JALPAC INDIA LIMITED ANNUAL REPORT 2011-2012 DIRECTOR'S REPORT To The Members, Your Directors present the Audited Accounts of the company for the year ended 31st March, 2012. FINANCIAL RESULTS (Rupees in thousands) Year Ended Year Ended 31st March, 2012 31st March, 2011 Net Sales & Other Income 241984 231199 Profit before Interest & Depreciation 4242 (1171) Profit before Depreciation 4011 (1332) Profit before Tax (18043) (23857) Add: Exceptional Items - - Less: Provision for FBT - - Profit after Tax (18043) (23857) Profit brought forward (471074) (447217) Balance carried forward (489117) (471074) ` DIVIDEND: In view of the company being sick, the Directors do not recommend any dividend. Operations: As reported earlier, no bank support has been available after Sept 2008 and despite the company having made an offer along with the co-promoter to the lenders, a settlement has not been arrived at. Hence no financial infusion has taken place in the company. Despite no working capital and no bank support in terms of L/C discounting facilities etc., operations have continued on the strength of a very limited portfolio of customers who are willing to pay either 100% advance or fund the purchase of rawmaterials. While sales in quantity terms decreased by 8%, value increased by 2%. Exports including deemed exports increased by 53% in quantity and 30% in value terms. Domestic sales including jobwork declined by 37% in quantity terms and 28% in value terms. Despite a low capacity utilization of 16%, on account of no working capital and no bank support, there was a positive EBIDTA OF Rs. 42.42 lacs despite a negative foreign exchange fluctuation of Rs. 68.37 lacs as a result of a weakening rupee. EBIDTA and capacity utilization comparison for the last 3 years is: Year Capacity EBIDTA Utilisation (Rs. in lacs) 2009-10 14% 38.82 2010-11 18% (11.71) 2011-12 16% 42.42 The above shows that after a Debt Rehabilitation Scheme based on an OTS with the bankers is in place, the company would be able to achieve a financial turnaround. As reported earlier, the focus has been only on the production of value added products. More value added products can be developed once there are no financial constraints which can take the company into a positive direction. Metallized paper with improved barriers can be a product for the future. Metallized paper - a promising product for the future: As reported last year, the Ministry of Environment and Forests banned the use of plastics for packaging of Pan Masala, Gutka and tobacco products effective 1st March 2011. This positively impacted the company in the first quarter of this financial year as metallized paper sales increased significantly during this period. Subsequently, however, aluminium foil was imported from China and that became the major product of usage in that segment since it has a better barrier than metallized paper. Despite this, as the world and India get more environmentally conscious, metalllized paper with improved barriers can be an environmentally friendly packaging material for the future. Some more developments will have to be carried out in terms of the improvement of the moisture and oxygen barriers which are critical for packaging. If success is achieved on the barrier front, metallized paper could be a promising product for the company in future. Rawmaterial prices: Polyester film along with paper is one of the major rawmaterials. Polyester film prices which were at skyrocketing levels of Rs. 229/kg. in October 2010, dropped to levels of Rs. 117/kg. in April 2011 and remained at a price of around Rs. 100 till March 2012. Exports: With no bank support and no L/C discounting facility available, only limited selective export orders were taken from customers who are able to pay in advance. Clubbed together, - exports (direct and deemed) increased by 53% in quantity terms and 30% in value terms. There was a compression in value because of a sharp decline in the rawmaterial - polyester film price during the year as against the previous year. Product development: The company has been working on improving the barriers of metallized paper as also working on some value added coated products as the future of the company depends on high value niche products. Turn around strategy and outlook: The company has been able to convince one of its major customers to invest and participate in the rehabilitation of the company. However, the offer made by the company along with this co-promoter has not been acceptable to the bankers as they are looking at a higher offer. The EBIDTA positive financial performance not withstanding a low capacity utilization because of severe working capital constraints is an indicator that with a financial infusion and a Debt Rehabilitation Scheme based on an OTS being in place, the company would be in a position to turn around financially. Status of reference to BIFR As reported earlier, the company is a Sick Industrial Company within the section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985. A reference was filed with BIFR under Section 15(1) of the said Act by the company on 7th June, 2004 and registered by BIFR on 21st June, 2004. The Hon'ble BIFR in its order dated 5.9.2006 had declared the Company sick and appointed the State Bank of India as the operating agency. A rehabilitation scheme was filed by the company in June 2009 based on a One Time Settlement with the secured lenders backed by a strategic investor. The OTS offer made by the company with backing from a strategic investor had not been acceptable to the lenders, as a result of which a fully tied up Debt Resolution Scheme could not be put in place. The Hon'ble BIFR in its order dtd 22.4.2010 had directed the Operating Agency to issue an advertisement for Change of Management as per their guidelines and had directed the Operating Agency to submit its report and a Draft Rehabilitation Scheme, if it emerges, within 4 months. As per the Hon'ble BIFR's guidelines, the existing promoters could also submit their fully tied up Draft Revival proposal with or without a co-promoter with proof of their financial resources for rehabilitation. As per their guidelines, other things being equal, the proposal from the existing promoters would still get a preference over others. The company had made a bid within the stipulated period in July 2010 along with a co-promoter with proof of the financial resources of the co- promoter. The offer was not accepted by the lenders on 3.9.2010. The Hon'ble BIFR in its order dtd 3.3.2011 had directed the Operating Agency to reissue another advertisement for Change of Management as per their new guidelines and had directed the Operating Agency to submit its report and a Draft Rehabilitation Scheme, if it emerges, in 2 months from the date of closing of bid/offer. The Hon'ble BIFR also directed SBI (OA) to examine the proposal of the Japanese firm that had offered to raise funds for the company. Though an offer was received from the Japanese firm, their proposal was turned down by the lenders. The company had again submitted a Debt Revival Scheme (DRS) within the stipulated period along with a co-promoter. This offer was also not accepted by the lenders. The Hon'ble BIFR in its order dtd 17.8.2011 had indicated that the company is working and the products that they are manufacturing are now having a good market potential and that the company employs about 151 workers, whose livelihood is dependant on the company's survival. Hence the bench gave one more opportunity to the company to settle its secured debts. The company was also asked to show cause as to why the company should not be wound up keeping in view that the dues of the secured lenders had not been settled and the proposals submitted by the company had not been accepted by the secured lenders. The company had submitted its reply to the show cause notice for winding up on 27.10.2011. The Hon'ble BIFR in its order dtd 29.12.2011 after considering the material on records and the submissions made, observed that the bench was convinced that the company was making sincere efforts for its revival. The board observed that the company was employing about 151 workers whose livelihood depended on the company's survival. Hence, the Bench gave one more opportunity to the company to settle its secured creditors and kept the SCN for winding up of the company in abeyance till the next date of hearing. The company had already informed the Hon'ble Board that the strategic financial investors identified by the company earlier, who were willing to support the efforts of the company had withdrawn as the OTS settlement offers made with their support were not acceptable to the secured lenders. The company therefore, made renewed efforts to identify a new strategic/ financial investor and made an offer along with a co-promoter, who is also a major customer of the company on 1.3.12 which the lenders again turned down in the hearing held on 6.3.12. Despite having identified a co-promoter who is willing to participate in the Rehabilitation of the company, as a result of no settlement with the lenders, the Hon'ble BIFR has formed an opinion about the winding up of the company under Section 20(1) of SICA vide their order dtd 20.7.2012. Since the Hon'ble BIFR does not have the power to wind up, they would be communicating their opinion to the Hon'ble High Court of Uttarakhand in which State our plant facility is located. Being an operating company with a reasonable turnover despite no bank support and no working capital, the company is in the process of filing an appeal before the Hon'ble AAIFR against the order of the Hon'ble BIFR. Personnel: As reported earlier, during the period of sickness of the company, there has been a heavy exodus of management and supervisory personnel. We have been doing our best to retain the core team. After 1st April 2005, till date - a period of over 7 years, only two increments were granted to the management and supervisory staff. Despite this, some of the employees have demonstrated great determination and loyalty during this very very turbulent period in the history of the company. Retention of the core management and supervisory team is critical for the company's operations. FIXED DEPOSITS The company has not accepted/renewed any deposits during the year. DIRECTORS' RESPONSIBILITY STATEMENT AS REQUIRED UNDER SECTION 217(2AA) OF THE COMPANIES ACT, 1956: As required under Section 217(2AA), which was introduced by the Companies (Amendment) Act, 2000 your Directors confirm that: I. In the preparation of the annual accounts, the applicable accounting standards have been followed alongwith proper explanation relating to material departures; II. The Directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the Company for that period; III. The Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; IV. The Directors have prepared the annual accounts `on going concern basis'. V. These financial results of the company have been audited by M/s Lodha & Co. Chartered Accountants. A reference may be made to their report dated 30.08.2012 to the members together with Annexure `A' thereto containing information as per requirement under the Companies (Auditor's Report) Order, 2003 attached with these annual accounts. CORPORATE GOVERNANCE The Company has complied with the mandatory provisions of Corporate Governance as prescribed in the Listing Agreement with the Stock Exchanges. A separate report on Corporate Governance is included as a part of the annual report alongwith the Auditors' Report on this compliance. AUDITORS' REPORT: Your directors wish to comment on the following remarks made by the auditors in their report under Companies Auditors' Report Order, 2003 as under: 1. Regarding non maintenance of inventory and valuation thereof: Company is maintaining full itemwise details of finished goods, raw material, stores and spares and in the opinion of management, valuations are fair. Other comments of the auditors in their report have suitably been explained in the relevant notes on accounts, which are self explanatory and do not call for any further comments from the Directors. LISTING OF SECURITIES: Trading in shares of the company has been suspended at Bombay Stock Exchange w.e.f. 24.02.2011 due to certain non-compliances. Pursuant to special resolution passed at previous Annual General Meeting held on 28.09.2010 the company has filed application for voluntary delisting on 15.3.2011 with stock exchanges at Uttar Pradesh, Kolkata, Ahmedabad and Delhi. The same is pending at respective stock exchanges. The securities of the company shall continue to be listed on the stock exchange having nation wide trading terminal vis Bombay Stock Exchange, Mumbai, and therefore as per the SEBI (Delisting of Equity Shares) Regulations 2009, issued by the Securities and Exchange Board of India, no exit opportunity need to be given to the shareholders of the Company. DIRECTORS Shri Anil Sharma, Director retires by rotation as required under the Companies Act, 1956 and being eligible, offers himself for re-appointment. PICUP appointed Mr. D K Sharma as Nominee Director on the Board of Directors vide their letter no. Sec/Board/3795 dtd 15.12.2011. Formalities of his appointment are in process. AUDITORS M/s Lodha & Co. Chartered Accountants, auditors of the Company, retire at the forthcoming Annual General Meeting and being eligible, offer themselves for reappointment. CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNING AND OUT GO: Information in accordance with clause (e) of subsection (1) of section 217 of the Companies Act, 1956 read with the Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1988 and forming part of the Directors' Report for the year ended 31st March, 2012 is given in Annexure A to this Report. COST AUDIT COMPLIANCE The company is in the process of appointing Cost Auditors. PERSONNEL: There was no employee in the Company drawing remuneration more than the limits prescribed under Section 217 (2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules, 1975. ACKNOWLEDGEMENTS: The Directors wish to place on record their appreciation of the dedication, commitment and loyalty of the employees who have stood by the company in its most difficult hour in embattled, warlike conditions despite having to face personal financial pressures. The Directors also wish to record their appreciation of the support and understanding displayed by the Company's Bankers and Financial Institutions. On Behalf of the Board of Directors Sd/- Sd/- New Delhi Madhukar Jalan R.R. Malhotra Dated 30.8.12 Managing Director Executive Director ANNEXURE A REPORT ON CONSERVATION OF ENERGY ETC. FORMING PART OF THE DIRECTORS' REPORT A. CONSERVATION OF ENERGY: Both the chiller units of two Metalizing plants are not being operated when chamber is open to save on energy costs. B. TECHNOLOGY ABSORPTION: Success in improvement of the moisture barrier in metallized paper. C. FOREIGN EXCHANGE EARNING & OUTGO: i. Total Foreign Exchange used & earned (Rs. in Thousands) (a) Foreign Exchange Earned 9657 (FOB Value of Exports) Claim received - (b) Foreign Exchange Used (CIF Value of Imports) (i) Capital Goods - (ii) Raw Materials - (iii) Stores & Spares 159 (iv) Others - On Behalf of the Board of Directors Sd/- Sd/- Madhukar Jalan R.R. Malhotra Managing Director Executive Director Place: New Delhi Date : 30th August, 2012 Registered Office: Jalpac India Limited Mota Haldu, Haldwani, Nainital Uttarakhand MANAGEMENT DISCUSSION AND ANALYSIS 1. INTRODUCTION Your Company is engaged in the manufacture of Metallized Paper/Board, Metallized and Coated Films, Metallic yarn and Metallized films with an installed capacity of 8900 tons per annum at its plant located at Haldwani, Distt. Nainital, Uttaranchal. The metallized paper is used mainly in the labels and the gift-wrap segment. Effective 1st March 2011, there was a ban on use of plastics for packaging of Pan Masala, Gutkha and Tobacco products. This led to usage of metallized paper in the packaging segment also. This demand subsequently waned because of import of aluminium foil from China which has a better barrier than metallized paper. Metallized and coated films are used in flexible packaging, insulation, glitter powder and metallic yarn/zari applications. Metallized films are used in the packaging segment. 2. INDUSTRY STRUCTURE, DEVELOPMENTS AND BACKGROUND Traditionally, the industry had a distinct three tier structure with no backward or forward linkages: a. Film manufacturers b. Metallizers c. Printing Convertors Initially, large printing convertors had backward integrated into the metallizing arena which had an impact on a reduced market size for standalone metallizers like us. This threat, at that time, was successfully countered by increasing exports of metallized film. As reported earlier, polyester film manufacturers who forward integrated into the metallizing business around the year 2002/2003 have continued to expand capacity continuously and now completely dominate the plain metallized film packaging segment - both domestic and exports. This has virtually rendered the plain metallizing packaging segment unremunerative for standalone metallizers since film manufacturers price the metallized film at variable cost plus levels as they view the value chain, right from DMT/PTA/chips to the metallized film realization pushing standalone metallizing companies out of the packaging segment. As a result of this phenomenon, standalone metallizers and players in the unorganized yarn segment made a foray into the coated product segment (film for metallic yarn) as a result of which margins eroded significantly in the coated film segment also. Both these - backward integration by our customers and forward integration by our suppliers hit our plain metallized film business hard which segment was given up because it became unremunerative at prices from the integrated metallizers. The only way to ward off this challenge is to either backward integrate into film making which entails a very huge investment, forward integrate into printing and flexible packaging or focus on specialty niche products. Your company has chosen the latter option as production of such products does not require any major capital investment and such products can be produced on the current equipment. 2.1 Recent Developments: After the ban on plastics for the packaging of pan masala, gutkha and tobacco products, there was a heavy demand for metallized paper in this packaging segment during the first quarter of the financial year - April to June 2011. Subsequently with the import of aluminium foil from China, packaging in this segment shifted to an aluminium foil paper laminate, since the barrier properties of aluminium foil are better than metallized paper. Despite this negative development, as the world and India become more environmentally conscious, metallized paper with improved moisture and oxygen barrier which will need development can be an environmentally friendly, plastic free packaging material for the future. The focus should be on developing this product for packaging segments other than gutkha and pan masala because many states have started banning these products. 2.2 Advantages to integrated polyester film producers with metallizers against standalone metallizers like us: A. As a consequence of their integration, have the ability to price plain metallized films at variable cost levels and use metallization as a means of selling their film. B. In the export segment, Indian polyester film producers with metallizing plants have a distinct advantage in terms of quicker delivery and freight costs, since they are now located in different parts of the world (Thailand, Dubai, Turkey, Mexico, Poland and USA) and are closer to the major markets. C. Since endusers buy both plain and metallized polyester film, they prefer a single source who can supply both. This has had a serious impact on both the domestic and export plain metallized film business as plain metallized film constituted almost 90% of our metallized/coated film export business. 2.3 Raw material prices: Polyester film along with paper is one of the major rawmaterials. Polyester film prices which were at skyrocketing levels of Rs. 229/kg. in October 2010, dropped to levels of Rs. 117/kg. in April 2011 and remained at a price of around Rs. 100 till March 2012. 2.4 Worldwide market - geographical breakup and product wise growth/ decline: The world market for metallized materials is estimated at 10,57,000 tons. The Indian market size for metallized products is estimated at around 105700 tons. The approximate breakup of the world demand for metallized products is: Europe 25% China 25% North America 18% India 10% South America 05% Middle East 06% South Africa 03% Rest of the World 08% Total 100% The world metallized/vacuum coated product wise demand is estimated at: Polyester 26% PP 45% Paper 21% Board 01% Other films 07% The overall, worldwide growth in the metallized product market is estimated at around 7%. The growth in the metallized film market is estimated at round 8%, in the metallized paper market at around 3% while there is a decline of 5% in the metallized board market. 2.5 Indian market growth: The domestic metallized polyester and metallized BOPP markets are growing at around 11% and 15% respectively but have been captured largely by polyester and BOPP film producers with metallizers. The flexible packaging market growth in India is at around 17% per annum. 3. STRATEGIC VULNERABILITY: Way back in 1994, the company had explored possibilities of backward integration into polyester film production. This option was dropped at that time because of investment constraints as also the much acclaimed management `mantra' of sticking to core competency. Your company followed this percept and focussed on metallizing and coating and on the strength of its quality made inroads into major global markets becoming a top exporter in this product segment. Despite these positives, with hindsight, the vulnerability of this strategy has been exposed because of forward integration by our suppliers and backward integration by our customers into the metallizing business. By not integrating - forward or backward, the company's metallized film expansion initiatives gave the desired results only till the time that film producers had not decided to enter the metallization business. So the success of this strategy depended on others not making a foray into the metallization business. With radical changes in the industry and developments, it is obvious that the product mix will need a radical shift to specialty coated products and metallized paper where there is no imminent threat from polyester film producers with metallizers. This change has already been made with a shift in focus to specialized coated film products and metallized paper which film producers with metallizers do not produce. With the world and India becoming more environmentally conscious, metallized paper, a product that the company specializes in, can be the product for the future if the barrier properties can be improved, since it is a more environmentally friendly product compared to plastic or aluminium foil. 4. BUSINESS AND FINANCIAL PERFORMANCE: The business performance of the Company is appended below: Quantity Production (Tons) Growth 2011-12 2010-11 Decline Metallized Film 987 1260 (22%) Metallized Paper 469 325 44% Total 1456 1585 (8%) Sales (Tons) Growth 2011-12 2010-11 Decline Film: Domestic 221 679 (67%) Export (Deemed & Direct) 790 510 55% Job work 3 85 (96%) Paper: Domestic 328 70 369% Export (Deemed & Direct) 0 5 (100%) Job work 136 255 (47%) Total 1478 1604 (8%) Combined Quantity Sales (Tons) Growth 2011-12 2010-11 Decline Domestic 549 749 (27%) Export (Deemed & Direct) 790 515 53% Job work 139 340 (59%) Total 1478 1604 (8%) Value Sales value (Rs. In lacs) Growth 2011-12 2010-11 Decline Film: Domestic 292 912 (68%) Export (Deemed & Direct) 1581 1206 31% Job work 1 16 (94%) Paper: Domestic 441 56 688% Export (Deemed & Direct) 0 8 (100%) Job work 109 185 (41%) Total 2374 2383 40% Combined Value Sales value (Rs. In lacs) Growth 2011-12 2010-11 Domestic 734 968 (24%) Export (Deemed & Direct) 1581 1214 30% Job work 110 201 (45%) Total 2425 2383 2% Sales value of current year does not include sale of traded goods of Rs.43.75 lacs 5. FINANCIAL PERFORMANCE: Despite a low capacity utilization of 16%, on account of no working capital and no bank support, there was a positive EBIDTA OF Rs. 42.42 lacs despite a negative foreign exchange fluctuation of Rs. 68.37 lacs. EBIDTA and capacity utilization comparison for the last 3 years is: Year Capacity EBIDTA Utilisation (Rs. in lacs) 2009-10 14% 38.82 2010-11 18% (11.71) 2011-12 16% 42.42 6. OPPORTUNITIES AND THREATS: Opportunities a) The ban on plastics for packaging of Pan Masala, Gutkha and Tobacco products last year is a pointer that metallized paper with technical developments relating to improvement in the moisture and oxygen barriers could be a promising packaging medium in the future, since the world and India are becoming more environmentally conscious. b) Additional investment for forward integration in select niche segments like metallic yarn and holography. c) Additional investment for forward integration into flexible packaging. d) Additional investment for backward integration into film production. e) Product and market development initiatives in paper based products. f) Recent development of a new coated product for the insulation market. g) Beer sales are reportedly now growing at a galloping rate of around 25% which could present an opportunity for metallized paper also. h) New product developments of specialized products. Threats a. While the `Law of the Land' as on date, bans the use of plastics for packaging of pan Masala, Gutkha and Tobacco products, several litigations are pending with the Hon'ble Supreme Court including some for ban of the end product. The ban on the end product which has already commenced and implemented in several states, will impact the opportunity. b. The metallized paper market will be focussed upon by more standalone metallizing companies, since they like us cannot compete in the plain metallized film business. c. A standalone metallizer with coating facilities has backward integrated into polyester film production and this may put pressure on coated polyester based products in both the domestic and export markets. d. Though the threat from the unorganized sector is receding because of a reduction in excise duties which are currently at 12% and 6% respectively on film and paper, this threat still exists. There has been a need to implement the `Rule of Law' to instill fear into those not following the laws of the land and bring such people and entities to the book, so that those following the law of the land have an advantage rather than a disadvantage in terms of business opportunities. 7. OUTLOOK: The company has been able to convince one of its major customers to invest and participate in the rehabilitation of the company. However, the offer made by the company along with this co-promoter has not been acceptable to the bankers as they are looking at a higher offer. The EBIDTA positive financial performance not withstanding a low capacity utilization because of severe working capital constraints is an indicator that with a financial infusion and a Debt Rehabilitation Scheme based on an OTS being in place, the company would be in a position to turn around financially. 8. RISKS AND CONCERNS: Despite having identified a co-promoter who is willing to participate in the Rehabilitation of the company, as a result of no settlement with the lenders, the Hon'ble BIFR has formed an opinion about the winding up of the company under Section 20(1) of SICA. Since the Hon'ble BIFR does not have the power to wind up, they would be communicating their opinion to the Hon'ble High Court of Uttarakhand in which State our plant facility is located. Being an operating company with a reasonable turnover, despite no bank support and no working capital, the company is in the process of filing an appeal before the Hon'ble AAIFR against the order of the Hon'ble BIFR. 9. INTERNAL CONTROL AND THEIR ADEQUACY: The Company has a proper and adequate system of controls in order to ensure that all assets are safeguarded against loss from unauthorised use or disposition and that all transactions are checked, verified, recorded and reported correctly. Internal Audit checks are carried out to ensure that the responsibilities are executed effectively and that proper adequate systems are in place. The Board of Directors has constituted an Audit Committee with its Chairman as an Independent Director. The Committee meets periodically. The observations and recommendations of the internal and statutory auditors are addressed. 10. HUMAN RESOURCE AND INDUSTRIAL RELATIONS: As reported earlier, during the period of sickness of the company, there has been a heavy exodus of management and supervisory personnel. We have been doing our best to retain the core team. After 1st April 2005, till date - a period of over 7 years, only two increments were granted to the management and supervisory staff. Despite this, some of the employees have demonstrated great determination and loyalty during this very very turbulent period in the history of the company. Retention of the core management and supervisory team is critical for the company's operations.