ESSAR STEEL LIMITED ANNUAL REPORT 2010-2011 MANAGEMENT DISCUSSION AND ANALYSIS GLOBAL SCENARIO: The global economy

witnessed slow but steady recovery in year 2010 with leading indicators of economy viz. GDP, Industrial Production, Crude Oil Prices, Purchasing Managers' Index, etc. improving across all regions post global recession of year 2009. Business confidence increased gradually through the year for most parts of the world. The automotive sector rebounded strongly, construction activities continued to decline, and the recovery of mechanical engineering, domestic appliances, metal goods and other transport equipment sectors remained subdued in 2010. The fear of double-dip recession in advanced economies is reduced given the fact that private demand is advancing while fiscal policy support is diminishing. Financial conditions, though improved remain unusually fragile particularly in Europe. From late 2009, fears of sovereign debt crisis developed concerning some European states. Concern about rising government deficit and debt level, across the globe together with a wave of downgrading of European government debt created alarm in financial market. On May 2010 Europe's Finance Minister approved a comprehensive rescue package aimed to ensuring financial stability across Europe by creating the European Financial Stability Facility. In many emerging market economies, demand is robust and overheating is a growing policy concern. Rising food and commodity prices pose a threat to poor households, adding to social and economic tensions, notably in the Middle East and North Africa. The macroeconomic impact of the earthquake in Japan is projected to be limited, although uncertainty remains elevated. The flood in Australia impacted supply of Coking Coal used primarily in steel making and prices has increased beyond previously forecasted prices as a result of supply disruptions caused by the floods. Overall, with the recovery stronger on the one hand but oil supply growth lower on the other, projections for global real GDP growth in 2011-12 are moderate. INDIAN SCENARIO India witnessed robust economic growth at 8.5% during the Financial Year 2010-11. According to CMIE, the growth had been powered by a rebound in the agricultural sector which grew at 5% following the drought in 2009-10, and a sharp pick-up in private consumption and gross fixed capital formation. The manufacturing sector saw an annual growth of 8.1% in output during FY 2011 as against 11% during FY 2010. Similarly, the Mining Sector saw a decline in growth to 5.9% in FY 2011 compared to 9.9% in FY 2010. The capital Goods segment was among the most affected as it grew by just 9.3% in 2010-11 as compared to 20.9% in the previous fiscal. Inflation remained a cause for concern. Persistent inflationary pressures have been driven by rising income levels and inadequate policies to increase the supply of goods in the economy. The growth in Indian economy is expected to be moderate amidst inflationary pressures and rising interest rates. The impact of the past monetary policies and reduction in the pricing power, will slow down Industry and Services growth. The growth is Service Sector is projected to be lower and Industrial growth is likely to decline further. Overall GDP growth is expected to be in the range 7.7-8%. The investment demand is projected to moderate and the private consumption demand too could start slowing down due to increased interest rates in 2011-12. The RBI has revised interest rate upward several times since March 10, a dampener on consumption and growth. STEEL INDUSTRY (A) Global Overview Global Steel consumption reached 1283.6 mt in 2010 (up by 13.2% over 2009) which is a record consumption since inception. Apparent Steel Use (Finished Steel)* Region Quantity (Mt) Growth (%) 2010(A) 2011(E) 2012(P) 09 Vs 10 10 Vs 11 11 Vs 12 World 1,284 1,359 1,441 13.20% 5.90% 6.00% European 145 152 158 21.20% 4.80% 3.80% Union (27) Other Europe 30 33 35 23.80% 10.80% 7.30% C.I.S 49 52 57 34.30% 7.40% 8.80% N.A.F.T.A. 110 122 130 33.00% 10.90% 6.30% Central & 46 49 53 36.40% 6.60% 8.20% South America Africa 26 25 27 -3.60% -3.10% 9.20% Middle East 45 47 50 7.20% 2.60% 7.30% Asia & Oceania 834 880 931 8.40% 5.60% 5.80% China ' 576 605 635 5.10% 5.00% 5.00% India 61 69 79 9.60 13.30% 14.30% * Source: World Steel Association Figs, on Calendar Year Basis The higher growth rates witnessed in advanced economies reflects the rebound from the severe downturn of the earlier years. India and China, which were least affected by the slow down and continued to grow at robust rates. According to World Steel Association, the global steel consumption is projected to reach 1359.2 mmt in 2011 (up by 5.9% over 2010). There are however uncertainties due to the fragility in peripheral European economies, unrest in some oil producing countries in the Middle East and the earthquake in Japan. In US, the rebound in apparent steel use is forecast to continue in 2011, reflecting the second round of quantitative easing and new fiscal policy initiatives Apparent steel use in the EU is forecast to grow on the back of an export- driven industrial rebound. The largest euro zone economies like Germany and France are forecast to enjoy solid recovery in steel use mainly in the automotive and machine building sectors. The recovery of steel use in the CIS has been healthy mainly due to a strong rebound from steel-using sectors in Russia. Given the pace of steel

production in the first quarter of 2011, Chinese apparent steel use could be even higher. However, it is expected that the Chinese government's efforts to cool down the overheating economy, particularly the real estate sector, will impact Chinese steel demand somewhat later this year. Steel demand in the MENA region is expected to remain stagnant in 2011, mainly due to downward revisions from North African countries. (B) Domestic Overview The growth momentum in the Indian steel industry continues. In the financial year 2010-11, steel consumption (nonalloy and alloy) in India reached 65.6 mmt, registering a growth of 10.6% over FY 2009-10 levels. Finished Steel production in the country registered a growth of 8% during FY 2010-11 and reached a level of 66 mmt. The overall import of steel though having declined from the previous year's level, maintained a high volume of 6.79 mmt. The Exports were marginally up and touched 3.46 mmt as against 3.25 mmt during previous year. The country continued to be a net importer of steel by over 3.0 mmt. To meet the growing domestic demand, the crude steel capacity is projected to increase from 78 mmt in 2011 to 98.4 mmt in 2012. The Finished Steel production in the country is estimated to exceed 70 mt during FY 2012. The outlook for the Indian steel industry looks promising. OPERATIONS: The FY 2010-11 was a watershed in the history of your Company. The various facilities which were at project stage since last 2 to 3 years have been commissioned during the year' and started operation. Further the year has witnessed expansion of capacity to add wide range of products. Your Company is the first in the world to have ail three iron making technologies, viz. HBI - DRI, COREX and Blast Furnace at one location. This year your Company achieved highest production. Key highlights of the year were: * The state-of-the-art Plate Mill with an installed capacity of 1.5 MTPA with Heat Treatment facilities fully commissioned, it is amongst Asia's widest and only mill to produce 5 meter plates in the country, with a comprehensive thickness range of 5 to 150 mm. * Successful commission of CSP facility enables Company to produce hot- rolled coils up to 0.8 mm thickness, which will find wide applications in the automotive market. This will enable your Company to cater to a wider range of customer segments and product applications. * The Blast Furnace commissioned on 23rd Nov'10 which will help the Company in reducing the production cost by using alternate fuel. * To reach 10 MTPA capacity, your company has started the following facilities also during the current year: - ConArc furnace with capacity of 2.5 MTPA. - 6th DRI module. - 4th continuous Caster. - CSP Mill. - 2 Corex modules readied for startup. * Stabilization of DRI process with low grade pellets. * With sustained effort, the Slurry Pipe Line was started in Dec'10. * The Commissioning of the LSAW mill in the first half of FY 2010-11 added LSAW Pipes to the portfolio of specialized products. During the year Company produced 3.58 MT (flat product) and achieved sales of 3.34 MT, recording an increase of 6% and 3% respectively over the previous year. During the year under review, Pellet production at Vizag and Steel production at Haztra continued to be affected due to the suspension of material movement through the slurry pipeline from Beneficiation Plant at Kirandul to the Pellet Plant at Vizag for eight months of the year. This had an adverse effect on the profitability. The Company undertook various measures to mitigate the adverse impact by making alternative arrangements of movement of iron Ore through railway rake and road, purchase of iron ore fines and Pellets from alternate sources. The transportation of slurry through the 267 KM slurry pipeline from the Beneficiation Plant at Kirandul to the Pellet Plant at Vizag. was suspended from May'09 to Feb' 10 due to damage to the Pipeline. The company completed the repair and the restoration work by mid Feb'10 2010 and Slurry was pumped through the Pipeline to Vizag thereafter. Since, the pipeline system was lying idle and was not operational for over 8 months, it was imperative to conduct a detailed end-to-end health check up of the entire system for safe and continuous operation. The health checkup activities were in advanced stages of completion and the Company was definitely well poised to complete the same by end March'10 in accordance with the plan and restart the pipeline system immediately thereafter on a continuous basis. Unfortunately, damage to Pumping Station (PS)-2 in Mar'10 forced the Company to halt all further activities at PS-2, while work at other locations continued and were completed as planned. However, the non-availability of PS-2, rendered the entire pipeline system non-operational. The Company completed the repair and restoration activity at PS-2 and started slurry pumping in a phased manner from 25th Nov'10. The slurry pumping throughput reached its normal operating capacity on 9th Dec'10. Since then the Peiletization Complex starting from Beneficiation Plant at Kirandul to the Pellet Plant'at Vtzag are operating under normal operating conditions. The production levels have picked up again to planned levels in the last quarter. The company has an Insurance Policy which covers Material Damage loss and Loss of Profit due to Business interruptions including Terrorism Cover. The company has filed an insurance claim of Rs.9.79 Cr. for Material Damage loss and Rs.

881 Cr. for loss of profit (for the indemnity period till 30th September 2010) with the New India Assurance Company. Pending settlement of the claim with the Insurance Company, the amount of the claims has not been recognized in the accounts. Following were the achievement in major cost parameters and steps taken to achieve cost reduction: * HBI finished with NG consumption of 290 sm3/t in FY 2010-11 against 297 sm3/t achieved in FY 2009-10. * HSM ended with YTD yield of 98.2% for FY 2010-11 as against 97.84% previous year. * Hot Metal usage started at Plant A to increase productivity and reduce power consumption. * Consumption of various wastes/by products like Sludge Pond Fines, Mills Scale, flue dust, under size line stone etc. in sinter plant. Sales and Marketing: * The financial year 2010-11 saw the global economy recover from the economic crisis which had stymied growth in the previous year. The Indian economy recovered to register a GDP growth of 8.5%. * There had been loss of momentum in industrial growth and this had affected the performance of the mining and manufacturing sectors. * The successful commissioning of the CSP facility enables Essar to produce hot-rolled coils up to 0.8 mm thickness, which will find wide applications in the automotive market. This will enable us to cater to a wider range of customer segments and product applications. * The year 2010-11 was an eventful one and some performance parameters need to be seen in the right perspective. Overall sales of flat steel products improved marginally 3% y-o-y to 3.34 million tones. Export volumes, at 0.55 million tonnes, increased 77% on account of the improved steel demand globally while domestic sales at 2.8 million tonnes dropped marginally by 4.6% y-o-y. * Revenues were up 18% to Rs. 12,827.59 Cr. and net sales realization per tonne increased 18% y-o-y mainly on account of increase in price globally and more focus on value-added sales. * As much as 70% of sales were made in the value-added segments and this was largely due to continued emphasis on value-added products, like Electrical, Auto Hi-strength grade, PEB, API, etc. * Essar Hypermart sales in 2010-11 grossed 0.8 million tonnes with revenues of Rs. 3,005 crores. it extended its footprint across the length and breadth of the country by adding 23 more outlets from 87 to 110, while our market penetration and reach was further strengthened by the expansion of the Expressmarts network from 387 to 500. * With the addition of Bhuj Service Centre, our current steel processing and distribution installed capacity in India has gone up to 3.5 mtpa and two more Service Centers at Indore and Kolkata are under various stages of commissioning. * Essar Steel's focus on innovation was underlined by the following achievements: - API certification for plate & pipe products - Essar Steel became the first Indian steel producer to bag an order to supply steel for Volkswagen's passenger vehicles. - Essar Steel became the first Indian private steel producer, to be approved by the Indian Navy for steel supplies to Mazagaon dockyard for production of naval ships. - Nissan, Japan has approved Essar Steel for HR and CR supplies to its Indian and overseas facilities. - Essar Steel entered into an agreement with Kobe Steel, Japan for development of skin panels for automotive applications. - Caterpillar has approved Essar Steel's indigenously developed quenched and tempered (QT) steel for its applications. - Essar Steel became the only Indian steel company to supply steel for the Tata 'Nano'. * One of the strengths of Essar Steel is its unique, diversified global business model. This means that we are ideally positioned to benefit when market demand fully recovers. We strongly believe that the year 2011-12 will be an inflexion point for Essar Steel and will catapult it to the next level. FINANCE: The amalgamation of the Essar Steel Business in India was successfully concluded in the financial year 2010-11 (w.e.f. April 1, 2009) based on the orders of the Honourable High Court of Bombay Judicature and the Honourable High Court of Gujarat. This, along with the commissioning of the various plant facilities as outlined in the 'Operations' Section above, has brought your Company closer to achieving the plan to be a 10 million metric ton per annum Steel producer; and thus poised to become one of the leading steel producers in the country. During the financial year under review, the Company successfully consolidated its Rupee Term Debt facilities under a single loan agreement, thereby simplifying the administration of debt by your Company and the lenders. Similarly the Company also initiated the process of consolidation and enhancement of its working capital limits under single loan agreement with common terms and conditions. In order to meet the increased business needs, the enhanced working capital limits for FY 11-12 has been assessed by the lead bank, State Bank of India (SBI). During FY 11, post amalgamation, your Company has been assigned a rating of 'CARE A-' for the long term debt facilities and a rating of PR2+ for the short term debt facilities by Credit Analysis and Research Ltd. (CARE); The rating of 'CARE A-' indicates that the long term debt facilities offer adequate safety for timely servicing of debt obligations and carry low credit risk. The rating of 'CARE PR2+' indicates that the short term debt facilities have adequate capacity for timely payment of debt obligations. During the year, your Company was successful in progressing with its capital expenditure programme,

and meeting its payment obligations. Your company witnessed several challenges during FY 11 viz. high inflation in the Indian economy leading to frequent interest rate hikes, debt crisis in European economies, steep increases in price of metallic inputs, non- operation of slurry pipeline for major part of the year. With the re-start of the slurry pipeline in Q3 of FY 11 and successful completion i and commissioning of the various on-going projects on a progressive basis, your Company is well positioned to realise the benefits from the substantial capital investments made in the last 3 years by increasing its scale of operations and market presence. CHANGE IN CAPITAL STRUCTURE During the year under review the paid up equity capital of the Company increased from Rs. 1184.08 crores to Rs. 2571 crores due to allotment of shares made on preferential basis to Essar Steel Ltd., Mauritius, holding company of the Company in accordance with approval granted by the members under Section 81 of the Companies Act, 1956 at the last annual general meeting. SUBSIDIARIES As on March 31, 2011 the Company had following four direct subsidiaries and 21 step-down subsidiaries: * Essar Steel Middle East FZE, Dubai * Essar Steel Trading FZE, Dubai * Essar Steel Offshore Limited, Mauritius * Essar Steel Overseas Limited, Mauritius During the year under review, Essar Bulk Terminal Paradip Ltd. ceased to be subsidiary of the Company. The statements pursuant to Section 212(1)(e) and 212 (8) of the Companies Act 1956 relating to its subsidiary Companies forms part of the Annual Report. As per the general exemption granted by the Ministry of Corporate Affairs, Government of India vide General Circular No: 2/2011 File No: 5/12/2007-CL- III dated 8th February, 2011 and as per the consent accorded by the Board of Directors of the Company at their meeting held on November 14, 2011 for not attaching the annual accounts of the subsidiary companies, annual accounts of the above-mentioned subsidiary companies have not been attached with the Annual Accounts of the Company. Financial information of the subsidiary companies, as required to be disclosed by the said Circular are disclosed in the Annual Report. The Company will make available the Annual Accounts of the subsidiary companies and the related detailed information to any member of the Company and its subsidiaries who may be interested in obtaining the same, on request. The annual accounts of the subsidiary companies will also be kept open for inspection by any shareholder of the Company at the Registered Office of the Company. The Consolidated Financial Statements presented by the Company include financial results of its subsidiary companies. HOLDING COMPANY Essar Steel Holdings Ltd. (which in turn is a subsidiary of Essar Global Ltd., Cayman Island the ultimate holding Company) continues to be the Holding Company of your Company. RESEARCH AND DEVELOPMENT (R & D): The company has a well equipped R&D center with latest state-of-the-art facilities and a highly qualified team of engineers and technologist who are conducting developmental activities on a continuous basis. 1. Specific areas in which R&D carried by the Company and benefits derived: R & D is involved in the activities of product research and development. The major thrust areas include: A. Product development I. Hot rolled plates : Plates conforming to API specifications for oil and gas industry : - API 2H Gr. 50Z - API 5L X52 PSL 2 - API 5L X70 PSL 2 - API 5L Gr. B PSL 2 - API 5L X52 PSL 2 Sour Boiler quality plates: - ASTM A 537 Class 1 - IS 2002 Gr. 3 - ASTM A573 Gr.70 ASTM A 516 Gr.60, Gr. 65, Gr. 70 - ASTM A 387 Gr.11 Class 2 - ASTM A 387 Gr. 12 Class 1 - ASTM A 517Gr. F - ASTM A 537 Class 2 High strength structural grades: - IS 2062 E450 Fe 570 with Cu - IS 2062 E410 Fe 540 - ASTM A 572 Gr. 50 Type 2 - BS EN 10025 S355 - BS EN 10025 S355 JO N+Z15 Special quality plates: - DMR 249A - As rolled/Quench and tempered - Abrasion resistant steels : Caterpillar Specification 1E 1839 - Shipbuilding grades DH-36 II. Hot rolled strips: - API X-70 grade in higher thickness (17.5 mm) - 51 CrV4 grade - Stretch flange able steel III. Cold rolled Annealed / Galvanized steels: - Bake hardening steel for automotive panels (BH-220/180) - SS-50 galvanized grade HSLA 420 - IFHS 440 IV. Beneficiation Process: - Possibility of usage of tails was studied in coordination with IIMT & Flow sheet for the same was developed. - Installed & Commissioned Slon to improve weight recovery of FE Units from the tails. - HGMS spares developed indigenously, to reduce spares/maintenance cost. - Spirals operating efficiency enhanced by modifying the jet nozzle. - Air Blaster in iron ore fines bin for free flow of material was installed & observed an improvement, 2nd bin will also be incorporated with the same modification. V. Slurry Pipeline: - Rheology test done for iron ore slurry to study its behaviors while pumping iron ore slurry at higher densities. Presently pumping density is increased from 2.2 to 2.22 T/m3. - High pressure mail slurry pump (Geho Make) NRV indigenization for life enhancement, increased life of 100 hrs noticed (Almost 25%) - High Pressure Slurry valves indigenization. VI. Pelletization Process: - Design changes of the grate bars of the Induration machine to enhance life - Life Improvement test works for ceramic plates. Ceramic Plates tests were conducted with a new set of chemical reagents (Dithionite-Carbonate- Oxalate), positive results achieved. Now test works on the same in plant

scale is under progress. A patent for the same is filed & have been successfully approved. - Slurry Heating Project to study the impact on filtration throughput at elevated temperatures of slurry. Test works have proven that the increase in temperature of slurry from 35deg to 60deg increases the throughput of the filtration equipment by 35%. - Development of Online Image Processing System for finding size distribution of pellets in balling disc. - Process Optimization study of filters & grinding circuit to increase the productivity, Modification carried out as per recommendations. - Basket tests done for Pelletization with Dolomite addition. - Gmax Cyclones installed in the Ball Mill grinding circuit to improve the cut size of the material during classification. - Installation Particle Size analyzer to enable identify the particle size distribution. - Introduction of additional burners in the furnace to prepone the firing cycle & enable obtain better pellet quality at higher production rates. - Mix of oils without affecting the combustion efficiency & reduce the overall cost/MT. - Pellet plant Burner modifications to reduce clinker & Hot spot formation on burner ports. - Pelletizing disc side wall modification to UHPWE liners for improved life of scrapers & increase operation flexibility. VII. Captive Power Plant: - Raw water online coagulation is implemented effectively to reduce the silt density index of filter water to less than 5 (i.e. which is earlier >7) - The cartridge filters is introduced to improve the performance of RO system. This modification helped in using 67% filtrate water from ESTL and 37% GVMC water which reduced GVMC water consumption - Coal drying procedures implemented to enable plant operations in the rainy season for 3 months without shut down. - Reduced the specific fuel consumption by improving the condenser vacuum to -0.947 which resulted in an additional power generation of 0.4 MW for the same quantity of steam during winter (for 4 months). B. R&D for improvement of process - Development of innovative method for cleaning of ceramic filters used for filtering iron ore slurry - Reduction of annealing time in batch annealing furnaces for high carbon grades - Laboratory simulations on use of low grade iron ore and plant return fines for use in sinter making - Development of online real time model for temperature prediction of coils in batch annealing furnace - Reduction of coil break defect in hot rolled drawable grades - Optimization of ferro alloy addition in the existing grades leading to lower cost of production C. Material characterization a. Characterization of cold DRI pellets and suggest suitable process parameters to reduce tendency of catching fire. b. Characterization of electrical steel using hysteresis loop tracer c. TEM characterization of precipitates of micro alloyed grades D. Waste utilization a. Pilot plant trials on a method of recycling hazardous fines from effluent treatment plant 2. Benefits derived as a result of the above R&D: - Import substitution: Development of various special grades from state of the art plate mill will enable the company to provide steel which were imported. Typical grades are: ASTM A387 Gr 11, Gr 12, Abrasion resistant steel (similar to Hardox 400 supplier from other suppliers), DMR 249 A grade in thicker sections for military applications. - The Company produced 121 KT plate mill products in the grades listed above. Process R&D in the areas listed is expected to reduce manufacturing cost by Rs. 10 Cr/ year. This is achieved by lower ferro alloy consumption, lower use of consumable and higher productivity achieved. - Cost of spares of HGMS & Slon reduced as a result of indigenization of the spares. - Spirals efficiency has been increased; as a result better weight recovery is achieved. - Slurry Pumping at higher density is achieved, as a result material at higher rate is delivered. Test works with Dithionate is proved successful & a patent for the same is also approved. - Tail recovery project approved based on the test results. - Increased use of NRVs of GEHO Pump reduced & also cost reduction achieved due to indigenization. - Increased life of grate bars by 6 Months due to improved design & change in chemical composition. - There is a saving of 350KW/hr hence the net savings annually is Rs.0.40 Crs achieved due to improvement of the condenser vacuum to -0.947 in CPP. - Cost saving of Rs. 196 lakhs annually on using 67% filtered water and 37% GVMC water in CPP 3. Future plan of action: R&D will cater to product development, process improvement and raw material usage in 10 MTPA Hazira complex, beneficiation & Pelletization plants of the Company. The key focus areas in 2011-12 will be: A. Product Development: - Plate Mill Products - Especially steels with yield strength > 550 MPa - Products from newly commissioned from CSP plant - Value added cold rolled annealed/ galvanized/coated grades B. Process improvement - Special thrust on low grade iron ore use and Tailings. - Use of coal, coke and iron ore fines C. Modeling and simulation - Physical modeling of liquid steel during steel refining and casting - Use of Artificial Neural Networks and Computational Fluid Dynamics - Laboratory scale models for process simulation - Reuse of effluent after treatment to reduce specific water consumption. D. Material Characterization - Characterization of iron ore pellets from different sources to evaluate the effect of composition on iron making productivity. - Characterization of sinter, coal - Characterization of high strength plate mill products. E.

Waste Utilization - Usage of EAF slag in compound wall and road making - Technology to make tiles or building blocks from the non magnetic part of slag has been developed with Glass & Ceramic research institute. - Iron fines utilized as a partial replacement of cement in concrete road to cut down the cement cost. - Drum type micro pelletizing unit shall be put up to convert ETP sludge into micro pellets so as to utilize the same in a sinter plant.

ESSAR STEEL LIMITED ANNUAL REPORT 2009-2010 MANAGEMENT DISCUSSION AND ANALYSIS GLOBAL SCENARIO: The world economy entered into further recession in the 1st half of FY 10 though it started picking up towards the 3rd Quarter. It is now on a definite recovery path. After a sharp, broad and synchronized global, downturn in late 2008 and early 2009, countries around the world are now showing positive quarterly growth in gross domestic product (GDP), and some recovery in their trade patterns and global industrial production. The Global equity markets are also showing improvements and the risk premiums on borrowing have also fallen. Despite these more encouraging developments in global economy on the whole, the recovery is uneven. While the developed nations still continue to struggle through the effects of the downturn, the developing nations look to be at a more comfortable position. However with the ever growing dependence among the economies of the world, the condition for sustained growth remain fragile. Credit conditions are still tight in major developed economies, where many major financial institutions are stili continuing the process of strengthening their balance sheets. The real demand in most of the domestic market remains tentative as much of the rebound currently seen in the real economy is due to the strong fiscal stimulus provided by Governments in a large number of developed and developing countries and to the restocking of inventories by Industries worldwide. Consumption and investment demand remain weak and unemployment and underemployment rates continue to rise. In the outlook, the global economic recovery is expected to remain sluggish and employment prospects look unclear. Further adding to the concerns of the World economy is the fiscal positions of several European high-income countries. Europe's Sovereign debt crisis did slow down the recovery in the European Union and had its impact elsewhere in the world as well. INDIAN SCENARIO: During the Financial Year 2009-10, the Indian economy has bounced back from the global economic slowdown and is on its way to a growth path of 9%. The economy displayed a broad based recovery in the second half of 2009-10 and despite poor monsoon and fragile global recovery, the Indian economy achieved a GDP growth of 7.4% during the financial year 2009-10, one of the highest in the world. The prudent and accommodative fiscal stance by the Indian government created an overall liquidity and interest rate conditions that were conducive for growth. The inflationary conditions changed significantly during the Financial Year 2009-10, Though it remained subdued in the first half of the year, the headline inflation shot up in the second half, driven by high food prices in the beginning and later turning more generalized over successive months. The Indian economy, despite the inflationary pressures, looks quite promising in the current fiscal. The outlook for GDP growth in 2010-11 has improved considerably, given the robust recovery seen in the overall economy during the last quarter of 2009-10. The prospects of continuation of the momentum are good and will be driven by buoyant performance of the industrial sector, better monsoon compared to last year and sustained growth of services. From the demand side, investment demand had already witnessed a sharp acceleration by the fourth quarter of 2009-10 and trends in growth of production of capital goods in the first quarter of this financial year suggest continuation of momentum. Private consumption demand, going by recent pattern in corporate sales, the production of consumer durables and auto sales 'suggest a gradual pick up which could accelerate to make the growth process more self sustaining. Although concerns about a possible weakening of global recovery persists, domestic risks to growth have receded significantly. As a result, the GDP growth projections for 2010-11 have been revised upwards to 8.5% in July'10 from 8% projected in April'10. STEEL INDUSTRY A) Global Overview: After witnessing huge setbacks arising out of economic crisis of 2008, world steel industry turned the corner by mid-2009 and has been firmly set on a path to recovery since then. The recovery has mostly been an outcome of the massive multi-governmental projects all around the world and to some extent the start of restocking. World Apparent Steel use in 2009 was estimated at around 1121.1 million tonnes (mt) a drop of 6.7% over 2008 levels. The Global crude steel production during the same year was at 1,226 mt, a decline by almost -8% year-on-year. Apparent Steel Use (Finished Steel) Source: WSA Regions 2009 2010 2011 09/08 10/09 11/10 Quantities (MT) Growth (%) World 1,121.2 1,240.9 1,306.2 -6.7 10.7 5.3 European Union (27) 118.4 134.6 145.2 -35.2 13.7 7.9 Other Europe 23.9 27.2 30.4 -12.5 13.5 11.9 C.I.S. 35.8 39.8 43.0 -28.2 11.0 8.0 N.A.F.T.A. 80.9 99.9 107.1 37.4 23.5 7.2 Central & South America 33.6 40.4 43.1 -24.1 20.0 6.7 Africa 26.4 28.7 31.3 9.6 8.6 9.3 Middle East 40.7 44.7 48.4 -8.0 16.0 8.2 Asia & Oceania 761.5 825.7 857.7 8.7 8.4 3.9 The economic crisis has also brought about a definite shift in the landscape of the global steel industry. The steel industry is now shifting focus to East. .The emerging economies witnessed a quicker and stronger recovery than developed economies. In 2009, the Asian region alone accounted for 67% of world steel use, 11% higher than in 2007. In particular, China and India posted

impressive growth rates through the crisis. The increase in the regional share of developing economies is likely to remain in the foreseeable period. The recovery in the major developed economies is slow and their projected demand in 2011 remains at some 70% of the 2007 peak level. Brazil, Russia, India and China (The BRIC countries) were the driving force behind the global economic recovery and steel demand growth in 2009. Thanks to the resilience of China and India, ASU in BRIC countries grew by 17.5% and reached 640 mt. This figure accqunted for 57% of world steel demand in 2009. Excluding BRIC, the world ASU growth rate would have recorded -26.8% and without China -24.6%. The projected demand for the world excluding BRIC countries for 2011 will be at the level of 2003. The BRIC countries showed major discrepancies in the period of crisis. While China and India maintained high growth due to booming internal demand, Russia and Brazil suffered a substantial decline. The Russian recovery lags behind that of the other BRIC economies. In NAFTA, the economic recovery started in the third quarter of 2009. The manufacturing sector has been improving steadily. ASU in the US is expected to recover by 26.5% after plummeting by 42% in 2009. The recovery is backed by improving end-user demand and stock rebuilding. The EU-27 was among the most severely affected regions during the economic recession. Recovery is expected to be slow and surrounded by uncertainties. The fall in real steel use and destocking led to an ASU decline amounting to -35% in 2009. In 2010, there will be a 14% 'technical recovery' in ASU, mostly from inventory build-up. The CIS, which was badly affected by the crisis, is recovering, but more slowly than other emerging economies. Export-driven sectors of Russia are benefiting from the global recovery. Domestic market driven sectors such as automotive and construction, however, have weak prospects. Russia's ASU, after dropping by 30% in 2009, is forecast to grow by 10% in 2010. In 2009, steel use in MENA (Middle East & North Africa) increased by 0.8%. However, a closer look at the region reveals widelyvarying growth rates, from 40% in Egypt to -38.6 % in the UAE. The strength of Egypt was the demand from the infrastructure sector and a special government housing program. In Iran, oil & gas projects and housing construction drove steel use up by 4.6% in 2009. In 2010, the region's steel use will increase by 9.5% to 63 mt, given the strength of oil producing countries such as Saudi Arabia. Egypt and Algeria will see steel consumption moderate with the end of stimulus spending. Similar to the trend in Apparent Steel Use, Crude Steel production also witnessed a similar trend. While developed economies suffered unprecedented decline (for example, the EU was down by -30% and the US by -36% year-on- year), India, China, Iran and some North African countries continued to record growth during the crisis. Most notably, crude steel production in China increased by 13.5% and reached 567.8 mt. This is a record annual crude steel production figure for a single country. China's share of world steel production continued to grow in 2009, The country produced 47% of the world's total crude steel, an increase of 9 percentage points compared to 2008. In the World excluding China, crude steel production fell by 21% during 2009 compared to 2008. The other most important recent happening in the Global Steel Industry was the shift in the pricing of Raw Material from Annual Benchmark to quarterly prices. From the first quarter of 2010, the price contracts negotiated between the raw material majors and steel mills are now on a quarterly basis. This has further added to complexities that the steel industry is currently facing as this has brought in more volatility or instability in the market prices especially in terms of prices. B) Domestic Overview: While the Global Steel Industry witnessed a drop in production during 2009, the steel industry in India has been moving from strength to strength. According to the Annual Report 2009-10 published by the Ministry of Steel, India has emerged as -the fifth largest producer of steel in the world. According to a recent statement made by the India's Steel Minister, Mr. Virbhadra Singh, the country is all set to become the world's second- largest steel producer by 2012, with more than doubling its capacity to 124 mt as part of the push being given to assist overall infrastructure development. According to Ministry of Steel's Annual Report, Crude Steel Production in India in FY 2009-10 rose 11% to reach 64.9 mt in 2009-2010. The finished steel consumption rose 7% in the year ended March 2010 and touched 52.8 mt up from 48.99 mt over the same period a year ago on account of improved demand from sectors like automobile, infrastructure and housing. Earlier the National Steel Policy 2005 had projected an annual steel consumption growth of 7% based on GDP growth rate of 7-7.5% and production of 110 mt of crude steel by 20192020. However, with the current rate of ongoing Greenfield and Brownfield projects, the Ministry of Steel has projected that these growth trends are likely to be exceeded and it is envisaged that in the next five years demand will grow at higher annual average growth rate of over 10% as compared to around 7% growth achieved between 1991-92 and 2005-06. The likely growth in the India Steel industry is evident from the huge investments being planned by both the domestic players and by other international majors like Arcelor Mittal,

POSCO, etc. While most of the existing domestic payers are on a huge expansion spree, International majors are looking for opportunities to enter the fast growing domestic market through direct investments and Joint ventures. According to the Ministry of Steel, 222 memorandum of understanding (MoUs) have been signed with various states for planned capacity of around 276 mt. Major investment plans are in Orissa, Jharkhand, Chattisgarh, West Bengal, Karnataka, Gujarat and Maharashtra. With factors like high growth rates in economy of around 9%, huge government spending on infrastructure, rich and huge iron ore reserves, country set to become automotive hub, growing manufacturing sector etc. India's steel consumption is set to grow at a steady rate. OPERATIONS Manufacturing: Recovering from effects of the global economic meltdown, Essar produced 3.39 MT (flat product) & achieved sales of 3.24 MT showing improvement of 8% & 6% respectively. Sales were on lower side in Q II & Q III on account of Raw Material shortage to sustain Hazira operations. The Company has suspended slurry transportation through its slurry pipeline from Kirandul to Visakhapatnam from end of May 2009 till date due to damage to the pipeline at various locations caused by some unknown group of people. Though the Company tried to initiate the repair works, there have been some difficulties due to inhospitable terrain, monsoons and resistances from the local population and hence the restoration of pipeline could not be completed till date. To maintain the sustainable production of pellets at the Company's Palletisation plant at Visakhapatnam, production of steel at its plant at Hazira and augment the shortage of slurry, the Company has made alternative arrangements like movement of Iron ore fines through railway rakes, purchase of iron ore fines from sources other than NMDC and procurement of products like pellets, DRI and Slabs. The production levels picked up again to plan levels in the last quarter Some steps taken were: * 1st time in the history of Midrex modules that BF grade pellet was used. * Stabilisation of pellet quality in the backdrop of a fluctuating input. * Increase In usage of Hot DRI to 66.1% resulting in further saving power at Steel Melt Shop. * Umbrella agreement on Quality and capability improvement with Kobe Steel, Japan was extended to encompass development of skin panels. * Discussions initiated for joint venture in the field of further value addition In CRCA by adding Continuous Annealing in the product portfolio. Your Company has done well on the whole though the impact of variable raw material input played its role. Some indicators are as below: * NG & Power consumption @ HBI was higher in Q II & Q III mainly on account of lower production on account of Raw material shortage & poor quality of oxides from sources like KIOCL However from Q III NG consumption improved as production level had increased. * HBI finished with NG consumption of 297 sm3/t in Financial Year 2009-10 against 292 sm3/t achieved In Financial Year 2008-09, Power consumption during Financial Year 2009-10 was 112 kwh/t as against 111 kwh/t In Financial Year 2008-09. * SMP finished with liquid steel yield of 83,84% as against 84.97% achieved In Financial Year 2008-09. The main reasons for lower yield in Q IV were use of non beneficlated pellets & use of oxide with much lower Fe% (from KIOCL etc.). The situation Is getting corrected as we go forward due to alternative planning and use of beneflciated pellets. * SMP achieved power consumption of 608 kwh/t of liquid steel as against 589 kwh/t achieved In Financial Year 2008-09, the main reasons being poor oxide quality etc, The situation Is getting corrected as we go forward due to alternative planning and use of beneficlated pellets, * HSM ended with YTD yield of 97.84% as against 97.83% previous year. Highest yield achieved was 98.21% In Jan'10. * Performance of the Cold Rolling Mill Complex was as per plan and utilization of lines was at planned levels. Sales and Marketing: The financial year 200910 was witness to the global economic crisis and was a critical year for the steel industry. Only companies with sound fundamentals managed to survive in difficult market conditions and Essar Steel is one of them. Essar Steel is in the process of expanding its liquid steel production capacity at its Hazira facilities to approximately 10.0 MTPA and has diversified the finished steel product portfolio to include plates and pipes. The state-of-the-art Plate Mill with an installed capacity of 1.5 MTPA is under trial run and is capable of producing High Strength Extra Wide plates, including quenched & tempered and furnace normalized categories. It is amongst Asia's widest and only mill to produce 5 meter wide plates in the country, with a comprehensive thickness range of 5 to150 mm. As a part of forward integration of our steel plant, we have commissioned a 600,000 TPA Pipe Mill including one L-SAW mill with a capacity 325,000 TPA and two H-SAW mills with total capacity 275,000 TPA pipe making facility. Our pipes will cater mainly to the oil and gas transportation, line pipe and structural fabrication segments. In addition to this we also have 3LPE/3LPP/ FBE (Capacity 2 Mn square meter per annum) and internal liquid epoxy coating (Capacity 1 Mn square meter per annum) facilities. We have already received API 5L and API 2B certification. The upcoming CSP will enable us to produce hot-rolled coils up to 0.85mm thickness, which will find wide applications in the automotive

market. This will enable us to cater to a wider range of customer segments and product applications. * The year 2009-10 was an eventful one and some performance parameters need to be discussed in the right perspective. Overall sale of flat rolled products was up 6% Year on Year to 3.24 million tonnes, largely because of improved performance in the domestic markets. Domestic sales at 2.93 million tonnes rose 19% Year on Year. This was in line with the 21% improvement in combined domestic sales volume of the top 5 producers. Export volumes, at 0.31 million tonnes, dropped 48% on account of the depressed steel demand globally. Revenues were down marginally 8.26% to Rs. 10,893.01 crore and net sales realization per tonne was lower by 16.34% Year on Year on account of cheap imports flooding the country. This trend was evident across the entire domestic steel industry. * As, much as 71% of sales were made in the value-added segments - up from 52% in Financial Year 2008-09. This was largely due to increased emphasis on value-added products, like Electrical, Auto Hi-strength grade, PEB, API, etc. Essar Steel gained in market share (domestic) - from 13.6% in Financial Year 2008-09 to 14.8 % in Financial Year 2009-10. Essar Steel was the first Indian producer to de-commoditize steel and increase its availability across the remotest corners of the country. Essar Hypermart is the first and largest steel retail network in India and needless to say, commands the largest sales volume to its credit. Essar Hypermart sales in Financial Year 2009-10 grossed 1.11 million tonnes, thus registering a stupendous 82.73% growth in volumes. Revenues grew by an impressive 37.23% to approximately Rs. 3,487 crore. Increase in revenues was achieved mainly because of higher sales volume. In the year Financial Year 2009-10 Essar Hypermart extended its footprint across the length and breadth of the country by adding 26 more outlets from 61 to 87, while our market penetration and reach was further strengthened by the expansion of the Expressmart network from 27 to 387. With the acquisition of SPSL (Shree Precoated Steel Ltd.), now rechristenedESPF (Essar Steel Pune Facility), Essar Steel has added Pre- painted galvanized coils and sheets in its product portfolio and has emerged as one of the largest producer by capacity of coated products in the country, Essar Steel is the only Indian steel company to have the entire range of flat products from Plates to Pre-painted Galvanized coils and sheets. * We are aiming to widen our geographical reach and further strengthen our distribution network in Financial Year 2010-11 with the addition of more Hypermarts and Expressmarts. * The four existing Service Centers at Hazira, Pune, Bahadurgarh and Chennai are fully established and have successfully developed good customer base to cater to various just-in-time customized requirements. Our current Service Centre installed capacity is 2.6 MTPA and we are expanding the network to include three new upcoming Service Centers at Bhuj, Indore and Kolkata to augment our processing capacity to 3.6 MTPA, which is the largest in the country. The year ahead will be a challenging one and Essar Steel is well positioned to play a defining role in the domestic as well as overseas steel markets and will aim to further establish its presence in new product segments and emerging markets and increase stakeholder value.