Sun Earth Ceramics Ltd Directors Report.

ANNUAL REPORT 1999-2000 SUN EARTH CERAMICS LIMITED DIRECTORS REPORT Your Directors are pleased to present the Twenty Second Annual Report on the business operations of the Company together with the audited statements of accounts for the year ended 30 June, 2000. The year 1999-2000 was yet another year of good performance. Dividend & Bonus Issue Your Directors are pleased to recommend a final dividend of R 1.00 per equity share. The total dividend for 1999- 200C was Rs 3.50 per equity share, this includes an interim dividend of Rs 2.50 per equity share (previous year Rs 3.50 per share). The consequent outflow including preference dividend paid and dividend tax, is Rs 4.95 cr (previous year Rs 3.81 cr). The Board has also recommended the issue of Bonus shares in the ratio of 1:1. The record date for the same will be announced in due course. Financial During the year under review, sales and non-manufacturing income registered a sharp rise from Rs 117.07 cr to Rs 175.59 cr, a growth of almost 50 percent over the preceding year. Consequently, the gross profit improved from Rs 35.86 cr to Rs 55.45 cr during the same period. Net profit was Rs 26.87 cr for 1999-2000 compared to Rs 14.80 cr in 1998-99. Operations Your Company performed well in a year that saw the revival of the ceramic tile industry. It is well on its way to attaining the premier position amongst the domestic players Wall Tile Division The wall tile division commissioned in 1995 at Alibaug, Maharashtra, achieved a capacity utilization of 124 per cent, substantially higher than the industry average. The Company became the first in India to launch the Lustre series targeted at the premium segment. These tiles possess a metallic effect with high gloss property. Sun Elarth was also the first company in India to launch Perfect form tiles, a new concept popular in the developed markets of Western Europe and USA. These tiles possess straight edges instead of the traditional rounded ones, helping eliminate the problem of dust accumulation. The response to both these tiles was encouraging. The market for large wall tiles continued to grow. Your Company is well positioned to cater to the incremental demand. With the release of 40 cm x 20 cm tile, Sun Earth is expected to capture a bigger share of this value- added segment. Your Company built a-design laboratory at the cost of Rs 25 lacs to add better designs and colour combinations to its existing library. Your Company continued to break new ground by providing excellent quality; the number of First Quality tiles reached above 90 per cent, another industry landmark. Savana Ceramics Limited, a 100 per cent subsidiary of the company with a plant at Bharuch, achieved a capacity utilization of 100 per cent. As a result of these pioneering and quality-driven initiatives, the market share of Sonora wall tiles reached 19 per cent within five years of launch. Floor Tile Division The floor tile division was commissioned in May 1998 in a record time of 11 months at Karjat in Maharashtra. The capacity utilization of this plant touched 100 per cent within the first year; currently the plant is operating at a capacity utilisation of 119 per cent. Third Fired Tile Division A plant for third fired tiles exists at Bharuch. It has an installed capacity to produce 800 sq. meters per day. Sun Earth is also in the process of installing a plant for third fired tiles at Karjat. After the commissioning of this plant, the total capacity of third fired tiles is expected to reach 2800 sq. meters per day. Vitrified Tile Division Sun Earth is also in the process of launching vitrified tiles. Production is expected to commence within the next three months at Bharuch and Karjat. These tiles are expected to corner the existing market for granite and imported tiles, estimated in excess of Rs 600 cr. Your Company intends to become the largest domestic producer of these premium tiles by the end of 2000-1 with an installed capacity of 10,500 sq. meters per day. Vitrified tiles are expected to contribute more than half of the Companys turnover in the coming years. Product penetration A wider distribution network, a diverse product basket and increased availability helped Sun Earth achieve national status and recognition. This helped your Company increase its market share in wall tiles from 14 to 19 per cent in 1999-2000. The Companys share in the floor tile segment reached 11 per cent in the year under review. The acquisition of Savana Ceramics Ltd. helped your Company penetrate the northern and eastern markets deeply. The dealer network crossed 400 and approximately 500 new sub-dealers were introduced to make Sonora and Savana easily available across the country. Allotment of equity shares The equity share capital increased from Rs 7.59 cr in 1998-99 to Rs 8.53 cr in 1999-2000. Your company successfully placed 4,36,470 equity shares of Rs 10/- each, as per SEBI guidelines at a price of Rs 90 per share with C F, Mauritius. Additionally, 10,63,530 equity shares of Rs 10 each were issued to the promoters on a preferential basis at Rs 90/- each. The Company also placed 1,72,222 equity shares with Gujarat Venture Fund at an issue price of Rs 90 each (premium Rs 80). As per the terms of allotment, 3,83,333 Optionally Fully Convertible Debentures held by Nandi Investments Limited have been converted into equal number of shares of Rs 10 each, at a premium of Rs 80 per share. The presence of an overseas long-term investor in your Company indicates the attractive potential of growth. Acquisition Your Company has just taken the first step in becoming a global layer. Sun Earth is in the final stages of acquiring a plant each in Spain and Romania. These plants will be acquired through a special purpose acquisition vehicle for $ 5 mil ion; $ 1.25 million is expected to be raised from internal accruals, the rest through loans. The production from the two companies will be sold in the markets in Europe and the USA where realizations range from $ 5 to $ 6 per sq. metre, resulting in a revenue of around $ 50 to $ 55 million per annum. Co-generation Power Plant To help rationalize the fuel cost - the biggest item of expenditure, accounting for 20 per cent of the total cost of production - your Company is in the process of setting up co- generation power plants at each of its manufacturing locations. The first will be set up at Karjat shortly and is expected to bring about a reduction in the fuel cost by approximately Rs 6 cr. Your Company hopes to set up other plants by the end of the year. Exports Your Company registered a remarkable growth in revenues from the overseas markets. Exports jumped to Rs 4.65 cr in 1999-2000 from Rs 87 lacs in 1998- 99. Exports for the coming year are expected to be around Rs 15 cr from the markets in West Europe, the Gulf countries and Asia Pacific. Your Companys products are world class and sell at a premium when compared with other Indian ceramic tile manufacturers. Capital expenditure Your company has embarked on a capital expansion programme of around Rs 105 cr, which will be funded from internal accruals and debt. The expansion will result in new lines for third fired and vitrified tiles at Karjat and Bharuch. The lines are expected to be completed during the financial year 2000-1. Subsidiary company The statement required under section 212 of the Companies Act, 1956, in respect of subsidiary company is appended herewith. Outlook 2000-01 The outlook for the current financial year appears to be promising for the industry and Sun Earth. Industrial growth in 1999-2000, measured by the Index of Industrial Production (IIP), was a robust eight per cent compared to 3.9 per cent in the previous year; this growth is expected to sustain in 2000-1. Early indications in April and May 2000 point to buoyant production in sectors such as sugar, steel and motorcycles. With infrastructure getting top billing and given the shortage in dwelling houses, the housing industry looks set to post attractive growth. Your Company is attractively positioned to draw on this evolving market place reality. Your Company has set up plants at low cost, possesses attractive economies of scale, has proximity to raw material sources, has low fuel costs and depreciated plants that are expected to enable it to capitalise on the increase in demand. Your Companys marketing focus will increasingly shift from the institutional towards the retail. The ability of the ceramic tiles industry to generate significant demand growth by influencing a shift from mosaic tiles to ceramic tiles (thereby countering the over capacity situation to an extent) will play an important role in improving the topline for most companies in the sector. Sun Earth will leverage its quality, designs and distribution to deepen its penetration in the domestic market. The strengthening of the brand is expected to help in improving margins and fetching higher than average marker realizations. Directors Mr. Suresh G. Motwani has resigned as Managing Director during the year, since he will be mainly involved in managing the operations of the overseas companies to be acquired by Sun Earth. Mr. Vinod G. Motwani was appointed as the Managing Director of the Company with effect from 1 June, 2000. He will be designated as the Vice Chairman and Managing Director of the Company. Mr. . M. Trivedi was appointed as Additional Director of the Company during the year and his term expires at the ensuing Annual General Meeting. The Company has received notice under Section 257 of the Companies Act, 1956 from a member proposing his candidature for the office of Director liable to retire by rotation. Accordingly your Directors recommend approval of the resolution. Mr. Ashok Kamble has been appointed as Nominee Director of IDBI on the Board of Company. Mr. Pramod Kumar Bhuchar, Mr. G. Philip Stephenson, Mr. Ashok Paranjpe retire by rotation at the ensuing Annual General Meeting and being eligible offer themselves for re-appointment. Personnel The Board wishes to place on record its appreciation of the contribution made by all employees in ensuring good operational performance and growth that your Company has achieved during the year. During the year, the industrial relations with the employees were cordial. Information as per Section 217 (2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees ) Rules, 1975 (as amended) forms part of the report and is annexed herewith as Annexure 1. Energy Conservation, Technology Absorption and Foreign Exchange Earning & Outflow . Additional Information on conservation of Energy, Technology Absorptions, Foreign Earnings and Outgo as required to be disclosed in accordance with the Companies (Disclosure of Particulars in the report of Board of Directors) Rules, 1988 is annexed to the Directors Report as Annexure ll. Auditors The Auditors, M/s. K. P. Kapadia & Co. Chartered Accountants, retire at the conclusion of this Annual General Meeting. They have signified their willingness to accept re-appointment and have further confirmed their eligibility under Section 224 of the Companies Act, 1956. The Board wishes to place on record its appreciation of the hard work and dedication of employees at all levels. Industrial relations in all the units of the Company continued to be cordial during the year under review. Your Directors also convey their grateful thanks to the Financial Institutions, Bankers and Shareholders for their continued co-operation and patronage. For and on behalf of the Board Place : Mumbai Suresh G. Motwani Date : 30 October, 2000. Chairman ANNEXURE -II TO THE DIRECTORS REPORT CONSERVATION OF ENERGY FORM FOR DISCLOSURE OF PARTICULARS WITH RESPECT TO ABSORPTION: * Specific areas in which R & D carried out by the Company. - Development of Ceramic Tiles of new designs, textures and colours. - Development of alternative raw materials. * Benefits derived as a result of the above R & D. - Improvement in quality of Tiles. - Reduction in Cost. * Future plan of Action. Continuous efforts are being made in the above areas along with efforts to improve the quality while reducing costs. * Expenditure on R & D. Rs. in lacs Particulars 1998-99 1999-2000 a) Capital -- -- b) Raw Materials 19.05 24.05 Total 19.05 24.05 Total R & D Expenditure as a 0.17% 0.13% percentage of total turnover (Ceramic division only) FOREIGN EXCHANGE EARNINGS AND OUTGO CIF value of goods 1998-99 1999-2000 Rs. Rs. i) Capital Goods 32,31,002 6,30,23,257 ii) Materials 3,63,89,021 2,12,89,152 iii) Spares 80,75,092 90,21,418 iv) Others 13,66,873 0 Total 4,90,61,988 9,33,33,827 Expenditure incurred in Foreign Currency: (On Payment basis) i) Technical Know-how -- 60,800 ii) Travel 2,16,555 6,97,116 iii) Dividend- -- 88,29,669 Total 2,16,555 95.87.585 Earning in Foreign Currency, FOB Value of Exports: Export Turnover 86,65,061 4,64,65,391 For and on behalf of the Board Suresh G Motwani Mumbai, 30 October,2000 Chairman