J K Pharmachem Ltd Management Discussions

J.K. PHARMACHEM LIMITED ANNUAL REPORT 2004-2005 MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW: During the year under review, no improvement in the domestic Penicillin-G industry, was noticed. Presently only one Penicillin-G unit is manufacturing whereas another is producing small quantity for its captive consumption. Import prices hovered around US$ 6.0-6.25/BU during the year under review & accordingly domestic prices were also in the range of about Rs.320/BU. Raw materials prices continued to rise (by about 25%) & furnace oil from Rs.10841/KL in Sept., 04 to Rs.18000/KL in Sept., 05 due to spurt in global oil prices, hence cost of production increased substantially thereby continuing to render the operations unviable. Due to this, the units producing Penicillin-G continued to incur heavy losses. As per information available and as reported earlier prices of Penicillin-G being imported from China are at dumping level, which are lower than manufacturing cost in China. Indian Penicillin Manufactures Association (IPMA) brought this anomaly to the notice of the Government of India with a request to impose anti-dumping duty on imports of Penicillin-G but to no avail. On the contrary, export obligation period which was reduced from 30 months to 3 months, was subsequently increased to 6 months during the year. This has adversely affected the Indian Penicillin industry. The global market share of India has further come down to 3% against 7%, whereas Chinas market share went up to 75% against 65% last year. Huge build-up of capacities in China has led to over-supply resulting in a price crash. Although the international prices increased somewhat but the cost of production increased much more due to spurt in global prices of petroleum products and raw materials especially solvents and sugar. As per available information, the price level of Penicillin-G imported from China is below the cost of manufacture for most of the producers internationally but China continued dumping Penicillin-G in the Indian market which crippled the Indian Penicillin industry. OUTLOOK: On the international front, the capacity expansions for manufacturing Penicillin-G is increasing and China will continue to dominate the global Penicillin-G scenario. Any further reduction in import duty will adversely impact the domestic industry. Unless suitable measures are taken to neutralize the inequalities through lower power tariff, higher customs duty and also imposition of anti-dumping duty, it will be difficult for the Indian Penicillin industry to recover. HUMAN RESOURCES: The operations of the Company remained suspended from middle of September 04. An amicable settlement was reached with the workmen whereby all the workmen were paid off. Only a nucleus management cadre continues. THREATS AND CONCERNS: Major area of concern is the continuous import of Penicillin-G from China at very low prices, i.e. at below their cost prices. Further, expected reduction in customs duty, rise in the petroleum products globally as well as absence of anti-dumping duty on Penicillin-G by Govt. of India will completely destroy the Indian Penicillin-G industry. FINANCIAL PERFORMANCE AND INTERNAL CONTROL SYSTEMS: During the year under review, the Companys turnover was Rs.6.53 crores and Operating loss Rs.4.18 crores. After providing for financial charges, depreciation, extraordinary income, the loss for the year was Rs.10.91 crores. (Rs. Crs.) PARTICULARS 2004-05 2003-04 Turnover 6.53 44.91 Operating Profit (PBIDT) (4.18) (14.03) Cost of Borrowings 6.53 7.46 Profit/(Loss) before tax (10.90) (31.45) Fringe Benefit Tax 0.01 - Extraordinary Items - 3.15 Profit/(Loss) After Tax (10.91) (28.30) During the year, the Company has paid all dues towards principal redemption and interest upto 30.04.2005 of debentures held by public. The Company could not meet the commitments of other two institutional debenture holders and the interest due to the public accrued upto 30.09.2005. Internal control systems are in place in all activities of the operations of the Company. The Company has been conducting structured and elaborate internal audits since its inception. The Audit Committee of Directors meets regularly and reviews operations of internal audit and action thereon. CAUTIONARY STATEMENT: Management Discussion and Analysis Report contains forward looking statements, which may be identified by the use of words in that direction, or connoting the same. All statements that address expectations or projections about the future, including but not limited to statements about the Companys strategy for growth, product development, market position and expenditures and financial results are forward looking statements. The Companys actual results, performance or achievement could thus differ materially from those projected in any such forward-looking statements. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent development, information or events.