Bell Ceramics Ltd merged Directors Report

BELL CERAMICS LIMITED ANNUAL REPORT 2010 DIRECTORS REPORT Your Directors submit herewith the Twenty Fifth Annual Report and the Audited Accounts of the Company for the financial year ended 31st December 2010. FINANCIAL RESULTS (Rs. in lacs) Current Previous Period Year 2010-11 2009-10 (9 Months) (12 Months) Sales & Other Income 11943.70 16666.11 Profit Before Interest, Depreciation and Taxation 1015.76 1464.98 Interest 1235.65 1088.02 Profit Before Depreciation & Amortization -219.89 376.96 Depreciation 837.64 1114.59 Profit/(Loss) before tax -1057.54 -737.63 Less : Provision for Tax - Current Year/earlier year 0.00 -95.65 - Deferred Income Tax 267.65 202.57 - FBT -4.81 -6.61 Profit/(Loss) after Tax -794.70 -637.32 Profit/(Loss) b/f from previous year -3442.22 -2804.90 Less: Written off under the scheme 2838.18 0.00 of Arrangement & Restructuirng as per order of Honble High court of Gujarat Profit/(Loss) carried to Balance Sheet -1398.74 -3442.22 Business Performance: With continuous reduction in the market share of the companys product, there was further fall in the capacity utilization of the plants. During the year on an annualized basis, the production reduced by 6% in terms of quantity whereas the sales reduced by 10% in terms of quantity over the previous year performance. With the under utilization of the plant capacity, the fixed cost could not be amortised resulting into the higher effective per unit cost of production. With the change in the management control effected in the later part of the year, the Company has started receiving technical and marketing support from the holding company i.e. Orient Ceramics and Industries Ltd. The Company has already started witnessing improvement with reduction in the energy cost and higher yield in the form of improved percentage of first quality production. Steps are being initiated to improve the marketability of products by up gradation in the existing product and by improving the product mix to suit the market requirements. All efforts are being made which would result into higher capacity utilization. DIVIDENDS In view of the losses for the year, your Directors do not recommend any dividend on the Equity Share Capital. Scheme of Arrangement - Restructuring of Capital The Scheme of Arrangement (the Scheme) under the provisions of Section 391 and 394 and 100 to 104 of the Companies Act, 1956 as approved by the Shareholders of the company at their EGM held on 10.11.09 has been approved by the Honble Gujarat High court vide its order dtd 02.07.10. The scheme has been made effective from 15.07.2010 being the date of filing the certified copy of the order with the office of the Registrar of Companies, Gujarat. Pursuant to the approval received from the High court, the scheme has been implemented as under: a) a sum of Rs 1434.76 lakh being 2/3rd of the total amount of Equity Share Capital as appeared in the books of the Company on the effective date was written off from the Share capital and the said amount was credited to Capital Restructuring Account. b) On writing off the amount of Rs 1434.76 lakh from the share capital of the company, the paid up value of equity share of Rs 10/- each was reduced to Rs 3.33 per equity share, fully paid up. c) After the adjustments of writing off capital was made, the Company has consolidated 3 equity shares of Rs. 3.33 (as reduced) each fully paid up into 1 equity share of Rs. 10/- each fully paid up; d) General Reserve Balance of Rs 1460.75 lakh as at 31.03.08 was transferred to Capital Restructuring Account. e) The Company has set off its accumulated losses of Rs 2838.18 lakh as at 31st March, 2008 against the Capital Restructuring account of the Company created from the reduction of the paid up capital of the Company and transfer from General Reserve as above . f) The Company has converted its 1,50,00,000 Redeemable cumulative Preference shares of Rs 10/- each fully paid up into 50,00,000 Equity share of Rs 10/- each fully paid up at a premium of Rs 20/- per share. g) Accumulated amount of preference dividend aggregating to Rs. 1564.51 lakh payable as on 31.03.2008 and further amount payable to the Preference shareholders as dividend till the effective date of the scheme stood cancelled. For the purpose of issue of new Equity shares on reduction of capital, 27.07.2010 was decided as the Record Date and new share certificates were issued. CHANGE IN THE MANAGEMENT CONTROL OF THE COMPANY AND CONSEQUENT TO THAT THE COMPANY BECOMING THE SUBSIDIARY OF ORIENT CERAMICS AND INDUSTRIES LIMITED (OCIL) : As the members are aware, during the year, pursuant to the Share Purchase Agreement (SPA) executed on 20.09.10, between Shri Shiv Kumar Jatia, one of erstwhile promoters of the company, OCIL and Bell Ceramics Limited, OCIL has acquired from Shri Shiv kumar Jatia, 75,87,709 (62.33%) of the Equity Shares of Rs. 10/- each fully paid up in the Company at a price of Rs. 20.69 per share. With this there was a change in the management control of the company from Shri Shiv Kumar Jatia to OCIL. On acquisition of Equity shares from the promoters as above, pursuant to Regulation 10 & 12 of SEBI (SAST) Regulation 1997, OCIL had made an offer for purchase up to 20% of the Equity shares from the public shareholders of the company. On completion of this offer, OCIL has acquired further 6,56,475 (5.39%) Equity shares of Rs. 10/- each fully paid up in the Company at a price of Rs. 25/- per share With this, OCIL has acquired 82,44,184 (67.72%) Equity shares of Bell Ceramics Limited. On completion of the transaction as above, effective 29.12.2010, Bell Ceramics Limited has become the subsidiary of OCIL. SCHEME OF AMALGAMATION / MERGER OF BELL CERAMICS LIMITED (BCL) WITH ORIENT CERAMICS AND INDUSTRIES LIMITED (OCIL) As explained hereinabove, effective 29.12.2010, BCL has become the subsidiary of OCIL. Both BCL and OCIL are in similar line of business and OCIL believes that it can derive significant synergy with the business of BCL. It further believes that BCL has plants and strong presence in South and West India whereas OCIL has plant in North India and strong presence in North and East Indian markets which is a good business synergy. To the extent required and to optimise the value to the shareholders of both BCL and OCIL, it has been thought in the interest of both the companies to amalgamate/ merger of BCL with OCIL. Since last few years, BCL has been incurring losses and facing financial difficulties to run its operations smoothly. The amalgamation will enable OCIL to make BCL a financially viable unit which would facilitate rehabilitation or revival of the business of BCL, to diversify its activities and to explore the possibility of expanding its production capacity. Apart from the usual benefits and economics of amalgamation, reduction in overhead expenses, costs of management and administration, the business of the said companies can be conveniently and advantageously combined together. The proposed Amalgamation / Merger will enable the aforesaid two companies to rationalize and streamline their management and finance so as to enable them to successfully withstand the recession and competition. The proposed Scheme of Amalgamation/ Merger of BCL with OCIL will however be subject to the required statutory and other approvals. CHANGE IN THE CURRENT FINANCIAL YEAR OF THE COMPANY As mentioned hereinabove, effective 29.12.2010, BCL has become the subsidiary of OCIL. The Board of the Directors have subject to necessary approvals, proposed amalgamation / merger of BCL with OCIL. For the purpose of implementing the proposal of amalgamation / merger, it is necessary to decide the exchange ratio of Equity shares of the transferor company (BCL) with that of the transferee company (OCIL). For this purpose it was felt necessary to get the accounts of the Transferor Company (BCL) audited as early as possible. As per the earlier practice the accounts of BCL were being prepared and audited for a financial year of 12 months commencing from 1st April and ending at 31st March of the subsequent calendar year. It was recommended to close the current financial year of the company for a period of 9 months. Accordingly the current financial year of BCL has been changed from 01.04.2010 to 31.03.2011 (12 months) to 01.04.2010 to 31.12.2010 (9 months). Pursuant to the provisions of Section 210 of the Companies Act, 1956, at every Annual General Meeting of the company the Board of Directors of the company shall lay before the company a balance sheet and Profit and loss Account for the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting by more than six months or if extension granted than by more than six months and the extension so granted. Further pursuant to Section 210(4) of the said Act, the period of financial year to which the account relates may be less or more than a calendar year but not exceed 15 months or for a period of 18 months with ROC permission. Accordingly it is permissible to have accounts of the company for the period of 9 months also. MANAGEMENT DISCUSSIONS & ANALYSIS Management discussion and analysis report annexed herewith is forming part of this report inter alia adequately deals with the operation and the current and the future outlook of the Company. CORPORATE GOVERNANCE As required under clause 49 of the Listing Agreement with the Stock Exchanges, the Report on Corporate Governance together with Auditors Certificate regarding compliance of the code of Corporate Governance is annexed herewith. DIRECTORS RESPONSIBILITY STATEMENT Pursuant to provisions of Section 217(2AA) of the Companies Act, 1956, your directors hereby confirm that: a) in the preparation of Annual Accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures; b) the accounting policies selected had been applied consistently and judgments and estimates made 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 31 December 2010 and of the loss for that period; c) proper and sufficient care had been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and d) the annual accounts have been prepared on a going concern basis. AUDITORS REPORT Referring to the remark printed in italic in para (v) of the Auditors Report, the Directors would like to submit that the request of the company for removal of the disqualification of the Directors have been favourably considered by the Central Government and the approval to this effect has been received by the company on 25.02.11. Referring to the remark printed in italic in para 9a) in the Annexure of the Auditors Report, the Directors would like to submit that on account of poor financials of the company there were delay in few cases in making the payment of tax deducted at source and the value added tax. The dues of tax deducted at source and fringe benefit tax aggregating to Rs. 169.77 lakhs have since been settled by making payment of Rs. 160.43 lakhs after adjusting the extra provision. PUBLIC DEPOSITS The Company has not accepted any deposits from the Public during the financial year ended 31 December 2010. DIRECTORS The Companys applications for removal of the disqualification of its Directors under the provisions of Section 274 (1) (g) of the Companies Act, 1956 have been considered by the Central government and with this the said disqualification have now been removed. At the ensuing Annual General meeting, none of the Directors shall retire by rotation. Till 24.11.2010, the Company had five Directors on the Board including two Whole-time Directors and one Nominee Director from IDBI Bank Ltd. The other two directors out of the total five Directors namely Ms Anita Thaper and Shri Rameshwar Lal Maheshwari, who were liable to retire by rotation resigned from the Board effective 24.11.2010. During the year, on account of change in the management control of the company from Shri Shiv Kumar Jatia (the erstwhile promoter of the company) to Orient Ceramics And Industries limited, seven new Directors namely Shri Mahendra K Daga, Shri Madhur Daga, Shri S K Jatia, Shri R N Bansal, Shri NR Srinivasan, Shri Arun Sodhani and Shri Anil Agrawal were appointed as Additional Directors on the Board effective 24.11.10. Pursuant to the provisions of Section 260 of the Companies Act, 1956 (the Act) read with Article 104 of the Articles of Association of the Company, all the seven Additional Directors hold office up to the date of the ensuing Annual General Meeting of the Company. Notices under Section 257 of the Act, have been received proposing all of them as candidates for the office of Directors, liable to retire by rotation. Effective 07.02.11, IDBI Bank has changed its nomination on the Board and in place of Shri Pawan Agarwal, Ms Madhavi Kapadia has been appointed as Nominee Director of IDBI Bank Ltd. The Board welcome all the new Directors on the Board and with a sense of appreciation take note of the co operation and guidance extended by all the three outgoing Directors namely, Ms Anita Thaper, Shri Rameshwar Lal Maheshwari and Shri Pawan Agarwal during their association with the company. PARTICULARS OF EMPLOYEES The information required under section 217(2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules, 1975, forms part of this Report. However, as per the provisions of Section 219(1)(b) of the Companies Act, 1956, the Report and Accounts are being circulated to the shareholders do not include the Statement of Particulars of Employees under Section 217(2A) of the Act. Any shareholder interested in obtaining a copy of the said statement may write to the Company Secretary at the Registered Office. PARTICULARS WITH RESPECT TO CONSERVATION OF ENERGY ETC. Information as per Section 217(1)(e) of the Companies Act, 1956, read with Companies (Disclosures of Particulars in respect of the Board of Directors) Rules, 1988 and forming part of this report is annexed to and forming part of this report. AUDITORS As per the resolution approved at the previous Annual General Meeting of the company held on 18.09.2010, M/s. R. P. Malhan & Company, Chartered Accountants, New Delhi, were appointed as Auditors of the Company for the period till the conclusion of the ensuing Annual General Meeting. They have however resigned from the office of Auditors effective 25.02.2011. The Board of Directors have subject to the approval of the shareholders at their Extra Ordinary General Meeting scheduled to be held on 16.04.11, considered appointment of M/s. S. R. Dinodia & Co., Chartered Accountants, New Delhi, as the Statutory Auditors of the Company in place of M/s. R. P. Malhan & Co. A consent from M/s. S. R. Dinodia & Co., was received along with a certificate from them pursuant to the provisions of Section 224(1B) of the Companies Act, 1956. Their present appointment in the office of the auditors is for the period till the date of ensuing Annual General Meeting. A fresh certificate from them is also received under the provisions of section 224(1B) of the Companies Act, 1956 for considering their reappointment as the auditors of the company from the conclusion of this Annual General Meeting till the conclusion of the next Annual General Meeting. The Board with a sense of appreciation took note of the valuable services and the co-operation extended by M/s. R. P. Malhan & Co., Chartered Accountants during their association as auditors of the Company. ACKNOWLEDGEMENT Yours Directors place on record their sincere appreciation of the continued co-operation and support extended by IDBI Bank Ltd. and other Banks, Suppliers, Dealers, C&F Agents, Customers, Employees and various Central and State Government Agencies. The Directors also take this opportunity to thank the shareholders for their continued confidence reposed in the Management of the Company. For and on behalf of the Board Place : New Delhi Mahendra K Daga Date : 25.02.2011 Chairman ANNEXURE TO THE DIRECTORS REPORT Conservation of Energy: A. Energy Conservation measure taken: With the support of technical team of the holding company, focus is given on the various energy saving measures. This group identifies potential areas for improvement, scan environment for innovative and reliable solutions and considers proposals for implementation. Efforts are being taken to reduce energy consumption in both the plants of the company. Steps have been taken to optimize the operation of 1000 KVA Generating Set taken on BOOT for generation of electricity. B. Technology absorption: Despite lower capacity utilization at the Bangalore plant, the per unit consumption of LPG could be controlled by effectively managing the process parameter. C. Research and Development (R&D): I. Specific areas in which R & D is carried out by the company; a) Production Development: - Efforts are in the pipe line to improve the surface of the tiles to provide a longer life to the finish of the product and have higher resistance. - development of wall tiles & floor tiles with new tones/hues in popular designs, new textures as per the requirement of the market. - development of local sources for spares for the imported machines to reduce dependence on import. - Improvement in the process parameters for better quality of the products. b) Cost Reduction: - Efforts made to source alternative raw materials for reduction in the cost as also flexibility in the input materials. II. Benefits derived as a result of the above R&D: - Due to under utilization of the plant capacity , the benefits could not be noticed of the various steps taken in the process. However in the later part of the year improvement in the product quality and per unit energy consumption could be noticed. III. Future Plan of Action: - To install heat recovery system - To upgrade the equipments to conserve the energy - To focus on improving the production to an optimum level and to concentrate on quality products. IV. Expenditure on R&D: - Expenses on the development being nominal , no separate records of these expenditure have been maintained. C. Foreign Exchange Earnings & Outgo: The information of foreign exchange earnings & outgo are contained in para 16, 17 and 18 of the notes to accounts in Schedule 17. MANAGEMENT DISCUSSION AND ANALYSIS Industrial Scenario: Mix reports are being received in the matter of witnessing signs of recovery in the world economy. The market remained volatile for most part of the year. Inflationary trends prevailed in the developing economies like China and India adversely affecting their estimated growth in GDP. In the earlier part of the year the financial situation in the European countries had gone out of control. In the later part of the year, there are reports of improvement in performance of some of these countries. There was constant pressure of increase in the prices of crude oil which has further fueled the inflation in the prices of important minerals and metals. Efforts are still on to improve the situations but the conditions are so bad that it may take long time for normalcy in the situation. The Indian economy largely depending on imports for its requirement of crude oil, the increase in the international prices of the crude oil coupled with appreciation of US dollars vis-a-vis the Indian currency, the balance of payment position was not satisfactory to support the desired growth in GDP. Recessionary trends in the countries importing Indian materials have restricted growth in the export earning of the country. The situation of inflationary trend started in the previous year in the prices of basic food grains have further worsen for most part of the year . The corrective measures taken by the government hardening the credit norms also could not yield the desired results to curb the inflation. High volatility in the international market more particularly in the economies of developed countries like USA and Europe resulted into increase in the prices of major minerals. There is still uncertainty prevailing in the international market. In the circumstances, more efforts would be required to sustain the Industrial growth at the desired rate. Outlook of the Industry The trend of growth in the real estate market of the country, started in the previous year continued during the year. This has been supported by the Central and state Government agencies in the form of huge spending on infrastructures. However on account of very high increase in the prices of basic construction materials like steel and cement, in the later part of the year, the industry witnessed a pressure of with holding the growth. With the increase in prices of fuel (both for transport of raw materials as also fuel used in the manufacturing process), the cost of manufacturing has increased. Increase in the outward freight has lowered the per unit sales realization. To avoid the situation of high ratio of NPA in their real estate financing, banks have become more vigilant in their lending to this sector. Apart from increase in the interest rate on housing loans, the banks have also stipulated higher margin money by the investors. Despite the overall growth rate of 15% in the Ceramic tiles industry, it continues to face the problem of overcapacity situation. Export market in ceramic tiles did not see any improvement due to very high ratio of default in the financial commitments noticed in the international market. There was always a pressure in selling the products in the domestic market resulting into lower per unit sales realizations . With finance becoming costlier, the industry has to carry higher cost of inventory holding . With the expected spending on infrastructures by the Government , the industry is looking up to sustain the present growth rate of 10% to 15%.in years to come. Review of Companys operation: With continuous reduction in the market share of the companys product, there was further fall in the capacity utilization of the plants. During the year on an annualized basis, the production reduced by 6% in terms of quantity whereas the sales reduced by 10% in terms of quantity over the previous year performance. DORA (Baroda) Unit Due to lower off take in the market, the company was forced to reduce the production resulting into under utilization of the plant. During the year of 9 months there was fall in both production and sales quantity by 21% and 23% respectively on an annualized basis. This unit was operated at 50% of the installed capacity. With the under utilization of the plant capacity, the fixed cost could not be amortised resulting into the higher effective per unit cost of production. With the change in the management control effected in the later part of the year, the unit has started receiving technical and marketing support from the holding company i.e. Orient Ceramics and Industries Ltd. The unit has already started witnessing improvement with reduction in the energy cost and higher yield in the form of improved percentage of first quality production. Steps are being initiated to improve the marketability of products by up gradation in the existing product and by improving the product mix to suit the market requirements . All efforts are being made which would result into higher capacity utilization. HOSKOTE (Bangalore) Unit The performance for the 9 months of the current year were comparable with the performance of the similar period of previous year. However this was not enough to optimize the plant capacity. Overall reduction in the market share forced the company to operate the plant at lower capacity. During the year there was an annualized increase in the production by 2% and reduction of sales at 3% in terms of quantity over the previous year. This unit was operated at 85% of the installed capacity. LPG being the major component in the cost of manufacturing, consistent high prices of LPG through out the year, reduced the operating margin considerably. With the ability to use higher % of electricity form the grid, the unit has seen some sign of relief in the cost of power and rescued the situation to some extent. The unit is looking for the opportunity to replace use of LPG (a costly fuel) by availability of natural gas in years to come through proposed pipe line from GAIL. As mentioned earlier, this unit has also started receiving technical and marketing support from the holding company i.e. Orient Ceramics and Industries Ltd. The unit has witnessed improvement with reduction in the energy cost and higher yield in the form of improved percentage of first quality production. Steps are initiated to improve the marketability of products by up gradation in the existing product and by improving the product mix to suit the market requirements. All efforts are being made which would result into higher capacity utilization. Opportunities and Threats: Opportunities: With a very low per capita consumption of ceramic tiles in India as compared to global average, the opportunity for growth in the domestic market is high. Continuous thrust on the real estate industry noticed in last so many years annual budget of the Indian Government, keep the hope of maintaining the overall growth of the industry at 15%. in the years to come. Significant importance is given by the Central Government on the development of urban infrastructures, Agricultural sector, affordable housing etc which are expected to aid for the growth directly or indirectly. With the consistent higher GDP, there will be improvement in the disposable income of the people. Threats & Risks: (a) Power & Fuel cost is a major ingredient in manufacturing of ceramic tiles. Increase in the prices of natural gas and LPG is a matter of worry . During the year 2010-11, the prices of the domestic gas increased to almost more than 75%. Similarly the prices of imported gas and LPG also increased as per the international prices. The gap in the demand supply position of natural gas (including the imported gas) is widening and this is adversely affecting the supply of gas on a continuous basis and at a normal price. (b) Working of the ceramic tile industry in India which is more dependent on the European countries for its requirements of machinery parts, some raw materials and the capital equipments would likely to be affected due to continuous financial disturbances prevailed in those countries . (c) Dumping of ceramic tiles at a very low price both from China and the unorganized sector in the domestic market is a big threat to the industry. (d) Frequent increase in the prices of crude in the international market results into increase in the diesel and petrol prices in the Indian market. This has direct impact on the freight cost for both the incoming and outgoing materials. The position on the supply price of crude oil is not likely to improve in the near future. Internal Control System and their adequacy The various internal control systems prevalent in the Company include: (a) Maintenance of an ERP System for Companys logistic system (sales & marketing), accounting systems and for manufacturing activities have strengthened the Management information system. (b) Periodical verification of assets at both the plants of the Company and stocks of finished goods at warehouses as well as at the depots through out the country were carried out at a regular interval both internally as well as through independent firms of Chartered Accountants. (c) Generation of periodic management reports to monitor the statutory and other compliance. (d) Review of the internal audit system and compliance of the accounting standards prescribed by the Institute of Chartered Accountants of India by an independent audit committee. Discussion on financial performance with respect to the operations of the Company Your Company achieved the turnover of Rs. 11368 lakhs during the year (9 months) against the turnover of Rs. 16456 lakhs for the previous year (12 months) which shows annualized reduction in turnover by 8% over the previous year. For the year ended 31.12.2010, the Company has incurred cash loss of Rs. 220 lakhs (previous year cash profit of Rs.377 lakhs) and net loss before Extra ordinary itmes and tax of Rs. 1058 lakhs (previous year loss of Rs. 738 lakhs). Pursuant to one of the conditions of the Restructuring Agreement, IDBI Bank Ltd. have during the last quarter of the year, raised a demand of recompense amount of Rs. 525.45 lakhs being the differential interest of 3% for the period from 01.04.08 to 01.08.2011. Accordingly the finance cost for the year has increased to the extent of the proportionate amount of the recompense amount as above, worked out for the period upto 31.12.10. During the year under review, there was some delay in meeting the financial obligations with IDBI Bank and other banks. The Company has entered into one time settlement with one of the short term loan providers who have waived off recovery of the principal liability of Rs. 525 lakhs. Due to shoftfall in meeting the projections of financials, the working capital banks though apprised enhancement in the requirement have not provided required fund resulted into lower productivity during the year. Material developments in human resources and Industrial Relations The Company has been regularly monitoring its policy for enhancement in the skills of its employees by providing need based training. Industrial Relations continued to be cordial during the year resulting in constant co-operation by all the employees in day-to-day work and implementing policies of your Company. Disclaimer: This report is based on the information available to the company in its businesses and assumptions based on experience in regard to domestic and global economic conditions and Government and Regulatory policies. The performance of the Company is dependent on these factors. It may be materially influenced by macro environment changes, which may be beyond the companys control, affecting the views expressed in or perceived in this report.