Anus Laboratories Ltd Directors Report

ANUS LABORATORIES LIMITED ANNUAL REPORT 2011-2012 DIRECTORS REPORT Dear Members, Your Directors have pleasure in presenting the 16th Annual Report together with the Audited Accounts of the Company for the financial year ended March 31, 2012 and the Auditors Report thereon. Financial results Rs. Million 2011-12 2010-11 Income from operations 2799.28 2908.24 Excise duty (118.86) (181.59) Other income 5.76 0.59 Total Income 2686.18 2727.24 Expenditure (before finance costs and depreciation) 2302.88 2282.43 Profit before finance costs and depreciation and tax 383.30 444.81 Finance costs 255.43 165.62 Profit before depreciation and tax 127.87 279.19 Depreciation 58.79 27.64 Profit before tax 69.08 251.55 Provision for taxation 29.07 78.58 Profit after tax 40.01 172.97 Income tax - Prior period (5.62) (41.07) Add: Balance brought forward from previous year 414.39 317.08 Appropriations 448.78 448.98 Transfer to general reserve - 34.59 Balance carried to Balance Sheet 448.78 414.39 Review of operations The year under review was critical for your Company in view of the severe liquidity constraints faced resulting from aggressive expansion in the last two years; PCB cap on the production capacities; delay in stabilising the operations at Unit 3; non-commencement of operations at Unit 4 and unrest due to agitations in the State. All these factors have contributed to mismatch of cash flows, which in turn resulted in defaults to various stakeholders. During the year, the material consumption as a percentage of income at Rs.1767.48 million constituted 66.40% of income, while it was lower at 64.23% in 2010-11. With marginal increases in manufacturing and employee costs, the operating margin was lower at 14.40% as against 17.17% reported in the previous year. Hence, the operating profit was lower at Rs.383.30 million as against Rs.444.81 million in the previous year. Further, the year witnessed inflationary pressures which impacted raw material prices, all of which could not be passed on to the customers. The tight money policy followed by the central bank, tended to firm up the interest rates affecting finance costs. Your Company incurred finance costs of Rs.255.43 million, approximately 54% higher than the previous year. The impact of the prevailing external challenging conditions did impact your Companys business, and despite being productivity oriented and raising the level of cost consciousness, the profit after tax was Rs.34.39 million for the year, lower than Rs.131.90 million reported in 2010-11. Sale of Unit 2 Your Company has taken systemic initiative to set right the tight cash flow situation by deciding to dispose of Unit 2 situated at Pashamylaram, Medak Dist, Andhra Pradesh. A postal ballot process has already been initiated in this regard for the approval of the Members and the result will be announced on August 31, 2012. With the funds realised from sale of Unit 2, your Company expects to ease the tight cash flow situation and meet the various commitments to stakeholders and scale up the production in the remaining two units. Your Company has drawn a multipronged action plan to tackle the PCB issue and is confident of resolving the same at the earliest. The proceeds of sale shall be utilised to reduce debt burden; bring idle assets to operation; and improve liquidity. These measures are expected to make up for the loss of revenue by sale of Unit 2 through higher capacity utilisation. Dividend In order to conserve resources, your Board has decided not to recommend dividend for the financial year 2011-12. Exports In 2011-12, your Company has achieved an export turnover of Rs.132.41 million. Your Company is trying to consolidate its presence in global markets, while efforts to widen the depth and penetration of the existing markets are being taken up and new markets are being explored. Directors In terms of the provisions of Sections 255 and 256 of the Companies Act, 1956, Dr. K. Rajeswara Rao will retire at the ensuing Annual General Meeting and being eligible, offers himself for re-appointment. His re- appointment is proposed in the Notice convening the Annual General Meeting of the Company. Mr. Sundarashyam Chakravarthi and Mr. K. Ravindran Parthasarathi have resigned from the directorship effective from August 14, 2012. The Board placed on record its appreciation of the valuable services rendered by them during their tenure as directors of the Company. Cost audit The Company has appointed Nageswera Rao & Co, Cost Accountants, Hyderabad as the Cost Auditor of the Company for conducting cost audit for the financial year 2011-12. The Cost Audit Report for the financial year 2011-12 will be submitted to the Central Government within the stipulated time. Research & Development The Company has incurred an expenditure of Rs.5.34 millions on R&D. IPO update Your Company had successfully concluded an initial public officer (IPO) during the financial year 2008-09 to fund the project at Jawaharlal Nehru Pharma City, Visakhapatnam to venture into the production of active pharmaceutical ingredients (APIs) and intermediates. Your Company has commissioned the plant and commenced production on March 25, 2010, with minor variation in respect of implementation of CRAM project. A brief summary of the utilization of the IPO funds as on March 31, 2012 is given below: Rs. Million Name of the project As per Actuals prospectus Setting up a new plant at Vizag for manufacturing of drug intermediates 550.90 608.72 Setting up pilot plant for carrying out CRAM at Vizag 83.44 32.62 Long-term working capital requirements 166.70 166.70 General corporate purpose 41.49 41.49 Issue expenses 79.66 79.66 A separate resolution is being proposed in the ensuing Annual General Meeting under Section 61 of the Companies Act, 1956 for the approval of the Members for the variation in the project implementation. Corporate governance Your Company is committed to maintaining the highest standards of corporate governance. As required under Clause 49 of the Listing Agreement with the stock exchange, the Report on Corporate Governance as well as Auditors Certificate on the Compliance of Corporate Governance are annexed. In order to strengthen the corporate governance framework, the Ministry of Corporate Affairs had issued a set of Voluntary Guidelines in December 2009 for adoption by companies. Your Company is already complying with various requirements of the guidelines and has initiated appropriate action for implementing the residual items. Management Discussion and Analysis A separate section titled Managements Discussion and Analysis Report forms part of the annual report. Directors Responsibility Statement Pursuant to Section 217 (2AA) of the Companies Act, 1956 with respect to Directors Responsibility Statement, your Directors confirm that: a. in the preparation of the accounts for the financial year ended March 31, 2012, the applicable accounting standards have been followed and there were no material departures; b. the Directors have selected such accounting policies and applied them consistently and made judgments and estimates which are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit of the Company for the year under review; c. the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities. d. the Directors have prepared the accounts for the financial year ended March 31, 2012 on a going concern basis. Auditors The Statutory Auditors of the Company, M/s. Karumanchi & Associates, Chartered Accountants, Hyderabad retire at the conclusion of the ensuing Annual General Meeting and being eligible offer themselves for re- appointment. The Company has received a letter from them to the effect that their appointment if made would be within the prescribed limits under Section 224 (1-B) of the Companies Act, 1956. Fixed deposits The Company has not invited/accepted deposits from the public within the meaning of Section 58A of the Companies Act, 1956. Particulars of employees During the year under review, the Company maintained the cordial relations with the employees. Information pursuant to Section 217(1)(e) read with Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1998 and forming part of report for the year ended March 31, 2012 is furnished as an Annexure to this report. Conservation of energy, technology absorption, foreign exchange earnings and outgo Particulars required under Section 217(1) (e) of the Companies Act, 1956 read with Rule 2 of the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules are furnished in the Annexure. Acknowledgement Your Directors wish to place on record their appreciation for the valuable support and co-operation extended by IDBI Bank, SBI, Karur Vysya Bank Limited, ING Vysya Bank, IFCI Venture Capital Funds, Andhra Pradesh State Financial Corporation, state and central government agencies. Your Directors also wish to place on record their sincere appreciation of the contribution made by the employees of the Company and are thankful to the shareholders for their continued patronage and support. For and on behalf of the Board K. Hari Babu Managing Director Place: Hyderabad Date : August 14, 2012 Annexure to the Directors Report Details as required under Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, read with clause (e) of sub- section (1) of Section 217 of the Companies Act, 1956. A. Conservation of energy: The Company is making necessary efforts for conservation of energy. FORM - A Form for disclosure of particulars with respect to conservation of energy Particulars 2011-12 2010-11 A. Power and fuel consumption 1. Electricity a. Purchased units (Nos./Million) 8.55 8.34 Total amount (Rs. Million) 39.93 36.50 Rate/unit (Rs.) 4.67 4.37 b. Own generation Through diesel generator Unit (Nos./Million) 0.32 0.94 Unit per litre of oil 4.94 3.83 Cost/unit (Rs.) 8.97 10.28 2. Coal (C grade used for boiler) Quantity (MT) 7413 10844 Total cost (Rs. Million) 35.31 33.76 Average rate (Rs.) 4723 3113 Particulars 2011-12 2010-11 3. Other/Internal generators (Husk, biofuel briquettes, fire wood) Quantity (MT) 7369 5370 Total cost (Rs.Million) 15.90 12.70 Average rate (Rs.) 2157 2366 B. Consumption per unit of production (Kg.) Consumption per unit of production } As the Company uses the same Production } manufacturing facilities for Electricity (No. of units) } various products, it is not Furnace oil } practicable to give consumption Coal (Kg.) } per unit. Husk } FORM - B Form for disclosure of particulars with respect to technology absorption, Research and Development (R&D) A. Research & Development 1. Specific areas in which R&D Development of API, intermediates is carried out by the Company and fine chemicals 2. Benefits derived as a result Cost reduction and process of the above R&D optimization 3. Future plan of action Development of new molecules and invention of new compounds 4. Expenditure on R&D Rs.5.34 million 5. Total R&D expenditure as percentage of sales 0.19% B. Technology absorption, adaptation and innovation 1. Efforts, in brief, made towards Process development for manufacture technology absorption, adaptation of intermediates and APIs, whereby and innovation achieved cost competitiveness and process efficiencies on existing products. Developed processes for newer APIs and intermediates. No technology absorption is involved. The Company has its own DSIR recognised R&D Centre which has been developing and improving processes for manufacture of intermediates. 2. Benefits derived as a result of Processes for several new chemical the above efforts e.g. product entities have been developed. improvement, cost reduction, Process optimization has been substitution etc. achieved in production, which resulted in lower cost of production and scaling up of volumes. 3. In case of imported technology, There is no import of technology (imparted during the 5 years reckoned from the beginning of the financial year), following information may be furnished a. Technology imported Nil b. Year of import N.A. c. Has technology been fully absorbed N.A. d. If not fully absorbed, areas where this has not taken place, reasons therefore and future plans of action N.A. C. Foreign exchange earnings and outgo Mentioned in the Notes to Accounts Activities relating to export Ongoing initiatives are regularly initiatives taken to increase made to explore and widen the reach exports, development of new of the products, by regular export markets for production interaction with customer and and service, and export plans participation in exhibitions and trade fairs. MANAGEMENT DISCUSSION AND ANALYSIS Industry overview A highly organized sector, the Indian pharmaceutical industry is estimated to be worth US$ 4.5 billion, growing at about 8 to 9% annually. It ranks very high amongst all the third world countries, in terms of technology, quality and the vast range of medicines that are manufactured. It ranges from simple headache pills to sophisticated antibiotics and complex cardiac compounds with almost every type of medicine is now made in the country. The Indian pharmaceutical industry currently tops the chart amongst Indias science-based industries with wide ranging capabilities in the complex filed of drug manufacture and technology. The industry is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades, with severe price competition and government price control. The industry meets around 70% of the countrys demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles. There are approximately 250 large units and about 8000 small scale units, which form the core of the pharmaceutical industry in India (including 5 Public Sector Units). Indian pharmaceutical market is expected to grow at a CAGR of 15.3% between 2011-12 and 2013-14, according to a Barclays Capital Equity Research report on India Healthcare & Pharmaceuticals. The outlook on the Indian pharmaceutical industry remains favourable, according to a report by ICRA and Moodys. Domestic formulation market stood at Rs.58,300 crore (US$ 10.54 billion) and has been ranked third in terms of volume and tenth in terms of value, globally. From 2011, trends are changing. MNCs are focusing on chronics, branded generics and launching patented products, besides expanding their field force and focusing on tier-II as well as tier-IV towns. Domestic market grew at 15%, while pharma multinational companies (MNCs) revenue grew at 18.7%. Generics will continue to dominate the market while patent-protected products are likely to constitute 10% of the pie till 2015, according to McKinsey report India Pharma 2015 - Unlocking the potential of Indian Pharmaceuticals market. India tops the world in exporting generic medicines worth US$ 11 billion. Indias exports of drugs, pharmaceutical and fine chemicals grew by 27% to Rs.60,000 crore (US$ 10.85 billion) for the year ended March 2012, according to data compiled by Pharmaceutical Exports Council of India (Pharmaxcil). India is expected to witness largest number of merger and acquisitions (M&As) in the pharmaceutical and healthcare sector, according to consulting firm Grant Thornton. A survey conducted across 100 companies has revealed that one-fourth of the respondents were optimistic about acquisitions in the pharmaceutical sector. Pharma Vision 2020 prepared by the Department of Pharmaceuticals, Government of India encourages making India one of the leading destinations for end-to-end drug discovery and innovation and for that purpose, the Department promises to provide requisite support by way of world class infrastructure, internationally competitive scientific manpower for pharma research and development (R&D), venture fund for research in the public and private domain and so on. (Rs.1 equals US$ 0.01818 or US$ 1 equals Rs.55) Company perspective Anu Labs has established itself as a manufacturer and supplier of cost effective high quality intermediates and specialty chemicals and has recently entered the active pharmaceutical ingredients (API) domain. It has developed long term relations with leading pharmaceutical companies. The Company is one of the leading manufacturers of 2,4-Dichloro-5 Fluro Acetophenone, CIS + Hydroxy Lactam, Chlorohexanone 2-One,Q-Acid, Sodium Meth oxide solution and powder. The specialized processes include Friedel Crafts reactions, high vacuum fractional distillation and optical resolution and carries out special reactions as per specific customer requirements. Manufacture of API at its JNPC facility at Vizag has commenced and the plans are to add more APIs to cater to a wider client base. There is a strong in-house R&D team which is engaged in non-infringing synthesis of APIs and intermediate, process development and customs synthesis. The Companys production facilities operate with WHO-GMP guidelines as basis for quality assurance. The quality management systems of the Anu labs are certified to ISO 9001-2000 standards. Opportunities & Threats There is an immense potential for APIs and intermediates with growing domestic market and increasing export potential. Demand for intermediates, APIs and CRAMs are expected to increase with international players focusing on new drug development pipelines in different therapy segments. There is a growing market for generics consequent to imminent expirations of large number of drug patents and higher R&D needs while reducing the spend. The Company believes that competition in the market has to be met squarely by developing production systems based on cost efficiency, high productivity, modern technology, quality assurance and timely deliveries. Accordingly the Company is gearing itself to exploit the opportunities by developing innovative product process and applications. Constant efforts are being made to meet the stringent quality requirements in all markets. New markets are being explored and efforts are ongoing to widen the depth and penetration of the existing markets. Recent developments The Company faced severe liquidity constraints resulting from aggressive expansion in the past two years; PCB cap on the production capacities; delay in stabilising the operations at Unit 3; non-commencement of operations at Unit 4 and unrest due to agitations in the State. All these factors have contributed to mismatch of cash flows, which in turn resulted in defaults to various stakeholders. The management of Anu Labs has taken systemic initiative to set right the tightcash flow situation by deciding to dispose of Unit 2 situated at Pashamylaram, Medak Dist, Andhra Pradesh. A postal ballot process has already been initiated in this regard for the approval of the Members and the result will be announced on August 31, 2012. With the funds realised from sale of Unit 2, the Company expects to ease the tight cash flow situation and meet the various commitments to stakeholders and scale up production in the remaining two units in operation. The proceeds of sale shall be utilised to reduce debt burden; bring idle assets to operation; and improve liquidity. These measures are expected to make up for the loss of revenue by sale of Unit 2 through higher capacity utilisation. The Company has also drawn a multipronged action plan to tackle the PCB issue and is confident of resolving the same at the earliest. Internal control systems The Company has proper and adequate internal control system commensurate with the size and complexity of the organization. The internal control is supplemented by an extensive program of internal audits which is designed to ensure that the financial and other records are reliable for preparing financial statements and other data. Human resources/industrial relations The Company recognizes the immense value addition made by its employees to the growth and development. In turn, the Company is committed to train and develop its people and motivates them to enhance their potential and industrial relations have been cordial and mutually beneficial. As on March 31, 2012 the Company had 358 employees. Financial performance During the year 2011-12, the Company achieved a turnover of Rs.2686.19 million compared to Rs.2726.67 million for the year 2010-11 constituting a marginal decrease. Net profit after tax for the year was Rs.34.39 million, when compared with a profit after tax of Rs.131.90 million during the year 2010-11. Cautionary statement The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956, guidelines issued by Securities and Exchange Board of India (SEBI), Generally Accepted Accounting Principles in India and Accounting Standards issued by The Institute of Chartered Accountants of India (ICAI). Our management accepts responsibility for the integrity and objectivity of the financial statements as well as for various estimates and judgments used therein. The judgments relating to the financial statements have been made on a prudent and reasonable basis so that the financial statements reflect in a true and fair view of the state of affairs of the Company. Readers are advised to kindly note that the above discussion contains statements about risks, concerns, opportunities, etc, which are valid only at the time of making the statements. A variety of factors known/unknown expected or otherwise may influence the financial results. These statements are not expected to be updated or revised to take care of any changes in the underlying presumptions. Readers may therefore appreciate the context in which these statements are made before making use of the same.