Steelcast Ltd Management Discussions.

Company overview

Steelcast Ltd is a well-known name in the Steel & Alloy-steel castings industry. It manufactures cast products using No-Bake and Shell Molding processes. With the improvement in market conditions during FY 2018-19, the company achieved its record turnover and looked like the company is making a steady progress. FY 2019-20 marked with economic tussle between China and USA tail ended with beginning of COVID-19. FY 2020-21 began with complete lockdown in the country due to COVID-19. The company could dispatch in1st Quarter the goods which were ready as all business establishments were shut for almost full quarter. Lockdown started lifting slowly world over and business activities began to pick up in 2nd Quarter and during the 3rd quarter it looked like rough phase is over. The 4th Quarter turned out to be an opportunity to recoup the lost sales. The impact of pandemic felt throughout the year and was never off the minds of the people. The company coped with the situation by keeping the cost under control to maintain the margins. Drastic cost control measures were taken and the positive effects can be seen in the financial results of the company. The company continued catering to its main sectors like earth moving equipment, mining & mineral processing, construction, railways, steel plants, cement, locomotive etc. The company is looking for further opportunities in other industrial segments and products. The company managed to put up a moderate inancial performance despite all lockdowns & uncertainties. The global developments play a signicant role in performance of the company. The domestic sale for FY 2020-21 were higher compared to export sales due to COIVD-19 situation was worse in USA and European countries and business disruption period persisted throughout the year. FY 2020-21 was badly impacted by pandemic and situation further worsened at the close of the year. The surge in COVID-19 cases in the beginning of the current year FY 2021-22 has raised an alarm and seems the lock down & COVID-19 curfews will stay longer this time. Current times are very uncertain and 2nd wave seems very deadly. Saving of human lives is top priority. However, so far projections for the current year are quite optimistic and will be better than previous two years, provided the 2nd wave impact is limited and controlled at the earliest possible time.

Industry Structure and Developments:

1.0 Mining Industry: Mining Industry is expected to show a good growth in the coming year. For Domestic sector against we expect a growth of @ 66% in FY 2021-22 as compared to FY 2020-21.

For Export sector against a sales of Rs. 1,495 Lacs in FY 2020-21, FY 2021-22 expected sales is Rs. 3,642 Lacs; meaning an expected growth of @ 143% on YoY basis.

2.0 Earth Moving Equipment: In line with Mining Machinery Industry; Earthmoving Industry is also expected to show similar rise in FY 2021-22.

Against sales of Rs. 3,510 Lacs in FY 2020-21, expected sales in FY 2021-22 is likely to be Rs. 5,107 Lacs, meaning more than 45% YoY growth.

In a similar fashion, in Export Sector against Sales of Rs. 4,756 Lacs in FY 2020-21, FY 2021-22 expected Sales is Rs. 8,346 Lacs which means growth of @ 75% on YoY basis.

3.0 Construction Equipment: This industry is also showing promising trend in FY 2021-22 as compared to FY 2020-21.

Domestic Sector is also showing good growth in FY

2021-22. Against sales of Rs. 3,664 Lacs in FY 2020-21, expected sales in FY 2021-22 is to the tune of Rs. 6,066 Lacs which means YoY growth of more than 65%.

Export Sector is expected to grow @ 80% on YoY basis with Sales of Rs. 743 Lacs in FY 2021-22 as compared to Sales of Rs. 412 Lacs in FY 2020-21.

4.0 Locomotive & Railways: With new customers and parts under development in this scal year and also expected Pilot lot orders coming towards end of FY 2021-22, this sector shows good growth.

Against actual sales of Rs. 429 Lacs in FY 2020-21, expected sales in FY 2021-22 is Rs. 2,069 Lacs. This shows signicant growth in coming years.

5.0 Cement & Steel Sector: These are expected to more or less remain steady in FY 2021-22 with moderate growth. In FY 2020-21 we did sales of Rs. 717 Lacs and in FY 2021-22, this sector shows expected sales of Rs. 732 Lacs.

6.0 Ground Engaging Tools (GET): We expect a signicant improvement in this sector in the coming year with development of new customers and new parts.

7.0 Partnering with Indian Defence Units: The Company is making its constant endeavour to contribute to defence of the nation by partnering with the Indian Defence units. This efforts is continuing and we expect improvement in this sector considering the Government push through schemes like Atmanirbhar Bharat, Make in India etc.

Industrial opportunities and outlook: Scene of Indian Economy

The Economic Survey of India underlined that the year 2020 was dominated by the COVID-19 pandemic and the ensuing global economic downturn, the most severe one since the Global Financial Crisis. The lockdowns and social distancing norms brought the already slowing global economy to a standstill. Global economic output is estimated to fall by 3.5 percent in 2020 (IMF January 2021 estimates). A palpable V-shaped recovery in industrial production was observed over the year. Manufacturing rebounded and industrial value started to normalize.

The following indicators suggest silver lining in the current situation: (a) V-Shaped Economic Recovery due to Mega Vaccination Drive, Robust Recovery in the Services Sector and Robust Growth in Consumption and Investment. (b) V-Shaped Recovery is due to Resurgence in High Frequency Indicators Such as Power Demand, Rail Freight, E-Way Bills, GST Collection, Steel Consumption, Etc (c) India to become the Fastest Growing Economy in Next Two Years as Per IMF

(d) India to Have a Current Account Surplus of 2 Per Cent of GDP in FY21, A Historic High After 17 Years (e) Net FPI Ino ws Recorded an All-Time Monthly High of 9.8 Billion Dollars in November 2020 (f) Indias foreign exchange reserves continuous on rise. (g) Chief executives around the world expect a return to strong economic growth over the next two years, as per Gartners 2021 CEO Survey of the 465 CEOs and other senior business executives polled, around 60 per cent expect an economic boom in 2021 and 2022.

Some of the initiatives and developments undertaken by the Government during the year are listed below: (a) The Govt of India announced various economic packages worth of around Rs 20 trillion (US$ 283.73 billion) and being almost 10% of Indias GDP.

(b) World Bank and Government of India signed a US$ 750 million agreement for Emergency Response Programme for MSMEs.

(c) ADB & India signed US$ 500 million loan for the Delhi-Meerut Regional Rapid Transit System (RRTS) Corridor to improve regional connectivity and mobility in Indias national capital region (NCR).

(d) The Government of India, Government of Himachal Pradesh and World Bank signed a US$ 82 million loan to implement the Himachal Pradesh State Roads Transformation Project, to improve the condition, safety, resilience, and engineering standards of state road network.

(e) India is expected to attract investment of around US$ 100 billion in developing the oil and gas infrastructure during 2019-23.

(f) The Government of India is going to increase public health spending to 2.5% of the GDP by 2025.

(g) In the mid-term review of Foreign Trade Policy (FTP) 2015-20, the Ministry of Commerce and Industry enhanced the scope of Merchandise Exports from India Scheme (MEIS) and Service Exports from India Scheme (SEIS), increased MEIS incentive for ready-made garments and made-ups by 2%, SEIS incentive by 2% and increased the validity of Duty Credit Scrips from 18 months to 24 months. In April 2020, Government extended FTP for one more year (up to March 31, 2021).

(h) Indias GDP is expected to reach US$ 5 trillion by FY25 and achieve upper-middle income status on the back of digitization, globalization, favorable demographics, and reforms.

(i) India is also focusing on renewable sources to generate energy. It is planning to achieve 40% of its energy from non-fossil sources by 2030, which is currently 30%, and have plans to increase its renewable energy capacity from to 175 gigawatt (GW) by 2022.

Position of the company in Foundry Market

The Foundry industry in India has been growing steadily over the past several years despite economic slowdown dented its demand from the end user industry i.e. engineering and auto component sectors. Generally, moving in tandem with the growth of the countrys economy, the Indian foundry industry has surpassed Indias GDP growth with a wider margin. Over the last 5 years the Coal Mining activity is showing an upward trend with many private players entering in to this apart from the government controlled “Coal India”

Since the company has enjoyed a good track record in the Mining & Earth Moving industry, the market share from the products being sold to these industries have always dominated in the companys sales performance. To insulate against possible drop in sales due to recession in these industries the company has developed many new parts for the existing and new customers from these Industries. The companys manufacturing capabilities are designed to cater to other sectors too. Hence, the company has developed newer products to enter into other markets. This is likely to expand the companys customer base and to meet with the competition, both domestic as well as international.

The industry is witnessing high level of competition from both India and abroad but there are few competitors when it comes to technologically advanced companies manufacturing highly intricate Steel castings. In India, there are small and unorganized players involved in manufacturing Steel castings and the industry is quite fragmented.

The company enjoys premier position in terms of production capability, product mix, number of parts developed and high quality standards. It is a fact that, in this industry entry barriers are quite high since it is a capacity based and quality based industry. The company is able to leverage all these aspects along with economies of scale to meet the competition.

Impact of Second Covid-19 wave on growth recovery

S&P Global Ratings has cautioned that the second Covid-19 wave is likely to hit Indias near-term economic recovery and could push growth for the current scal below 10 per cent. S&P Asia Pacic chief economist Shaun Roache further warned that the longer India takes to regain control, the greater will be the permanent damage. The average of the first quarter is likely to carry on through the rest of the year and the impact on the GDP could be around one to three percentage points, he added.

S&P Global Ratings is continuously revising & stating that the second Covid-19 wave may derail the recovery in the economy and credit conditions. The agency further stated that a rebound in economic activity is expected in the September 2021 quarter onward, assuming restrictions can ease somewhat over that timeframe. UBS Indias economic activity index entered a negative terrain in April 2021 with a seven percentage points fall to 95 as the second wave of the Covid-19 pandemic and resultant localized lockdowns pulled down economic activity during the month. UBS expects the activity levels to sequentially weaken further in May 2021 as most states have extended mobility restrictions to iatten the virus curve, thus adversely impacting real GDP growth in the June 2021 quarter.

Crisil Ratings has warned that the second Covid-19 wave threatens the economic growth of India. Stating that risks to its 11 per cent growth forecast for current scal are rmly tilted downwards.

Amid the entire given situation, the following points indicate good opportunities in the coming year(s): (a) Various sectors of the Industry like mining, real estate, construction, etc. are on recovery phase, hence, good opportunities to utilize unused capacity (b) Diversication into newer sectors (c) Global economy is reviving from slowdown and offers huge export potential (d) Stable Government in the country (e) Government of India has laid emphasize on infrastructure development which would raise demand from Construction & Mining Equipment Industry (f) India, a preferred destination after China (g) Huge potential for India to enter into Global Supply Chain.

Financial Performance snapshot:

(Rs in Lakhs)

Particulars 2020-21 2019-20
Sales/Income from Operations 15,772.98 20,058.88
Other Income 149.02 47.77
Sub-Total 15,922.00 20,106.64
Total Expenditure 12,616.74 16,325.68
(before Interest & Depreciation)
Operating Prot (EBIDTA) 3,305.25 3,780.95
Operating Margin % 20.76% 18.80%
Prot/(los s) After Tax 1,202.12 797.75
Return on Capital Employed % (EBIT) 13.09% 14.99%
(ROCE=Total Equity + LT Borrowings)
No. of months Receivables 3.91 1.69
(Receivables/Sales 12)
Current Ratio 1.93 1.53
(Current Assets/Current Liabilities)
Debt Equity Ratio 0.14 0.23
(Long Term Borrowings/Net Worth)
Production (in MT) 7,586 8,614

Disclosures of key changes in financial indicators Key Financial Ratios:

(disclosure of the following ratio changed 25% or more as compared to previous year)

Sr. No. Ratios Change % compared to Previous year Remarks
1 Debt Equity Ratio 39.33 Significant reduction of long term debts and increase in Net-Worth
2 Inventory Turnover Ratio (29.36) The major reason being the decrease in turnover substantially due to pandemic.
3 Debtors Turnover Ratio (56.63) Debtors at the close of year increased substantially over the previous year.
4 PAT Margin % 91.63 Overall cost reduction coupled with tax expense drastically reduced due to favourable deferred tax liability.
5 Return on Invest- ment % 37.96 Betterment of PAT as well as Net-Worth.
6 Current Ratio 26.02 Current Liabilities has significantly reduced compared to current assets.
7 Working Capital Turnover Ratio (46.54) Net working capital increased coupled with significant decrease in turnover.

Quality Assurance:

As a company policy, we are committed to total customer satisfaction both in terms of quality and services in a healthy, safe & environmentally responsible manner. The Company is committed to: l Deliver goods with excellent performance and at reasonable price l Comply with applicable legal & other requirements l Adopt programs for prevention of pollution, improving health & safety performance, resource conservation and waste reduction l Continual improvement in our quality, environmental and occupational health & safety performance through efficient systems and procedures

We encourage teamwork, co-operation, education and training of all our people to fulfill our commitment to quality, environmental and OH&S management system in our operations.

During 2020-21, we undertook following initiatives to further strengthen our quality parameters: a) Design and development of Hot air blower for pre-heating of mold before pouring to minimize moisture related defect in high humid conditions. b) To minimize welding related defect a systematic approach implemented in fettling for repair welding called welding process layer audit to comply with well-defined welding process parameter and technique. c) By accurate defect interpretation trough NDT quantum of defect excavation minimized leads to reduce overall weldment and post weld heat treatment. d) Development of appropriate size and location of Cooling Fins/Ribs to avoid solidification crack in complex geometry casting. e) Development of appropriate pouring practice to enhance pouring rate to minimize scabbing, cold laps and wrinkles on cope surface of heavy section castings. f) Development of appropriate gating system for long travel metal stream movement of metal flow to minimize temperature loss. g) Study of Ferro alloy size for complete dissolution during ladle treatment to minimize slag related defects. h) Development of special Welding alloy to enhance mechanical properties like hardness, Ultimate Tensile Strength of weldment in Low Alloy High Strength Steel.

Research and Development:

Since 1976, the Companys in-house R&D is recognized by DSIR (Department of Scientific and Industrial Research). The Company is involved in manufacturing high quality products through R&D activities across product development, technology up-gradations and process improvements. The R&D team has hands-on foundry experience that combine with in-depth knowledge of latest metallurgy & foundry technology. The department is equipped with state-of-the-art equipment with digital calculations to monitor mechanical & chemical testing results having NABL Accreditation. A modern version of software to simulate Solidification behavior of casting and Role of process parameters in Heat treatment is being utilized for New product development. Dedicated sets of equipment are installed to carry out testing of different sands including Resin Coated & No-Bake sands and test critical parameters of quenching media (Water & Polymer). A Strong sub-section in R&D allows us to do conduct complete failure analysis and give latest technical inputs based on Fractography & SEM/EDS report.

Our constant efforts on R&D have allowed us to maintain ever -increasing demand of high-end products by global customers, especially in the high strength materials. Our initiatives have helped us get orders for items requiring import substitution with international specifications through pilot batches mechanism followed by bulk orders.

Going ahead, the Company will further undertake the following R&D strengthening initiatives: a) Development of Ceramic Whirl gating system to trap exogenous inclusion. b) Development of High Alumina Neutral lining material to enhance lining life of the furnace. c) Study and Investigation of compatibility of Desert sand with PUNB and shell sand practice. d) Development of Suitable Post Weld Heat treatment technology for cosmetic repairing and TIG welding.

Human resources and industrial relations:

The human resource philosophy and strategy of your Company have been designed to attract and retain the best talent to create a workplace environment that keeps employees engaged, motivated to encourage innovation. Your Company has fostered a culture that rewards continuous learning, collaboration and development, making it future ready with respect to the challenges posed by ever changing market realities. Employees are your Companys most valuable asset and your Companys processes are designed to empower employees and support creative approaches in order to create enduring value. Your Company maintains a cordial relationship with its employees. Its emphasis on safe work practices and productivity improvement is unrelenting. Your Company employs more than 598 employees on direct employment. The Company is conscious of its strong corporate reputation and the positive role it can play by focusing on “EHS” aspects. Towards this, the Company has set very exacting standards in “EHS” management. The Company recognizes the importance of “EHS” aspects in its operations and has established comprehensive indicators to track performance in these areas. The Company values the safety of its employees and constantly raises the bar in ensuring a safe work place.

Risk Management :

The Company recognizes that every business has its inherent risks and it is required to possess a proactive approach to identify and mitigate them. Your Company has embedded an efficient organizational risk management framework, which regularly scans all possible internal and external environment to identify risks, decide on possible mitigation plans and incorporate them in its strategic plans. Some of the key risks include Disruption and Uncertainty in Business due to Covid-19 pandemic, Volatile global economic scenario, Restrictions on global mobility, industry risk, foreign currency fluctuation, client concentration, technology risks and financial risk. The processes relating to minimizing of the above risks have already been put in place at different levels of management. The risk mitigation plans are regularly monitored and reviewed by the Management and Audit Committee of your Company.

Long-term and medium-term strategy:

The company has been enjoying a leadership position in the steel casting business for many years. During the last one decade the company was mainly focusing mining industry and also had a strong customer base. However, growth was impacted due to sluggish economy and slowdown in mining industry. Such a market environment led to the conservative mind-set of mining customers for capital investment, against the backdrop of sluggish commodity prices. Rationalization Measures - Strategy

The management of the company took stock of the situation and have prepared a comprehensive business plan to not only come out of the dependency in mining sector but also to scale up the turnover in next five years. The business plan comprises of i) Product development ii) Business development In order to execute the above business plan, the company has already initiated a rationalization plan since last 2 years. The highlights of both these measures are as follows: (A) Rationalization Plan a. Reduced manpower by increasing productivity. There will be major long term benefits of it. b. Periodical evaluation of power demand to ensure saving in fixed cost. c. Purchasing of power through open market access. d. Reduced consumption norms of few key materials. e. Reduction in internal rejection.. f. Reduction in throughput time for processing of castings. (B) Forward Looking Plan a. Introduction of newer products for existing customers b. Entering into newer sectors c. Developing newer products for newer customers For each of the new segments to be developed, the company has identified the potential customers and potential parts to be sold to them.

CAUTIONARY STATEMENT: Statement in this “Management Discussion and 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 and supply conditions, finished goods prices, input materials 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. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements, on the basis of any subsequent development, information or events or otherwise.

By Order of the Board of Directors
For STEELCAST LIMITED
Place: Bhavnagar (Chetan M Tamboli)
Date: May 28, 2021 Chairman & Managing Director
DIN: 00028421