steelcast ltd Management discussions

Company overview

Steelcast Ltd is a well-known name in the steel and alloy- steel castings industry. It manufactures cast products using no-bake and shell moulding processes. The company continued catering to its main sectors like earth moving equipment, mining & mineral processing, construction, railways, steel plants, cement, locomotive, defence etc. The company explored new regions, sectors and customers during the year, thus adding to the number of parts produced. The performance of the company during the year has been exceptionally well historically. The financial performance has exceeded the expectations made at the beginning of the year in terms of top and bottom line. The positive recovery globally contributed significantly to the performance of the company during the year under review. The growth of export sales was higher as compared to domestic sales of previous year.

Global economic overview

The global economy was estimated to have grown at a slower 3.2% in 2022, compared to 6% in 2021. Some realities that defined the global business and trading sentiment comprised the Russian invasion of Ukraine, return of inflation, pandemic upsurge in China, global liquidity squeeze following higher interest rates and quantitative tightening by the US Federal Reserve.

The total outcome of these adversities translated into moderated global capital and consumer spending, disrupted trade, increased energy costs and cautious consumer spending. Even as the global conflict remained geographically distant from India, ripples comprised increased oil import bills, cascading inflation, cautionary government and a sluggish equity market.

Global inflation was 8.7% in 2022, among the highest in decades. US consumer prices increased about 6.5% in 2022, the highest in four decades. The Federal Reserve raised its benchmark interest rate to their highest in 15 years. Brent crude oil decreased significantly from a peak of around USD 120 per barrel in June 2022 to USD 70 per barrel at the end of the calendar year due to the availability of cheap Russian oil. The S&P GSCI (benchmark for commodity investments and a measure of global commodity performance) fell from a peak of 4319.5 in June 2022 to 3495.76. There was a sharp decline in crude oil, natural gas, coal, lithium, lumber, cobalt, nickel and urea realisations.

Regional growth (%)	FY2023	FY2022
World output	3.2	6.1
Advanced economies	2.5	5
Emerging and developing economies	3.8	6.3

Performance of major economies

• United States: Reported GDP growth of 2.1% compared to 5.9% in 2021

• China: GDP growth is expected to contract from 8.1% in 2021 to 3% in 2022.

• United Kingdom: GDP is expected to grow 4.1% in 2022 compared to 7.6% in 2021

• Japan: Reported growth of 1.6% in 2022 compared to 1.7% in 2021

• Germany: Reported GDP growth of 1.8% compared to 2.6% in 2021

(Source: PWC report, EY report, IMF data, OECD data)

Outlook

Global real GDP growth is forecast at 2.8% in 2023 (3.2% in 2022). Global inflation is declining on the back of lower energy and food prices, which could stagger interest rate hikes by the worlds major central banks. Volatility across asset classes could increase; the price correction is still incomplete in most global private and public markets; besides, much depends on the stance of US Federal Reserve related to interest rates.

Indian economic overview

India reported an estimated economic growth of 7.2% in FY 2022-23, one of Asias best growth rates during the period. By the close of FY 2022-23, India overtook UK to become the fifth largest global economy. India surpassed China to become the worlds most populous nation.

Growth of the Indian economy

	FY 20	FY 21	FY 22	FY23E
Real GDP growth (%)	3.7	-6.6%	9.1	7.2

Growth of the Indian economy quarter by quarter, FY 2022-23

	Q1FY23	Q2FY23	Q3FY23	Q4FY23
Real GDP growth (%)	13.1	6.2	4.5	6.1

(Source: IMF, World Bank, Budget FY24: Economy Projections, RBI projections)

Indias fiscal deficit was estimated in nominal terms at ~ Rs 17.55 lakh crore and 6.4% of GDP for the year ending March 31, 2023.

Indias headline foreign direct investment (FDI) numbers rose to a record $84.8 billion in FY2021-22, However, during the fiscal year 2022-23, the country experienced a 16% decrease in foreign direct investment (FDI) inflows, amounting to $71 billion on a gross basis. This decline can be attributed to the unfavourable global economic conditions and stands as the first contraction in FDI in the past ten years. In 2022-23, the government was estimated to have addressed 77% of its disinvestment target (Rs 50,000 crore against a target of Rs 65,000 crore).

Indias foreign exchange reserves, which had witnessed three consecutive years of growth, experienced a decline of approximately $70 billion in FY2022-23, primarily influenced by rising inflation and interest rates. Starting from $606.47 billion on April 1, 2022, reserves decreased to $578.44 billion by March 31, 2023. The Indian currency also weakened during this period, with the exchange rate weakening from Rs. 75.91 to a US dollar to Rs. 82.34 by March 31, 2023, driven by a stronger dollar and an increasing current account deficit. Despite these factors, India continued to attract investable capital. The countrys retail inflation, measured by the consumer price index (CPI), eased to 5.66% in March 2023. Inflation data on the Wholesale Price Index, WPI (calculates the overall price of goods before retail) eased to 1.3% during the period. In 2022, CPI hit its highest of 7.79% in April; WPI reached its highest of 15.88% in May 2022. By the close of the year under review, inflation had begun trending down and in April 2023 declined below 5%, its lowest in months.

Outlook

India is expected to grow 6-6.5% in FY2024, catalysed in no small measure by 35% capital expenditure growth by the government. The growth could be catalysed by broad-based credit expansion, better capacity utilisation and improving trade deficits. Headline and core inflation rates could down. The private sectors investments could revive, strengthening the economy.

India is poised to sustain its outperformance. The landscape favours India: Europe is moving towards a probable recession, US economy is slowing, Chinas GDP growth forecast of 4.4% is less than Indias GDP estimate of 6.1%, America and Europe are experiencing the highest inflation in 40 years.

India emerged as the second fastest growing G20 economy in FY 2022-23. Indias production-linked incentive appeared to catalyse downstream sectors. Inflation was steady. India was at the cusp of making significant investments in renewable energy and other sectors and emerging as a suitable industrial supplement to China. India was poised to outpace Germany and Japan and emerge as the third largest economy by the end of the decade.

Global metal casting industry overview

The metal casting industry was valued at US$ 151.6 Billion in 2022 and is expected to reach US$ 236.7 Billion by 2028, exhibiting a growth rate (CAGR) of 7.4% during 2023-2028. This growth is driven by the rising awareness towards numerous advantages offered by metal casting, such as improved energy efficiency, lower production costs, enhanced environmental quality, etc.

The global metal casting market can be segregated into cast iron, aluminum, steel, zinc, magnesium, among others. The global metal casting market can be segment into automotive and transportation, equipment and machine, building and construction and aerospace and military. The automotive and transportation sector accounts for the largest market share in the metal casting industry.

Geographically, Asia-Pacific accounted for the largest share of the metal casting industry at 63.8% in 2021. This growth is attributed to countries such as India, Australia, Indonesia and Malaysia, witnessing a rapid increase in building and construction sector where metal castings are employed to provide structural supports to both residential and commercial building and construction sites, such as hotels, hospitals, homes, apartments, warehouses, showrooms, garages and offices.

(Source: Imarcgroup, Allied Market Research)

Indian metal casting industry overview

The process of molding hot metal liquid into a hollow cavity in order to obtain a desired shape is called metal casting. Metal casting is used for the mass production of large and complex components. It can be done with non-ferrous metals such as zinc, copper, aluminium, magnesium, lead, pewter and tin-based alloys. In India, metal casting is used as a cost-efficient method to recycle wasted scrap metal. Metal castings also form an integral part in the goods and equipment industry to produce a wide variety of home appliances, surgical instruments and critical components for aircraft and automobiles.

After China, India is the second largest producer of castings. The growth in the market is driven by the increasing industrialisation and urbanisation, giving a boost to the construction industry and growing demand for lightweight vehicles due to increase in disposable incomes.

(Source: Economic Times, imarcgroup)

Growth drivers

Population growth: India has surpassed China as the worlds most populous nation, fostering demand for infrastructure and housing.

Increasing urbanisation: As of 2021, around one-third of Indias population was likely living in cities. By 2031, 75% of Indias national income is expected to come from cities. Housing demand: India witnessed a 34% rise in demand for houses, reaching a nine-year high, catalysing the demand for construction equipment.

Economic growth: India is expected to become the third largest economy in the world by 2029, owing to the increasing income which will foster demands for better facilities.

China plus one: Post-pandemic, a number of corporate giants are deleveraging their supply chain from China and looking for an alternate market like India.

Indias crude steel output: Indias crude steel output grew by 5.80% from 117.63 MT in 2021 to 124.45 MT in 2022.

Construction equipment industry: The Indian construction equipment industry, in its The ‘Vision Plan 2030 proposed an action plan to help India become a manufacturing and export hub for construction equipment and boost the development of world-class infrastructure in the country. Indian railways: The Indian railway witnessed a record earning of Rs 54,733 crore in the passenger segment from April 2022 to January 2023, increasing by 73% y-o-y. (Source: Business Standard)

Industry structure and developments of Steelcast Limited

1. Mining industry: Mining Sector showed a good growth during the year compared to previous year: a. The domestic sector showed an outstanding performance witnessed a substantial growth in FY2022-23 compared to FY2021-22. b. The export sector witnessed a growth of 114% on YoY basis.

2. Earthmoving equipment: In line with mining machinery industry the earthmoving industry showed a similar rise in FY2022-23. a. The domestic sector grew more than 31% YoY. b. The export sector witnessed a growth of 18% YoY.

3. Construction equipment: This industry showed positive growth in FY 2022-23 compared to FY2021-22. a. The domestic market showed a YoY growth of more than 46%. b. The export market showed a 29% YoY growth in FY22-23 compared to the previous year.

4. Locomotive and railways: With new customers and parts under development in this fiscal year and also AAR audit done and certificate expected in next three months, the company expects robust sales in the coming years. In FY 2022-23, this segment showed a YoY growth of 196%.

5. Cement and steel sector: This segment is expected to continue to show a steady growth

6. Ground engaging tools (GET): We expect a significant improvement in this sector in the coming year with the development of new customers and new parts.

7. Partnering with Indian defence units: The Company is making its constant endeavour to contribute to the defence of the nation by partnering with the Indian

Defence units. This effort is continuing and we expect improvement in this sector considering the Government push through schemes like Atmanirbhar Bharat, Make in India etc.

Position of the company in the foundry market

As the world is underdoing economic slowdown, India is expected to grow at 6-6.5% GDP, due to growing consumption, increasing urbanisation, rising disposable incomes and conducive government policies.

The company has a strong presence in the mining and earthmoving industries, which have accounted for the majority of its sales. The governments investment in infrastructure and housing has indirectly boosted the demand for our products.

The company has continued to follow its strategy of deleveraging excess dependence on any particular industry by venturing into new industries and introducing new parts into existing markets. This expansion is expected to increase the companys consumer base and enable it to compete both domestically and internationally.

While there is intense competition in the foundry industry from both Indian and overseas players, the company holds a competitive edge in producing intricate steel castings due to its technological expertise and its long-term relationship with its clients, where it is given preference as a strategic supplier.

The steel casting industry in India is fragmented, with small, unorganized businesses manufacturing the product. The company ranks first in terms of production capability, product mix, number of parts developed and high-quality standards. However, entry barriers to this industry are relatively high, making it challenging for new players to enter. The company can leverage its competitive advantages such as operational efficiency, pricing and product mix to stay ahead of the competition.

Risk management

While every business carries a certain amount of inherent risk, our company recognises the importance of actively identifying and minimising these risks. To achieve this, we have established a robust organisational risk management system that regularly scans our internal and external environment to detect potential risks and develop effective strategies to mitigate them. We also integrate these measures into our strategic plans to ensure they are implemented throughout the organisation.

Various types of risks such as geopolitical developments (e.g. war or natural calamity), travel restrictions, industry-specific risks, foreign currency volatility, client concentration, technology hazards and financial risks are just a few examples of the significant threats we face. Our company has already implemented measures to mitigate these risks at various levels of management. Additionally, we regularly review and monitor our risk mitigation plans to ensure they remain effective in protecting our business from potential threats.

Changes in the financial performance

Particulars	2022-23	2021-22
Sales/Income from Operations	47,683.39	30,204.02
Other Income	110.34	30.46
Sub-Total	47,793.74	30,234.48
Total Expenditure (before Interest & Depreciation)	36,285.86	23,833.91
Operating Profit (EBIDTA)	11,507.87	6,400.57
Operating Margin %	24.08%	21.17%
Profit/(loss) After Tax	7,052.46	3,327.19
Return on Capital Employed % (EBIT)	43.64%	28.35%
(ROCE=Tangible Net Worth + Total Long Term Debt + Deferred Tax Liability)
No. of months Receivables (Receivables/Sales*12)	1.95	2.99
Current Ratio (Current Assets/Current Liabilities)	1.81	1.35
Debt Equity Ratio (Total Debt/Shareholders Equity)	0.11	0.40
Production (in MT)	15,275	13,263

Key financial ratios:

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

Sr. No. Ratio	% change	Reason for variance
1 Current Ratio	34.30	Ratio improved due to better inventory and debtors control
2 Debt- Equity Ratio	72.61	Significant reduction of short term debts and increase in Net- Worth
3 Return on Equity Ratio	62.74	Overall improvement in cost control and better margins
4 Trade Receivable Turnover Ratio	19.46	Debtors remained almost constant compared to last year despite the turnover of the company increased substantially.
5 Net Profit Ratio	34.31	Overall improvement in cost control and better margins
6 Return on Capital Employed	53.91	Overall improvement in cost control and better margins
7 Return on Investment	54.25	Overall improvement in cost control and better margins

Quality assurance:

As a company policy, we are committed to total customer satisfaction both in terms of quality and services in a healthy, safe and environmentally responsible manner. The Company is committed to:

• Deliver goods with excellent performance and at reasonable price

• Comply with applicable legal and other requirements

• Adopt programs for prevention of pollution, improving health and safety performance, resource conservation and waste reduction

• Continual improvement in our quality, environmental and occupational health and safety performance through efficient systems and procedures.

In consultation of workers, we encourage teamwork, cooperation, education and training of all our people to fulfil our commitment to quality, environmental and OH&S management system in our operations.

During 2022-23, we undertook following initiatives to further strengthen our quality parameters:

a) Development of high performance coating to prevent metal mould reaction and sand fusion in heavy section casting.

b) Study of oil quenchant behaviour to prevent quench crack in high strength low alloy steel.

c) Welding process layer audit has been initiated to ensure quality welding.

d) In house welding training carried out by external agency to educate welder and supervisor.

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 and foundry technology. The department is equipped with state-of-the-art equipment with digital calculations to monitor mechanical and chemical testing results having NABL Accreditation. A modern version of software to simulate solidification 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 and no-bake sands and test critical parameters of quenching media (water and polymer). A strong sub-section in R&D allows us to do conduct complete failure analysis and give latest technical inputs based on fractography and SEM/EDS report.

Our constant innovation in 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 win 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) To develop heat treatment simulation skill to predict mechanical properties in heavy section casting b) To Study feasibility of re-use of burnt sand to minimize sand disposal.

c) To develop in house Ferro alloy checking facility to comply incoming material quality standard.

d) Development of high strength welds alloy and technique for austenitic Manganese steel.

e) Development of thermal insulation coating in heat treatment furnace for energy conservation.

Human resources and industrial resources

At our company, we prioritize attracting and retaining top talent to create an engaging work environment that encourages innovation. We believe in rewarding continuous learning, collaboration and development, which helps us remain future-ready and adapt to the ever-changing market realities. We consider our employees as our most valuable asset and strive to empower them through our processes, allowing for creative approaches to add value.

We maintain a strong relationship with our employees, emphasizing safe work practices and productivity improvement. Our company employs over 887 individuals directly and we are aware of our corporate reputation and the positive impact we can have by focusing on environmental, health and safety (EHS) aspects.

We have set high standards in EHS management, recognizing the importance of these aspects in our operations. We have established comprehensive indicators to track our performance in these areas and we are committed to continuously improving our practices. We value the safety of our employees above all else and we constantly strive to maintain a safe workplace by raising the bar in this regard.

Internal control system

Your Company has an adequate and effective Internal Control Mechanism in place to ensure efficient conduct of its operations, security of assets, prevention and detection of frauds/errors, accuracy and completeness of accounting records and the timely preparation of reliable financial information as per its Management Information System (MIS). These controls have been designed to provide reasonable assurance about maintaining proper accounting controls for ensuring the reliability of financial reporting, monitoring of operations and protecting assets from unauthorized use or losses, compliance with regulations.

The Company has continued its efforts to align all its processes and controls with global best practices.

Apart from strong internal control, your Company has also appointed external and independent Audit Firms as its Internal auditors for periodical checking and monitoring of the Internal Control Measures for its plants. Internal Auditors are present at the Audit Committee Meetings Where Internal Audit Reports are discussed alongside management comments and the findings and observation of the Internal Auditors. The Terms of Reference of the Audit Committee inter alia include reviewing the adequacy of the internal control environment, monitoring implementation of the action plans emerging out of Internal Audit findings including those relating to the strengthening of the Companys Risk Management Systems and discharge of statutory mandates.

Your Company has a Comprehensive Budgetary Control System in operation and its Key Performance Indicators (KPI) are set for all-important operational parameters. These are monitored and reviewed regularly by the management in Management Committee Meetings, which are chaired by the Executive Director of the Company and participated by all departmental heads and necessary corrective and preventive actions are being initiated.

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 materiallyfromthoseexpressedorimplied.Importantfactors 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, based on any subsequent development, information or events or otherwise.

	For and on behalf of the Board of Directors
	For STEELCAST LIMITED
	(Chetan M Tamboli)
Place: Bhavnagar	Chairman & Managing Director
Date : 23rd May, 2023	DIN: 00028421