sunflag iron Management discussions

Sunflag Iron and Steel Company Limited ( ) 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 Assay Auto Ultrasonic testing machine, Magna flux leakage test, Eddy current test, MPI and mobile / XRF Spectrometer, Anti mix testing for assuring best quality.

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, 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. is also embarking on an export thrust and is regularly supplying to various customers in South East Asian, North American and South American Countries, East African Countries, Europe, Japan, Taiwan, China, Turkey, South Korea and Vietnam.

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

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

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

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. 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.

GLOBAL ECONOMIC SCENARIO & OUTLOOK

A) MACRO-ECONOMIC CONDITIONS

After growing 3.1 percent last year, the global economy is set to slow substantially in 2023, to 2.1 percent, amid continued monetary policy tightening to rein in high inflation, before a tepid recovery in 2024, to 2.4 percent. Tight global financial conditions and subdued external demand are expected to weigh on growth across emerging market and developing economies (EMDEs). Projections for many countries have been revised down over the forecast horizon, with upgrades primarily due to stronger-than-expected data at the beginning of 2023 more than offset by downgrades thereafter. Inflation has been persistent but is projected to decline gradually as demand weakens and commodity prices moderate, provided longer-term inflation expectations remain anchored. Global growth could be weaker than anticipated in the event of more widespread banking sector stress or if more persistent inflation pressures prompt tighter-than-expected monetary policy. Recent bank failures call for a renewed focus on global financial regulatory reform. Global cooperation is also necessary to accelerate the clean energy transition, mitigate climate change and provide debt relief for the rising number of countries experiencing debt distress. At the national level, it is imperative to implement credible policies to contain inflation and ensure macroeconomic and financial stability, as well as undertake reforms to set the foundations for a robust, sustainable, and inclusive development path.

In all, greater-than-expected resilience of major economies at the end of 2022 and early in 2023 led to the overall upgrade to growth in 2023. Growth rate in 2023 in USA is expected to be 1.6%, while the eurozone is expected to remain strained at 0.8%. The energy shock, a result of the war in Ukraine, continues to impact the economic activity in Europe. Chinas economy is set to rebound to 5.2% as mobility and industrial activity pick up after lifting of pandemic restrictions.

B) RECENT DEVELOPMENTS AND ECONOMIC OUTLOOK

Advanced economies

Tight labor markets and high wage growth prevented a sharper slowdown in advanced economies in early 2023. Policy rate hikes and recent bank failures have contributed to a tightening of financial conditions and a slowdown in bank lending. The recovery in China is expected to be led by services activity, which tends to be less trade intensive. In the first quarter of 2023, GDP expanded by 1.1 percent in the United States on a quarterly basis, supported by broadly robust consumption. EURO area GDP grew by 0.3 percent at an annualized rate, reflecting lower energy prices, easing supply bottlenecks, and fiscal policy support for firms and households. Advanced-economy growth is projected to slow to an annual average of 0.7 percent in 2023. This largely reflects the continued effect of considerable central bank policy rate hikes since early 2022. More restrictive credit conditions due to banking sector stress in advanced economies should slow domestic demand further in 2023. Past increases in energy prices and the expected softening in labor markets are also projected to weigh on activity. Growth is expected to accelerate modestly to 1.2 percent in 2024 due to a pickup in the euro area.

Emerging Market and Developing Economies (EMDE) outlook

Growth in EMDEs is projected to edge up to 4 percent in 2023, which almost entirely reflects the rebound in China. Excluding China, EMDE growth is set to decline to 2.9 percent this year, from 4.1 percent last year, due to the drag from high inflation and the associated monetary tightening both domestically and via monetary policy spillovers from advanced economies as well as from slowing external demand. Growth in EMDEs excluding China is expected to pick up modestly to 3.4 percent in 2024, as the effects of monetary tightening diminish and several larger EMDEs emerge from domestic strains, including natural disasters, power shortages, and political turbulence.

C) INDIAN ECONOMY

Strong economic growth in the first quarter of FY 2022-23 helped India overcome the UK to become the fifth-largest economy after it recovered from repeated waves of COVID-19 pandemic shock.

India has emerged as the fastest-growing major economy in the world and is expected to be one of the top three economic powers in the world over the next 10-15 years, backed by its robust democracy and strong partnerships.With more than 100 unicorns valued at US$ 332.7 billion, India has the third-largest unicorn base in the world. The government is also focusing on renewable sources to generate energy and is planning to achieve 40% of its energy from non-fossil sources by 2030.

According to the McKinsey Global Institute, India needs to boost its rate of employment growth and create 90 million non-farm jobs between 2023 and 2030 in order to increase productivity and economic growth. The net employment rate needs to grow by 1.5% per annum from 2023 to 2030 to achieve 8-8.5% GDP growth between 2023 and 2030. Indias current account deficit (CAD), primarily driven by an increase in the trade deficit, stood at 2.1% of GDP in the first quarter of FY 2022-23.

D) ECONOMIC AND BUSINESS OUTLOOK- GLOBAL AND INDIAN STEEL INDUSTRY

1. GLOBAL AND INDIAN STEEL INDUSTRY

The global steel production volume is estimated to reach 2175 million tonnes in 2024, growing at a CAGR of 4.50% for the period spanning from 2020 to 2024. The factors such as rising population growth, growing urban population, growing automobile sector, growing spending on construction and infrastructure projects and growing demand for long steel are expected to drive the market. However, the growth of the industry will be challenged by price volatility. A few notable trends include technological advancements, rising demand for stainless steel and rising demand for recycled steel.

The global steel market is expected to grow in future owing to increasing infrastructural activities and rising adoption of steel in automotive, electrical and other end-use industries. In terms of geographical areas, China is the major contributors to the global steel production supported by increasing automotive production and growth of electrical appliances. India is the fastest-growing market for steel with increasing urbanization, industrialization and infrastructure investments.

As per reports by CareEdge Research, the domestic steel consumption growth rate in India is expected to be around 10-12% in FY2023. There is also a rise in investments in the infrastructure sector and support from the government to encourage the growth and outlook of the Indian steel industry.

One of the primary forces behind industrialization has been the use of metals. Steel has traditionally occupied a top spot among metals. Steel production and consumption are frequently seen as measures of a countrys economic development because it is both a raw material and an intermediary product. Therefore, it would not be an exaggeration to argue that the steel sector has always been at the forefront of industrial progress and that it is the foundation of any economy.

India emerged as the second largest steel producer in the world. Indias finished steel production has increased by over 6%, whereas globally steel production declined by 4.2% in calendar year 2022. Indias Steel consumption has grown over 11% to 119 million tonnes in FY 2023 from 105 million tonnes in FY 2022. Steel consumption including exports will be around 132 million tonnes to 135 million tonnes in FY 2024.

The growth in the Indian steel sector has been driven by the domestic availability of raw materials such as iron ore and cost-effective labour. Consequently, the steel sector has been a major contributor to Indias manufacturing output. The Indian steel industry is modern, with state-of-the-art steel mills. It has always strived for continuous modernisation of older plants and up-gradation to higher energy efficiency levels.

Overall, the key steel consuming sectors are expected to perform well in FY2023-24 supported by a rise in infrastructure spend by the Government and gradually improving semiconductor supply. High CAPEX allocation in key steel consuming sectors such as railways, national highways and housing is expected to drive steel consumption.

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.

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.

According to the Indian Steel Association (ISA), domestic steel demand stood at 119.86 mt in fiscal 2022-23. Indian steel demand is expected to be robust and growing by 6.2% in FY2023-24 supported by strong GDP growth forecast, private consumption and Government expenditure. Indias capital goods sector is also expected to benefit from the momentum in infrastructure and investment in renewable energy. Automotive and consumer durables are expected to maintain healthy growth driven by sustained growth in private consumption.

Integrated Steel Players will continue to add capacity in FY2023-24, and utilisation levels are expected to remain healthy at 80%. Net export position is expected to strengthen with removal of export duty.

In order to unleash the demand-led growth of steel industry in India, the government is pushing through extensive reforms to strengthen infrastructure to enhance productivity. It would be intriguing to see how effectively India implements its reform agenda and infrastructure plans to pave the way for optimal growth and expansion of the steel industry.

In parallel with this, there are certain international trends such as the looming trade wars and economic slowdown which are going to test the mettle of Indian steel industry.

It is worth noting here that the cost of steel production in India is higher compared to other countries because of creaking infrastructure, high taxes and expensive cost of capital.

OPPORTUNITIES

s Super Alloy Steel manufacturing facility has been commissioned and now it shall be able cater to requirements related to Aircraft Parts, Defence, Space Vehicle, Nuclear Reactor, 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.

is an approved vendor to VSSC, LPSC, HAL and GE Gas & Power and has received orders for supply of high-quality Aero steels & Inconels.

Steel is a key sector for the Indian economy. India is the worlds second largest producer of crude steel and second largest consumer of finished steel. In FY 21-22, the sector contributed approximately 2% to the countrys GDP and provided approximately 20 lakh jobs. Moreover, the sector is set for significant growth: the National Steel Policy has set a target to reach 300 million tonnes (MT) of annual production by 2030 from the existing level of 120 MT.

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 Rs30,000 crores and create additional capacity of about 25 million tonnes of speciality steel in the next five years.

Steel Ministry is in the process of aligning policies with the Gati Shakti Master Plan, which will complement the hundred lakh crore investments for infrastructure development. Increased indigenous defence procurement and a growing manufacturing sector in the country is expected to contribute to steel demand.

CURRENT CHALLENGES / THREATS

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 five fiscals through 2022-23 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.

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.

SUSTAINABILITY

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.

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

During the year under review, has signed MoUs for four product categories with the Ministry of Steel under the Production-linked incentive (PLI) Scheme- 2013 for specialty steel.

The Company during the year commissioned its Blooming mill and Forging Plant which are now operating at their minimum capacity in view of operational requirement for stabilization. Few approvals from customers for super alloy products have been received and accordingly the Company is now developing various grades of steel to cater to these customers.

During the year under review, 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. As a result, there was an increase

in the sales and profit before tax. Profit before exceptional items and taxes stood at Rs291.10 crore in the year under review as against

Rs 284.29 crore in the previous year.

In order 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 2022-23 under review.

FINANCIAL AND OPERATIONAL PERFORMANCE:

A detailed financial performance together with segment-wise/product wise performance of the Company for the FY 2022-23 is provided in BoardRss Report forming part of this Annual Report.

KEY RATIOS:

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

Particulars	FY 22-23	FY 21-22	Variation	Explanation of Y-o-Y variance higher than 25%
Debtors Turnover Ratio	11.26 Times	10.34 Times	8.90%	Not significant change, ratio is within the industry norms.
Inventory Turnover Ratio	2.61 Times	2.35 Times	11.06%	Inventory turnover has increased in view of increased volume and turnover.
Interest Coverage Ratio	5.15 Times	7.60 Times	- 32.24%	Interest coverage reduction is on account of interest on additional loans availed.
Current Ratio	1.56 Times	1.53 Times	1.96 %	Not significant change, ratio is within the industry norms.
Debt Equity Ratio	0.16 Times	0.30 Times	- 46.67 %	Decrease in debt equity ratio is due to increase in other equity on account of exceptional income booked.
Operating Profit Margin (%)	10.47%	11.93%	- 12.24 %	Decrease in OPM/Net profit margin is mainly due to increase in input cost coupled with increase in interest and depreciation, accordingly, both OPM and NPM have decreased even though there is a marginal increase in volume.
Net profit Margin (%)	6.20%	8.02%	- 22.69 %	As explained above
Return on Networth (%)	37.71 %	15.47%	143.76 %	Increase is due to increase in other equity on account of exceptional income booked.

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 2022-23 are provided in BoardRss Report forming part of this Annual Report.

CORPORATE GOVERNANCE

At , 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 Certificate 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.