SMS PHARMACEUTICALS LIMITED
ANNUAL REPORT 2011-2012
Your Directors have pleasure in presenting the 24th Annual Report and
Audited Accounts of your company for the year ended 31st March, 2012.
Financial Results (Rs. In Lakhs)
Particulars 2011-12 2010-11
Gross Sales 22,630.57 24,911.60
Net Sales 20,692.30 22,427.43
Other Operating Income 717.44 166.69
Other Income 42.95 219.08
Total Net Income 21,452.69 22,813.20
PBIDT 3,818.06 4,099.83
Finance Charges 2,412.34 1,787.17
Depreciation 1,263.97 1,264.29
Profit before Tax 141.75 1,048.37
Taxation 28.00 209.10
Profit After Tax 113.75 839.27
Profit brought forward 2,539.98 1,975.31
Total available for
Appropriations. 2,653.73 2,814.58
Proposed Dividend - 150.23
Dividend Tax - 24.37
General Reserve - 100.00
Profit carried to
Balance Sheet 2,653.73 2,539.98
Earning per share
- Basic/Diluted 1.14 8.38
During the year 2011-12 your company has produced 1945 M.T. of APIs and
their intermediates as against 2948 MT. during the corresponding year. The
net sales of the company has reached to Rs.206.92 crores as against
Rs.224.27 crores during the previous year. Your company has earned net
profit of Rs.1.14 crores as against Rs.8.39 crores during the year 2010-11.
Your Directors have not recommended the dividend for the year 2011-12 to
the Shareholders keeping in view of the conservation of resources (Previous
year Rs.1.50 per equity share of Rs.10/-).
The Statutory Auditors of the Company, M/s. Rambabu & Co., Chartered
Accountants and M/s. P. Murali & Co., Chartered Accountants, retire at the
ensuing Annual General Meeting and being eligible for re-appointment have
confirmed their eligibility and willingness to accept office for the
financial year ended 31st March, 2013.
The Company has received confirmation from both the firms that their
appointment will be within the limits prescribed under Section 224(1) of
the Companies Act, 1956. The Audit Committee of the board has recommended
the re-appointment of joint auditors.
Pursuant to Section 233B of the Companies Act, 1956, the Central Government
has prescribed Cost Audit for the Company. Based on recommendations of the
Audit Committee and with the approval of the Central Government, Sri K. S.
N Sarma, Cost Accountant, Hyderabad was appointed as Cost Auditor of the
Company for the year 2012-13.
The relevant cost audit report for the financial year 2010-11 was already
filed. The cost audit report for the financial year 2011-12 shall be
submitted to the Central Government within the stipulated period.
The company has not accepted/invited any deposits from the public in terms
of Section 58A and 58AA of the Companies Act, 1956.
Pursuant to Article 110 of the Articles of Association of the Company Dr.
B.M. Choudary and Mr. A.P. Rao, will retire by rotation at the ensuing
Annual General Meeting and being eligible offers themselves for
reappointment as Directors. Your Board of Directors recommends their re-
The profiles of the respective Directors are included in the Report on
Corporate Governance annexure. Contribution to the ex-chequer.
Your Company has contributed Rs 2,215.10 lakhs to the ex-chequer (Previous
year Rs.3,040.68 lakhs) by way of taxes.
Directors' Responsibility Statement
As required under Section 217(2AA) of the Companies Act, 1956, Directors of
your company hereby state and confirm that:
1. The applicable accounting standards have been followed in the
preparation of the Annual Accounts.
2. The accounting policies as mentioned in the schedule 27 of the notes to
the financial statement have been selected and 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 as at 31st March,
2012 and its profit for the year ended on that date.
3. Proper and sufficient care has been taken for the maintenance of
adequate accounting records in accordance with the provisions of the
Companies Act, 1956 for safe guarding the assets of the Company and for
preventing and detecting fraud and other irregularities.
4. The Annual Accounts have been prepared on going concern basis.
Research and Development (R & D)
Research and Development is the backbone of a Company in Pharma Industry.
The R & D activity of your company focusing mainly on development of new
chemical entities apart from cost cutting of the existing products and also
for development of cost effective non-infringing routes for the products
whose patents are due for expiry in the coming years. The major therapeutic
focus of the R & D is Oncolgoy, Retro Viral and anti-Hypertensive.
Management's Discussion and Analysis
A detailed Management Discussion and Analysis is provided in the Annual
A detailed Report on Corporate Governance as required under the Listing
Agreement forms part of this Annual Report.
Particulars of Employees
During the year under review, there was no employee drawing salary in
excess of the prescribed limit and whose particulars are required to be
given under Section 217 (2A) of the Companies Act, 1956, read with the
Companies (Particulars of Employees) Amendment Rules, 1975 as amended.
Conservation of Energy, Technology Absorption
The information required under Section 217 (1) (e) of the Companies Act,
1956 read with the Rule 2 of the Companies (Disclosure of Particulars in
the Report of Board of Directors) Rules, 1988 is enclosed herewith and
forms part of this report. Corporate Social Responsibility Corporate Social
Responsibility is commitment of the Company to improve the quality of life
of the workforce and their families and also the community and society at
large. The Company believes in undertaking business in such a way that it
leads to overall development of all stake holders and society.
The Company has taken initiatives to reduce the pollution, Anti-pollution
measures taken by the Company help minimize the impact of industrial
process on the environment.
Your Company's shares are under compulsory DEMAT mode and all the physical
shareholders are hereby recommended to opt for this facility for prompt
Related party transactions.
As a matter of policy, your company carried out transactions with related
parties on an arms-length basis. Statement of these transactions is given
in Notes on Accounts in compliance with accounting standards issued by
Your Directors gratefully acknowledge and appreciate the support extended
by the Banks, Financial Institutions, various government authorities and
also customers, dealers and trade, employees and workers for their
continued support and confidence reposed in the company.
For and on behalf of the Board
P. Ramesh Babu
Chairman & Managing Director
Date : 10.08.2012
ANNEXURE TO THE DIRECTOR'S REPORT
Information pursuant to Section 217 (1) (e) of the Companies Act, 1956 read
with the Companies (Disclosure of particulars in the Report of Board of
Directors) Rules, 1988.
FORM - A
Disclosure of particulars with respect to Conservation of Energy
A. Conservation of Energy
Power & Fuel Consumption
Particulars 2011-12 2010-11
Units (Lakhs) 115.94 129.00
Total Amount (Rs.in Lakhs) 556.05 614.12
Rate/Unit (Rs.) 4.80 4.76
b. Own generation
Through Diesel Generator
Units (KWH in Lakhs) 28.31 22.61
Unit per Lt. of Diesel 3.29 3.32
Cost/Unit (Rs.in Lakhs) 12.88 12.01
2. Coal (D/C Grade):
Quantity (Mt.) 13,154 14,023
Total cost (Rs.in Lakhs) 600.73 534.97
Average Rate per Ton (Rs.) 4,567 3,815
3. Furnace Oil:
Quantity (K. Ltrs) 257 230
Total Amount (Rs.in Lakhs) 94.54 71.06
Average Rate per Ltr. (Rs.) 36.76 30.91
B. Consumption per Unit of Production:
Products } Since the Company manufactures different Bulk
Electricity } Drugs & Drug Intermediates, it is not practicable
Coal (D/C Grade) } to give consumption per unit of production.
FORM - B
Disclosure of particulars with respect to Technology Absorption
I. Research and Development (R&D)
(a) Specific areas in which R&D is carried out by your company
The Company's R & D strength are in developing intellectual property in the
area of non-infringing processes and resolving complex chemistry
challenges. In the process your company is developing new drugs apart from
development of cost effective processes for existing products.
(b) Benefits derived as a result of the above
(i) Developed new products and achieved cost and process efficiencies of
(ii) Modification of existing processes for reducing the cost of production
in the areas of antimigraine, antihypertensive, antifungal, antiulcer etc.
(c) Future plan of action
* Process development for new bulk drugs of various therapeutic categories
identified after an extensive analysis of the market.
* Development of cost effective process for the existing products.
* Undertake more of custom manufacturing projects.
* Improvements in quality and productivity.
(d) Expenditure on R&D
(Rs. in Lakhs)
Particulars Current Year Previous Year
Capital - 5.05
Recurring 156.38 209.68
TOTAL 156.38 214.73
Total R & D expenditure to sales 0.69% 0.96%
II. Technolog Absoraption, Adaptation and Innovation
a) Efforts in brief, made towards technology absorption, adaptation and
No technology absorption is involved. The company has its own R&D Centres
which have been developing and improving processes for manufacture of
Active Pharmaceutical Ingredients and drug intermediates.
b) Benefits derived as a result of the above efforts:
Processes for several new products have been developed. Process
optimization has been achieved in production, which resulted in lower cost
c) Details of technology imported during the last 5 years.
Year of Import. } No technology has been
Has Technology been fully absorbed } imported during past
If not fully absorbed, areas where this } five year.
has not taken place, reasons there for
and future plan of action.
FORM - C
Foreign Exchange Earnings and Out Go
(a) Activities relating to exports, initiative taken to increase exports,
developments of new export markets for products and services and export
(i) The export turnover consists of 58.09% of total turnover for the year
2011-12 as against 54.62% for the previous year.
(ii) Total exports on FOB was Rs.101.32 crores for the year 2011-12 as
against Rs.104.50 crores for the year 2010-11.
(iii) Your Company expects considerable export revenue for the forthcoming
(b) Foreign Exchange Earned and Used.
Total Foreign Exchange earnings and used is given in note 27 B (o) & (p) of
the Notes to Accounts.
MANAGEMENT DISCUSSION AND ANALYSIS
According to the economic survey - 2011-12 Indian Economy is estimated to
grow at 6.9% in 2011-12 and is expected to be around 7.6% in 2012-13. The
growth has been broad based with a rebound in the agricultural sector which
is expected to grow around 2.5%. Manufacturing and services sector also
have registered impressive gains. The survey reports that the industrial
output growth rate was 3.9% while the services sector registered a growth
rate of 9.4% in 2011-12.
* India remains among the fastest growing economies of the world. The
country's sovereign credit rating rose by a substantial 2.98% during the
* Cumulative exports recorded during the 2011-12 (April-January) stood at
$242.8 billion, registering a growth of 23.5%.
* Imports in 2011-12 (April-January) at $391.5 billion registered a growth
* Forex reserves stood at $292.6 billion by end of January, 2012. Services
sector grew by 9.4%, its share in gross domestic product (GDP) goes upto
59%. Industrial growth is estimated to be at 3.9%, expected to improve as
economic recovery resumes.
The year under review was also adversely affected by severe inflationary
pressures, raising interest cost, volatile rupee-dollar ratio with a
tendency to get weaker and currency concerns in all most all trading
According to a United Nation's annual economic report, despite the macro
strains and likely ad wind of double- dip recessions in Europe and the US,
India's economic growth is expected to remains robust in 2012 and 2013.
They believe Indian economy is expected to grow between 7.7% - 7.9% during
the current year.
India is the second most preferred destination for foreign investors,
according to the report doing 'business in India' by Ernst & Young. The
report explores India's key sectors, investment climate, funding scenario,
laws and regulations to aid companies that are doing are plan to do
business in India.
Pharmaceutical market research firm, IMS Health forecast that the global
pharmaceutical market will grow between 3% and 6% annually up to 2015,
based on sales of US$ 856 billion in 2010. In the five preceding years, the
market grew by an average of 6.2% per year. According to the data, overall
market volume should increase by between US$ 210 billion and US$ 240
billion up until 2015, then reaching a total volume of between US$ 1,065
billion and US$ 1,095 billion.
While the U.S. market represented 36% of the global market in 2010, this
share is expected to decline to 31% by 2015. The United States will still
be the world's largest market (US$ 320 billion to US$ 350 billion). IMS
Health sees Japan remaining in second place in 2015 (11% share, US$ 110
billion to US$ 140 billion), followed by China (US$ 115 billion to US$ 125
billion) and Germany (US$ 38 billion to US$ 43 billion).
Most developed markets continue to move away from branded generics to
commoditized unbranded generics and lower margin tender based business.
Amongst new frontiers, Japanese generic offers large potential, though
there are significant challenges.
In the European markets, while companies may face pressure on
profitability, volume growth would continue as health care reforms
initiated by Governments would push growth in Generics. Emerging markets,
with growing spend on health care and strong branded generic markets offer
profitable growth opportunities for pharmaceutical business. Besides
emerging markets, the gradually evolving generic opportunities in Japan,
the second largest market in the world (after United States) also offers
the generic players and opportunity to pursue long term investments.
Key challenges facing the industry are potential implementation of the new
pricing policy in India increasing competitive pressure in the economic
segment, aggressive approach such as authorized generics by innovators in
the US and health care reforms in European markets are some of the factors
that could impede profitability for pharma companies.
Future level of global spending on medicines has implications for
healthcare systems and policy makers across developed and emerging
economies. Unprecedented dynamics are at play - including historically high
levels of patent expiry, rapid expansion of demand for medicines in the
world's growing economies, fewer new medicines reaching patients, and more
moderate uptake of those that do become available. These dynamics are
driving rapid shifts in the mix of spending between branded products and
generics; and between spending in the major developed countries and those
17 high growth emerging countries referred to as 'pharma emerging'.
Pharmaceutical industry is presently facing many challenges and
uncertainties. The industry continues to grow modestly, while adapting to
unparalleled changes. This is putting pressure on the companies to focus on
ways to increase the productivity and streamline the significant overheads.
In order to stay competitive vis-a-vis its peers in Europe and US, the
company lays great stress on leveraging its inherent strengths of playing a
complementary and non-conflict role building strong customer relationships
supported by developing cost competitive and faster delivery structure.
SMSPL has strong presence across the pharmaceutical chain, manufacturing
and marketing active pharma ingredients (APIs/Bulk Drugs). The market
segment for the products of SMSPL demonstrate growth tends every year with
raising volume and value.
SMSPL has robust product portfolio spread over major product areas
encompassing Gastroenterological, Anti Retroviral, Anti-Migraine Anti
Fungal, Anti Cancer Anti Hypertensive, and other products. Two
manufacturing facilities, (in Hyderabad and Vijayanagarm Districts) are
qualified by USFDA. Hyderabad facility also has a successful EUGMP
(Germany) inspection. SMSPL is the largest manufacturer of Anti Ulcer
products in World. Having forged tie ups with MNCs in Anti Retroviral, Anti
Migraine segments, significant revenue potential is envisaged apart from
consolidation of existing product revenues where SMSPL is market leader.
Segment-wise or product-wise performance.
The Company's business activity is a single primary business segment of
'Bulk Drugs'. In view of higher capital investment, bulk drug manufacturers
typically generate lower return on capital employed as compared to
formulation companies owing to thin margins and high competition. Bulk drug
business being completely driven by scale of operations, dominated mostly
by Indian companies, which results in high product concentration and
pricing related vulnerabilities.
Risks and Concerns.
SMSPL's business naturally involves risks. Risk management is integral part
of the company's plans, business strategies, monitoring systems and
results. It takes in all organizational processes geared to early risk
detection, identification and timely implementation of appropriate counter-
SMSPL is in a competitive market and the challenges are both Indian
manufacturers who have similar production facilities, as well as those in
China. Human resources with similar skills, talents and experiences in the
Industry are mobile between competing companies. Yet, it must be
appreciated that Indian manufacturers in general and SMSPL in particular
have made an impact on the global stage and have worked hard to get shelf
Price sensitivities get tested in crowed market where price tends to sag
while volume business gets done. Competing Pharmaceutical companies have
several similar bio-equivalent products in the same markets manufactured at
facilities that have been approved by regulatory authorities. All of them
stay focused on the same markets with the result that price elasticity is
tested and margins get eroded.
This threat however, does not affect SMSPL because of its control over raw-
material sourcing. The company is a dominant player in the active
ingredients business and has been able to control its quality, control its
costs and has the ability to deliver at short notice.
SMS Pharma lays emphasis on risk management and has an enterprise wise
approach to risk management, which lays emphasis on identifying and
managing key operational and strategic risks. Through this approach, the
company strives to identify opportunities that enhance organizational
values while managing or mitigating risks that can adversely impact its
Your company constantly reviews its policies and procedures to adhere to
ensure conformity to the various regulatory approvals for its manufacturing
facilities.. The company's risk management and control procedures involve
prioritization and continuing assessment of these risks and devise
appropriate controls, evaluating and reviewing the control mechanism and
redesigning it from time to time in the light of its effectiveness.
The company's current and fixed assets are adequately insured against
Internal Control systems and their adequacy.
SMSPL has a well-defined internal control system which is adequately
monitored. Checks and balances and control systems have been established to
ensure that the Assets are safe guarded, utilized with proper authorization
and in recorded in the books of account.
There is a proper definition of rules and responsibilities across the
organization to ensure information flow and monitoring. These are
supplemented by internal audit carried out by a firm of Chartered
Accountants. The company has an Audit committee consisting of Three
Directors, all of whom are independent Directors. This Audit Committee
reviews the internal audit reports, statutory audit reports, the quarterly
and annual financial statements and discusses all significant audit
observations and follow up actions arising from them.
Performance and operations review
During the year under review SMS achieved a Gross Revenue Rs.226.30 Crores
as against Rs.249.12 crores during the previous year which consists of
export turnover Rs.125.54 crores and Rs.128.64 crores respectively. The
export turnover consists of 55.48% out of total turnover as against 52.64%
during the previous year. The earnings before interest, depreciation and
tax (EBIDT) amounted to Rs. 38.18 crores as against Rs.41 Crores during the
The company has earned other income of Rs.7.60 crores during the year 2011-
12 as against Rs.3.86 crores in the previous year 2010-11 which consists of
loss on account of exchange fluctuation of Rs. 0.13 crores for the year
under review as against gain of Rs.1.67 crores during the previous year.
Your company has incurred Rs.1.56 crores towards R & D expenditure for the
year 2011-12 as against Rs.2.15 crores in the previous year. The said R & D
expenditure works out to 0.69% and 0.96% of turnover respectively.
Your company continuous to work towards optimizing the capacitities of its
manufacturing facilities and also adding additional capacities aimed at the
business opportunities available to its in its domain capability in line
with its strategy to work with innovators laying complimentary role and a
non-compete model with its generic customers.
As your company engaged in a knowledge-driven business its performance is
enhanced through selective recruitment, skill enhancement and people
retention. The Company recruits professions of high academic achievements,
experience and behavioural competencies across the operations, research and
The company's induction, training for new recruits, comprises
familiarization visits, orientation on various functions and tailor made to
each specific unit. Managers are sent for external orientation to
conferences, seminars, work-shops and training programmes where they are
updated with contemporary industry and managerial practices.
At the year end the company had 611 employees directly employed apart from
indirect employees of 510.
IR situation by and large continues to be peaceful during the year under
review, there were not incidents of work stoppage or loss of production due
to IR related issues.
Safety, Health and Environment.
Your Company had adopted comprehensive safety, health and environment (SHE
systems.) Occupational, health and safety management system (OHSAS)
complies with the requirements as stipulated in the standard: OHSAS 18001 :
2007, for all the units of your company.
SMSPL has set ambitious goals for the years through to 2015 in expectation
of a moderate upward trend in the global economy. The company has world
class manufacturing facilities and an enviable basket of approved markets
and strong relationship built with some of the best names in the pharma
industry. Your company has set in motion a set of strategic initiatives to
improve the revenues and profitability of the company.
The focus will be on expanding the markets and the profitability of the
portfolio will be analyzed on continual basis. By implementing these
strategies, your company aims to increase its revenues, EBITDA and return
on investment higher than the industry average. The company is targeting to
improve its cash flow position which would lower the leverage as well as
reduce interest out go, all of which are expected to translate into growing
earning per share.