Vst Industries Limited

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VST INDUSTRIES LIMITED

ANNUAL REPORT 2007

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CONTENTS VST Industries Limited

Page

Board of Directors 3

Notice of Meeting 4

Report of the Board of Directors & Management Discussion and Analysis 6

Annexure to the Directors' Report.. 14

Statement Regarding Subsidiary Company 17

Report on Corporate Governance 18

Certification by CEO and CFO 34

Report of the Auditors 35

Balance Sheet 38

Profit and Loss Account 39

Schedules to the Balance Sheet .. 40

Schedules to the Profit and Loss Account 50

Significant Accounting Policies .. 57

Cash Flow Statement 58

Balance Sheet Abstract and Company's General Business Profile 60

Report & Accounts of Subsidiary

VST Distribution, Storage & Leasing Company Private Limited 61

Consolidated Financial Statements 74

Operating Results 95 ECS Mandate/Bank Mandate 96 Admission Slip/Form of Proxy 99

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BOARD OF DIRECTORS VST Industries Limited

Chairman ABHIJIT BASU

Managing Director RAYMOND S. NORONHA

Finance Director & Secretary N. SAI SANKAR

Directors ANDREW O'REGAN AIR CHIEF MARSHAL IDRIS HASAN LATIF, P.V.S.M. (Retd. T. LAKSHMANAN R.V.K.M. SURYARAU S.THIRUMALAI

Auditors Lovelock & Lewes Chartered Accountants Hyderabad - 500 082 Andhra Pradesh

Registered Office 1-7-1063/1065, Azamabad Hyderabad - 500 020 Andhra Pradesh

Registrars & Share Transfer Agents Sathguru Management Consultants Private Limited Plot No. 15, Hindi Nagar Near Sai Baba Temple, Punjagutta Hyderabad - 500 034 Phone : 040 - 2335 0586, 2335 6507, 2335 6975 Fax : 040 - 2335 4042 E-mail : [email protected]

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NOTICE OF MEETING VST Industries Limited

NOTICE IS HEREBY GIVEN THAT the Seventy Sixth Annual Companies Act, 1956 and in respect of whom the General Meeting of VST INDUSTRIES LIMITED will be held Company has received a notice in writing from a at Hotel Taj Krishna, Road No.l, Banjara Hills, Member proposing his candidature for the office of Hyderabad - 500 034 on Wednesday, 18th July, the Director be and is hereby appointed as a Director 2007 at 10.30 a.m. for transaction of the following of the Company whose period of office shall be liable business: to determination by the retirement of Directors by rotation." 1. To receive, consider and adopt the Audited Balance Sheet as at 31st March, 2007, the Profit and Loss The Register of Members of the Company will remain Account, Auditors' Report and Directors' Report for the closed from 1 6th July, 2007 to 1 8th July, 2007 (both Company's year ended 31st March, 2007. days inclusive) for payment of dividend, if approved.

2. To declare a Dividend on the Ordinary Share Capital. Transfer of shares received in order by the Company's Registrars and Share Transfer Agents, M/s. Sathguru 3. To elect Directors in place of those retiring by rotation. Management Consultants Private Limited, Plot No. 15, 4. To appoint Auditors and to fix their remuneration. In Hindi Nagar, Near Sai Baba Temple, Punjagutta, this connection to consider and, if thought fit, to pass Hyderabad - 500 034, before the close of business the following Resolution which will be proposed as an on 14th July, 2007, will be registered in time for the Ordinary Resolution: transferees to become eligible for dividend, if declared.

"RESOLVED that Messrs. Lovelock & Lewes, Chartered Dividend, if approved, will be paid on or before 1 7th Accountants, be and are hereby appointed as the August, 2007 to those shareholders whose names Auditors of the Company to hold such office until the appear in the Register of Members of the Company on conclusion of the next Annual General Meeting at a 1 8th July, 2007 or to their Mandarees, subject however remuneration of Rs. 14,00,000 (Rupees Fourteen lakhs to the provisions of Section 206A of the Companies only) payable in two equal instalments plus service tax Act, 1 956, or any amendment or modification thereof. as applicable and reimbursement of out-of-pocket In respect of dematerialised shares the dividend will be expenses incurred." payable on the basis of beneficial ownership as per details to be furnished by National Securities Depository SPECIAL BUSINESS Limited (NSDL) and Central Depository Services (India) 5. To consider and, if thought fit, to pass with or without Limited (CDSL) for this purpose. modification(s), the following Resolution which will be By Order of the Board, proposed as an Ordinary Resolution:

"RESOLVED that Mr. Andrew O'Regan who was N. SAI SANKAR appointed a Director of the Company to fill the casual Secretary vacancy caused by the resignation of Mr. Emil Dated this 1 8th day of April, 2007. Moskofian and who vacates office at the ensuing Azamabad, Hyderabad - 500 020, Annual General Meeting under Section 262 of the Andhra Pradesh.

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VST Industries Limited

NOTES

1. A Member entitled to attend and vote at the General Shareholders should inform the Company's Registrars Meeting may appoint a proxy, who need not be a and Share Transfer Agents, M/s. Sathguru Member, to attend and on a poll, to vote on his Management Consultants Private Limited of any change behalf. The proxies should be deposited at the in their registered address, before 1 6th July, 2007. Registered Office of the Company not less than forty eight hours before the commencement of the Shareholders who have multiple folios in identical Meeting. names or joint names in the same order are requested to intimate to the Registrars and Share Transfer Agents, 2. In accordance with Section 173(2) of the Companies M/s. Sathguru Management Consultants Private Limited, Act, 1 956, an Explanatory Statement in respect of item these folios to enable consolidation of all such 5 being item of Special Business is annexed to the shareholdings into one folio. Notice of the Meeting. 6. Shareholders are requested to refer to the "Shareholder 3. In accordance with the provisions of Article 93 of the Referencer" which inter-alia contains details regarding Articles of Association of the Company, Mr. A. Basu unclaimed dividend. and Mr. R.V.K.M. Suryarau will retire by rotation at this Annual General Meeting and being eligible offer 7. Shareholders are requested to bring their copy of the themselves for re-appointment. Annual Report to the Meeting.

EXPLANATORY STATEMENT

In accordance with Section 173(2) of the Companies Act, Mr. Andrew O'Regan as a Director at this meeting having 1 956, the following information is given in explanation of filed his consent with the Company to act as Director. the items of Special Business set out in the attached Notice Mr. Andrew O'Regan is a Science Graduate and has wide of the Seventy Sixth Annual General Meeting of the knowledge and experience of corporate management. Company to be held at Hotel Taj Krishna, Road No. 1, Currently, he is Managing Director and CEO of Ceylon Banjara Hills, Hyderabad - 500 034 on Wednesday, Tobacco Company Limited, Sri Lanka. 18th July, 2007. No Director of your Company other than Mr. Andrew Item No. 5 O'Regan is concerned or interested in this Resolution. Mr. Andrew O'Regan who was appointed as a Director of The Board commends this Resolution for your approval. the Company on 27th July, 2006 to fill the casual vacancy caused by the resignation of Mr. Emil Moskofian in terms of Section 262 of Companies Act, 1956 and Article 98 of By Order of the Board, the Articles of Association of the Company, vacates office N. SAI SANKAR at this Annual General Meeting. Secretary A notice has been received by the Company along with a Dated this 1 8th day of April, 2007. deposit of Rs.500 from a Member under Section 257 of Azamabad, Hyderabad - 500 020, the Companies Act, 1 956, proposing the appointment of Andhra Pradesh.

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REPORT OF THE BOARD OF DIRECTORS & MANAGEMENT DISCUSSION AND ANALYSIS TO THE SHAREHOLDERS FOR THE YEAR ENDED 31ST MARCH, 2007 VST industries Limited

The Directors of your Company have pleasure in presenting their Annual also have a severe impact on volumes Report and Accounts for the year ended 31 st March, 2007. and profitability for the year 2007-08.

Financial Results Rs. Lakhs Market Scenario The Net Profit for the year, after Your Company after reversing the trend deducting all charges, expenses of declining volumes in 2004-2005, and taxation but before continued to maintain volumes in line extraordinary item amounts to 5509.17 with last year in spite of price changes Adding thereto Profit brought forward from the of key filters and micros in 2006-2007. previous year 5145.04 This was made possible primarily through expanding the consumer base The amount available for disposal was 10654.21 in the micro segment, both in existing areas of operations, as well as in Out of which the following appropriation has been made : previously unrepresented geographies, and by successfully launching an General Reserve 600.00 extension of a key filter brand. Leaving a balance of 10054.21 In the micro plain segment, distribution Out of which your Board recommends 3613.25 focus resulted in the growth of Should be distributed as Dividend on the Charminar Standard. Your Ordinary Share Capital at the rate of Company's second largest micro brand Rs.20 per share and inclusive of Shaan grew significantly, particularly Dividend Tax in previously unrepresented areas of Uttar Pradesh and Madhya Pradesh. Leaving an undistributed amount of 6440.96 In addition, there has been a sizeable in the Profit and Loss Account to be carried forward growth seen in the tipped micro segment to the following year. with Ace Tipped and launch of a new brand Gold Medal Tipped. considered for disclosure mainly consist INDUSTRY STRUCTURE & In the regular sized filter segment, the DEVELOPMENT of sales within India and sales outside India. The entire activity pertaining to Special trademark, through its two The Indian economy has taken off with sales outside India is carried out from variants, Special Filter and Special Extra Smooth, continued its GDP recording growth in excess of 9% India. for the last 2 years. The cigarette satisfactory performance. Special industry has been growing albeit at a Industry Issues Filter continued to protect its consumer franchise from competitive threats. It much lower rate. The primary reasons The industry has been representing to showed significant improvement in for this low growth are the the government about the need for an discriminatory tax policies and severe disposition through a pack format equitable tax policy for all tobacco change to fine edge pack for the first restrictions imposed on smoking and products but with no success till date. time in regular size filters in India. advertisements. Laws have also been The share of cigarettes which constitutes Special Extra Smooth meanwhile proposed to bring in graphic health a mere 1 5% of the total tobacco has built a loyal base among the value- warnings which could further curb consumption could erode further with seeking consumers in the state of West smoking thereby affecting future growth Union Budget proposals for the year Bengal. patterns. 2007-2008 levying a 6% increase In the Charms family, its new variant SEGMENT WISE PERFORMANCE across the board in all segments of the Charms Premium, showed a cigarette industry inclusive of 1 % cess. Your Company considers tobacco and sizeable presence primarily in markets related products as the primary segment The introduction of Value Added Tax on with strong Charms equity, drawing its for reporting. Geographical segments tobacco products at the state level could share from new entrants.

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VST Industries Limited

In keeping with your Company's As a social responsibility to conserve Engineering commitment of expanding its brand greenery, your Company is continuing Variable frequency drives (VFD) for range and establishing its presence in social forestry through afforestation and SMD humidification system with unrepresented and under represented Trees for Life and also actively speed modulation geographies through new brand discouraging child labour involvement endeavours and brand extensions, two in tobacco growing/processing. VFD for scrubber new brands namely, XLS and PRODUCTION AND PLANT Soft Starters for band conveyors in Moments in the regular sized filter MODERNISATION PMD segment were launched in the last quarter of 2006-2007. Further new Primary Manufacturing Harmonic audit was carried out brand developmental activities continue Department (PMD) 1 7 new earth pits to be accorded high levels of priority New design tipper/holding band from and organizational focus. Dickinson Fowler, Bangalore has been HUMAN RESOURCE DEVELOPMENT Leaf Tobacco installed in stem conditioning line to reduce degradation and spillages. Your Company's human resource We are happy to report that your management system aim is to have on Company has recorded Rs.44.90 New design roller sieve complex from a continuous basis, a talent pool ready crore leaf export turnover, which is 5% Dickinson Fowler, Bangalore has been to meet challenges in the highly higher than the year 2005-2006, installed in lamina cutting line to ensure competitive market and deliver results. despite increasing competition. consistent sieving and less rejections. Steam treatment of stems (STS) from Development programmes have been Your Company has established special undertaken at periodical intervals in order tobaccos for niche markets, which are Dickinson Legg, U.K. has been installed in stem drying line to improve to build the requisite competencies as well being produced by the large farmer as to improve knowledge and job content. base of your Company. This has consistency and fill values and to helped in optimizing the turnover and reduce rejections. As on 31st March, 2007, your Company had a strength of 1072 profit and also helped in economic Tobacco utilization in the processing employees, with 264 management staff upliftment of the backward regions. lines has increased by 0.3% over the and 808 workmen. Your Company has entered into long last year. term tie-ups with potential customers for The Long Term Agreement was signed Secondary Manufacturing Oriental Tobacco development and with the Company's recognized union Department (SMD) marketing, which has now attained for a period of 3\ years commencing commercial production levels. As per ongoing modernisation plan of 1st February, 2006. Established market with premium Secondary Manufacturing Department During the year, 94 workmen opted for customers for Air Cured Burley exports to improve productivity and quality, the Voluntary Retirement Scheme framed will ensure steady export growth in the following technology has been put in by the Company. years to come. Your Company place - continues to retain the premier status in CONSERVATION OF ENERGY, Four Molmac MK9 MTF machines Sun/Air/Fire cured tobaccos. TECHNOLOGY ABSORPTION, speed has been increased from FOREIGN EXCHANGE You will be pleased to learn that your 5000 to 5500 cpm EARNINGS AND OUTGO Company's farmers continue to grow One Molmac MK9 MTF machine tobacco with lowest pesticide residue Information in accordance with clause has been installed levels and within international (e) of sub-section (1) of Section 217 standards. Your Company is also Direct transportation of corrugated read with the Companies (Disclosure of actively promoting Vermi Compost units fibre cartons (CFC) from SMD Particulars in the Report of Board of for organic farming among tobacco packing lines to the warehouse on Directors) Rules, 1988 is given in the farmers. the filter line. Annexure to this Report.

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VST Industries Limited

ENVIRONMENT, HEALTH & Your Company had celebrated ENTERPRISE RESOURCE SAFETY (EHS) AND National Safety Day on 4th March, PLANNING (ERP) COMMUNITY SERVICES 2007 by conducting safety meetings, medical check up for workmen and Your Company is now planning to Your Company has been maintaining also organized Castrol Road Safety move into an upgraded version of sustained safety performance for the Week for VST employees in association Enterprise Resource Planning. This is last 10 months without any accidents expected to be completed within this with Castrol by conducting Quiz and and working over 1 .88 million financial year. The total information Slogan contests. manhours till the end of the financial technology activity has been year. Behind this creditable Surveillance Reviews of ISO 14001 : outsourced, between WIPRO achievement, there have been co- 2004 & OHSAS 18001 for the year Technologies / Lanco Global ordinated efforts by all employees. 2006 by Registro Italiano Navale Solutions. India (RINA) revalidated your During the year, your Company had Further alignment of business process Company's certifications. installed automatic sprinkler alarm is also being contemplated. system integrating with existing sprinkler In the environmental side, as a FIXED DEPOSITS system for faster response time. responsible corporate your Company continues to put in sustained efforts in As on 31st March, 2007, your Gold Award for the year 2006 was the upkeep and improvisation of existing Company does not have any deposits given by Royal Society for Prevention for the purpose of its business. Letters of Accidents (RoSPA), U.K. for systems like scrubber, DRF systems, rain have been written to 7 depositors who maintaining highest standards in water harvesting pits, ETP with soil did not claim their deposits (amounting Occupational Health and Safety. biotechnology, etc. to Rs.33,000), before and after the Safety Innovation Award for the year Statutory compliances are in place. date of maturity for repayment. 2006 was awarded to your Company The thrust on EHS will continue while Your Company has stopped accepting by Safety & Quality Forum, Institute of emphasizing the focus on best fresh deposits for the last several years. Engineers (India) for implementing international work practices. innovative Safety Management RATING Systems. FINANCE The Credit Rating Information Services Environment, Health and Safety (EHS) The Profit After Tax for the year at India Limited (CRISIL) have re-affirmed in day-to-day business operations is Rs.55.09 crore is the highest ever the rating of your Company to "FAAA" given very high priority by your achieved in the history of the Company. for Fixed Deposit Schemes and "AA+" Company. 510 employees and 14 This was done after charging in total for Long Term Non-convertible contractors had undergone EHS training an amount of Rs.9.25 crore incurred Debentures. programme during the period to comply on account of Voluntary Retirement UNCLAIMED DIVIDENDS with the Company EHS guidelines. Scheme launched by your Company Involvement by workmen in quarterly during the year. Your Company had vide its letter dated EHS reviews along with staff members 25th October, 2001 communicated to and periodical inspections have kept the The focus of the business continues to all the shareholders about the performance monitoring on vigil. be in growing the traditional tobacco promulgation of Rules pertaining to the Quarterly and Annual EHS audits of the business. Profitability and cash flows Investor Education and Protection Fund. Company operations including leaf continue to be healthy. Tight working Dividends which remain unpaid or godowns was carried out to ensure capital management and cost control unclaimed for a period of seven years compliance of EHS requirements to measures with specific emphasis on would be deposited in the Investor measure the EHS progress. EHS Road elimination of non-value added Education and Protection Fund. The Map rating of your Company was activities have enabled resources to be final dividend for the year ended 31 st assessed at 3.50 as against the scale deployed in the most productive assets March, 2000 remaining unpaid would of 4.0 for the year 2006. thereby enhancing profitability levels. be deposited by 1 2th November,

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VST Industries Limited

2007 in accordance with Section operations, consideration of accounts with effect from 19th June, 1989. He 205C read with Investor Education and on a quarterly basis and monitoring was appointed under the provisions of Protection Fund (Awareness and the implementation of audit Section 257 of the Companies Act, Protection of Investors) Rules, 2001. recommendations were the key areas 1956 at the Annual General Meeting of focus. The Statutory Auditors were held on 20th July, 1990 and was last SUBSIDIARY COMPANIES invited to attend all the Audit Committee retired and re-appointed at the Annual It was reported last year that an meetings and share their views on General Meeting held on 22nd July, application was being made for merger adequacy of internal controls as well 2004. Mr.Basu is now due to retire by of Hallmark Tobacco Company Private as present their audit plan for the year. rotation at the forthcoming Annual Limited (HMTC) with VST Distribution, General Meeting and being eligible, A self-evaluation system has been put Storage and Leasing Company Private offers himself for re-appointment. in place on internal controls and Limited (VSTDSL). A Court Order has comprehensive documentation has Mr. Basu is a Graduate in Physics from since been received sanctioning the been done covering the various Oxford University. He has had about amalgamation of HMTC with VSTDSL business processes. This would 34 years of experience in ITC Limited with effect from 1st April, 2006. strengthen the control environment and held various positions in the areas COXPOKAJf GDVfJftMMf farther. of Personnel,, Leaf,, Printing and Packaging and Hotels. He retired as The Company's Report on Corporate Internal control guidelines covering the Deputy Chairman from ITC Limited in Governance is annexed to this Report. entire business process has been put in the year 1989 and joined your place. This will be reviewed on a Company as Chairman. Your Certificate of the Auditors of your continuous basis and would form an Company regarding compliance of the Company has been receiving his expert effective tool for improving internal advice and guidance for over 1 8 years conditions of Corporate Governance controls on a continuous basis. as stipulated in Clause 49 of the Listing of his association with the Company. He Agreement with stock exchanges is Risk Management is also a Member of Audit Committee and Committee of Directors of your annexed to this Report. A Risk Management Committee Company. Mr. Basu is a nominee Your Company has taken adequate comprising members from various Director on the Board of VST Distribution, steps for strict compliance with the functions has been set up and the Storage & Leasing Company Pvt. Ltd., Corporate Governance provisions Committee meets periodically to identify wholly owned subsidiary of the including the revisions made. the potential risks as well as to take Company, in compliance with Clause adequate steps for mitigating the risks 49 of the Listing Agreement with the INTERNAL CONTROL SYSTEMS so identified. These are subject to Stock Exchanges. regular reporting to the Board. Your Company remains committed on b. Mr. R.V.K.M. Suryarau improving the effectiveness of internal DIRECTORS contro environment which provides Mr. R.V.K.M. Suryarau was appointed assurance on the efficiency of Directors retiring by rotation a Director on the Board of your operations and security of its assets. Company with effect from 9th In accordance with Article 93 of the December, 1989. He was appointed The internal audit process captures the Articles of Association of your under the provisions of Section 257 of control environment prevalent in the Company, Mr. Abhijit Basu and Mr. the Companies Act, 1 956 at the Annual organization. Over a period of three R.V.K.M. Suryarau retire from the Board General Meeting held on 20th July, years, the entire business process of and being eligible, offer themselves, for 1 990 and was last retired and re- your Company is reviewed, potential re-election. Your Board also appointed at the Annual General high risk areas identified and steps to recommends their re-appointment. Meeting held on 22nd July, 2004. mitigate these are put in place. a. Mr. Abhijit Basu Mr.Suryarau is now due to retire by The Audit Committee of your Board met rotation at the forthcoming Annual four times during the year. Review of Mr. Abhijit Basu was appointed a General Meeting and being eligible, audit observations covering the Director on the Board of your Company offers himself for re-appointment.