HEG Chairmans Speech

Dear Shareholders,


In business every day is a battle - for survival, for growth and for sustenance. But our fight was quite unique. For it [ was not as much with the external world L as it was with ourselves - collectively I and individually. For, in 2015-16 we i suffered a loss of Rs.8 Crore, our first in I 39 years. We were with our back to the wall.


I We had two options. Either continue H blaming the prevailing external environment for our doom, or stand L up with a united interest - success.


To succeed, we knew that talent, knowledge and expertise were not enough. We needed something more critical - the will to win. And we ignited this passion in the hearts and minds of every HEG member. The magic of this strategy is borne out in our performance.


Our operations and marketing teams worked in tandem.


On the operation side, we challenged prevailing benchmarks, put in place new systems and monitoring parameters, inculcated a mindset of disciplined operations and ensured that we delivered on our commitment every single hour.


On the marketing side, we spread wide and delved deep for expanding our opportunity matrix. We added customers, we entered new geographies and strengthened existing relations. And as the saying goes - luck favours the brave. Our efforts were supported by a turn in the external environment. The fortunes of the global steel industry changed for the better leading to restocking of inventories. Besides, the on-going supply-side restructuring in China’s steel sector has facilitated in restarting of EAF-based steel making infrastructure in other parts of the globe. The combination of these factors worked in our favour - we got sizeable orders to shore our capacity utilization.


Interestingly, focused marketing, intelligent planning and disciplined operations resulted in saving precious working capital which we prudently used to retire external debts. The bottomline then is that we made the organization fitter with a leaner man-force; we made business model more solid even as we made the organization increasingly liquid.


The bottomline then is that we made the organization fitter with a leaner man-force; we made business model more solid even as we made the organization increasingly liquid.


Looking ahead


Even as we cheer towards our success in one bout, we feel the fight has only begun for now the challenge lies in sustaining our performance against all odds. So while the prospects seem bright, the journey abounds with challenges.


Promising prospects: After registering a 0.8% growth in 2016, the global steel sector is expected to grow by 0.5% in 2017 even as weakness in investment globally continues to hold back a stronger steel demand recovery (Source: World Steel Association). While the prospects at macro level do not appear very promising, a deeper analysis at the micro level reveals interesting opportunities.


China, the largest steel producer in the globe, has launched the supply-side reforms to phase out lesser efficient steel mills - a target of permanently shutting 150 million MT capacity by 2020. While a total of 85 million tonnes of annual capacity was shut in 2016, exceeding a national target, the nation aims to shut another 45 million tonnes of annual steel capacity in 2017. This capacity closure has significant ramifications.


* One, demand is expected to outweigh supply for the first time in 5 years, which means 1) price stability in the global marketplace and 2) China participation in global trade will reduce considerably, a huge relief for steelmakers across the globe who have been hit by cheap Chinese shipments. This is evidenced by a significant fall in China’s steel exports in 2016.


* Two, China’s steel manufacturing capacity is primarily through the blast furnace route. Capacity closure in China would result in the revival of capacities in other parts of the globe, especially in the Middle-East (leveraging the EAF technology), which were severely impacted by steel dumping from China.


With EAF capacities expected to come online in the near term, the demand for graphite electrodes is expected to increase over the coming years. And with about 2,00,000 MT of graphite electrode capacity across the globe permanently shut over the last three years, the prospects for the existing players is expected to be promising.


Challenge


Even while the demand is set to increase, the input prices for graphite electrodes has skyrocketed by more than 100% over the previous year average. This unprecedented rise could exert significant pressure on business margins during the current year.


Our focus


Despite the mixed bag, I remain optimistic about the Company’s performance in the current year. The positives promise to shore our order book and consequently our capacity utilization. In addition, we will continue to strengthen the man-machine efficiency at our operating units which should facilitate in minimizing the impact of inflationary pressures. In addition, our efforts in optimizing our interest liability should also make an important contribution to the Company’s bottomline - enabling us to strengthen shareholder value over the coming years.


Message to shareholders


As we see optimism on the horizon, we are readying ourselves for a stronger performance. We remain confident of our success tomorrow and in the years to come.


Warm regards,


Ravi Jhunjhunwala


A fellow shareholder and Chairman

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