Steelco Gujarat Ltd Management Discussions.

INDUSTRY STRUCTURE, DEVELOPMENTS, OPPORTUNITIES AND OUTLOOK

The Steel Industry plays a dynamic role in the development of economy. The demand for steel industry is driven mainly from industries like infrastructure, automobile, engineering, aviation, construction. The per capita consumption of steel is a normally accepted measure for socioeconomic development of the people of the country. Consequently, the steel sector has been a major contributor to Indias manufacturing output.

Global Economy and Steel Industry

The world economy grew at 3.6% in CY 2018 as compared to CY 2017. The International Monetary Fund (IMF) expects the global economic growth to further slow down to 3.3% in CY 2019 in view of the issues that out-broke in second half of CY 2018 with the US policy stimulus are expected to spill over to CY 2019 first half. The Global steel demand grew by 2.1% in CY 2018, mainly driven by China with some advanced economies. The world crude steel production has increased to around 1808.6 Million Tonnes (MnT) in the CY 2018, an increase by 4.6% from CY 2017. The world apparent steel use per capita reached the mark of 224.5 kilograms. Over the year, the global steel sector has perceived significant growth pattern, with several challenges and headwinds. The global steel expects demand for finished steel to grow by 1.3% in CY 2019 with 1735 MnT.

Indian Economy and Steel Industry

The Indian Economy grew at 6.8% with the worlds fastest growing major economy, despite some slowdown in the last quarter of the last financial year. Steel consumption has a strong tie with the economic growth, since steel has become an essential material in almost every aspect of the economy, from infrastructure on roads / rails, transportation, food packaging and consumption.The steel sector contributes to over 2% of the Countrys GDP. India gained second position among the major steel producing countries by achieving 106.5 MnT crude steel production in the CY 2018. The apparent steel use per capita also increased to 73.9 kg for CY 2018.The Steel demand grew at 7.5% to 97.5 MnT;the production grew at the pace of 3.3% to 106.5 MnT, with the consumption growth of 97.54 MnT for FY 2018-19. Total exports during April-December 2018 were 6.36 MnT against the total import of 7.84 MnT.

Based on the growth patterns in the industry over the years, it may be expected that the country would reach to first rank in coming years. Per IMF, India is expected to grow at 7.3% in CY 2019 and 7.5% in CY 2020. With the strong mandate, with the stable government, through structural reforms and Government Policies on development, it is likely to make India a $ 5 Trillion economy by 2024. Going forward, Indias steel producers are likely to rely more on robust domestic demand with better margins, with production of high-end value added steel.

The major initiatives taken by the Ministry of Steel, Government of India for boosting Steel sector are:

• National Steel Policy 2017.

• Policy on Preference to Domestically Manufactured Iron and Steel Products.

• Investment Facilitation Cell to provide information and facilitate investment.

• Anti-Dumping on Steel from various countries like China, Indonesia.

• Some of the Free Trade Agreements with countries like Korea, Puerto Rico, Vietnam, etc.

Certain Key information on outlook are:

• With the National Steel Policy 2017 roll out, forex of 5,000 cr was saved since last year while around 24 MnT of crude steel capacity was added during four years. With the said Steel Policy, it shall help the country to become world leader in energy efficiency and sustainability with global standards in industry safety and health and shall also help to domestically meet the entire demand of high grade automotive steel, electrical steel, special steel & alloys.

• With current pace steelmaking capacity is expected to reach150 MnT mark by 2020 and to reach to 300 MnT by 2030.

• Generation of additional employment for 36 lakh people directly or indirectly, is expected.

• Infrastructure, oil and gas and automotives are expected to drive the growth of the industry.

• Ministry of Steel also plans to set up ‘Steel Research and Technology Mission in India to which shall promote R&D activities in the sector.

• The Industrial environment for the steel industry is becoming favorable with Government initiatives such as ‘Make in India and ‘Smart City Mission and ‘ease of doing business.

OPPORTUNITIES, THREATS, RISKS AND CONCERN

Being net exporter of total finished steel, growth in exports ensures huge access to global markets. The Stable Government at the center with policies in place for development of economy along with steel industry. The Steel consumption and production are expected to grow with pace year-on-year basis Against the vast opportunities, certain likely threats and risks associated are :

• Demand balance.

• Excess volatility in steel and raw material markets

• Dumping of excess inventory in other countries by countries producing steel in abundance.

• Overcapacity and oversupply in global steel industry.

• Cheaper imports and raw material deficiencies may lead to low capacity utilization despite of the capacity of Indian steel sector to work at full capacity level.

• Competition from substitute materials may lead to change in demand pattern.

The Indian steel industry still writhes with high cost of power, fuel and transportation, which are expected to be addressed by Government by various measures. Continuous capacity expansion of integrated steel manufacturer for processing value added products are resulting into increase in their market share at the cost of secondary manufactures and resulting into squeezing margins due to keen competition. To stay ahead, it shall be the endeavour of your company to continued developing more and more value added specialized products (Niche) and better product mix and geography mix to ensure its own growth.

The volatility of currency contributes to high risk and to minimize the impact of the same a prudent policy of necessary hedging / forward sales may be adopted, as may be required, to draw the balance between the forex asset and liabilities.

The Board of Directors is being informed periodically in respect of risk assessment and steps being taken by the Company.

FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONS

The overall sales in revenue including other income during FY 2018-19 stood at 74.02 crores and net loss of 97.73 crores. This is against the revenue of FY 2017-18 of 475.52 crores and a net loss of 57.06 crores in the previous year.

The main reasons for reduction in the revenue as well as the profits,was lower production volumes with the own production of only around 4900 MT during the year and production through job work of around 31100 MT with indirect cost of finance incurred to various job work companies of around

4.31 crores which severely impacted the profitability of job work assignments. The Company had to move to job work operations in view of lack of adequate working capital facilities due to stoppage of utilization of working capital facilities by the lenders, since the account became NPA with all the lenders. The lower volumes also significantly increased cost of production, mainly the power cost, which increased by around 2.40 per unit with additional cost of 2.50 crores, adding to losses.

The Companys performance overall has been impacted adversely during the year due to factors, which are briefed hereunder:

• Lack of working capital facilities, which led to operations through job work with lower volumes

• Fluctuation in raw material prices and currency during the year.

• The lower volumes through job work, squeezed the margins further in view of some fixed overheads.

• Increase in power cost due to fixed components in the cost, as well as the Company was not able to get the benefit / saving in power cost through Open Access in view of lower capacity.

• The domestic coated market graduated to 1220 mm and above width (1450 mm) material with rapid growth in the Colour Coated Steel subsector and against that, the Company was not able to participate due to width concern;

• Non-materialization of capex plan & various restructuring proposals, because of various reasons beyond the control of the company; and

There are challenges going forward in FY 2018-19, however, the outlook of the Company is optimistic in view of the following:

• The debt restructuring proposal, viz. One Time Settlement Proposal once materialized, would improve the operations in volumes as well as in margins. The OTS is expected to be materialized which is in view of the the support & commitment of the Ultimate Holding Company towards OTS.

• The Company has already submitted the OTS proposal and subsequent to balance sheet date, on the receipt of the funds for initial deposit from the Ultimate Holding Company, M/s. Spica Business Corp., Panama, under the Loan Facility Agreement, the Company had also deposited the initial deposit of 5% with the lenders for their consideration of OTS proposal. The same is at the advanced stage and the Company is hopeful for OTS approval and revival of operations after OTS. The Board of Directors is cautiously optimistic of a turnaround in the performance with better outlook of the Company in long run.

• With adequate working capital facilities post OTS, overall productivity improvement & capacity enhancement will lead to improvement in margins.

• Long Term availability of Open Access Power would be able to be availed, once the Company operates on reasonable volumes, with significant saving in power cost;

• With upcoming economy with value-add capex of ColourCoated Products, which already has high demand, both domestic & global, volumes and margins are likely to be improved;

• The proposed value-add capex of Aluminum Zinc (AZ) Line will enable the company to enhance the Companys viability in the market with wider market, both domestic & export, better margin and branding of the Company;

• Forward Integration by implementation of capex like wider width from 1250-1550 mm Galva lume line adding value added products resulting in higher realization per ton of production;

• With various products, the Company will be in a position to explore and penetrate new markets including domestic markets, which will enable sustained growth; and

• Various measures & initiatives being taken by the Government of India / Ministry of Steel has already started to help grow steel industry as a whole;

• It is the endeavor of the Board of Directors of your Company to strengthen the financial structure & operations of the Company.

The outlook, hence, is quite positive in long run.

INTERNAL CONTROL SYSTEM AND THEIR EFFICACY

The Company has in all material respects sound Internal Financial Control system in place, commensurate with the size, scale and complexity of its business operations.These have been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorized use or losses executing transaction with proper authorization and ensure compliance of corporate policies.

Internal Audit covering the key areas of operations and Audit on Internal Financial Control covering areas including operations having Financial Reporting impact are conducted at regular intervals. It is an independent assurance and functions responsible for evaluating and improving the effectiveness of risk management control and governance processes.

An Audit Committee consisting of two Independent Directors and one Non-Executive Director is in place. The Internal Audit Reports are placed before the Audit Committee. The Audit Committee deliberates and advises the Management on improvements/compliance and the management provides complies with the same to the said Committee, from time to time.

STATUTORY COMPLIANCES

After obtaining confirmation from the various departments of the Company in respect of compliance with all the statutory requirements, a declaration regarding compliance of the provisions of various statutes is made by the Managing Director at each Board Meeting and deviations, if any, are brought to the notice of Directors with reasons and remedial measures taken to comply with the same. The Company Secretary, as a Compliance Officer, ensures compliance of the Companies Act, provisions of the Listing Agreement and various SEBI Regulations.

QUALITY

Your Company believes in branding its products for sustainable and long term growth, through customer satisfaction that goes beyond contractual obligations, improvement in quality, resolution of customer complaints with a target of improvement in reduction of complaints from time to time. In todays global competition and open economy, quality plays a vital role in marketing the products and in staying ahead of others. Therefore, more emphasis is being given to manufacturing of products that meets high standards of quality in the global market and customers satisfaction. Proactive efforts are directed towards determining customers requirements and achieving all-round customer satisfaction. This is primarily achieved through automated systems, high attention to complaint resolution, online communication, and information exchange, at various levels.

MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS

Industrial and employee relations with the company remain cordial throughout the year. It has been with the fulfillment of our market commitments, prompt communications, and participation in social activities and to provide challenging and safe environment in the company, where every employee can develop its own strength and deliver its best expertise in the companys interest.

The Board of Directors on record conveys thanks to all the employees for their valuable contribution towards their support in performance of the company in this difficult situation.

Your Company encourages employees to go beyond their scope of work, initiated various employee engagement activities and encourages them to participate, undertake voluntary projects and training and developmental sessions enabling the employees to learn and contribute innovative ideas in line with the vision, mission and core values of the Company.