Chairman's Speech for the 26 th Annual General Meeting of Kirloskar Ferrous Industries Limited on 3 rd August, 2017. Welcome Good morning Ladies and Gentlemen On behalf of the Board of Directors, it is my pleasure and privilege to extend a very warm welcome to all of you to this 26th Annual General Meeting. The notice convening the meeting, the Directors' Report and the audited accounts have been with you for some time and with your permission, may I consider them as read. This AGM heralds your Company s successful business growth in terms of profitability for FY 2016-17. Economic scenario: The global economic growth was at 3.1 percent for 2016. The Indian economy grew at 7.1 percent in FY 2016-17. The trade deficit for the year was $ 105 billion. At the end of FY 2016-17 the Rupee appreciated to a level Rs. 64.84 per dollar after reaching peak level of Rs. 68.72 during FY 2016-17. Industry scenario: Coke and iron ore are two major items required in the manufacture of pig iron. Coke prices which were at a level of US$ 117 per MT at the beginning of the year rose to a level of US$ 350 per MT, alongwith applicable anti-dumping duty of US$ 25 per MT for coke imports from China. The Company has been able to procure the iron ore at reasonable price by strategically sourcing through e-auction and beneficiated iron ore. Performance of Auto Industry and Tractor Industry during FY 2016-17: Auto industry produced a total of 25.32 million vehicles in April-March 2017 as against 24.01 million in April-March 2016, registering a growth of 5.41 percent over the same period last year. Sales of passenger vehicles grew by 9.23 percent and the overall Page 1 of 8
Commercial Vehicles segment registered a growth of 4.61 percent as compared to the same period last year. The tractor industry registered a growth of 18 percent. A good monsoon performance augured well for good agricultural production and also replenished reservoir levels required during the winter months. This resulted in good growth for the industry despite the effect of demonetisation felt during the month of November 2016. Financial performance of the Company year under review: Now I would like to share with you some of the financial highlights of your Company considering the prevailing economic scenario, industry review and steps taken by the Company towards business improvement: Sales and other income stood at Rs. 1,139 Crores as compared to Rs. 1,116 Crores of the previous year. Your Company sold castings aggregating to Rs.519 Crores as compared to Rs.461 Crores in the previous year. The pig iron sale was Rs. 589 Crores as compared to Rs. 623 Crores in the previous year. Reduction in pig iron sales value is basically reduction in volume owing to one furnace being taken up for upgradation for a period of around 4 months inspite of increase in sales realisation by 7 percent. The profit before tax for the year under review stood at Rs. 121.45 Crores as compared to Rs. 85.22 Crores in the previous year after providing for depreciation and amortization. The profit after tax for the year under review stood at Rs. 90.57 Crores as compared to Rs. 57.73 Crores in the previous year. Your Company was able to achieve higher profit due to strategic procurement of input materials, cost control, reduction of interest on working capital and long term borrowing through proper finance planning. Further the Company has repaid its entire long term borrowing. Dividend: Based on the profitability of the Company for FY 2016-2017, your Directors at their meeting held on 28 th April, 2017 proposed a dividend of 35 percent (Rs.1.75 per equity share) which is being placed for your approval at this Annual General Meeting. Page 2 of 8
Industrial relations: The Employer Employee relations have been generally cordial throughout the year. The employee engagement survey conducted by Aon Hewitt reflected improved engagement with the employees of the Company, which also contributed to the improved performance of the Company. Award received: Your Company has received several awards and appreciation which has been mentioned in the Annual Report. In addition your Company has received the recognition for Koppal plant for in-house research and development for the period 21st March, 2017 to 31st March, 2019 from the Department of Scientific and Industrial Research. Business scenario and current year prospects: IMF has forecast global growth of 3.5 percent for 2017. Risks to the global economic outlook appear to be broadly balanced, with a slight positive bias. The economic recovery is gradually being consolidated on the back of a general uptick in global demand and improving labor markets, particularly in the developed world. Moreover, with the exception of the United States, monetary policies among the world s largest economies will remain accommodative throughout this year and Governments are expected to shore up economic activity via fiscal spending. Higher commodity prices are providing some relief to some battered emerging-market economies. Indian Economy: Reserve Bank projected a growth for 2017-2018 at around 7.4 percent. (Lower Government spending and wider though not concerning current account deficit (CAD) could entirely offset the expected pick-up in private spending). Possible disruption due to implementation of goods and services tax (GST) could temporarily have an impact on tax revenue, further curtailing Government spending, and thus, GDP growth. Page 3 of 8
Cumulative value of exports for the period April-June 2017 was US$ 72.21 Billion and imports during the said period was US$ 112.26 Billion, taking merchandise and services together, overall trade deficit for April-June 2017-18 is estimated at US$ 28.6 billion Oil imports during April-June, 2017-18 were valued at US$ 23.17 Billion which was 22.98 per cent higher than the oil imports of US$ 18.84 Billion in the corresponding period last year. The oil prices are projected to be around US$ 53 for the year despite production cut by OPEC. Outlook of Automobile Industry and Tractor Industry: The Society of Indian Automotive Manufacturers (SIAM) forecast a 7 to 9 percent growth for the domestic passenger vehicle sales in the financial year 2017-18 and the commercial vehicle segment is expected to grow by 4-6 percent. The auto industry produced a total 6.90 million vehicles including passenger vehicles, commercial vehicles, three wheelers, two wheelers and quadricycle in April-June 2017 as against 6.43 million in April- June 2016, registering a growth of 7.5 percent over the same period last year. Domestic sale of Passenger Vehicles grew by 4.38 percent in April-June 2017 over the same period last year. The overall Commercial Vehicles segment declined by (-) 9.08 percent in April-June 2017 as compared to the same period last year. The rating agency has forecast a growth of about 6-7 percent for the tractor industry (domestic + exports) in FY2018, which is marginally lower than the long term CAGR estimate of 8-9 percent for the industry. The Government of India remains committed towards rural development and agri-mechanization, a critical component in improving the state of agriculture in the country. Also, continued support towards enhancing irrigation penetration through fresh allocations would reduce rainfall dependence over long term. This coupled with other factors such as increasing rural wages and scarcity of farm labour is likely to aid growth in industry volumes over the long term. Page 4 of 8
Tractor Manufacturers Association (TMA) said that as per the new tax rates under GST input cost per tractor would go up and this will have an impact on industry working capital. This anomaly is due to the downward revision of GST being limited to token components of a tractor while major aggregates and components such as engines, transmissions and other parts will continue to be levied at 28 percent. TMA said in a statement. Outlook for business and future prospects: A) Iron ore Mines: In response to e-auctioning of 14 C category mines in Karnataka in 2016. The end users had expressed interest only for 7 mines. Your Company participated in the auction of mines but the mines have been won by other companies at a price which was not economical to your Company. The steel ministry has suggested separate auction of iron ore for end users and mercantile category on the lines of e-auction coal supplies. The idea to strike a difference between profit and profiteering through a formula that incorporates cost of ore plus a certain percentage of profit. To have some policy to have separate bids (for iron ore) for end use and the mercantile category the support of State Government is essential. Central Government plans to put 57 mineral blocks for auction in FY 2017-18. The Karnataka Government vide its notification dated 20 th June 2017 has announced the auction of nine category C iron ore mines in the second stage for electronic auction for grant of mining lease. The last date of submission of technical bid is 7 th August 2017. Your Company will participate in auction. B) Coke and Iron ore prices: Imported coke prices which was at a level of $ 322 per MT at the beginning of the year has dropped to a level of $ 285 per MT at the end of June 2017. Iron ore prices continued to rise due to large demand viz-a-viz the supply of iron ore in Karnataka. Page 5 of 8
C) Interest cost has started going down with the introduction of marginal cost of funds by RBI. Further, good monsoon, increased domestic private investment, starting of stalled projects, infrastructure development, development in rural economy, opening of certain sectors for foreign direct investment can see business growth leading to economic growth. Financial performance in the first quarter of FY 2017-18: The Board of Directors at its meeting held today has approved the financial results of first quarter of current year 2017-18 as follows: 1. Total Income is Rs. 378.24 Crores (Quarter 1 of 2016-17 Rs.339.81 Crores). 2. Profit before tax is Rs. 1.55 Crores (Quarter 1 of 2016-17 Rs. 54.80 Crores). 3. Profit after tax is Rs. 1.23 Crores (Quarter 1 of 2016-17 Rs. 37.81 Crores). Quarter 1 of the current financial year 2017-18 was challenging on many fronts. Implementation of Euro-IV from 1 April 2017 by the Automobile companies, had some effect in the month of April, as some of the customers of the Company were not fully ready and were thinking of selling Euro-III vehicles produced in 2016-2017 in the first Quarter of 2017-2018. However, the Supreme Court by its order prohibited the sale of Euro-III vehicles with effect from 1 April 2017. Anticipating the problems in holding the pig iron stock on the cut out date of the Goods and Service Tax (GST) implementation ie. 1st July 2017, many pig iron customers started reducing the purchase of pig iron from the second week of June 2017. This affected the sales to the some extent in the second half of June 2017. Commodity prices (such as pig iron and scrap) have decreased substantially and this has created huge swing in profitability. During the first quarter of last financial year ie. 2016-2017 coke prices were as low as US$ 117 Per MT, whereas during the first Quarter of the current financial year, price of coke has risen to a level of US$ 322 Per MT. Iron ore prices also went up by nearly Rs.1,000 Per MT. Although the input price increased substantially by around 61 percent the selling price of pig iron increased by only 24 percent compared to the first quarter of previous year. This resulted in erosion of profit in pig iron business. Page 6 of 8
There was also a delay in passing on the cost increases to casting customers, due to which there has been a pressure on the margin. The Company has taken up the price revision with its customer and is in the process of settling the price increase negotiations with its customers and there has been a good progress so far which may help in. Further there has been easing in prices of coal, coke and steel scrap, owing to which the Company can see some improvement in Quarter 2 of current financial year. With the coke prices remaining high and with Anti Dumping Duty of US$ 25 Per MT in force on Chinese coke, the Company has now started buying of coal for conversion into coke to reduce the input price of raw material. The Company implemented GST from 1st July, 2017 successfully without affecting operations of the Company. Last year at the Annual General Meeting I had informed you that the Company was proposing to acquire moveable and immoveable assets relating to pig iron plant of VSL Steels Limited. However, in March 2017 the Board of Directors decided not to proceed with proposed transaction owing to unaccounted delay caused by pending disputes. Your Company has plans to scale up its top line as well as profitability by under taking various projects as under: 1) Backward integration such as coke oven plant and power plant. 2) Installation of machine shop. 3) Completion of railway siding at Koppal plant. 4) Installation of solar power project. 5) Acquisition of iron ore mines Corporate Social Responsibility (CSR): Your Company has taken several measures as a part of its corporate responsibility to the society by focusing on rural health, hygiene and education to serve the society in the local vicinity of the plant. The Company has incurred CSR expenditure as per the requirement of the Companies Act and the details of the same has been mentioned in the Annual Report. Page 7 of 8
Environment: Requirements of environmental acts and regulations are complied with. Monitoring and analysis of water, stack emissions and ambient air quality etc., are undertaken periodically to verify whether the level of environmental parameters maintained are well within the specified limits. Effluent treatment of waste water and suppression of fugitive emissions through sprinklers is also being carried out effectively. Plantation of around 1.48 Lac trees has been undertaken till date, to improve the greenery all around the plant and also to reduce dust emission during operation of raw material handling and movement of vehicles. Acknowledgement: Before I conclude, I take this opportunity to thank all our Customers, Bankers and suppliers for their cooperation and assistance extended to your Company. I thank all the shareholders for their support and confidence reposed with the Company. I also place on record my appreciation to the leadership of Mr. Gumaste and to the employees of the Company for their hard work and commitment. I shall be happy now to answer any question on the Company s operations and on the Annual Report for the FY 2016-17. Thank you! RAHUL C. KIRLOSKAR CHAIRMAN FOR THE MEETING Note: This does not purport to be proceedings of the 26th Annual General Meeting held on 03.08.2017. Page 8 of 8