Sunflag Iron & Steel Company Ltd Management Discussions

Sunflag Iron and Steel Company Limited (SUNFLAG STEEL ) has set up a state of the art Integrated Steel Plant at Warthi, Bhandara Road in the State of Maharashtra, to produce high quality Special Steels with manufacturing facilities like Sponge Iron Plant, Mini Blast Furnace, Sinter Plant, Captive Power Plant, Steel Melt Shop, Continuous Casting Machine with EMS facility, Ingot Casting and Rolling Mills. Modern annealing facilities include Bell annealing furnace, hardening and tempering, Electric annealing furnace. Bright Bar facilities like peeling machine, Combined drawing machine, Wire drawing units, coil to bar peeling machine, polishing & grinding lines and heat treatment facilities are available for value addition. Further, Ultramodern inspection and testing facilities which include Phased Array Auto Ultrasonic testing machine, Magna flux leakage test, Eddy current test, MPI and mobile / XRF Spectrometer, Anti mix testing for assuring best quality. SUNFLAG STEEL has established itself as a major global force. With the modern complex pulsating with world class technology, expert human resources and a commitment to excellence, SUNFLAG STEEL has become a reputed supplier in Flat Bars, Round Bars, Bright Bars and Wire Rods of Alloy Steel, Spring Steel, Ball Bearing Steel and Stainless Steel and captured better position in these market segments. SUNFLAG STEEL is also embarking on an export thrust and is regularly supplying to various customers in South East Asian, North American and South American Countries, South Africa, European Union, Japan, Taiwan, Australia, Switzerland, UK and Ireland.

With Ultramodern Blooming Mill & HV Mill, SUNFLAG STEEL can cater higher section requirement for Automobile, Heavy Engineering, Railways, Defence and Aerospace requirements with higher reduction ratio. Further, with Bottom poured ingot facilities, SUNFLAG STEEL is is catering special requirements of Railways and Defence for critical / core applications.

SUNFLAG STEEL has facilities like Electro Slag Refining (ESR); Vacuum Induction Melting (VIM) and Vacuum Arc Remelting (VAR), which will cater to Aerospace and Defence.

SUNFLAG STEEL is actively involved in development activities for import substitution of the special steel under the guidance of Ministry of Steel, Government of India.

SUNFLAG STEEL is developing various Special Steels which are presently not being made in India. The grades developed are in bearing grades for ball application, soft magnetic ferritic stainless steel, particularly duplex, super duplex stainless steel, precipitation hardening stainless steel, tool steels and high-speed steels. SUNFLAG STEEL is also actively involved in various MTD Committees of Bureau of Indian Standard and involved in modification and upgradation on Indian Standard through the MTD Committee for revision of Indian Standard to meet the International Standards requirements, which facilitate the indigenisation of various grades of steel.

The objective of this Management Discussion is to present an analysis of the current Indian and World economic scenario along with the expectations from the period ahead.

A) MACRO-ECONOMIC CONDITIONS

Global growth is projected to stay at 3.1 percent in 2024 and rise to 3.2 percent in 2025. The global economy has been surprisingly resilient, despite elevated central bank rates to fight inflation and a withdrawal of fiscal support amid high debt weigh on economic activity. Inflation is falling faster than expected in most regions, amid unwinding supply-side issues and restrictive monetary policy. Global headline inflation is expected to fall to 5.8 percent in 2024 and 4.4 percent in 2025, with the 2025 forecast having been revised down. The medium-term prospects show that the lower predicted growth in output per person stems, notably, from persistent structural frictions preventing capital and labor from moving to productive firms, dimmer prospects for growth in China and other large emerging market economies will weigh on trading partners.

Advanced economies are expected to see incremental growth, largely reflecting a recovery in the euro area from low growth in 2023. Developing economies are expected to experience stable growth through 2024 and 2025, with regional differences.

Advanced economies and Emerging Market and Developing Economies (EMDE) outlook

The global economic outlook has improved since the previous forecast released in January 2024. Most major economies have managed to bring down inflation without increasing unemployment and triggering a recession. However, the outlook is only cautiously optimistic as higher-for-longer interest rates, debt difficulties, and escalating geopolitical risks will continue to challenge stable and sustained economic growth. Ever-worsening climate shocks continue to pose additional challenges to the global economic outlook, threatening decades of development gains, especially for least developed countries and small islands developing States.

The upward revisions of growth mainly reflect improved prospects in the United States of America and several large developing economies, notably India and Brazil. Several large developing economies - Indonesia, India, and Mexico - are benefiting from strong domestic and external demand. Chinas growth is projected to moderate to 4.8 per cent in 2024, from 5.2 per cent in 2023. The European Union and the United Kingdom of Great Britain and Northern Ireland are expected to register modest improvement this year, after barely growing in 2023. Nevertheless, declining inflation, robust wage growth and projected rate cuts by the European Central Bank and the Bank of England are expected to provide some impetus to regional growth in the near term. Recent high frequency data indicate improving trade performance since the last quarter of 2023. In February, the global Purchasing Managers Index moved to the expansionary zone for the first time since August 2022. Tight labour markets - particularly in the developed economies - continue to sustain relatively strong household spending, notwithstanding the lagged effects of monetary tightening on consumption.

C) INDIAN ECONOMY India- Economic Outlook

Indias economy grew substantially in 2023, with estimates showing a 7.3 per cent expansi?n due to high levels of capital formation- the highest among the major economies.

In the vast landscape of global economies, India stands out with its meteoric rise and unwavering determination to reach new heights. Indias economic performance has remained robust despite global challenges and geopolitical concerns, stated the Economic Review for the month of March. This can be attributed to strong domestic demand, rural demand pickup, robust investment, and sustained manufacturing momentum, as mentioned in the review. It also mentioned that the price pressures continue to abate from the country. "Globally, inflation management continues to remain a key priority," the government release stated. The buoyant domestic economic landscape is further evidenced by improvements in consumer and investor confidence, reflected in enhanced sentiment across various sectors.

1. GLOBAL AND INDIAN STEEL INDUSTRY

Global Steel industry has been impacted by high inflation and interest rate environment in addition to growing geo-economic fragmentation. The slowdown of steel consuming sectors, especially in advanced economies viz. EU & US continued in 2023 as investment and consumption weakened. The delayed effect of tightening monetary policy may allow slow recovery in 2024 in advanced economies while emerging economies, particularly Asia may grow faster.

It seems the world economy will experience a soft landing from this monetary tightening cycle, global steel demand growth is expected to remain weak and market volatility remaining high on lagged impact of monetary tightening, high costs and high geopolitical uncertainties. While residential construction has been impacted by high interest rates, infrastructure investments have cushioned the impact in many regions, including advanced economies. Manufacturing and consumer durables sectors continued to slow against weak demand. Though automotive recovery continued in 2023, however it is expected to decelerate in 2024.

The economic situation in China appears in a transition phase. The property sector turmoil impacted domestic steel demand through most of2023. However, the Steel demand in China in 2024 is expected to witness the same level that of2023, as real estate investments continue to decline, but the corresponding steel demand loss will be offset by growth in steel demand coming from infrastructure investments and manufacturing sectors. European Union (EU) and United Kingdom (UK) are deemed to be facing the biggest challenges with geopolitical shifts, high inflation monetary tightening and partial withdrawal of fiscal support, and still high energy and commodity prices. The downside factors pulled the demand in 2023 to lowest since 2000. The demand in 2024 is expected to be just over the pandemic levels.

India, the worlds second-biggest crude steel producer remains a bright spot globally with robust demand from its construction and automotive sectors. Steel consumption in India jumped 13.4 per cent to 136 million metric tons during FY 23-24, reflecting buoyant demand for the alloy in one of the worlds fastest-growing economies.

Indias steel demand is likely to stay strong as the government expects economic growth will outpace the global economy in the next fiscal year. During FY 23-24, Indias finished steel exports were at 7.5 million metric tons, up 11.5 per cent on year. Crude steel output stood at 143.6 million metric tons, growth of 12.9% from previous year and Finished steel output stood at 138.5 million metric tons with growth of 12.4% from previous year. Projections suggest that Indian steel demand will continue to charge ahead with 8% growth in its steel demand over 2024 and 2025, driven by continued growth in all steel using sectors and especially by continued strong growth in infrastructure investments. In 2025, steel demand in India is projected to be almost 70 million tonnes higher than in 2020.

According to the NITI Aayog, India has the potential to become the worlds production centre for green steel and pave the way for its worldwide adoption. The Indian steel industry is leveraging the power of Machine Learning (ML), Artificial Intelligence (AI), and smart manufacturing to improve efficiency and strengthen sustainability.

2. OUTLOOK FOR STEEL INDUSTRY- OPPORTUNITIES AND THREATS

The steel industry has emerged as a major focus area given the dependence of a diverse range of sectors on its output as India works to become a manufacturing powerhouse through policy initiatives like Make in India. With the industry accounting for about 2% of the nations GDP, India ranks as the worlds second-largest producer of steel and is poised to overtake China as the worlds second-largest consumer of steel. Both the industry and the nations export manufacturing capacity have the potential to help India regain its favourable steel trade balance.

The National Steel Policy, 2017 envisage 300 million tonnes of production capacity by 2030-31. The per capita consumption of steel has increased from 57.6 kgs to 74.1 kgs during the last five years. The government has a fixed objective of increasing rural consumption of steel from the current 19.6 kg/per capita to 38 kg/per capita by 2030-31. By 2030-31, crude steel production is projected to reach 255 million tonnes at 85% capacity utilisation achieving 230 million tonnes of finished steel production, assuming a 10% yield loss or a 90% conversion ratio for the conversion of raw steel to finished steel. With net exports of 24 million tonnes, consumption is expected to reach 206 million tonnes by the years 2030-31. As a result, it is anticipated that per-person steel consumption will grow to 160 kg. Huge scope for growth is offered by Indias comparatively low per capita steel consumption and the expected rise in consumption due to increased infrastructure construction and the thriving automobile and railways sectors.

SUNFLAESTEELs Super Alloy Steel manufacturing facility has been commissioned and now it shall be able cater to requirements related to Commercial & Fighter jet Parts, Defence, Space Vehicles, Nuclear Reactor, Advanced Ultra Super-critical Power Plants, Industrial and Vehicle Gas Turbines, Petro-Chemical Plants and other High Temp and Corrosive Applications. This will enable the Company to reduce its dependency on automotive and auto ancillary industries and create opportunity for expansion and foray in new markets.

SUNFLAE STEEL is an approved vendor to VSSC, LPSC, HAL, Brahmos, DRDO, Collins Aerospace and GE Gas & Power and has received orders for supply of high-quality Aerospace steels & Ni Alloys.

The Government of India has taken various steps for facilitating increase in steel production and consumption such as, Implementation of Domestically Manufactured Iron & Steel Products (DMI & SP) policy for promoting Made in India steel for Government procurement, implementation of Steel Scrap Recycling Policy to enhance the availability of domestically generated scrap, Establishment of a Project Development Cell (PDC) which identifies projects to facilitate new investments, evaluating the pipeline of projects and taking necessary steps to fast-track their implementation, Issuance of Steel Quality Control Order to stop manufacturing and import of non-standardized steel, Production-Linked Incentive (PLI) Scheme for Specialty Steel, Coordination with Ministries and States, besides other countries for facilitating availability of raw material for steel making on more favourable terms further Make in India initiative and the PM Gati- shakti National Master Plan with further engagement with potential users, including from Railways, Defence, Petroleum and Natural Gas, Housing, Civil Aviation, Road Transport and Highways, Agriculture and Rural Development sectors to enhance the steel usage, overall demand for steel and investment in steel sector in the country.

The Steel Ministry has signed 57 MoUs with 27 Companies for speciality steel under PLI scheme. The PLI scheme, which is expected to generate an investment of about 30,000 crores and create additional capacity of about 25 million tonnes of speciality steel in the next five years.

Susceptibility to fluctuations in raw material prices, changes in government regulations, and cyclicality in the steel and domestic auto industry:

Profitability is susceptible to fluctuations in raw material prices. Raw material costs constitute 60-65% of the revenue; although there is a pass-through mechanism to counter fluctuations, it happens with a time lag. The inability to pass on price hikes to customers immediately also constrains profitability. Operating margin has been volatile at 12-15% during the six fiscals through 2023-24 due to fluctuations in raw material prices.

Vulnerability to adverse changes in duties and tariffs also increases the final output cost, thereby reducing the competitiveness of products in domestic and global markets. Any unfavourable changes in import regulations intensifies competition from manufacturers in China and other countries, thereby restricting the pricing power.

Beside price logistic management of bulk raw material like Iron ore, coke etc. are challenging and costly.

Sunflag operates in the cyclical steel industry, thus making it vulnerable to downturns in demand, leading to a decline in realisations. Moreover, the bulk of revenue is derived from the domestic automobile industry, primarily the passenger car and commercial vehicle segments. In the automotive industry, demand depends on economic growth and consumer sentiments. Any decline in demand could impinge on sales and profitability.

Sunflag is mainly catering steel to Automotive industry. Steel demand from the automotive sector is expected to be sustained, despite the temporary blip in growth this year. However, the Indian government is putting a significant thrust on electric vehicles, which will require less steel as these vehicles have fewer auto components.

SUNFLAE STEEL is committed to maintain its quality and has received appreciations and awards from various sources. With the continuous efforts on making clean steel, now Company is focusing on expanding its market share in other segments viz. railways and defence etc. This will protect the Company from dependency on Automobile sector.

SUNFLAE STEEL exploring better opportunities in the years to come due to continuous developments of new grades of high alloy steel as well as wire rod. Further, venturing into the self-dependency of raw materials will help in reduction in the cost of production and enhancing the profitability. This has even proved advantageous during the recessionary period which is a very good sign for the Company.

MATERIAL DEVELOPMENT

As a milestone towards minimising the carbon emissions, SUNFLAE STEEL has entered into a Joint Venture Agreement with Renew Green Energy Solution Pvt. Ltd. to source 71.34 MW of captive renewable power from its Solar Photovoltaic Power Project, which will reduce carbon emissions over the contract period of 15 years which may be extended up to 25 years.

During the year under review, SUNFLAE STEEL see some material change in the top line and in profitability. Indian Steel industry has been driven by availability of raw material viz. iron ore, coal, coking coal etc. and cost of labour. Consequently, the financial year under review remained volatile during the year. Further, your Company with continuous development of new grades of steel and upgradation of plant and equipment, could maintain its presence in the market particularly in automobile industry. There was a marginal decrease in the sales and profit before tax. Profit before exceptional items and taxes stood at 181.42 crore in the year under review as against 291.10 crore in the previous year.

To achieve effective cost reduction and improvement in productivity, activity of Total Productive Maintenance (TPM) continued to be implemented by the Company during the Financial Year 2023-24 under review.

FINANCIAL AND OPERATIONAL PERFORMANCE:

A detailed financial performance together with segment-wise/product wise performance of the Company for the FY 2023-24 is provided in Boards Report forming part of this Annual Report.

KEY RATIOS:

As per provisions of SEBI Listing Regulations, 2015, the Key financial ratios are given below:

SUNFLAE STEEL recognizes that it is exposed to a number of uncertainties, which is inherent for the industries that it operates in. The volatility of the steel industry affects the financial and non-financial results of the business. To increase confidence in the achievement of the objectives and the sustainability of our business, management has implemented a risk management process operated by the business as part of the regular management activities for identification of internal and external risks faced by the Company, in particular including strategic/sectoral, financial/liquidity, operational, marketing, sustainability (particularly, ESG related risks), employee related risk, cyber security- information and employee dishonesty risk, credit risk, product related risks, natural calamity risk or any other risk. The Board of Directors has constituted the Risk Management Committee to oversees the entire Risk management process including Risk Identification, Risk Assessment, Risk Analysis, Risk Treatment, Risk Mitigation, Risk - Control and Monitoring.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has in place adequate internal control systems and procedures commensurate with the size and nature of business. For detailed information please refer Boards Report.

MATERIAL DEVELOPMENT IN HUMAN RESOURCES

The details of Material Development in Human Resources of the Company for the FY 2023-24 are provided in Boards Report forming part of this Annual Report.

DISCLOSURE OF ACCOUNTING TREATMENT IN PREPARATION OF FINANCIAL STATEMENTS

The Company follows the guidelines of Accounting Standards referred to in Section 133 of the Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rules, 2014 together with Ind AS issued by the Institute of Chartered Accountants of India.

CORPORATE GOVERNANCE

At SUNFLAE STEEL , we ensure that we evolve and follow the corporate governance guidelines and best practices diligently, not just to boost long-term shareholder value but also to respect minority rights. We consider it our inherent responsibility to disclose timely and accurate information regarding the operations and performance, leadership and governance of the Company.

Pursuant to the Listing Regulations, the Corporate Governance Report along with the Certif?cate from a Practicing Company Secretary, certifying compliance with conditions of Corporate Governance forms an integral part of the Annual Report.

CAUTIONARY STATEMENT

The Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be forward-looking statements within the meaning applicable to 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 economic conditions affecting demand / supply and price conditions in the domestic and overseas markets, changes in the Government regulations, tax laws, other statutes and other incidental factors.