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Management Discussion and Analysis

The Management of Bhushan Steel Ltd. presents its report covering performance and outlook of the Company. The report has been prepared in compliance with the Corporate Governance requirement prescribed in the Listing Agreement. The management accepts responsibility for the integrity and objectivity of the financial statements.

Industry Structure & Developments

The steel industry is divided into primary and secondary sectors. The primary sector produces billets, plates, rounds and Hot Rolled (HR) Coils/Plates. These form raw materials for the secondary sector, which produces value added items such as angles, channels, wire rod, cold rolled coils / sheets and galvanised coils/sheets. Cold Rolled (CR) Sheet is a thinner sheet used for consumer durables (refrigerators, washing machines etc), automobiles, bicycles etc. CR sheets are used by the automobile and domestic appliances industry whereas CR strips are used in manufacturing of bicycles, drums, barrel, fabrication, furniture etc. CR coils are mainly used for manufacturing GP/GC sheets.

BSL falls under secondary sector and has a strong presence in the OEM and export segments. This continues to provide stability to its earnings profile

The Global Steel Industry

World crude steel production stood at approx. 1.12 billion tons in 2005. China - today ’ s largest steel producer and consumer by far - continues and is expected to continue to lead the global steel industry as both its production and consumption have shown a remarkable growth.

In addition to the critical importance of China’s impact on the sector other major factors impacting the global scenario are i) The relatively recent and tight supply conditions of key raw materials namely iron ore and coking coal, which have widened the comparative advantage of integrated steel producers that have captive mines producing both these inputs, over those that depend on external suppliers. This situation is exacerbated by the highly concentrated nature of the world’s ore production coupled with constraints in freight capacity. Large steelmakers are reacting to this and are migrating to low-cost, iron ore rich locations. ii) The industry is increasingly becoming more global, in terms of both production and trade, not only because of access to key raw materials but also thanks to cost pressures and declining steel tariffs in a number of countries in line with their WTO commitments.

Indian Steel Industry

India derives its competitive advantage in steel making from the availability of abundant quality reserves of iron ore and coal, a fast growing domestic market driven by infrastructure, construction, automotive and consumer goods sectors as well as a highly skilled and low cost workforce. The economy grew at 8.1% in FY 2006. The trend for steel consumption is generally 1-2% higher than the GDP growth rate.

At present, the market is competitive with domestic prices closely correlated to international prices. Indian manufacturers generally peg their prices at around the landed cost of steel imports, which include freight, insurance, the import duty and other handling charges. These different charges, along with inland transportation charges, provide some proximity advantage to local producers. However, as the value added segment is very quality sensitive, and imports are not able to cater to the specific requirements of the segment BSL caters to.

Capacity Expansions

Taking advantage of the upturn in the demand cycle, a number of steel makers have started modernizing and/or expanding their plants while others have announced new capital spending in greenfield projects.

With respect to flats it is expected that an additional steel making capacity of 5 -7 million MT may come on stream over the next 4-5 years subject to favourable market conditions and availability of finance. This projected growth does not take into account big greenfield projects announced for implementation in Orissa most of which are unlikely to come on stream before 2010. BSL expects to have a first mover advantage in this regard, as its plant is scheduled for completion by FY 2009 itself

opportunities & threats

Riding on the back of favourable conditions like competitive prices, easy and abundant consumer finance, untapped rural demand in case of white goods/ consumer durables and soft finance schemes including tax rebate and massive government expenditure on housing and infrastructure, the following are likely to be the key drivers for increased steel demand in the near future:

Automobiles: Hot rolled flats are used in automobiles, as chassis, bumpers and clutch covers. In general, steel constitutes 60% of the weight of a car body. Cold rolled coils and sheets are used to manufacture auto bodies (for commercial vehicles, cars, tractors, two and three wheelers), and auto components (such as clutch assembly, bearings and horns). Coated sheets are also used in the manufacture of auto bodies. Total four-wheeler production in FY05 rose to 1.55 million vehicles, clocking a growth rate of 23%. Over the next five years, sales (domestic as well as exports) of passenger vehicles - main user segment of auto market for flats - is expected to grow at a compound rate of 14% to just under 2.5 million vehicles while the commercial vehicle market is projected to grow at a lower 4-5% rate.

Consumer Durables: The five year demand projections for various segments of the consumer durables marketplace range between 5%-20%. As this consumer durables sector is a major end-use sector for cold rolled flats - with white goods (the outer panel of most white goods is made of cold rolled or galvanized sheets) and furniture accounting for around 10.6% of total consumption, demand in the flat steel segment is also likely to be driven by the underlying growth in this sector.

Construction: Long products are used extensively in the construction sector, which consumes over 10 million tons of steel annually, and is projected to grow at around 20% for the next five year period. However, as compared with international norms, the construction industry in India is not steel-intensive and there is a further scope for improvement for broadening the base in this market.

Flat products are also used in the construction sector. Hot rolled steel coils and sheets are used in structural materials and welded pipes. Cold rolled sheets and coils are used in press formed components, which in turn are used in construction, for making tanks and containers. Galvanized sheets are largely used in roofing, slide cladding, making water tanks and as fencing material.

Pipes and Tubes: Flat steel demand is likely to get a significant pull from the piping sector, thanks to an increased emphasis on gas, irrigation and water supply projects. Currently, the country has around 6,300 km of pipeline in place. It is estimated that the pipeline network will more than double in the next 5-7 years.

Exports - The China Factor

China remained the world’s largest steel producer, while India occupied the seventh position. Chinese market, which was the driver for most of the growth in the steel industry in the last two years has now become a small net exporter. This situation is not expected to lead to an oversupply elsewhere thanks to generally strong demand and the Chinese Government tightening its policy. The Government of China has imposed restrictions on new capacity investments by local producers as well as lending to the sector. Chinese producers already face limited raw material availability, power shortages and the need to export due to increased domestic supply and tough domestic competition. These factors will likely lead to a reduced rate of new capacity addition in China. Also, given that steel is a visible industry, the Chinese Government will likely prevent its steelmakers from dumping abroad.

Performance

The Company is engaged in the Steel business, which in context of Accounting Standard 17 issued by the Institute of Chartered Accountants of India is considered the only business segment.

	Year 2005-06	Year 2004-05	Variation
Turnover	2805.15	2688.94	116.21
PBDIT	408.45	411.21	-2.76
Interest & Financial Charges	83.03	80.83	2.20
Cash Profits	311.65	317.27	-5.62
Depreciation	165.76	164.72	1.04
Profit Before Tax	159.66	165.65	-5.99