Nestle India Ltd

Dear Members,

Your Directors are pleased to submit their report and statement of accounts for theyear ended 31st December 2010.

The Government continued with its strenuous efforts to steer the economy. Withcontinued focus on reforms and a combination of stimulus packages, rural income generationschemes and monetary policy amongst others the government was successful in keeping theGDP growth largely on track especially when many parts of the world stowed on this front.

This past year highlighted the increasing complexity and volatility of the economicenvironment. While the Government staking action and new food regulation is being put inplace, faster implementation could sustain the growth momentum.

Against this background, your company's success can be measured on three dimensions -Growth inclusion Leadership.

Your Company has always reiterated that good food is essential for ensuringproductivity and good life. With economic growth, the lifestyles in India and evolving andchanging People need to eat better and stay healthy to keep pace with their aspirationsbut the evolving scenario is complex. On the one hand a very large population does nothave access to affordable nutrition, and on the other hand there is an Increasing problemof diabetes, obesity and heart diseases. The need for better nutrition is a challengeacross the income pyramid. Your Company has access to the Nestle Group's immensenutritional expertise and food technology for developing products that provide taste andscience-based nutrition. With strong consumer centric innovation and Renovation supportedby the Nestle R&D network, your Company remained focused on developing Indian conceptsand relevant products that help people manage their need for taste and nutrition andenabled the Company to grow.

Your Directors believe the Company remained sensitive to the need for efficient andsustainable utilisation of resources and following its basic approach to business toCreate Shared Value, it continued to Inspire happiness for its shareholders and thecommunities where it operates within its own sphere of activities your Company continuedto utilize its expertise and knowledge and consciously implemented initiatives to ensurethat while its core business continued to grow, the impact of its business on thecommunities, results in a better quality of life for them and is in their interest. YourCompany continued to invest resources both in terms of talent and capital in the areas ofwater, nutrition and rural development because these are also the areas where shareholdersinterest and the interests of society strongly intersect and where your Company can createsignificant value for both, in an inclusive manner.

The factories Invested in state-of-the-art technology and equipment to process and addvalue to agricultural produce, worked closely with the farmers, suppliers and communities,transferring technology and knowledge to help them upgrade the quality of their rawmaterials.

Your Directors are pleased to inform that during 2010 your Company delivered a strongperformance. Net Sale for the year 2010 increased by 21.9% over the pervious year DomesticSales increased by 22.9% on Increased volumes and realisations. Export Sales increased by7.6%. Overall, the businesses continued to grow the market while retaining leadership inmost businesses.

The consistent performance of your Company over the years, reflects the strength of thebrands, the trust in its products and the strong support coming from Nestle Group,Switzerland. It also demonstrates the continuous engagement and performance of the peopleand business partners.

Net Profit for the Year 2010 increased by 25% The operating margins improved due tobetter absorption of fixed cost and Improved product/channel mix. The impact of increasein cost of malarias was largely offset by the 'one-off' Cost in 2009 relating to actuariallosses on retirement benefits. The improvement in Net Profit Margin is due to the increasein operating margin as the effect of lowering of income tax rates has been offset by lowercontribution of the income tax holiday at Pantnagar factory. Your Company continued toemphasise on cash generation and delivered strong operating cash flow during the year.Surplus Funds have been prudently invested after ensuring that such investments satisfythe Company's criteria of safety, liquidity and returns.

The Company supplemented the Provision for Contingency with further amount of Rs.184million (net) for contingencies resulting mainly from issues, which are underlitigation/dispute and other uncertainties requiring management judgment. This was afterthe reversal/utilisation or Rs.250 million provision, due to settlement of certaindisputes for which provision was no longer required.

While the current year has also commenced as per plan, the beginning has been with anumber of uncertainties, including the intensity of cost increases specially the volatileraw material prices. Your Company will focus efforts to overcome these challenges and ishopeful that the Government would continue to support the food processing sector. YourDirectors are confident of the long-term business prospects of the Company. Exports:

During the year, Export Sates at Rs.3,537 million was higher by 7.6%. At constantexchange raise the same would be 10.3%.

The increase in exports was Largely on account of new exports of Coffee to South Africaand Egypt which wore started during the year. There was also a significant increase inexports of Instant Tea to certain European markets and to the Far East and a broadenedcustomer base has now been established. This was offset by the discontinuation of exportsof infant nutrition products to Sri Lanka and Bangladesh due to capacity constraints andthe Lower exports of culinary products.

Your Company continued its efforts to develop more products for the Indian ethniccommunity abroad and certain new products were shipped out during the year. Some newgrades of Instant Tea have also been developed and these will add variety and value to theportfolio.

Dividends:

The Board of Directors has recommended a final dividend of Rs.12.50 per equity share ofthe face value of Rs.10/- each (or the year 2010, amounting to Rs.1,205 Million. This isin addition to the two interim Dividends for 2010, aggregating to Rs.36.00 per equityshare, paid in May 2010 and November 2010 (amounting to Rs.3,471 million). The totaldividend payout for 2010 would be Rs.4,676 million (excluding the corporate dividend tax),and maintains the total dividend payout for 2009, and is in keeping with the financingneeds for capital expenditure.

Business Development:

India is evolving rapidly and people are becoming more health conscious and eat better.Nutrition plays a key role in enhancing Health and Wellness in our lives and India will bechallenged by the need for better nutrition across the income pyramid. Your Companyintends to play a definitive role in providing consumers with 'Good Food, Good Life.Nestle products are trusted for their high quality and this drives your Company toinnovate and renovate products to further strengthen its bonds with consumers.

The business of Prepared 'Dishes and Coolding Aids' grow rapidly MAGGI continued tostrengthen its wide portfolio at an accelerated pace. Being one of the top most TrustedFood Brands in the country, MAGGI has gone beyond offering products, to building emotionalrelationships with consumers MAGGI products provide Taste and Health and bring Happinessto every home, delivering 'Testa Bhi Health Bhi Khuehiyan Bhi'.

With the support of Nestle global network of R&D centres applying knowledge inscience based nutrition. MAGGI products were innovated and renovated in accordance withthe changing needs of all members of the family. During the year, an innovative range of'Me & Meri MAGGI' tastes were introduced in Noodles.

The 'Me & Meri MAGGI' campaign started in 2009, to calibrate 25 years of theemotional relationship of MAGGI with its consumers. The overwhelming response to thecampaign brought out some very distinct experiences and emotions that consumers' associatewith MAGGI, and the culinary experts worked extensively on concepts that capture theseexperiences in the taste of the Noodles. Three flavour launched were 'Me & MeriTHRILLIN CURRY', 'Me & Meri TRICKY TOMATO' and 'Me & Meri ROMANTIC CAPSICA' Soonafter. MAGGI Vegetable Multigrainz Noodles was rolled out MAGGI Vegetable MultigrainzNoodles is a combination of traditional ingredients, known for their goodness, such asRagi, Corn, Jowar, and wheat with real vegetables, and are a source of Fibre, Calcium andProtein, MAGGI Masala-ae-Magic and MAGGI NUTRI-LICIOUS PAZZTA launched in late 2009established themselves during the last year MAGGI NUTRI-LICIOUS PAZZTA is already themarket leader and continues to grow the market for light meals MAGGI Masala-ae-Magic,fortified with Iron, Iodine and Vitamin A, is helping housewives in kitchens across theincome pyramid, to provide tasty and nutritious food to their families everyday.

MAGGI continued to connect with consumers in innovative and impactful ways, MAGGISauces advertising acknowledged the increasing stress on consumers and advocated 'Hasaon,Khushi Phaelao ...India ko Healthy Banaol' It promoted happiness and spontaneous joy for ahealthy Living and encouraged a dialogue with the consumer. The campaign for MAGGIVegetable Muitigrainz Noodles revived another dimension in consumers' lives. It broughtalive the strong emotional bonds within the family and related the multi-benefits of MAGGIMuttigrainz to the mutti-qualities in every mother! Marketing 'Taste Bhi Health Bhi'solutions to consumers at the bottom of the pyramid has its's own challenges. These areinherent in the lifestyle of these consumers that is driven by traditional values, lack ofeducation and limited affordability. While the solutions have to be affordable, mostpeople may lack the basic understanding of nutrition. Since MAGGI Masala- ae-Magic is anaffordable product that even low income families can use, the challenge is to spreadnutrition education, Starting out with the first programme in Dharavi in Mumbai, MAGGI hasbeen sending out people to increase nutrition awareness. In association with a socialorganisation 'Drishtee' it is also organising health camps in rural areas. These campscreate awareness, amongst others, about micronutrient deficiencies, while the organisationalso develops retail entrepreneurs for products like MAGGI Masala-ae-Magic. With all theseinitiatives, MAGGI continued to be ranked as the 'No.1 Most Valuable Food Brand' andamongst the 'Top 10 Buzziest Brands' in the country.

The 'Chocolate and Confectionery' business continued to drive growth in the newersegments that are more relevant to emerging consumer needs and wellness preferences.Driven primarily by better understanding of consumers and extending the portfolioInnovatively your Company's chocolate and confectionery business has grown faster thanindustry. White the overall penetration for the chocolate category is still in singledigits and has a long way to go, the consumption is impulse led and driven largely byconvenlent price points. As economic growth creates more disposable income with morepeople the consumption is expected to increase. The challenge is to manage the correctcolnage for these products in an Inflationary environment. Your Company has grown thisbusiness steadily and it is now the leader in the chocolaty wafer segment for 'lightereating' with NESTLE KIT KAT and NESTLE MUNCH and 'Whites' (goodness of milk) with NESTLEMILKYBAR. During the year this business continued to innovate and renovate brands toincrease relevance to the consumers. Some of the more recant and successful launches wereNESTLE MILKYBAR Choo-Choko at Rs.5/- NESTLE MILKYBAR Crispy at Rs.5/- NESTLE MUNCH Gurupack at Rs.10/- and NESTLE KIT KAT single finger at Rs.5/-.

During the year your Company re-launched NESTLE BARONE Rigorous workwith the R&DCentres has enabled us to develop taste superiority in NESTLE BARONE, which is supportedby consumer research. It was re-launched as the companion for the confident young Indianand the re-launch campaign goes beyond the product benefit to strengthen the emotionalexperience of the consumer. NESTLE BARONE is available at price points of Rs.5/- andRs.10/-, and this new thrust is further strengthened by revamped packaging which is fresh,youthful and premium.

Your Company continues to believe that sweet snacking is an intrinsic part of people'slives and within this category the commitment is to offer taste as well as balance toconsumers. The NESTLE KIT KAT squirrels communication is an illustration of this where itinnovatively brings alive the importance of breaks in routine.

In the sugar sub-segment your company continued to focus on the two need states ofindulgence and refreshment with success. While it grew the overall Eclairs portfolio tomake your Company the largest player, volume gains by NESTLE POLO has now made yourCompany the biggest NESTLE POLO market in the world.

Your Company is the value leader in instant Coffee with NESCAFE. During the year, the'Coffee and Beverages' business not only strengthened its market position but alsostrengthened its bonding with consumers. The business continued to focus its efforts onthe value chain and leveraged Nestle's word class proprietary aroma recovery technology tofurther improve the aroma and taste of NESCAFE CLASSIC.

NESCAFE is a brand with a progressive world view and reflects the thinking that we canreach our destination when we have a sense of purpose. It talks to the youth of today'sprogressive India and sees the world as they see it. During the year it engaged withconsumers with the simple message 'Switch on your purpose. Switch on the best in you'. Thebusiness associated with the successful and vibrant Deepika Padukone as the brandambassador and to further engage with the youth, a digital page 'Know your neighbours' wascreated. This page is today the biggest fan page for NESCAFE In the world with more thanthree and a half lakh fans, and is continuing to grow. These initiatives along with theones already planned are expected to move NESCAFE to a new growth trajectory.

During the year 'Milk Products and Nutrition' business performed well and continued toconsolidate and grow. Science based nutrition, stringent quality standards end innovationand renovations are strong pillars for the business which is focused on enhancing thequality of life. During the year your Company launched the NESTLE START HEALTHY STAYHEALTHY educational Initiative in partnership with doctors, wtth the aim of making goodnutrition a way of life. It emphasises the fact that the nutrition that children get inthe early years of life can affect their health forever. And it all starts with mother'smilk. As we progress through different stages of life, we have different nutritional needsand we need to understand and balance our nutritonal requirements to stay healthy. Whileyour Company actively supports and promotes breastfeeding as being the best possiblesource of nutrition for the developing Infant it recognises that there are circumstanceswhere the mother to unable to feed. Your Company continued to build on the heritage thatNestle has of quality, trust and science based nutrition to meet the needs of infants, asthey grow up, and in later life. NESLAC Nutritious Milk Drink for children was launchedtowards the end of the year in select geographies.

Your Company has a portfolio of high quality UHT milks that pass stringent qualitychecks and are preferred by disceming consumers who demand the confidence of good tasteand purity. The range comprises NESTLE MILK (Rich and Creamy), NESTLE MILK (Halt Fat) andNESTLE SLIM [Skimmed Milk], and NESTLE PRO-HEART MILK with Omega 3. Your Company continuedto strengthen the business and also extended the range of NESTLE DAHI to include dahl inpouches. In the dairy whitener category NESTLE EVERYDAY continued to lead volume and valuegrowth and introduced affordable price formats to improve accessibility for lower incomeusers. The brand was renovated and research shows that 8 out of every 10 consumers preferNESTLE EVERYDAY, making it India's most preferred Dairy Whitener. During the year therewas greater emphasis on activations and sampling to bring the brand experience closer toconsumers MILKMAID sweetened condensed milk has in the past successfully Introduced a newgeneration of home cooks to easy 3 step recipes. Your Company continued to strengthen thisactivity and scale-up business.

The Healthcare Nutrition Business that was acquired from Speciality Foods India PrivateLimited, with products for consumers with special nutritional requirements performedsatisfactorily. Work is underway to develop it further. The products in this portfolio aremarketed under brands like

RESOURCE, OPTIFAST and SPERT. 'RESOURCE' is specially formulated for the management ofmainutrition and other medical conditions associated with increased nutritional needs. Ithas a range of formulations Including, amongst others, RESOURCE Diabetic, a reedy to use,fibre rich diet for better nutritional management of diabetics and RESOURCE High Proteinthat provides easily digestible whey protein 'OPTIFAST' is a Nutrition supplement inoverweight condition and 'SPERT' is a Protein supplement to address the increased proteinneeds of the family.

With more women entering the workforce and increasing disposable incomes, there isgrowing opportunity in the Out of Home segment Your Company is well polied to tap this.During the year as the economic environment improved and hiring by corporates increasedthe business was positively benefited. Your Company successfully launched vending machinestaking into account the specific needs of the customers in the large as well as smallestablishments.

Sales:

Your Company is aware that the emerging and the increasing competitive Intensity,requires us to be even more efficient as we go forward. The process of back-end salesautomation that was initiated earlier is now, fully implemented and provides a robust andintegrated distributor management solution that supports our efficiency in primary andsecondary sales. This also facilitates a more transparent record of the transactions fromdistributors, to retailers.

We strive to improve the availability of our products with a clear focus on buildingdistribution by going deep & wide across urban and rural geographies. This hasresulted in improving our reach to more than 400,000 outlets in the last year alone. YourCompany is committed to continuous excellence in the operations. During the year the focuswas on building capacity through the willing and able distributors who are long termpartners of your Company, and provided the front line field force, the support andknow-how to improve their capability.

Technology and Quality:

Your Company's products touch the lives of millions every day and Nestle is amongst themost trusted companies in India. The commitment to high integrity in Nestle products issupported by stringent quality assurance norms, state-of-the-art technology ano highdegree of automation. The access to Nestle's global R&D and emphasis on science basedinnovation and renovation to develop high quality products are significant competitiveadvantages. Your Company is also working on a robust and comprehensive improvementprogramme - Nestle Continuous Excellence (NCE) that is based on LEAN mindset for war onwaste and Total Performance Management concepts. The initial results from pllot areasindicated that better efficiencies have been achieved from the same assets while alsoreducing costs.

Nestle R&D Centre in India:

Your Directors are extremely pleased to inform that at the request of your Company,Nestle S.A., Switzerland has agreed to the setting up of a R&D Centre in India as apart of its global network of R&D Centres. Nestle R&D Centre India Pvt Ltd, is awholly owned subsidiary of Nestle S.A. and at the request of your Company, the R&Dfacility has been located in the proximity of your Company's Head Office. The foundationstone for the R&D Centre was laid by the Hob'ble Minister for Food ProcessingIndustries in September, 2010 and it is expected to be operational in 2012.

Nestle's decision to establish an R&D centre in India will be an additionalcompetitive advantage in the future and will further strengthen the benefits of technologyand know-how received by your Company from Nestle Group. The research at this Centre willprovide exciting opportunities for innovation and will focus on Popularty PositionedProducts (PPPs), especially for India but also worldwide. PPPs meet the specific needs ofconsumers with lower income levels by offering them high-quality, nutritionally enhancedproducts at affordable prices.

It should help to accelerate your Company's growth and contribute towards reducingnutritional deficiencies in India.

Environment:

Your Company is sensitive to the fragility of non-renewable resources and continues towork towards creating and increasing awareness for environmental sustainability. Emphasison conservation of resources is a priority within the factories and in the manageableareas there is a continuous effort to minimise consumption of natural resources and reducewaste and emission, while maximising production. All processes follow the NestleEnvironment Management System and business practices comply with government policies,environmental laws and regulations using state-of-the- art technology and equipment. Youwill be proud to know that as production volume has been increasing, during the past tenyears, there has been a significant reduction in usage of energy and water and reductionin emission of green house gases per tonne of production. Water consumption per tonne ofproduction has reduced substantially and water use efficiency has improved by almost 60%by employing efficient methods and technologies Energy consumption per tonne of producehas reduced by almost 51% through investments in energy efficient systems and processesand cutting down on energy losses. At the same time waste water discharge per tonne ofproduce reduced by almost 70% as a result of the reusing of water and more efficientprocesses that reduce water need. The carbon footprint has been significantly reducingthrough focus on technologies that improve combustion and emphasis on utilising renewablefuels such as coconut shells and process waste to replace non-renewable fuels.

Capacity and Funding:

Your Company has been growing at a healthy rate in recent years with continuingleadership across its businesses. This market leadership position and India's positiveeconomic environment coupled with a progressive population provides opportunities forgrowth. Your Company is therefore, accelerating Investment in capacities to provideconsumers a wide product range, from Popularity Positioned Products for low incomeconsumers to premium offerings in the recent past some signrficant investments havealready been initiated. Your Directors are hopeful that the Government continues tosupport the Food Processing Sector so that your Company can continue to expandmanufacturing and employment to provide consumers with affordable products.

Over the Last three years, Nestle India has spent over Rs.650 crores in capitalInvestments, but the Investments during 2010 alone were in excess of Rs.480 croros andadditional commitments of around Rs.680 crores already existed at the year end. Currentplans foreses a further acceleration in 2011 and beyond. This capital expenditure will gointo expanding facilities at Bichollm, Moga, Nanjangud, Ponda, Samalkha and in newGreenfield facilities While a new plant for MAGGI products is getting ready forcommissioning at yhee Nanjangud Factory, work has been initiated for a green fielddproject at Tahllwal in Himachal Pradseh.

In order to finance this accelerated capital expenditure trajectory your Company wouldhave a Judicious mix of 'Internal Accruals' and 'Debt'. The 'Borrowings Free' balancesheet of your Company and the strong credit ratings of Nestle should facilitate thisstrategy. Your Directors are pleased that the Reserve Bank of India has approved avalimentof External Commercial Borrowing from the foreign equity holders of upto US$ 450 millionfor the sourcing of capital goods, expansion/modemisation of facilities and new projects.The drawdown of the loan would be based on the funding requirements from time to time.

Supply Chain:

The current volatile and complex economic environment requires efficient and costeffective processes. During 2010 your Company has ensured timely and efficient supply ofmaterials to run the factories, accelerating the development of local suppliers. Thedistribution of finished goods to consumers across the country continues to be costeffective and more environmental friendly with increasing share of rail deliveries.

During the year, your Company also delivered sustainable coat optimisation initiativesas part of Nestle Continuous Excellence (NCE) to eliminate waste and manage input costsThis year the NCE programme will be expanded further to cover all supply chain processesand select distribution centres.

In line with the philosophy of Creating Shared value, Nestle India rolled out itsResponsible Sourcing programme in 2010. All the key vendors were engaged on thisInitiative through procurement led vendor meets at the Company's Head office and factoriesVendors wore supported through a pre- assessment process, consultant visits, dedicatedhelp desk and continuous engagement and education All vendors were registered on the SEDEXplatform and independent Audits by internationally approved agencies were conducted on thekey vendors shortlisted All these vendors were found compliant with minor gaps for whichroad maps have been agreed mutually

Human Resources and Trade Relations

Your Company strongly brieves that people are its assets and may are key to drivecompetitive advantage With the vision given to employees to 'Seek the Peak' in allendeavours, the emphasis has been on alignment of company goals with individual objectivesand then empowering employees to give their best with the mindset of 'Dream Dare Denver'

Recognising the importance of Human Resources, all efforts have been put by yourCompany to ensure that best talent is recruited, continuous developed and retained. Duringthe year, your Company has put heavy emphasis on performance driven culture andappropriate HR tools and processes have been deployed to ensure clear linkage withrewards. Strong recognition platforms have been crested to encourage people to deliverstretched goels. There has been a lot of emphasis on training and development includingself learning, manager inspired learning through coaching and career developmentopportunities.

All these efforts have ensured that your Company retains Its position as a preferredemployer and an employer of choice. Your Company believes in fostering trust and mutualrespect in employee relations. Your Company engaged employees with trust and respect bycontinuously transparently sharing Information through various forums, dialogues and othercommunication means These efforts have received excellent reciprocation from employees andin Its Industrial Relations.

Strengths:

* Being NESTLE

* General Licence Agreement which gives access to the Nestle Group's proprietarytechnology/brands, expertise and the extensive centralised Research and Developmentfacilities.

* High quality and safe food products at affordable prices, endorsed by theNestle

* Understanding of Nutrition, Health and Wellness.

* Strong and well differentiated brands with market share leadership.

* Product innovation and renovation, based on consumer insights.

* Well diversified product portfolio across categories and income strata.

* Efficient supply chain.

* Responsive Organisation Structure and strong Management Team.

* Distribution structure that allows wide reach and coverage in the target markets.

* Capable and committed human resources.

* Participation in Global Business Excellence (GLOBE).

* Strong financial position.

Weakness:

* Complex supply chain configuration.

* Cascading indirect taxes.

* Price point portfolio.

Threat:

* Prices Volatility of key raw, packaging materials and fuels.

* Availability of agro based commodities.

* Food inflation.

* White-collar talent.

Opportunities:

* Potential for expansion in smaller towns and other geographies.

* Growing demand for premium products.

* Introduction of GST to simpilly the taxation and distribution.

* Recovery of 'Out of Home' segment.

* Leverage Nestle Technology to develop more products that provideNutrition, Health andWellness at affordable prices.

Working with Communities:

Even as growth end social change accelerate the desire to move up the income pyramid,the issues of rural development, conservation of water and environmental resource, accessto nutrition and food security are potential challenges Your Company believes that ourresponse to these common issues will not only have a bearing on our own progress but alsothe ability to create sustainable Inclusive growth.

Nestle's approach to business is Creating Shared Value or 'Saanjhapan' as we call it inNestle India and it is about the impact of our business and engagement through it. Incolloquial thinking Saanjhapan reflects Joint benefit Your company is focused on the threeareas of Nutrition, Water and Rural Development where it has the greatest potential farJoint value with the communities.

Understanding of nutrition, knowledge of balanced diets and access to good nutrition isessential for a good life in a survey conducted by your Company around its factories in2009 lack of knowledge and oven awareness about balanced nutrition had emerged as a majorconcern Your Company has expertise and understanding of nutrition and Intends to use thisto help people Improve the quality of their lives. It has developed a simple but engagingprogramme in partnership with Universities that have knowledge of food habits andavailability in their areas . The programme modules are structured in a way that studentsabsorb the basic knowledge relating to foods in a practical manner it helps themunderstand the role of food In our bodies, the manner in which food is digested and how wecan Improve the balance of nutrients in diet. The module specifically devotes time toexplaining how cooking practices can improve nutrition, as well as the need for foodhygiene, sanitation, and physical exercise to improve health and wellness

This programme was rolled out nationally from April and during the year around 5000students in village school have already participated. The Universities also help to ensurethat the programme is being implemented in the beat Internet of the community.

The well being of the communities from where we draw our agricultural raw materials areimportant for us. Consequently your Company continues to do extensive work with farmersand other suppliers. transferring technology and knowledge to the communities and helpingthem build their capabilities so that they can participate more effectively in businessand build on progress through economic prosperity.

During the year your Company continued to extend its Clean Drinking Water Projects thatImprove access to dean drinking water In village schools and Increase awareness for waterconservation in the communities around our factories During the year, 17 Clean DrinkingWater Projects were constructed to benefit 6300 more students, As a result the number ofthese projects around our factories has increased to 156 and 66,000 students in villageschool are directly benefiting every year.

Your Company has been working extensively to develop dairy farming and to make it asustainable income source even for small and marginal farmers. This effort continued inthe Moga region with your company's veterinarians and agronomists providing support,expertise and knowledge that benefits over 110,000 farmers directly. Your Company alsocontinued with the Village Women Dairy Development Programmes that train them in gooddairy practices as well as spread awareness about personal health, hygiene, waterconservation and economic Independence. 160 more programmes helped to reach out to 5300additional women during the year, cumulatively benefitting over 45,000 village women

During recent years your Company has also been working with chicory farmers Transfer oftechnology, education and better knowledge of roasting and processing has increased yieldsand quality During the past 10 years the number of chicory farmers benefitting from thishas increased from 1000 to 7500.

Contribution to the Exchequer:

Your Company has been a leading taxpayer of the country and over the years has beenenabling significant contribution to various taxes. During the year 2010, the Companythrough its business, enabled tax collections at Central and State Level of close to Rs.13.98 billion in the aggregate.

Awards and Recognitions:

While your Company's products continued to be trusted for their high Quality, yourCompany has increasingly emphasised better consumer engagement. The success is reflectingin the awards and recognitions that your brands received during the year. They are also astrong Indication of the hard work and sustainable in natives being Implemented to delightconsumers Some of the key awards and recognitions:

* Conferred 'Marketing Company of the Year' award al PITCH India's Top 50 MarketersAwards 2010 to recognise excellence in Marketing.

* Pitch Magazine recognised MAGGI amongst the top 3 'Ageless Brands' and adjudged MAGGIMasala-ae-Magic amongst the top 3 for innovative work at the 'Bottom of the Pyramid'.

* NESTEA Voted 'Product of the Year' in the powdered beverages category by Nielsen'sConsumer Survey of product innovation 2010.

* KIT KAT adjudged 'Master Brand' by the World Brand Congress.

* MAGGi Masala-ae-Magic recognised amongst 'The Chartbusters' of 2010 by The EconomicTimes.

* 'NESCAFE Know Your Neighbours' campaign amongst Top 5 'Most Liked' Digital Campaignsof 2010 listing by AFAQS.

* MAGGI again rated the No. 1 Food Brand in India by an ICMR consumer study.

* 'Me and Meri MAGGI' campaign recognised by Campaign India Digital Media Awards-Silverfor Best Website' (FVCG) and Bronze for Best Loyalty Campaign'.

* MAGGI rated amongst India's Top 10 Buzziest Brands by AFAQS Survey 2010.

* 'Me and Meri MAGGI' advertising campaign received Silver and Bronze Awards at 2010ABBV'S.

* Coffee Board Awards for Best Exporter of Coffee to Russia and CIS, and Second BestExporter of instant Coffee, (2009-2010)

* In a survey by Business Today and indicus Analytics to understand externalperceptions Nestle India amongst the section toppers for FMCG on Best Companies to Workfor 2010.

Directors' Responsibility Statement:

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

* In the preparation of the annual accounts, the applicable accounting standards havebeen followed and no material departures have been made from the same;

* They have selected such accounting policies and applied them consistently and madejudgments and estimates that are reasonable and prudent so as to give a true and fair viewof the state of affairs of the Company at the end of the financial year and of the profitsfor that period;

* They have taken proper and sufficient care for the maintenance of adequate accountingrecords in accordance with the provisions of the Companies Act, 1956 for safeguarding theassets of the Company and for preventing and detecting fraud and other irregularities; and

* They have prepared the annual accounts on a going concern basis.

Corporate Governance:

In compliance with the requirements of Clause 49 of the Listing Agreement with theStock Exchange, a separate report on Corporate Governance along with Auditors certificateon its compliance is attached as Annexure-1 to this Report.

Cautionary Statement:

Statements in this Report, particularly those which relate to Management Discussion andAnalysis as explained in the Corporate Governance Report, describing the Company'sobjectives, projections, estimates and expectations may constitute 'forward lookingstatements' within the meaning of applicable laws and regulations. Actual results mightdiffer materially from those either expressed or implied in the statement depending on thecircumstances.

Directors:

Mr. Rajendra S. Pawar resigned as a Director of the Company with effect from 22nd April2010. The Directors wish to place on record their appreciation for the contributions madeby Mr. Pawar during his tenure;

Dr. Rakesh Mohan, appointed in the casual vacancy, Is currently Professor in thePractice of international Economics and Finance at the School of Management and SeniorFellow in the Jackson Institute for Global Affairs at Yale University He is also NonResident Senior Research Fellow of Stanford Centre for international Development. StanfordUniversity. He has been Deputy Governor of the Reserve Bank of India for many years(2005-2009 and 2002-2004) and held Senior positions. In the Government of India IncludingSecretary, Department of Economic Affairs (2004-2005) as well as Chief Economic Advisor tothe Government of India (2001-2002), Director General of National Council for AppliedEconomic Research, and Chief Executive of Indian Council for Research and internationalEconomic Relations Dr. Mohan is wall known and respected Internationally for his extensivework in the areas of economic reforms and liberalisation, Industrial economics, Urbaneconomics, Infrastructure studies, economic regulation, monetary policy and the financialsector.

His experience would be of Immense benefit to your Company and adds a valuableperspective in the Board of Directors Dr. Rakesh Mohan holds office in the Annual GeneralMeeting and is eligible for re-appointment.

In terms of the Articles of Association of the Company, your Directors appointed Dr.(Mrs.) Swati Piramal and Mr. Christian Schmid as additional director's of the Companyaffective from 2nd August 2010 Further, Mr. Christian Schmid was also appointed as theWhole-time Director of the Company designated as 'Director-Technical', for a period offive years with effect from 2nd August. 2010

Dr. Swati A. Piramal is Vice Chairperson of Piramal Life Sciences Limited She is thepast President of ASSO-CHAM She has completed her MBBS Medical Degree from University ofBombay, industrial Medicine from DIM College of Physicians & Surgeons, Bombay andMaster of Public Health from Harvard, USA. Her contribution to the Industry, achievements,membership of prestigious organisations and her directorship in other companies arementioned in detail in the Explanatory Statement under Section 173(2) of the CompaniesAct, 1956 covered under item no. 5 of the Notice of the 52nd Annual General Meeting. YourCompany will be immensely benefited with her appointment on the Board Dr. Piramal holdsoffice till the Annual General Meeting and is eligible for re-appointment.

Mr. Schmid took over as Executive Vice President Technical in August 2009 and comeswith Immense expertise in technology and process efficiencies. He is responsible for,amongst others, the manufacturing operations, cost optimisations, quality end safetystandards, all of which have a critical role in ensuing a competitive advantage for theCompany Mr. Schmid is a process engineer from the Swiss Federal Institute of Technologyand Joined Nestle in 1991 as a Productivity Specialist and has had a distinguished careerwith varied International experience and his last assignment was Group Technical Directorat Nestle United Kingdom Details of his proposal are mentioned in the ExplanatoryStatement under Section 173(2) of the Companies Ad, 1956 covered under item no. 6 & 7of the Notice of the 52nd Annual General Meeting. Mr. Schmid holds office till the AnnualGeneral Meeting & is eligible for re-appointment.

In accordance with Article 119 of the Article of Association, Mr. Pradip Baijal retiresby rotation and due to personal commitments has not sought re-appointment. The Directorswish to place on record their appreciation for the contributions made by Mr. Baijal duringhis tenure.

Auditors:

The Statutory Auditors of the Company, M/s. A.F. Ferguson & Co., CharteredAccountants, New Delhi, retire in accordance with the provisions of the Companies Act,1956 and are eligible for re-appointment. M/s. A.F. Ferguson & Co., CharteredAccountants, New Delhi have sought the re-appointment and have confirmed that theirre-appointment if made, shall be within the limits of Section 224(1)(B) of the CompaniesAct, 1956. The Audit Committee and the Board recommends the re-appointment of M/s. A.F.Ferguson & Co., Chartered Accountants, as the Auditors of the Company. Complying withthe provisions of Section 233(B) of the Companies Act, 1956, the Board of Directors haveappointed M/s. Ramanath Iyer and Co., Cost Accountants, New Delhi, to carry out an auditof cost accounts of the Company in respect of Milk Foods for the year 2011. Thisappointment has also been subsequently approved by the Central Government.

Information regarding Conservation of Energy etc. and Employees:

Information required under Section 217(1)(e) of the Companies Act, 1956 (hereinafterreferred to as 'the Act') read with Rule 2 of the Companies (Disclosure of Particulars inthe Report of Board of Directors) Rules, 1988 is given in the Annexure-2 forming part ofthis Report. Information as per Section 217(2A) of the Act, read with the Companies(Particulars of Employees) Rules, 1975, as amended from time to time, forms part of thisReport. However, as per the provisions of Section 219(1) (b) (iv) of the Act, the Reportand Accounts are being sent to all the members excluding the statement containing theparticulars of employees to be provided under Section 217(2A) of the Act. Any memberinterested in obtaining such particulars may inspect the same at the Registered Office ofthe Company or write to the Company Secretary for a copy.

Trade Relations:

The Company maintained healthy, cordial and harmonious industrial relations at alllevels. Despite severe competition, the enthusiasm and unstinting efforts of the employeeshave enabled the Company to remain at the forefront of the Industry.

Your Company continued to receive co-operation and unstinted support from thedistributors, retailers, stockists, suppliers and others associated with the Company asits trading partners. The Directors wish to place on record their appreciation for thesame and your Company will continue in its endeavour to build and nurture strong linkswith trade, based on mutuality, respect and co-operation with each other and consistentwith consumer interest.

Appreciation:

Your Company has been able to operate efficiently because of the culture ofprofessionalism, creativity, integrity and continuous improvement in all functions andareas as well as the efficient utilisation of the Company's resources for sustainable andprofitable growth.

The Directors wish hereby to place on record their appreciation of the efficient andloyal services rendered by each and every employee, without whose whole-hearted efforts,the overall very satisfactory performance would not have been possible.

Your Directors look forward to the future with confidence.

Information as required under Section 217(1)(e) of the Companies Act, 1956 read withthe Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988forming part of Directors' Report for the year ended 31^st December, 2010.

(a) Energy Conservation Measures Taken

As in the past, the Company continued to stress upon the measures for the conservationand optimal utilisation of energy in all the areas of operations, including those forenergy generation and effective usage of sources/ equipment used for generation. Thesignificant measures taken/continued during 2010, which have contributed to energyconservation, were:

• Improvement in steam generation ratio (steam / fuel ratio) by improving steamcondensate recovery; stack losses & lower blow down losses.

• Replacement of conventional dome lights with low wattage and better illuminationMetal Halide fittings.

• Grid power utilisation maximized over captive power usage.

• Regular energy audit of factories and awareness programs to optimize energy cost(generation, utilisation & recovery).

• Achieving High Oil to Steam ratio at boiler through various improvements in theboiler operation.

• Installation of new high efficiency boilers with Air pre-heaters.

• Reduction in the Steam requirement by recovering Waste Heat Energy.

• Reducing water consumption by reusing RO Reject water at cooling tower.

• Improving the energy by recovery of un-burnt carbon by commissioning of fly ashcombustor at coal fired boiler.

• Continued usage of non-conventional fuels like coffee husk, wood waste andcashew shells as an alternative fuel in addition to coconut shells, spent coffee/ teawaste for steam generation.

• Installation of variable speed drivers on water transfer pumps.

• Adoption of Programmable Logic Control (PLC) for energy cost optimisation andreduced idle operation of installations.

• Using ETP water for Incinerator operation and Water Sprinker System forgardening etc.

• Recycling of treated effluents for plantations & in non- process area etc.

• Commissioned sludge dewatering system for Incinerator waste water.

• Commissioned VAM on hot water circuit for improving overall efficiency ofcaptive power.

(b) Additional Investment

Following proposals were initiated for implementation during 2010:

• Water treatment system for usage of Milk's water to reduce water withdrawal.

• Exploring advance technology for usage of treated effluent in non process area.

(c) Impact of the measures at (a) and (b) above for reduction of energy consumption andconsequent impact on the cost production of goods.

The measures taken during 2010, including measures initiated in the past in the abovedirection have facilitated efforts for conservation of energy and helped contain theenergy costs. As a result, during the past decade, for every tonne of production yourCompany has reduced the usage of energy by almost 51%, reduced the generation ofgreenhouse gases by around 60% and generation of waste water by around 70%.

(d) Energy Consumption

Total energy consumption and energy consumption per unit of production, as perprescribed Form A together with the comparative figures for 2009, are given at the end ofthis part. The Company manufactures varieties of products each of them using a combinationof various sources of energy in different proportions. Therefore the comparison asmentioned in Form A, does not truly reflect the efforts of the Company at reducingconsumption in terms of units of consumption.

B. TECHNOLOGY ABSORPTION

Efforts made in technology absorption as per Form B are furnished below.

1. Specific areas in which R&D carried out by the Company.

Your Company as a part of Nestl Group and under the General Licence Agreement hasaccess to and advantage of drawing from the extensive Research and Development efforts andactivities of the Nestl Group. Nestl Group spends enormous amounts and efforts inresearch and development and in gaining industrial experiences. It has therefore beenpossible for your Company to focus its efforts on testing and modification of products forlocal conditions. Improving and maintaining the quality of certain key raw materials alsocontinued to receive close attention.

2. Benefits derived as a result of the above R&D

The ability to leverage the Research and

Development (R&D) expertise and knowledge of Nestl Group, has helped your Companyto innovate and renovate, manufacture high quality and safe products, improve yields,input substitution and achieve more efficient operations. Consequently the consumersperceive the products of your Company as a high value for their money.

3. Future plan of action

Steps are continuously being taken for innovation and renovation of products includingnew product development, improvement of packaging and enhancement of product quality /profile, to offer better products at relatively affordable prices to the consumers.

4. Expenditure on R&D

Your Company benefits from the extensive centralised Research & Development(R&D) activity and expenditure of the Nestl Group, at an annual outlay of over twobillion Swiss Francs. Expenditure of the Company in the nature of Research and Developmentare those incurred locally, primarily relating to testing of products and inputs and areas under:

1. Efforts, in brief, made towards technology absorption, adoption and innovation

As a result of the Company’s ongoing access to the international technology fromNestl Group, Switzerland, the Company absorbs and adapts the technologies on acontinuous basis to meet its specific needs from time to time.

2. Benefits derived as a result of the above efforts

Product innovation and renovation, improvement in yield, product quality, inputsubstitution, cost effectiveness and energy conservation are the major benefits.

3. Imported Technology

All the food products manufactured and / or sold by the Company are by virtue of theimported technology received on an ongoing basis from the collaborators. Technologytransfer has to be an ongoing process and not a one-time exercise for the Company toremain competitive and offer high quality and value for money products to the consumers.This has been secured by the Company under of products input and are as each GeneralLicence Agreements with the collaborators and provides access for licence to use thetechnology and improvements thereof, for the product categories, manufactured / sold bythe Company, on a continuous basis.

(a) Activities relating to exports; initiatives taken to improve the exports;development of new export market for products and export plans:

Members are requested to refer to the Directors' Report under the paragraph of"Exports", for this information.

(b) Total foreign exchange used and earned:

During the year under review, your Company had earnings from exports of Rs. 3,505Million, mainly comprising foreign exchange earnings of Rs. 2,473 million (including salesto Russia invoiced in Rupees) and export to neighbouring countries in Rupees amounting toRs. 1,030 million.

The foreign exchange outgo was Rs. 8546 Million. Details of earnings from exports andforeign exchange outgo on account of imports, expenditure on traveling, general licencefees, etc. and remittances made to non-resident shareholders on account of dividend areshown in Notes 7, 8, 10(a) and 11 respectively of Notes to the Accounts. Members arerequested to refer to these Notes.

CONSERVATION OF ENERGY (CONSOLIDATED)

(B) Consumption per unit of production

Note: There are no specific standards avialable for each category since the productrange under each head shown above consists of various products with different function.