Summary of an Annual Report

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Chairman’s message

In the message to the stakeholders the Chairman Mr. R. A. Shah has mentioned how the global economic conditions were challenging for the financial year 2013-14. He also states that as per the latest reports by the IMF strong growth is expected in various foreign markets like Central and South American, Middle East and African, the ASEAN region as well as India because of exports and increase in domestic demand. He also wishes the newly formed government good luck. The Company wishes to align itself with national goals of increasing per capital income, reducing income disparities, and alleviating poverty.

Increase in the health awareness among the population has brought about a change in the consumption pattern of the Company’s tobacco products. The continually increasing tax rates on tobacco products has made it necessary for the Company to strike a fine balance between the twin objectives of business growth and legal compliance. Technical advancements and wellness trends are leading companies to produce products aimed at harm reduction. He also thanks all the stake holders for continued support in the Company’s endeavor.

President’s message

The President Mr K. K. Modi has mentioned the Company’s turnover at has mentioned the Company’s turnover at INR 4,196 crore with a growth of 15.2% over the previous year. Despite the closure of one of the manufacturing plant at Andheri, Mumbai the Company recorded a 7.6% increase in the profits before tax at INR 255 crores. The Company has also witnessed a 31% growth in revenue in the non-tobacco sector to reach 270 crores. The Company has also declared a dividend of INR 40 per share.

There was a management change because of the sad demise of a vastly experienced and able leader Mr. S. Seru after prolonged illness. The new management is focusing on developing a performance driven culture to smoothen its growth.

In the near future the Company wishes to expand its international businesses by tie-ups, collaborations etc. for entering into new markets like Latin America, Middle East and Africa. The Company is committed to produce innovative products across all categories with a clear goal of harm reduction. The Company aims to invest in manufacturing capabilities to match global standards and also upgrade people skills. Despite the new budget not favouring tobacco products, the Company will aim to achieve sustainable growth under all circumstances. Mr. K. K. Modi thanks all the shareholders and stakeholders for their never-ending trust in the Company’s leadership and assures of growth.

Financial Highlights: Trends

  1. Gross Revenue (Ref. pg 4 of Annual Report):

The gross revenue of the Company has increased continuously since 2004-05 till 2012-13. The gross revenue for the previous year 2012-13 is INR 4,196 crores a substantial increase over the previous year mark which was around INR 3,750 crores. The Company managed to increase its revenues despite tough economic conditions which is commendable.

  1. PAT (Ref. pg 4 of Annual Report):

The Company has also managed to maintain same profit after tax levels slightly above INR 150 crores. There was not much of an increase in the overall profits because of the increases in the tax rates as well as changing consumer behavior.

  1. Book value per equity share (Ref. pg 4 of Annual Report):

Book value per equity share refers tothe total amounta Company would be worth if it liquidated its assets and paid back all its liabilities. Company’s book value per share is showing constant growth since 2004-05. In case of bankruptcy it has the ability to pay the liabilities and investor can still make profit

  1. EPS (Ref. pg 4 of Annual Report):

Earnings per share represents Company’s earning. It is net of all taxes and preferred stock. The Company’s earning is showing a stagnant growth from last year. It had maximum growth in the year 2011-12.

  1. Shareholders’ funds (Ref. pg 4 of Annual Report):

Shareholders fund represents funds invested in Company through common and preferred stock. It is increasing very year and ended close to INR1200 crore for the year 2013-14.

  1. Market capitalization (Ref. pg 4 of Annual Report):

Market capitalization is calculated by multiplying market share price by total no. of Company’s outstanding share. Market capitalization has been fluctuating since 2004-05. And it has increased from last year i.e. 2012-13.

Revenue Distribution (Ref. pg 5 of Annual Report):

Nearly 41% of the total revenue was spent on taxes which is quiet a substantial proportion of the revenue. The raw materials accounted for nearly 24% of the total revenue. Around 5% of the revenue was used for personnel expenses and depreciation and income tax accounted for 3%. Other expenses led to 20% of revenue and the remaining 5% was the income.

DIRECTORS’ REPORT

The Directors present the Seventy-seventh Annual Report on the business and operations of the Company for the financial year 2013-14.

ECONOMIC ENVIRONMENT

The global economic conditions were tough for the year 2013-14. The US economy strengthened during the course of the year while it was a turbulent economic phase for the Euro Zone. The developing nations showed a sluggish growth pattern. The domestic economy hit a decadal low while the industrial sector saw persistent slowdown.

With new government formation and positive sentiments around, the domestic environment is changing. As fiscal conditions improve the demand is sure to surge and developed economies will rebound. The global growth is projected to improve from 3.3 per cent in 2013-14 to 3.6 per cent, growth in advanced economies is expected to lag the global growth at 2 per cent. The developing economies are expected to grow at about 5% in 2014-15. The Company’s export division is further likely to benefit from geopolitical risks withering down in the developing nations.

TOBACCO INDUSTRY

The Indian tobacco industry is estimated to be around USD 13 billion in Financial Year 2013-14. Cigarettes constitute 61 percent of the total, followed by Bidis (23 per cent) & Chewing tobacco products (16 per cent). The exports of Indian leaf tobacco were higher as compared to previous year, both in terms of volume and value terms.

REGULATIONS AND TAXATIONS

The global tobacco regulatory environment is becoming stricter by the day, and businesses are facing a challenging task.* Even in India, over the previous years the Union government has increased excise on the Cigarette industry, continuously and State governments are further imposing high VAT at varying rates. In the recent budget the excise duty has further been hiked on various segments, ranging between 11 to 72 per cent.

The Company is committed to follow the regulations as a responsible corporate, the Company eagerly awaits a unified taxation system with respect to GST as it is expected to benefit not only the industry but the consumers as well, by rationalizing the differential pricing which will curb sales of illicit products.

SEGMENTWISE PERFORMANCE IN 2013-2014

Cigarettes

The central and state taxes increased for the second year in succession for the cigarette industry. The sales income continued to increase at a healthy rate 11.7% despite a decline in the sales volume. The total sales income increased from INR 2,920 crore to INR 3,263 crore. The Company managed reversed the decling trend of previous years and managed to successfully hold on to its market share. There has been an increase in the volume of 64mm segment despite aggressive competitive moves.

The Company aims for a steady growth by balancing brand portfolio, consumer centric work, effective response to environmental changes and factual decision making process. Multiple cross-functional projects are currently underway aimed to make the brands consumer centric in the market place by delivering superior product experience and hence winning consumer confidence.

Tea

The Company’s domestic tea producing business has progressed well, and posted an overall net sales of INR 116 crore against INR 106 crore i.e. growth of almos10 per cent over the previous year. The tea division focused on acquiring the premiumization trend in the domestic market. The Company launched Supercup Gold and the Supercup Premium, and continued expanding presence in non-tobacco segment like modern trade, institutions and home shopping. Concerted efforts helped the team’s premium offering Symphony to grow by 12 per cent in the domestic market. To improve quality focus, the Company has implemented the Kaizen and 5S systems in its factories at Kolkata and Bazpur.

Exports

The exports for the Company grew by a 36 per cent and were valued at INR 491 crore for the financial year 2013-14. The Company has restructured its International Business division so that it can realize its full potential. A long term business plan is being chalked out for a sustained growth of international business across all product categories. The key focus is on increasing sustainable business with existing clients as well as expanding to cover new geographies and adding value to the business. The regional hub setup in Dubai and Singapore is expected to help in building greater customer confidence.

The Company is also looking to get a foothold in the African markets through tie-ups and alliances. Tea exports experienced a phenomenal growth of 39% over previous year mainly because of expansion into new geographic regions like Afghanistan, Russia and Netherland and growing client base in key regions of Iran and Pakistan. Oman and Uzbekistan have been identified as potential markets.

Chewing Products

There was an 11 per cent growth in the last fiscal as the sales were up from INR 142 crores to INR 158 crores. The Company also launched two new products namely ‘Raag’ pan masala and ‘Raaga Zarda’. The Company reaped benefits from the states of Gujarat & MP. A lot of research and development work is being carried out to understand the market and the consumer in a deeper manner. The Company is in the process of building ‘Pan Vilas’ salience and superior imagery in order to not only capture more market share, but also build a compelling solution for the premium mixer, and proliferate ‘Raag’ in the popular Pan Masala segment.

Retail

The Company’s has entered into retail business through 24x7 convenience stores and is making steady progress in the retail segment. The Company has currently opened 42 stores across NCR and includes 4 new stores opened in Chandigarh. The new business models are currently being evaluation with the help of Japanese consultants and the Company hopes to scale greater heights in future.

TREASURY OPERATIONS

The Company is enjoying the highest rating of ‘CRISIL A1+’ for Short Term Debt Programme, ‘CRISIL AA+/Stable’ for Long Term Loan, ‘CRISIL AA+/Stable’ for Cash Credit Limit and ‘CRISIL A1+’ for Non-fund based Limit.

The above ratings imply that the Company is able to raise funds at competitive terms. Guided by the policy of safe, liquid and tax efficient returns, the Company has been deploying its long term surplus funds primarily in debt oriented schemes of reputed mutual funds. The Company also continued to park its temporary surpluses in liquid schemes of various mutual funds.

FIXED DEPOSITS

The Company has not accepted any Fixed Deposits from the public or members during the year. No amount was outstanding towards unclaimed deposits payable to the depositors as on March 31, 2014.

DIVIDEND

Despite a decline in the sales volume the company has managed to give a dividend of INR 40 per equity share whose face value is INR 10 each. The dividend offered is the same as last year.

INTERNAL CONTROL SYSTEM

The Company has a strong system in place to ensure that transactions are authorized, recorded and reported correctly. The company also safeguards its assets against unauthorized use, loss from wastage and disposition. There is an extensive programme of internal audit carried out by a firm of chartered accountants and regular management review process.

HUMAN RESOURCE DEVELOPMENT

The Company has made necessary changes in the organization in order to make it more performance driven organization. Also efforts have been made to create a synergy and improve various intra and inter functional effectiveness. Various initiatives like training of female employees on personal safety and security, creating guidelines for prevention and prohibition of sexual harassment and its redressal, annual health check-ups for employees and building employee capabilities to help the Company to engage its employees and improve business outcomes.

CORPORATE DEVELOPMENT

The Coorporate development team continued to provide strategic inputs to the senior leadership. The division is also responsible for outlining the long term objectives of the company and chalk out a path towards the fulfilment of the goal.

INFORMATION TECHNOLOGY

The Company is continuing to invest in Information Technology in order to enhance productivity and improve operational efficiencies. The company has successfully completed ERP implementation for all businesses and implementation of state of art hardware technologies to provide uninterrupted services to the businesses.

CORPORATE SOCIAL RESPONSIBILITY

‘Amodini’, is the flagship CSR initiative by the Company. The initiative is aimed at women empowerment and has impacted the lives of 23,000 women directly. Besides the company also initiated a drive in Kashmir for women equipped with handicraft skills. Rabale factory’s Green initiative was recognized with ‘Gold Rating’ by the IGBC and Ghaziabad factory was bestowed with ‘Platinum Award’ by the Greentech Foundation for outstanding achievement in environment management and ‘Gold Award’ by FICCI for quality awards in manufacturing.

CONSERVATION OF ENERGY

The company has listed various energy conservation steps that the company has taken to bring down the energy costs. One of the initiatives taken by the Company was to install LEDs in its Rabale plant. Various other initiative have been listed.

TECHNOLOGICAL ABSORPTION, ADOPTION AND INNOVATION

The Company has bought about various technical changes in order to improve the productivity and improve the security of the plants. The Company has also managed to obtain ISO-22000 certification for the chewing products plant. It has also introduced square cornered extended cigarette pack of 77 mm length.

RESEARCH & DEVELOPMENT

New Product Development

The Company carried out R&D work on differentiated products in cigarette, cut tobacco and chewing categories for meeting requirements of both domestic and overseas customer needs.

It also undertook various other testing methods for various products.

Benefits derived as a result of this Development

Because of the R&D projects the Company was able to create improved brands of cigarettes. Also it enhanced its existing tobacco blends and improved the smoke characteristics. The agile software developed has helped in building a robust product development process.

Future Plan of Action

The Company aims to develop different flavours for e-cigarettes. The Company aims to create an expert panel for testing of chewing products in house.

FOREIGN EXCHANGE EARNINGS AND OUTGO

The earnings in foreign exchange by exports and other income increased to INR 491 crore from INR 361 crores in the previous year while the foreign exchange outgo on imports, dividends and other expenditure amounted to 184 crore while in the previous year it was INR 136 crore.

Report on Corporate Governance

  1. COMPANY’S PHILOSOPHY ON CORPORATE GOVERNANCE

The objectives of Corporate Governance initiatives of a Company are directed towards achieving basic aim of wealth creation for its stakeholders. Ample freedom is given to its executives to operate and secure the targets by putting their best efforts. Hence good corporate governance is vital to achieve sustainable growth of the business. The Company is in compliance with the norms and disclosures stipulated under clause 49 of the Listing Agreements entered with the Stock Exchanges with regard to Corporate Governance.

2. BOARD OF DIRECTORS

Composition of the Board

The Board of Director comprises of Executive Directors and Non-Executive Directors. The Board also includes Independent Non-Executive Directors. The Board comprised of 9 members. However, due to the sad demise of Mr. O.P. Vashi the number was reduced to 8. As on 31st March, 2014, the Board was constituted of 4 independent directors, 3 executive directors and 1 non-executive, and non-independent director.

PROFILE OF DIRECTORS

Sr.no

Name

Qualification

Experience

1

Mr. R.A. Shah

Solicitor

2

Mr. K.K. Modi

3

Mr. R. Ramamurthy

4

Dr. Lalit Bhasin

B.A.(Hons.), LL.B., FCIArb

5

Mr. Anup N. Kothari

B.Arch., F.I.I.A

6

Mr. Lalit Kumar Modi

Electrical Engineering and Business Administration at Pace University & Duke University, U.S.A.

7

Mr. C.M. Maniar%

8

Mr. O.P. Vaish^

9

Mr. Samir Kumar Modi

^ Has since ceased to be the director of the Company on his demise on 18th September, 2013.

% Ceased to be the director of the Company in view of his sad demise on 29th June, 2014.

Mrs. Bina Modi, wife of Mr. K.K. Modi and mother of Mr. Lalit Kumar Modi and Mr. Samir Kumar Modi, has been appointed as an Additional Director in the meeting of the Board of Directors conducted on 7th April, 2014. Additional Director being non-executive and non-independent and will hold the office until the next AGM is concluded.

The report also includes the reports of Board Meetings held during the year as well as the Details of pecuniary relationship or transactions of the non-executive directors vis-a-vis the Company. Further a brief profile the directors has been given which highlights their contribution. The report also includes the legal compliances and the code of conduct.

3. AUDIT COMMITTEE

The Audit Committee of the company has been constituted in line with the provisions of Clause 49 of the Listing Agreement with the Stock Exchanges read with Section 292A of the Companies Act,

1956. The Managing Director, Chief Financial Offier, Internal and Statutory Auditors are permanent invitees to the audit committee meetings. The details of the meetings are listed in the table (Ref pg no. 19 of Annual Report).

4. SUBSIDIARY COMPANIES

There is no unlisted Indian subsidiary company, of the Company. Hence there is no need to appoint a separate director to the board of an unlisted subsidiary company.

5. DISCLOSURES

(A) Basis of related party transactions

Party related transactions are ainly of 3 types. The details of each of the type of transaction is verified by the audit committee.

(B) Disclosure of Accounting Treatment

The financial statements for the year ended March 31, 2014 comply with the Accounting Standards notified by the Companies (Accounting Standards) Rules, 2006 and there have been no deviations from the treatment prescribed in the Accounting standards.

(C) Risk Management

The Company has a built-in internal control systems for assessing and mitigating elements risk elements with respect to its business operations. The respective functional heads are alive to this aspect in their daily functioning.

(D) Proceeds from public issues, right issues, preferential issues, etc.

The Company has not raised any funds through preferential issues, public, rights, etc. during the year 2013-14

(E) Others

There isn’t any provision for Whistle Blower policy as the same was not needed in 2013-14. The Company has complied with mandatory requirements of clause 49 of the Listing Agreement during the year

6. REMUNERATION TO DIRECTORS

7. MANAGEMENT

8. Nomination and Remuneration Committee

1

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