MANAGEMENT DISCUSSION & ANALYSIS

INDUSTRY STRUCTURE & DEVELOPMENT

Global Economy

Global growth in 2014 was a modest 3.4 percent, reflecting a pickup in growth in advanced economies relative to the brvious year and a slowdown in emerging market and developing economies. Despite the slowdown, emerging market and developing economies still accounted for three-fourths of global growth in 2014. (Source - IMF's World Economic Outlook, April 2014)

Complex forces that affected global activity in 2014 include medium-and long-term trends, such as population aging and declining potential growth; global shocks, such as lower oil prices; and many country- or region-specific factors, such as crisis legacies and exchange rate swings triggered by actual and expected changes in monetary policies.

Indian Economy

The Indian economy in 2014-15 has emerged as one of the largest economies with a promising economic outlook on the back of controlled inflation, rise in domestic demand, increase in investments, decline in oil prices and reforms among others.

The Gross Value Added (GVA), a new methodology introduced by Central Statistics Office to measure the economic activity, rose by 7.2 per cent in 2014-15 compared to 6.6 per cent in the brvious fiscal with base year of 2011-12. The manufacturing sector GVA rose by 7.1 per cent during the year as against 5.3 per cent in 2013-14 while mining and quarrying sector slipped to 2.4 per cent from 5.4 per cent a year ago.

During general elections held in May 2014, India witnessed the formation of Central Government with single party majority after 3 decades. This clear political mandate has ushered in new and significant hopes of India coming out of political uncertainties and taking long pending policy initiatives to accelerate economic recovery, improved business conditions, better fiscal, monetary and trade environment and corrections in overall economic fundamentals.

The new government has emphasized on improving ease of doing business, skill development and launching fresh initiatives like Make in India and Digital India, creating National Industrial Corridors Authority streamlining environment and forest clearances and labour reforms. The government has taken actions to remove regulatory uncertainty by passing ordinances to streamline land acquisition, e-auction of coal blocks for private companies and auction of other new coal mines. In the infrastructure sector, the focus has been on resolving long pending issues like pricing of gas, establishing processes and procedures for transparent auction of coal and minerals and improving power generation and distribution.

Iron and Steel

In 2014, overall global crude steel production expanded by 1.2 per cent, to 1.66 billion tonnes, from 1.64 billion tonnes in 2013. Global steel demand expanded by a mere 0.6 per cent to 1.537 billion tonnes, primarily due to contraction of demand in emerging economies like China, Brazil, Russia and Turkey. Chinese demand fell by 3.3 per cent in the year to 710.8 million tonnes, with the outlook for 2015 and 2016 showing signs of reducing further by 0.5 per cent year-on-year (yoy). Developed nations like USA, Germany, South Korea and Japan continued to show growth support during the year. In the first half of 2015, global steel output went down by 2 per cent to 813 million tonnes.

India continues to be the 4th largest producer of steel with production increasing from 81.2 million tones to 88.25 million tones during 2014-15 with an installed capacity of 100 million tones. There was no change in the order of top three steel producing nations with China, Japan and the USA retaining their slots in the respective order. A critical point that affected the industry was of fall of demand in China. Oversupply, falling raw material prices and record high exports from China have emerged as a result of the same. This scenario is likely to persist in 2015 with a high impact on the global steel markets.

India continues to be the world's largest producer of sponge iron. The world Direct Reduced Iron (DRI) production in 2014 was 74.55 million tonnes. India produced 17.31 million tonnes compared to 18.10 million tonnes in the brvious year, followed by Iran - 14.55 million tones and Saudi Arabia - 6.46 million tonnes. The production continued to decline for the fourth consecutive year since 2011. In 2014, gas based DRI production in India increased by about 20 per cent inspite of continued limited availability of natural gas. As regards the coal based DRI production, it has come down by about 7.58 per cent as compared to the brvious year. Overall there has been a reduction of about 3.60 per cent in the production of DRI in 2014. (Source SIMA)

Although, India has huge deposits of high-grade iron ore, the availability in 2014-15 was limited due to ban on mining in Orissa, Goa and Karnataka. On the other hand, excess supply of iron ore in the international markets made it convenient for sponge iron producers to import their input requirement. Global iron ore prices have declined sharply experiencing six year lows in 2014. India's iron ore imports jumped to a record above 15 million tonnes in the fiscal year as against 367 thousand tonnes imported in  2013-14.

In the Union Budget 2014-15, Customs Duty on ships for breaking was reduced from 5 per cent to 2.5 per cent. This is expected to generate lot of steel melting scrap in the country. Additionally, sluggish demand in big importing countries has softened the international prices of steel melting scrap. These two factors will continue to impact the financial performance of the Indian sponge iron producers.

With expectations of the new government's thrust on jump starting stalled projects initially followed by pushing large flagship projects, including the freight and industrial corridors, it is expected that India will begin moving back on the path of material intensive growth by the end of this year. However, constraint of domestic iron ore availability, consistently large imports at concessional duty from Japan and Korea under CEPA-FTA, as well as rising imports of boron-added steel from China and growing imbalance of global steel supply and demand remain major challenges for the Indian steel industry.

Ferro Alloys

The Indian ferro alloys industry is at cross roads. India's ferro alloy industry, which completed five decades of its existence, is engaged in supplying crucial intermediates to the steel sector. Depending on the process of steel making and the type of steel being made, the requirement of different ferro alloys varies widely. The principle functions of alloying steel is for increasing its resistance to corrosion and oxidation, improving hardness, tensile strength, high temperature properties (such as creep strength), wear and abrasion resistance, etc. Growth of Manganese alloys is directly linked with growth in crude steel. As per industry reports, the Indian Manganese alloy production remains flat.

India's dependence on imports for manganese ore continues to be the main area of concern. India is highly dependent on South Africa, Gabon, Australia and Brazil for sourcing manganese ore. Domestically, MOIL has reduced prices across its products by 20 per cent for silico grade ore and 10 per cent for ferro manganese grade ore. This announcement comes as a relief to  manganese alloy industry, which was hopeful of a price cut, as the alloy market has corrected itself considerably. The industry expects that manganese ore prices would soften further.

Power is the second most important requirement for bulk ferro alloy production. India has historically suffered from huge power shortages, inefficient power generation & transmission and high cost, partly due to cross subsidies and T&D losses. However, privatization of power generation and power distribution has brought significant improvement in the Indian power situation. While India is still at disadvantage compared with power cost in South Africa and Kazakhstan, the gap between China and South Africa on the one hand and India on the other regarding cost of power and its availability has clearly reduced, making ferro alloy production in India much more sustainable.

Prices of ferro alloys continue to remain under brssure. The export prices of ferro alloys have been established after export incentive cuts by the government. On one hand, Indian producers currently face brssure to sell (export) due to sluggish domestic market conditions. On the other hand, it is reported that overseas buyers have no interest for import of Indian origin material because Indian producers are not price competitive compared to Chinese and other competing countries currently.

In the domestic market, after witnessing a downfall, silico manganese prices are now slightly stable with demand dented as buyers were retreating due to diminishing steel margins. silico manganese producers are clamoring to offload stock. The Indian ferro alloys producers are reportedly cutting down their manganese alloy production and would like to exhaust stocks to enable steady cash flows amid thin price margins. Due to cutting down in production of ferro alloys, prices may increase further in short period.

Factors like proximity to sea ports, low labour cost, skilled technical manpower, China's retreating from export markets, etc. have given the Indian Ferro Alloy Industry immense and very significant growth opportunities in the last decade. However, global and Chinese slow down, cheap steel imports from Japan and Korea, poor duty structure, anti-dumping initiation by EU, smuggled Chinese manganese alloys from Vietnam and huge capacity coming up in Malaysia may affect the ferro alloys industry in India.

Power

Electricity industry in India had an installed capacity of 272 GW as of end March 2015. Renewable energy power plants constituted 28 per cent of total installed capacity and Non-Renewable energy power plants constituted the remaining 72 per cent. During the year 2014-15, the per capita electricity consumption in India was 1010 kWh which is still much lower than the global average consumption.

The woes of the Indian power sector continue. On the front of new capacity addition, the picture continues to look bleak. As per CEA, in the 12th Five Year Plan the target is to add 88,537 MW capacity and till end of Jan'15, capacity added stands at 52,078 MW. In terms of YoY capacity addition, there is a shortfall of 1,254 MW. Even though fuel supplies have improved, for this to percolate down to the power companies and that too in the balance sheets, will take some time, likely around H2 FY16.

With coal mine auctions on the way, supplies are expected to improve but will take some time. The government is trying to revive projects that are stuck and has even announced new UMPPs in the Budget. But given the past track record of UMPP, it will be difficult to find takers of the UMPPs. To conclude, the outlook for immediate future remains a bit dim but by the second half of FY16, some improvement can be expected in this sector.

The government, through the Ministry of Power, has started focusing on low cost generation, optimization of capacity utilization, technology upgrades and utilization of non conventional energy sources; developing the National Grid, achieving distribution reforms by focusing on system upgrades, loss reduction, theft control, protecting consumer interests and making the sector commercially viable; addressing the issues like unmet demand, frequent power cuts, infrastructure bottle-necks, etc.

OPPORTUNITIES AND THREATS

Opportunities

With the government focusing on the development of infrastructural facilities, the demand of steel and power is expected to pick up. In the Union Budget 2015-16, the Finance Minister hiked the investments in infrastructure for the year by Rs. 700 billion as compared to 2014-15. An increase in the investment for roads and railways, infrastructure, etc. will augur well for the steel industry. Low per capita consumption of steel and power in India provides good potential in these sectors to meet the growing demand for infrastructure and growth. These factors include, amongst others, an estimated infrastructure investment of nearly a trillion dollars, increase in urban population to 600 million by 2030 from the current level of 400 million, emergence of the rural market for steel currently consuming around 10 kg per annum buoyed by projects like Bharat Nirman, Pradhan Mantri Gram Sadak Yojana, Rajiv Gandhi Awaas Yojana among others.

Threats

Mining and metals companies are grappling with unbrcedented global supply restructuring in the wake of the supercycle. The global mining and metals sector is in the midst of the "super correction" to the super-cycle, with an extended period of lower and volatile commodity prices, resulting in unbrcedented impacts on earnings, balance sheets and investor perceptions of the sector. As a result, mining and metals companies remain focused on margin, cash flow and capital returns.

Price and currency volatility continues to wreak havoc with mining and metals businesses. Apart from fierce competition for capital within mining and metals companies, massive budget overruns continue to plague the completion of these capital intensive projects.

SEML, with its manufacturing and infrastructural facilities, low cost production supported by captive power, captive iron ore, strategic location, economic size, prominent position in the market and established global clientele base, foresees a good opportunity for growth in the core area of its operation. The operations at the iron ore mines of the Company resumed after more than 5 years and during the year under review, the company has also started receiving material from its captive mines. The power plant at the Greenfield project at our Vizag facility is operating successfully and the operations at the Ferro alloys plant at the Greenfield project have also stabilized. With low gearing and a strong cash flow, the Company is in a position to take advantage of the opportunities and face the threat emerging in the brsent economic scenario.

OUTLOOK

The macro economic situation in India has improved significantly during the current year. Also, acceleration in services and manufacturing growth in the face of subdued global demand conditions point to the strengthening of domestic demand. However, concerns surrounding the construction and mining activities in the country still exist. The light of the parameters is generally optimistic and a growth of around 8.5 per cent in 2015-16 is in the realm of possibility.

The Chinese steel demand in 2014 saw negative growth for the first time since 1995 due to the government's rebalancing efforts that had a major impact on the real estate market. This situation is likely to remain unchanged in the short term and Chinese steel use will continue to record negative growth of 0.5 per cent in both 2015 and 2016. The rebalancing of the Chinese economy is inevitable as China enters its next stage of development, but it will take time. In the short term, it has global consequences for the steel industry in terms of trade flows and possible intensification of trade frictions.

The sharp decline in oil prices influenced the forecast, though its impact varies between countries. On the one hand, it has a negative impact on steel demand for infrastructure investments financed from oil revenues; on the other hand it helps business sectors and consumers in oil importing countries, thus creating better growth prospects. As the inflationary brssure subsides, a further relaxation of monetary policy by the Central Banks is possible in countries with high inflation, which will eventually strengthen the recovery of underlying real steel use. As economies adjust to lower oil prices, it may lead to reduced demand for steel in some economies in the short term, but should support economic growth and demand for steel in the medium term.

The developed world showed growth in steel demand of 6.2 per cent in 2014 on the back of strong US fundamentals and a firming EU recovery. However, growth in the developed world is set to moderate in 2015 due not only to the high base effect, but also less favourable steel market environments in the USA, Japan and South Korea. The recovery in the EU, although becoming regionally broader based, is still constrained by weak investment activity and high unemployment. The developing economies (excluding China) posted low growth of 2.3 per cent because of the continued deterioration in the Brazilian and Russian steel markets. Growth momentum in the developing economies is expected to remain generally weak in 2015, however, positive growth is expected in economies such as India, Indonesia, Vietnam and Egypt.

However, SEML believes that with massive spending on infrastructure being lined up and with the Make in India programme, and with the developed infrastructure readily available with Company, the outlook for the sectors in which the Company operates appears to be stable/positive.

RISKS AND CONCERNS

Risk, which is the manifestation of business uncertainty affecting corporate performance and prospects, is an integral part of business. As a proactive enterprise, SEML strengthens its systematic approach to its risk management. The Company has formed a Risk Management Committee. To address the identified risks, the Company continues to spend significant time, effort and human resources to manage and mitigate such risks.

• Economic risk

Your Company is into the commodity industry which is cyclical in nature and this is an inevitable risk. Risk mitigation

Your Company has significantly reduced the risks arising from erratic demand through integration of its operations backed by captive power plant. Besides, the Company's plants are located in a steel manufacturing belt, making it possible to provide products with speed, timely delivery and relatively high logistic efficiency.

• Environmental risk

Your Company is required to ensure that it complies with all applicable environment laws. Risk mitigation

Your Company has installed proper pollution control equipment of required capacity to ensure that the Company complies with all environment norms. The pollution-control equipment are regularly checked and repaired/replaced to keep discharge of pollutants in the atmosphere well within the permissible limits.

• Financial risk

Timely availability of finance for normal operations and capex for projects/expansion has been and will always be a risk to which the Company is exposed.

Risk mitigation

Your Company has very low debt on its books giving it a low gearing ratio. This gives the Company the required cushion for raising required funds and meeting all its obligations on time.

• Forex risk

Your Company is importing and exporting goods. As such it is exposed to forex risk. Risk mitigation

Your Company has substantial imports and exports and as such to a large extent it has a natural hedge available to it. Besides, the Company manages its foreign exchange risk through forward bookings and other avenues. Moreover, during the year, consequent to repayment of the ECB loan, the forex exposure has come down substantially.

• Input risk

In the business of steel manufacture, a number of diverse inputs are required to be progressively taken into the next stage. The challenge lies in an ability to procure these intermediate raw materials at the right cost and in the right time. Risk mitigation

Your Company's integrated business model makes it possible for the end product of one business to be positioned as the raw material of another, creating a self feeding ecosystem within minimal inventory, costing and logistic issues. This integration has strengthened the Company's insulation from external pricing and supply shocks and enhancing input security.

• Regulatory risk

Compliance with the ever changing applicable statutes and guidelines, rules and regulations is another risk the Company is exposed to.

Risk mitigation

Your Company is complying with all applicable statutory requirements and also has systems in place to ensure compliance with the regulatory changes, if any.

• Safety risk

Ensure safety of men, materials and machines Risk mitigation

Your Company has fully equipped dispensary and fire station to cater to any fire/health hazard in the course of its operation.

Internal Auditors exbrss their opinion on the level of risk identified during the audit of particular area which is reported to the Audit Committee through Internal Audit Reports. The Management does not perceive any major risks for your Company in the near future. Your Company has contingent liabilities as disclosed in note no. 37 of the Notes to Financial Statements for the year ended 31st March, 2015.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

Your Company has in place an adequate system of internal control commensurate with its size and nature of business. The system provides a reasonable assurance in respect of providing financial and operational information, complying with applicable statutes, safeguarding of assets of the Company and ensuring compliance with corporate policies.

Your Company has availed the services of independent professional firm for Internal Audit, which checks the effectiveness of the internal controls with an objective to provide an independent, objective and reasonable assurance of the adequacy and effectiveness of your Company's risk management, control and governance processes. The Audit Committee also seeks the views/opinions of statutory auditors on the adequacy of the internal control systems in your Company. The scope and authority of the Internal Audit activity are approved by the Audit Committee. Internal Auditor reports directly to the Audit Committee of Board. Audit Committee periodically reviews the Internal Audit Reports and issues guidance and advice. Minutes of the Audit Committee are put up to the Board of Directors.

Your Company has a business planning system to set targets and parameters for operations which are reviewed with actual performance to ensure timely initiation of corrective action, if required. The Company's Audit Committee reviews adherence to internal control systems, internal audit reports and legal compliances. This committee reviews all quarterly and yearly results of your Company and recommends the same to Board for its approval.

Your Company is ISO 9001:2008 certified and has also achieved the ISO 14001:2004 & OHSAS 18001:2007 certifications. This initiative will help your Company to broaden its base on safety/health/environment. Behavior Based Safety (BBS) journey is also in place to eliminate unsafe behavior patterns.

Finance cost

Finance cost includes exchange differences to the extent considered as an adjustment to the borrowing costs. The outgo on account of interest went down during the year due to reduction in the exchange differences to be considered as an adjustment to the borrowing cost. This was again on account of less volatility in the exchange rates in current year and also on account of full and final repayment of the foreign exchange loan in the current year.

Debrciation

The debrciation during the year is higher than the brvious year on account of change in the useful life of the fixed assets which have been revised in accordance with Schedule II of the Companies Act, 2013 applicable w.e.f. 1st April, 2014. Attention is invited to Note no. 39 of the "Notes to Financial Statements".

Profitability

During the year, the Profit Before Tax was Rs. 82 crore as against Rs. 134 crore in the brvious year. The profit reduced because of the charge of additional levy amounting to Rs. 143 crore on the total coal extracted by the Company since the commencement of the mines pursuant to the order of the Hon'ble Subrme Court of India. Of this amount, Rs. 107 crores, being the additional levy on the coal extracted till 31st March, 2014 has been charged off as exceptional item and the balance Rs. 36 crores being the additional levy on the coal extracted during 2014-15 has been included in the mining expenses. Late receipt of permission for disposal of coal middlings and rejects also contributed to lower profits. The Net Profit for the year was Rs. 56 crore as against Rs. 75 crore in the brvious year.

Long term borrowings

During the year, your Company repaid the final instalment of the ECB Loan amounting to Rs. 101 crore. Your Company also repaid Rs. 129 crore of other term loans availed from the banks/ financial institutions. All the loans and the interest payment commitments were met on time.

During the year, your Company availed fresh term loans amounting to Rs. 86 crore against its Diversification, Modernisation and Expansion projects and Rs. 11 crore as hire purchase loan against equipment and vehicles. As on 31st March, 2015, the long term loans stood at Rs. 351 crore as against Rs. 423 crore in the brvious year. The debt equity ratio improved from 0.43:1 to 0.34:1.

Consolidated borrowings stood at Rs. 1,010 crore as against Rs. 1,100 crore in the brvious year mainly on account of repayment of ECB loan.

Short term borrowings

The short term borrowings stood at Rs. 176 crore as against Rs. 205 crore in the brvious year. The reduction was mainly due to repayment of Buyers' credit facilities, repayment of short term loan and unsecured loan which was offset to certain extent by increased utilization of working capital facilities.

On a consolidated level, the short-term borrowings came down from Rs. 636 crore in the brvious year to Rs. 473 crore in 2014-15 mainly due to repayment of short term loan by SEML Hong Kong Ltd. and SEML and repayment of unsecured loans. There was, however, increased utilization of Buyer's credit and working capital facilities.

Trade payables

Trade payables came down sharply from Rs. 104 crore in the brvious year to Rs. 53 crore in the year under review.

Other current liabilities

The current maturities of long term debt has gone down from Rs. 166 crore to Rs. 137 crore. However, liability towards expenses has gone up from Rs. 2 crore to Rs. 27 crore mainly on account of additional levy imposed on the coal extracted for the period from 25th September, 2014 which was payable on 30th June, 2015. The same has been paid on due date.

Fixed assets

The gross block remained constant at Rs. 1,213 crore as was in the brvious year since the additions during this year were mainly on account of completion of br-existing Capital work in progress. The net block stood at Rs. 728 crore in the current year as against Rs. 793 crore in the brvious year.

Consolidated gross fixed assets went up from Rs. 2,226 crore last year to Rs.2,330 crore for the year under review mainly on account of project investments made by MBPCL and CHP LLP of Rs. 81 crore and Rs. 37 crore respectively.

Non-current investments

During the year, your Company has made further investments of Rs. 39 crore in its subsidiaries and controlled entities mainly in Madhya Bharat Power Corporation Ltd. and Chhattisgarh Hydro Power LLP. Further, shares have been allotted to the Company against all pending share applications except for a small amount of Rs. 5 crore, allotment against which has been done in the year 2015-16. The projects of subsidiaries, namely, CHP LLP and MBPCL are under various stages of execution. The benefits of the investments would flow to your Company in the coming years.

The inventories have increased due to the build-up of stock of coal middlings and rejects. It also includes build up of stocks of mineral ores. Receivables have increased marginally and are attributable to increased turnover. Short term loans and advances relate to business advances and have come down as compared to brvious year. The other current assets have also come down.

At the consolidated level the current investments have come down mainly due to the unwinding of the investments made in fixed deposits in Sarda Energy & Minerals Hong Kong Ltd. and repayment of the short term borrowings taken for the same. The inventories have increased due to the buildup of the stock of finished goods in SMAL after commissioning of ferro alloys plant apart from coal middlings and rejects (as explained above).

MATERIAL DEVELOPMENTS IN HUMAN RESOURCE/INDUSTRIAL RELATIONS

The growth of an organization depends on effective human resource (HR) planning and management. Strategic HR practice requires a focus on the long term goals of the organization. The Human Resource (HR) practices at your Company are geared towards creating a performance driven organization. Various initiatives have been taken to attract and retain the best talents and minimize attrition. The selection process is based on br-defined Competency Matrix which helps in self-development and organizational growth.

Your Company has always recognized importance of training of its employees where the objective is to create a learning organization which ensures that employees can effectively perform, gain competitive advantage and seek self-growth. During the year, the average mandays training achieved was 1.8 man-days per employee. During the year, Behavior Based Safety training, Integrated Management system, Skill Development, Corporate Culture for the shop floor employees & knowledge sharing session by seniors were focused more under training and development activities. Our organisation also participated in the Quality Circle Chapter Convention at Bhilai and won the Gold Medal & Excellence award at the National convention held at Pune.

Your organization has been awarded the Integrated Management System (IMS) certificate from ABS Quality Evaluations Inc., which comprises of ISO 14001:2004, OHSAS 18001:2007 & ISO 9001:2008.

A Behavior Based Safety Training (BBS), which was started last year with an objective to inculcate the aspect of safety in human behavior amongst all employees has received good response from all quarters. This program is named as "Sarda Bhai Bandhu Suraksha Abhiyan". Over 80 per cent of the manpower has already attended the BBS training.

As of 31st March, 2015, the total number of employees was 1,529 as compared to 1,516 in the brvious year. The attrition rate was 6.05 per cent as compared to 9.18 per cent in the brvious year.

FORWARD LOOKING STATEMENT

Statements in the Management Discussion and Analysis report describing your Company's objectives, projections, estimates, expectations may be "forward-looking statements" within the meaning of applicable laws and regulations. Actual results could differ materially from those exbrssed or implied. Important factors that could make a difference to your Company's operations include economic conditions affecting demand /supply and price conditions in the domestic and overseas markets in which your Company operates, changes in the government regulations, tax laws and other statutes and other incidental factors.