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102 Jindal Steel & Power Limited Business Leadership Sustainable Operations Excellent Governance Robust FinancialsManagement Discussion and Analysis ReportAnnual Report 2011-12103Steel Industry in India seems to be positiveDESPITE continuing global economicSLOWDOWN. This optimism stems frommany factors. The Indian steel industry isin some ways insulated from the eventsAFFECTING steel industry on a globalscale as it does not rely on exports to theDEVELOPED markets.set up plants in the iron ore-rich region of Bellary. Indian steelmakers are now investing in iron ore exploration overseas withtheir domestic growth largely affected by regulatory issues. Thisis despite the fact that India is gifted with huge unexplored oredeposits.Following the recent directive from the office of the Presidentof India, Coal India Limited (CIL) is currently agreement-boundto supply coal to the power stations in the country. The stateownedCIL is the primary source of coal for steelmakers, powerproducers and other industries to meet supply requirements.With the major portion of coal supply going to power producers,main sufferers of the fuel shortage will be steel mills andcement producers. After this directive, it will be difficult for CILto maintain balance in distributing coal to steel mills, powerproducers and the cement manufacturers.OUTLOOKSteel Industry in India seems to be positive despite continuingglobal economic slowdown. This optimism stems from manyfactors. The Indian steel industry is in some ways insulated fromthe events affecting steel industry on a global scale as it does notrely on exports to the developed markets. Despite high interestrates and marginal slowdown in economic activity, the basiceconomic fundamentals will ensure stable performance of theeconomy in coming years. The expected domestic consumptionof steel in the infrastructure and consumer durables sectoris likely to see an upward trend. A massive investment to thetune of about ` 50 lac crore in infrastructure sector has beenenvisaged during the 12th Five Year Plan starting this year. At thesame time, there is a greater emphasis on the manufacturingsector which is likely to witness growth in the coming years. Thishighlights the potential of steel consumption growth as roughestimate of incremental demand for steel in the country willbe approximately 40 million tons in infrastructure sector alone.Emergence of the rural market which is currently consuming ameagre 10 kg per annum will contribute to overall consumptionsignificantly buoyed by projects like Bharat Nirman, PradhanMantri Gram Sadak Yojana and Rajiv Gandhi Awaas Yojana.In 2011, India’s per capita steel consumption stood at 57 kgcompared to 1,157 kg in South Korea, 507 kg in Japan, 460 kg inChina, 284 kg in the US and World average of 216 kg.Your Company has built strong fundamentals over the yearsand is appropriately positioned to benefit from the expectedincreasing demand in the country for steel. The steel productioncapacity is being enhanced by setting up integrated steel plantsin Angul (Odisha) and Patratu (Jharkhand) and by increasingpresent steelmaking capacity of Raigarh Unit (Chhattisgarh).The Company is procuring state-of-the-art technology for theseprojects. Shadeed Iron & Steel Co. LLC, a subsidiary company isplanning to set up steelmaking facility with an annual productioncapacity of 2.0 million tons. The proposed enhancement inthe production capacity of steel making is in line with theincreasing consumption of steel and the Company will be in aposition to market its products. Marketing department has beenstrengthened appropriately which is exploring various marketsegments in India and abroad.In view of expected overcapacity, increasing domestic marketvolatility and margin pressures, the Company is changing itsapproach to suit the changing market conditions. The Companyis evolving itself to be able to respond to vagaries of emergingmarkets in a better manner. It includes use of improvedtechnologies, cost efficiencies, greater partnering with keycustomers, innovative pricing of products, broadening productservice offerings, focusing on more profitable and value addedsteel segments and prioritising on markets. The Company is alsotaking steps to improve the supply chain efficiency and specialattention is given to operational logistics. Enhancing supply chainflexibility and its robustness will not only help the Company tocompete in a dynamic economic environment but will alsoenable it to enhance its market position. In terms of adaptingto a volatile environment, the Company is also working towardsflexibility in production and will also adjust its capacity utilisationto match market conditions or adjust product mix to suit thedemand prevailing in the market.In view of planned enhancement of steelmaking capacity andwith a view to ensure constant supply of iron ore and coal, theCompany has been pursuing with Central and State Governmentsfor allotment of iron ore and coal mines and also for raw materiallinkages. Vigorous efforts are also being made for acquisitionof iron ore and coal mines in Australia and Africa continent.Power, which is in short supply in the country, is another keyinput for steel making. However, captive power generation isadequately meeting the present power requirements of the steelmanufacturing facilities of the Company.Power sector growth in the country has persistently laggedbehind and acute deficiency in power supply has providedenormous opportunities to the private sector to enter this fieldof enterprise. Your Company is also in the business of powergeneration through its subsidiary company, namely, Jindal PowerLimited (JPL), which is operating 1,000 MW (4x250 MW) powerplant at Tamnar (Chhattisgarh), the power generation capacity ofwhich is being enhanced by setting up another 2,400 MW (4x600MW) power project. JPL is also envisaging setting up of thermaland hydro power projects with an estimated aggregate powergeneration capacity of 12,700 MW. This business activity will addstrength and speed to the growth of your Company and ensurerich returns to all the stakeholders.FINANCIAL PERFORMANCEThe Company’s overall operational performance has beensatisfactory. During the financial year 2011-12, it achievedsales and other income of ` 13,518.43 crore as against lastyear’s ` 9,717.34 crore, registering an impressive growth ofabout 39%. Profit before interest and depreciation increasedfrom ` 3,725.72 crore to ` 4,246.95 crore, registering aremarkable growth of about 14%. Profit before tax increasedfrom ` 2,752.94 crore to ` 2,843.00 crore, registering agrowth of about 3%. Net profit increased by about 2% from` 2,064.12 crore to ` 2,110.64 crore. Cash profit increasedfrom ` 2,915.22 crore to ` 3,167.32 crore growing byabout 9%. Reserves and surplus stood at ` 10,751.92 crore.Net block of assets including capital work in progress stood at` 22,042.98 crore.INTERNAL coNTROLS AND SYSTEMSIrrespective of size of the business, internal controls and systemsshould be efficient, effective and ever evolving. The business ofthe Company has grown phenomenally, production capacitiesare being enhanced at a fair speed, business activities arebeing diversified through subsidiaries within the country andabroad, speed of flow of business information has increased,demand for prompt decision making based on informationand data has also increased. Accordingly there is imperativeneed to revise and update internal controls and systemsregularly considering the quantity of information, reports,records, documents, transaction statements etc. generatedcontinuously in the Company. Authentic information serves asa strong foundation for effective decision-making which has longlasting consequences on the business growth. The Companyhas set up internal control systems and procedures which arecompatible with size of its business operations and anticipatedenhancement in production capacities and are being updatedregularly to be in line with the business requirements. Audit ofoperations, establishments, marketing offices and stockyardsis conducted quarterly by outside chartered accountant firmsappointed by Audit Committee to ensure that systems areadhered to and controls are not flouted. Their reports cover allaspects of operations, accounts, purchases, stores, productionand marketing. Omissions and deviations are properly recordedand discussed thoroughly in the Audit Committee meetingsand remedial actions suggested and monitored. Cost Auditorsare separately appointed to audit cost accounting records andtheir report is discussed in the Audit Committee meetings beforebeing approved by the Board and submitted to the CentralGovernment. The Audit Committee monitors effectiveness andoperational efficiency of internal control systems periodically,provides valuable suggestions to improve the businessprocesses, systems and internal controls and briefs the Board ofDirectors about the areas of concern. Annual internal audit plansare prepared by internal auditors in consultation with AuditCommittee and audit is conducted in accordance with this plan.A separate department headed by a senior officer looks afterinternal control systems and assists internal auditors and theAudit Committee and provides desired inputs to them.FINANCIAL MANAGEMENTThe increasing requirement of funds is consistent with thegrowing business. Two main sources of funds are internalaccruals and borrowing from lenders. Internal accruals alonecannot fund the Company’s expansion at existing works andsetting up of new plants. The Company is raising funds forworking capital and project implementation from banks, financialinstitutions and other lenders, nationally and internationally,which are providing multiple financial facilities. Various creditoptions offered by lenders are thoroughly examined to find outtheir competitiveness and based on their terms and conditions,need based funds are borrowed. The financial facilities areappropriately serviced and secured as per terms of sanction. TheCompany’s senior management monitors the requirement andarrangement of funds, servicing of debts and management ofinternal accruals. The Company has arranged ` 4,277.93 crorefrom banks and FIs to meet capital expenditure during thefinancial year 2011-12.