out of some of the largest global economies and the impact of US Chine Trade war and Brexit. Going ahead, the Great Lockdown, as a result of the pandemic Covid-19, is projected to shrink the global growth in calendar year 2020 and thereafter. (Source: World Economic Outlook, April 2020, CNN, Economic Times, trading economics, Statista, CNBC)

Review of the Indian economy

India emerged as the fifth largest world economy in 2019 with a gross domestic product (GDP) of $2.94 trillion. India jumped 14 places to 63 in the 2020 World Banks Ease of Doing Business ranking. However, there was a decline in consumer spending that affected Indias GDP growth during the year under review. Indias growth for FY2019-20 is estimated at 4.2% compared with 6.1% in the previous year. Manufacturing growth is seen at 2%, a 15-year low as against 6.9% growth in FY19.

The disruption from the pandemic CORONAVIRUS (COVID-19) IMPACT: The novel coronavirus (COVID-19) has affected life and livelihood across the globe. By the last week of June 2020, over 9.2 million confirmed cases and over 4,70,000 deaths had been reported on account of COVID-19. The pandemic is estimated to have severely impacted both supply and demand sides of businesses. As production and global trade has been curtailed around the world, many sectors will experience shortage of inputs and a severe consumption slowdown.

Largest synchronized global response:Globally, governments and central banks, especially the G20, have synchronized their fiscal and monetary policy response to the extent of US$ 19 trillion to cope with the crisis. Emergency lifelines provided include higher spending and foregone revenues (US$ 3.3 trillion), public sector loans and equity injections (US$ 1.8 trillion) and guarantees (US$ 2.7 trillion). The IMFs executive board agreed on a new round of bilateral borrowing to secure its US$ 1 trillion lending capacity. The Catastrophe Containment and Relief Trust (CCRT) is being increased to US$ 1.4 billion to ease debt burdens of low-income member nations.

Unprecedented global efforts to create a vaccination: The race to find a vaccine for the new coronavirus is well underway. Governments and researchers are aiming to provide billions of people with immunity in eighteen months or less. As per the latest report (Draft Landscape of COVID-19 Candidate Vaccines - June 22, 2020) by World Health Organization (WHO), there are 13 candidate vaccines in the clinical evaluation stage and 129 in the preclinical evaluation stage.

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 been rolled out in support of the steel industry:

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

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

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

- 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 steelintensive design for roads, bridges and commercial and residential housing

Global steel industry

Global crude steel production reached 1,869.9 million tonnes (mt) for the year 2019, up by 3.4% compared to 2018. Crude steel production contracted in all regions in 2019 except in Asia and the Middle East.

Asia produced 1,341.6 Mt of crude steel in 2019, an increase of 5.7% compared to 2018. Chinas crude steel production in 2019 reached 996.3 Mt, up by 8.3% on 2018. Chinas share of global crude steel production increased from 50.9% in 2018 to 53.3% in 2019 and continued to remain as the largest steel producer in the world. The EU produced 159.4 Mt of crude steel in 2019, a decrease of 4.9% compared to 2018. Germany produced 39.7 Mt of crude steel in 2019, a decrease of 6.5% on 2018. Italy produced 23.2 Mt in 2019, down by 5.2% on 2018. France produced 14.5 Mt of crude steel, a decrease of 6.1% on 2018. Spain produced 13.6 Mt of crude steel in 2019, a decrease of 5.2% on 2018. Crude steel production in North America was 120.0 Mt in 2019, 0.8% lower than in 2018. The US produced 87.9 Mt of crude steel, up by 1.5% on 2018. The CIS produced 100.4 Mt, a decrease of 0.5%. Russia produced 71.6 Mt of crude steel in 2019, down by 0.7% on 2018. Ukraine produced 20.8 Mt of crude steel in 2019, a decrease of 1.2% compared to 2018. The Middle East produced 45.3 Mt of crude steel in 2019, an increase of 19.2% on 2018. Annual crude steel production for South America was 41.2 Mt in 2019, a decrease of 8.4% on 2018. Brazil produced 32.2 Mt in 2019, down by 9.0% compared to 2018. Turkeys crude steel production for 2019 was 33.7 Mt, down by 9.6% on 2018. Africa produced 17.0 Mt in 2019, down 2.3% on 2018. Oceania produced 6.1 Mt, down 2.9% on 2018. Per capita finished steel consumption in 2018 was at 224.5 kg for world and 590.1 kg for China. The same for India was 73.3 kg in 2018 and 75.7 kg (prov) in 2019.

[Source: wordsteel.org, Ministry of Steel, Government of India]

Indian steel industry

Rapid capacity addition and production growth over the years has helped Indian steel industry to emerge as the second largest steel producer in the world. As per the available provisional figures, India was also the largest sponge iron producer and the third largest steel consumer after China and the US in 2019.

India produced 102.06 Mt of finished steel during 2019-20 against 101.29 Mt of finished steel in 2018-19. Crude steel capacity was 142.98 Mt in 2019-20 (prov.), an increase of around 0.5% over 2018-19.

Government has taken various steps to boost the sector including the introduction of National Steel Policy 2017 and allowing 100 per cent Foreign Direct Investment (FDI) in the steel sector under the automatic route. According to the data released by Department for Promotion of Industry and Internal Trade (DPIIT), Indian metallurgical industries attracted Foreign Direct Investment (FDI) to the tune of US$ 13.40 billion between April 2000 and March 2020.

The Governments National Steel Policy 2017 aims to increase the per capita steel consumption to 160 kgs by 2030-31. The Government has also promoted policy which provides a minimum value addition of 15 per cent in notified steel products covered under preferential procurement.

Indias power sector

The country has made huge strides to ensure full access to electricity, bringing power to more than 700 million people since 2000. It is pursuing a very ambitious deployment of renewable energy, notably solar, and has boosted energy efficiency through innovative programmes such as replacing incandescent light bulbs with LEDs (under the Ujala scheme).

Indias installed power capacity stood at 371.05GW as on 30th June 2020. Thermal continues to be the dominant contributor with 62.2% of the total installed capacity. There has been significant growth in the countrys renewables segment which now accounts for 23.6% of the total installed capacity as on 30th June 2020. Electricity generation reached 1389.1 billion units (BU) in FY20 against 1376.1 BU (including renewables sources).

Between April 2000 and March 2020, the industry attracted US$ 14.98 billion in foreign direct investment (FDI), accounting for three per cent of total FDI inflow in India.

The Union Budget 2020-21 has allocated H15,875 crore (US$ 2.27 billion) to the Ministry of Power and H5,500 crore (US$ 786.95 million) to Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY). To bolster the countrys renewable generation capacity, the Government plans to establish additional renewable energy capacity of 500 GW by 2030.

OPPORTUNITIES AND THREATS

OPPORTUNITIES

- With high Agricultural output, least affected rural economy, the Roofing segment in rural is expected to recover fast, post lockdown and consumption expected to revive in pre-monsoon season.

- Health care infrastructure spending in a post-COVID scenario is expected to remain high, and is expected to create new demand in Pre-engineered Building (PEB) segment for isolation centers, hospitals and Government Infrastructure Space.

- Oil and Gas pipelines for city gas distribution and cross country pipelines are witnessing strong demand with several new

projects being launched due to strong government focus. The Renewable Energy sector is likely to revive rapidly in the post- COVID scenario.

- Packaging (drums and barrels) and Container segment demand to remain stable with continuation of growth in exports. THREATS

- Consumer durables and Appliance sectors are expected to decline significantly in Q1FY21 due to weak sentiments and low buying activities. Slow recovery is anticipated from Q2-Q3FY21 onwards post monsoon.

- The Automotive sector is expected to decline in Q1FY21, due to disruption of production and cessation of retail sales during lockdown. In addition, new launches are expected to be delayed due to negative consumer sentiments

RISKS AND CONCERNS

Steel consumption growth stalled in most economies in the later half of 2018, and the 2017 recovery lost its momentum. Downside risks included increased trade frictions and a weakening global economy. 2019 started off well but due to local and global issues cropping up, looked very similar to 2018 in the worlds steel markets as momentum continued to slow from the supercharged year of 2017.The Global finished steel market in 2020 is set to be weighed down by continuation of last years weaker end-consumption rates co-inciding with outbreak of COVID-19. Global steel consumption y-o-y growth for 2020 has been revised down to 1.1 % from initial forecasts of 1.7% while Chinas steel consumption is expected to stay flat. These downward revisions are largely due to negative impact of COVID-19 along with weak downstream activities in construction and manufacturing sectors. Meanwhile, disruption of supply chains has been the most significant in automotive industry as many countries rely on imported automotive parts from China and a large number of automotive factories are located within China. Traditionally, slower growth in steel consumption has a negative impact on steel prices and this trend will continue in 2020. But there are bright spots coming in the longer term with steel demand expected to rebound in H2 2020 from strong stimulus policies in China for economic recovery and GDP growth after COVID-19.

The steel industrys net leverage and interest coverage are likely to deteriorate in FY20 due to compressed EBITDA margins, due to a drop in net realizations in the face of a demand slowdown and increase in raw material prices. Indias steel exports are likely to decline in the next fiscal year due to higher domestic demand from automotive and infrastructure companies. The auto sector has seen one of the worst periods in the last 9 months. Better demands from auto and infra companies are expected in FY21 on a low FY20 base and it has already been observed that restocking had resumed since December 2019. Governments spending on infrastructure will boost the demand further in later half of 2020 once COVID-19 crisis will be over. Upside movement of coking coal prices accompanied with tight domestic market of iron ores, due to license expiry and auctions of mines, will eventually inflate the cost of production. Rising steel and iron ore prices could still help India to become a net exporter.

The growth trajectory of the steel industry has its own set of challenges/ concerns. Presently the biggest concern is with environment which is gradually taking center stage in India. The steel industry is energy intensive and is the second biggest consumer of energy globally. This leads to a higher carbon footprint and also affects the environment. Energy-efficient methods will be the focal point for production of steel. In spite of lowering down of policy repo rate by RBI 5 times and by 135 basis points in 2019 alone, cost of capital in India still remains significantly high and Indian steel makers continue to face a relative disadvantage visa-vis their competitors from the developed world. For most Indian steel makers managing logistics requirements in time is really challenging and costly affair. However, Government of India has announced National Infrastructure Pipeline (NIP) projects / initiatives for 2019-2025 in December 2019 especially for the transportation & logistics sector covering Roads, Railways, Ports and Airports. Achievement of NIP target will likely bring down the transportation and logistics cost in the future.

In FY20, Steel Exchange India Ltd focused on Debt Restructuring with Lenders, ramping-up operations, optimizing cost of production, streamlining logistics and raw material sourcing, improving environment and safety performance parameters, enabling steady performance across key product lines to survive critical business times. Through better financial prudence in working capital and credit management, we consolidated our position in FY20.

Division wise Performance:

1) Trading Division

The Trading division deals with a wide range of products from finished steel products to related items semis, coal, scrap, Sponge Iron etc. The division has been primarily responsible for developing the marketing base for the company throughout the coastal region of Andhra Pradesh, and Cochin. The division deals with the products manufactured by the Company, RINL (Vizag Steel), and other manufacturers for the products.

The division reported a turnover of Rs.87.20 crores for the year ended 31 st March 2020 compared to Rs. 143.64 crores in the previous year ended 31st March 2019.

2) Steel Ingot Division - 90,000 TPA

This division manufactures ingots using sponge iron and scrap / pig iron. The unit also has a power generation unit using natural gas for captive consumption. The company continued with low level of operations for the period under review keeping in view the market conditions and sold the power produced from the Power Plant.

The division reported a turnover of Rs.12.55 crores which came from sale of power compared to the turnover of power Rs. 34.58 crores in the previous year.

3) Integrated Steel Plant:

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

1. Sponge Iron Unit - 220,000 TPA

2. SMS Billet Unit - 250,000 TPA

3. Rolling Unit - 225,000 TPA

4. Captive Power Plant - 60MW

The total revenue for the period under review from ISP stood at Rs.664.18 crores as against Rs.828.39 crores in the previous year. The division reported marginal decrease in turnover on year to year basis due to lower level of production compared to previous year. The TMT bars produced are sold under the well-established brand name Simhadri TMT Bars.

The total revenue from the sale of Power for the period under review from Power Division stood at Rs.28.91 crores compared to Rs. 44.78 crores in the previous year. The division reported decrease in turnover on year to year basis as there was no firm arrangement for off take of surplus power capacity and the plant was operated only at 61% PLF compared 68% in the previous year. The surplus power produced over and above captive consumption was sold on the exchange on day to day basis.

Financial Performance

1) Share Capital

The Authorized capital of the Company is Rs. 332,00,00,000/- and the paid up share capital of the company is Rs.75,98,48,120/ - There was no change in the Authorized and Paid up share capital of the Company during the year.

2) Reserves and Surplus

For the year ended 31st March 2020, the Reserves and Surplus have increased from Rs. (36.79) crores to Rs.64.16 crores due to the profit transferred from the profit and loss account amounting to Rs. 64.29 crores and Other Comprehensive income of Rs. (0.13) Crs.

3) Secured Loans

There has been a decrease in secured Loans from Rs.990.68 crores to Rs. 984.21 Crores.

4) Unsecured Loans

There has been a decrease in Unsecured Loans from Rs. 30.08 Crores to Rs. 30.00 Crores.

5) Fixed Assets

During the year under review, the Fixed Assets and the total Fixed Assets (net Block) stands at Rs. 665.63 crores as against Rs. 690.70 crores in the previous year.

Operational Performance

1) Income

The income of the Company was Rs.791.42 crores for the year ended 31st March, 2020 as against Rs. 1029.27 crores in the previous year ended 31st March 2019.

2) Direct Cost & Other expenses

The Direct Costs comprising of cost material consumed, changes in inventories of finished goods, stock in trade & work-inprogress and purchases of traded goods was to Rs.611.79 crores for the year as against Rs. 840.57 crores in the previous

year ended 31st March, 2019.

Other expenses comprises of other manufacturing expenses, staff costs, administration and selling & distribution expenses etc. The same was Rs. 109.76 crores for the year ended 31st March 2020 as against Rs. 166.29 crores in the previous year ended 31st March 2019. The Company continues its efforts to minimize the costs and overheads.

3) Interest Cost

For the year under review, the interest and financial charges were Rs.3.47 Crores representing 0.44% of the turnover as against Rs. 9.96 crores representing 0.97% of the turnover in the previous year.

4) Depreciation

The company has provided a sum of Rs.27.24 crores towards depreciation for the year under review as against Rs.29.62 crores in the previous year.

5) Provision for Tax

The Company has not provided any amount towards income tax as the Company has accumulated losses. The accumulated losses of GSAL (India) Limited were transferred to the company upon its amalgamation with the company. The deferred tax provision for the period under review is Rs. (25.12) lakhs as against Rs. 19.50 crores in the previous year.

6) Total Comprehensive income/Loss(Net Profit/Loss):

The operations for the year ended 31st March 2020 have resulted in a Net Profit of Rs. 64.16 crores as against Rs. (36.79) crores Net Loss in the year ended 31st March 2019.

7) Dividend

No Dividend is recommended on the Equity Shares for the year ended 31st March 2020.

8) Key Ratios of the Company

Particulars F.Y 2019-20 F.Y 2018-19
EBIDTA/Turnover (%) 9 2
EBIDTA/Net interest * NA NA
Debt-equity ratio 7.9 14.6
Return on equity (%) 41.26 (40.28)
Book value per share (H) 20.46 12.02
Earnings per share (H) 8.44 (4.84)

* Lenders have stopped charging interest on debts since accounts of the company have been identified as NPA. Implementation of Debt Resolution Scheme:

As part of debt resolution, lenders under Consortium agreed for settlement of dues of the company under One Time Settlement Scheme (OTS). Till date, the company received sanctions from majority of lenders including lead bank i.e., SBI constituting 77.89% of the compromise offer. The company is actively pursuing sanctions from remaining lenders. Internal Controls & Their Adequacy

The Company has in place adequate systems of internal control commensurate with its size and nature of its business. These have been designed to provide reasonable assurance that all assets are safeguarded and protected against loss from unauthorised use or disposition and that all transactions are authorised, recorded and reported correctly.

The internal control systems are reviewed at regular intervals by the Audit Committee and corrective actions are initiated whenever deemed necessary. The Committee also meets the Companys Internal Auditors as well as Statutory Auditors to ascertain, interalia, their views on the adequacy of internal control systems of the Company and keeps the management informed of its major observations.

Human Resources Development and Industrial Relations

The Company considers the quality and commitment of its human resources to be its most important asset and places great emphasis on training and development of human resources at all levels and providing conducive working environment. The Management firmly believes that business cannot grow without utilising the potential of its human resources.

As on 31st March, 2020 the total strength of employeesemployees is about 738 and in addition with 81Management T rainees Your Company maintains a cordial relationship with its employees and values the safety of its employees ensuring safe work practices and the Board of Directors and the Management record their appreciation of all its employees for their valuable contribution towards the growth of the Company.

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.