Avon Organics Ltd

To

The Members,

Your Directors have pleasure in presenting their Eighteenth Annual Report on thebusiness and operations of the Company and the Audited Financial Accounts for the yearended 31st March, 2011.

FINANCIAL RESULTS

(Rs In lakhs)

The figures of the previous year have been reclassified to conform to the currentclassification.

DIVIDEND

The Directors are pleased to recommend a Dividend of 10% (Re. 1/- per Equity Share ofthe face value of Rs. 10/- each), which, if approved by the Members at the ensuing AnnualGeneral Meeting will involve an outflow of Rs. 225 Lakhs towards Dividend and Rs. 37.37Lakhs towards Dividend Distribution Tax resulting in a total outflow ofRs. 262.37 Lakhs.

PERFORMANCE REVIEW

During the year, the Company has achieved Net Sales and Operational income of Rs.16212.07 Lakhs as against Rs. 15045.49 Lakhs in the previous year, registering an increasein sales by 7.75%. During the year, the Company has achieved a Net profit before Tax ofRs. 986.05 Lakhs as against Rs. 890.20 Lakhs, during the corresponding period in theprevious year, resulting in consistent rise in profits for the 3^rd consecutivefinancial year.

The total sales of the Company includes export sales of Rs. 4223.65 Lakhs during theyear under review as against Rs. 5081.30 Lakhs in the previous year and account forapproximately 26.05% of the total sales in the current year as against 33.77% in theprevious corresponding period.

CAPITAL EXPENDITURE

During the year under review, the Company has incurred capital expenditure amounting toRs. 2949.96 Lakhs. The amount has primarily been used in upgradation and modernization ofthe manufacturing facilities including set up of ETP facility at Solapur.

QUALITY SYSTEMS

The Company being engaged in the pharmaceutical sector strives to maintain the higherquality standards and complies with various regulations in relation to the same. TheCompany has following valid certifications:

• The Company complies with the ISO standards and has a valid ISO 9001:2008Certificate for the unit of the Company located at Sadasivpet.

• The Solapur unit of the Company is cGMP compliant and is USFDA inspected.

DIRECTORS' RESPONSIBILITY STATEMENT

Pursuant to the provisions of Section 217 (2AA) of the Companies Act, 1956, theDirectors confirm that:

a) In the preparation of the annual accounts for the year ended 31^st March,2011, the applicable accounting standards have been followed along with proper explanationrelating to material departures;

b) Your Directors have selected such accounting policies and applied them consistentlyand made judgments and estimates that are reasonable and prudent so as to give a true andfair view of the state of affairs of the company as at 31^st March, 2011 and ofthe Profit and Loss Account for the year ended on that date;

c) Your Directors have taken proper and sufficient care for the maintenance of adequateaccounting records in accordance with the provisions of the Act for safeguarding theAssets of the company and preventing and detecting fraud and other irregularities and

d) The accounts for the year ended 31^st March, 2011, have been prepared on agoing concern

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CORPORATE GOVERNANCE

Your company complies with all the requirements which are mandatory for complianceunder the Companies Act, 1956 and the Listing Agreement entered with the Stock Exchanges.The nature of compliances made in order to meet the requirements and to promotetransparency are more specifically detailed in a separate report on Corporate Governanceattached herewith, which forms the part of the Annual Report.

NOTE ON OPERATION OF THE SUBSIDIARY COMPANY IN SINGAPORE

Pursuant to the resolution passed at the Meeting of the Board of Directors of theCompany, held on 15th May, 2010, a wholly owned subsidiary company has been incorporatedin the name of Regal Pharma PTE Ltd. in Singapore. The Subsidiary company has been formedto facilitate the marketing operations of the Company in the overseas market and toexplore any further business opportunities.

CONSOLIDATED FINANCIAL STATEMENT

The Ministry of Corporate affairs vide its General Circular no. 2/2011 dated 8thFebruary, 2011, has granted a general exemption under Section 212(8) of the Companies Act,1956, from appending the balance sheet of subsidiary companies to the annual report of theparent company. Accordingly, the Balance Sheet, Profit & Loss Account and otherdocuments of the subsidiary company are not being appended to the Balance Sheet of theCompany. The Company will arrange for the Annual Accounts of the subsidiary company andother the relevant information in detail, for any shareholder of the Company who may beinterested in obtaining the same. The Annual Accounts of the Subsidiary company will alsobe made available for inspection at the registered offices of both the Company and thesubsidiary company. The details of accounts of the subsidiary company shall be madeavailable in hard copies to any shareholder, on demand in writing.

The consolidated financial statements and a statement pursuant to Section 212 of theCompanies Act, 1956 are appended to and are forming part of this annual report.

DIRECTORS

The Board has an optimum combination of Executive and Non-Executive Directors withmajority of the Board comprising of Non-Executive Directors.

As per the requirements of Clause 49 of Listing Agreement, only one-third of the Boardshould comprise of Independent Directors in case the Chairman of the Board is aNon-Executive Director. However, in our case since the Non-Executive Chairman is aPromoter Director of the parent company, therefore he cannot be considered to beIndependent and therefore the Company has fifty percent of the Board comprising ofIndependent Directors, in compliance with the provisions of Clause 49 of the ListingAgreement.

Re-appointment of Mr. Ajit Kamath, Non-Executive Chairman & Managing Director

Mr. Ajit Kamath, Non-executive Chairman & Managing Director retires by rotation atthe ensuing Annual General Meeting and being eligible, offers himself for re-appointment.

Mr. Ajit Kamath is the Chairman & Managing Director in Arch Pharmalabs Limited, theparent company of Avon organics Limited. He is a commerce graduate by qualification andpossesses an experience of more than 12 years in the Pharmaceutical industry.

Re-appointment of Mr. V. S. Soma, Executive Director

Mr. V.S.Soma, Executive Director retires by rotation at the ensuing Annual GeneralMeeting and being eligible, offers himself for reappointment.

Mr. V. S. Soma is a Company Secretary and Chartered Accountant by qualification. He hastwo and a half decades of experience spanning diverse industries, majority being in thepharmaceutical industry. He is associated with Avon Organics Limited as a CompanySecretary since April, 2006.

Regularisation of appointment of Mr. Upkar Singh Kohli, Non-Executive, IndependentDirector

Mr. Upkar Singh Kohli was appointed as Additional Director of the Company at themeeting of Board of Directors held on 22^nd January, 2011. As per the provisionsof Section 260 of the Companies Act, 1956, Mr. Upkar Singh Kohli will hold office of aDirector up to the conclusion of Annual General Meeting. The Company has received noticein writing as per provisions of Section 257 of the Companies Act, 1956, proposing hiscandidature forthe office of the Director.

Mr. Upkar Singh Kohli holds a degree in Bachelor of Engineering (Mechanical). He is acertified associate of Indian Institute of Bankers. He has more than 35 years ofexperience in the banking sector and has worked with Punjab National Bank, Punjab &Sind Bank, etc. in various capacities like General Manager-Zonal, Manager- C.V.C. etc.

He is currently a Director on the Boards of Birla Power Solutions Ltd., Birla CotsynIndia Ltd., STI India Ltd., Union KBC Trustee Co. Pvt. Ltd., U.V.Asset Reconstruction Pvt.Ltd., Wizeman Finance and C. M. Farming alongwith Avon Organics Limited.

Resignation of Mr. Ramakant Nayak and Dr. Shantilal Jain, Non-Executive, IndependentDirectors

Mr. Ramakant Nayak and Dr. Shantilal Jain, appointed as Non-Executive, IndependentDirectors in the Company, resigned from the Board of the Company with effect from 22ndJanuary, 2011. The Board would like to place on record, its appreciation for theirservices to the Company during the tenure of their appointment.

STATUTORY AUDITORS

The Statutory Auditors, M/s. Mukesh Mehta & Co., Chartered Accountants, hold officeuntil the conclusion of the ensuing Annual General Meeting and are recommended forre-appointment upto the conclusion of next Annual General Meeting. A certificate ofeligibility has been received from the Auditors to the effect that their re-appointment,if made, would be within the limits prescribed under Section 224(1 B) of the CompaniesAct, 1956.

COST AUDITORS

Pursuant to the Cost Audit Branch Order no. F.52/26/CAB-2010 dated 02.05.2011 andNotification dated 03.06.2011 issued by the Ministry of Corporate Affairs, appointment ofCost Auditor for the financial year 2011-12, has been made mandatory for all the Companiesto which the Cost Accounting Records (Bulk Drugs) Rules, 1974 apply and which has a networth exceeding rupees five crores in the previous financial year or a turnover exceedingrupees twenty crores in the previous financial year or having its equity or debtsecurities listed or are in the process of getting listed on the Stock Exchange whether inIndia or outside India.

However, the Company has appointed Cost Auditors pursuant the Cost Audit Order no.52/66/CAB - 2010 dated 16^th December, 2010 issued by Central Government to ourCompany. M/s. D. Z. R. & Co., Cost Accountants, have been appointed at the meeting ofthe Board of Directors held on 19"' May, 2011, to act as Cost Auditors for themanufacturing facilities of the Company. A certificate of eligibility has been receivedfrom M/s. D. Z. R. & Co., Cost Accountants, to the effect that their appointment is inaccordance with the provisions of Section 224 (1) B of the Companies Act, 1956.

PARTICULARS OF EMPLOYEES

None of the employees of the Company drew remuneration of Rs. 60 Lakhs or above perannum and/or Rs. 5 Lakhs or above per month during the year under review. This informationis furnished as per the requirements of Section 217 (2A) of the Companies Act, 1956 readwith the Companies (Particulars of Employees) Rules, 1975, as amended.

CONSERVATION OF ENERGY, FOREIGN EXCHANGE, ETC.

Information as required under Section 217(1) (e) of the Companies Act, 1956 read withthe Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules,1988 relating to conservation of energy, technology absorption, foreign exchange earningsand outgo is given in Annexure-A attached hereto, which forms part of this report.

PUBLIC DEPOSITS

During the year under review, your Company has not accepted any fixed deposit underSection 58A of the Companies Act, 1956 from the public.

ACKNOWLEDGEMENTS

The Board of Directors would like to place on record their sincere appreciation for thesupport and assistance extended by the Company's suppliers, bankers, financialinstitutions, employees, customers business associates and various departments of theCentral and State Governments for their continued support and valuable cooperation.

Your Directors also express their gratitude to investors for the support and confidencereposed in the company and the Management.

ANNEXURE - "A" TO THE DIRECTORS' REPORT

Information under Section 217(1) (e) of the Companies Act, 1956 read with the Companies(Disclosure of Particulars in the Report of the Board of Directors) Rules, 1988

(Rs. in Lakhs)

FORMA

Form for disclosure of particulars with respect to conservation of energy.

1. Specific areas in which R&D was carried out:

Cholic acid : No of Methanol purifications were reduced by using n- Propanolpurification and quality of Cholicacid is improved.

UDCAIP1: Toluene as a solvent is introduced for dehydration and proceeded further.

UDCAIP2: MDC is introduced as a solvent in place of Ethyl acetate by which formationMono acetoxy impurity is reduced.

2. Benefits derived from above R&D:

A) Qualityof Cholicacid improved.

B) Increase in yield by 10% in UDCAIP1 Stage.

C) Increase in yield by 10% in UDCAIP2 Stage

3. Future plan of action:

i. ) Plans for introduction of usage of Sodium hydride along with soluble bags whichwill create the operational convenience and as a safety measure during handling of Sodiumhydride in PHEEMA batches.

ii. ) HEP & PHEEMAprocess modifications are to be implemented in the plant.

iii. ) Reduction of Solvent EDC in 4CEE

iv. ) Improvement of yields in Cholicacid.

4. Expenditure on R&D:

(Rs. In lakhs)

B. TECHNOLOGY ABSORPTION :