Sunshield Chemicals Ltd

I. The Company is operating only in one Segment, namely ‘SpecialtyChemicals’.

II. Industry Structure & Development :-

Your Company manufactures process chemicals that are formulated to meet requirements ofindustries and are known as "Specialty Chemicals" (SC)

Specialty Chemicals manufactured by the Company find extensive use in diverse range ofIndustries such as Wire Insulation Enamel, PVC stabilizers, Inks, Colours, Coatings,Textiles, Agro-chemicals, Plastics, Rubber and Latex, Tyre and Tubes, Lubricant andadditives, and many more.

Some of these SC are Ethylene Oxide (EO) based derivatives, called Ethylene OxideCondensates (EOC). For the EOC industry, EO is a vital input. EO is a product manufacturedmainly for captive consumption by petrochemical complexes to produce MEG, a vital inputfor Polyester Fibre industry. Based on the captive requirements, petrochemical complexesallocate EO to EOC industry. EO is non importable by sea /air on account oftransportation hazards because of its characteristics of low boiling point and explosivenature. Therefore, EO needs to be transported at controlled temperatures and underNitrogen pressure, in specially designed road tankers. EOC Industry therefore dependsentirely on domestic EO availability and Prices.

Besides, EOC based Specialty Chemicals; Company has also diversified into themanufacture of a range of Anti-Oxidants and certain other additives, which do not use EO.This range of, products is also required by a diverse group of industries in the field ofLubricants, Additives, Plastics, Polymers, Rubber, Tyre, Resins and other industries.

The Company is presently catering to the requirements of both the ranges of SC, forlarge domestic Companies and prime MNCs operating in North and South America; Germany,France, Italy, Netherlands, Turkey etc. in Europe; and also in Asian markets like Korea,Taiwan, Malaysia, Japan etc.

III. Operating and Financial Performance of the Company

Pressure on Margins

1. Despite 24% growth in Net Operating Income, Profit before Tax came down from Rs. 383Lakhs in 2009-10 to Rs. 265 Lakhs, during the financial year 2010-11. Following are thekey factors for this decline in profits, mainly under the heads ‘Material Consumptionand Power & Fuel’

Against growth of 24% in Total Income, increase in Raw Material Consumption is 30% andin Power & Fuel at 46%. Thus, together, Material Consumption and Power & Fuel havegone up from 69.37% in 2009-10 to 73.87% of Net Sales in 2010-11.

These cost increases, could not be fully reflected in selling prices. This reflectedtime lag between cost increase and revisions in selling prices, due to volatility of pricechanges in major input materials during 2010-11.

2. Following factors further accentuated squeeze on margins

i. Hardening trend of Indian Rupee, especially against US $ and Euro, has resulted inlower Export Rupee Sales realizations. Company does not have matching imports in US $ orEuro Currency to compensate for lower realization as its major input material EO has to besourced domestically in Indian Rupee.

ii. Expenses under the head, ‘Power & Fuel’ have gone up from Rs. 204Lakhs to Rs. 298 Lakhs, an increase of 46% in the year 2010-11. This is on account ofrising fuel costs, being dependent on Crude Oil Prices. There was a steep rise in powertariff on one hand and more frequent power shut downs by MSEB and thus increased use ofin-house DG generated costlier power. Further, there has been increase in prices of Wood,Brickets etc; used as substitute to fossil fuels.

Thus, Operating profit before Interest, Depreciation & Tax came down from Rs. 919Lakhs in the year 2009-10 to Rs. 868 Lakhs in the year 2010-11

iii. With the reduced Operating profits as above, the Company had to absorb interestcost of Rs. 410 Lakhs in the year 2010-11 against Interest cost of Rs. 355 Lakhs in theyear 2009-10 caused by :

1. Need to fund additional Capex of Rs. 528 Lakhs, to acquire balancing equipments andassets to activate increased and flexible THEIC capacity;

2. To absorb increased Bank Lending rates;

3. To fund increasing working capital to meet higher sales.

However, in the light of Company’s exports crossing more than 54% of its turnover,it was able to avail of "Export Bill financing"at LIBOR + basis.

This meant interest cost in the year 2010-11 was only 15% more than 2009-10 againstincome rising by 24% in similar period and funding additional net capex of Rs. 528 Lakhsalong with repayment of Interest free Sales Tax Deferrals.

Net Profit after Tax

3. Net Profit after Tax stood at Rs. 160 Lakhs in the year 2010-11 against Rs. 305Lakhs in the year 2009-10 with higher provision for current and deferred tax and prioryear adjustments.

4. The Company has discharged all its obligation to pay off outstanding Sales taxDeferral including current year deferral due.

IV. Outlook

Your Company is already recognized globally, as a reliable supplier of qualitySpecialty Chemicals, for a variety of end use applications. Company is reasonably optimistto improve its performance in the current year.

This outlook is based on renewal of global supply agreement for a further five years bya multinational Company producing Wire Enamels. Additionally, arrangements are being madewith other MNCs for regular export to Euro zone, Brazil / Mexico and certain Asiancountries.

V. Risks and Concerns:

i. Slow down in world economies, coupled with strengthening of rupee, may bring insevere competition in the domestic market from imported Specialty Chemicals.

ii. Uncertainties in global economies may affect the demand & prices, from some ofthe overseas customers Export sales may be adversely affected.

VI. Internal Control System and its adequacy:

During the year, no significant internal control issue was identified. Internal checksand controls appropriate to growing size of Company’s business, are being introduced.An independent firm of Chartered Accountants has been entrusted with the Internal Audit ofthe Company.

VII. Material Development In Human Resources:

Employee relationships at all levels continue to be satisfactory. The management wouldlike to record its appreciation of dedicated and strong support provided to your Company,by its employees, at all levels.