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VST Industries Ltd.

BSE: 509966 Sector: Consumer
NSE: VSTIND ISIN Code: INE710A01016
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OPEN 3540.00
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VOLUME 196
52-Week high 3838.00
52-Week low 2470.00
P/E 23.91
Mkt Cap.(Rs cr) 5,312
Buy Price 3404.00
Buy Qty 4.00
Sell Price 3440.45
Sell Qty 38.00
OPEN 3540.00
CLOSE 3450.25
VOLUME 196
52-Week high 3838.00
52-Week low 2470.00
P/E 23.91
Mkt Cap.(Rs cr) 5,312
Buy Price 3404.00
Buy Qty 4.00
Sell Price 3440.45
Sell Qty 38.00

VST Industries Ltd. (VSTIND) - Director Report

Company director report

The Directors of your Company have pleasure in presenting before you the Annual Reporttogether with the Audited Statements of Accounts for the year ended 31st March 2018.

Financial Results (Rs. Lakhs)
2017-18 2016-17
Revenue from Operations 138244 228137
Profit after Tax 18189 15153
Retained earnings brought forward from previous year 29008 27700
Balance available for Appropriation 47197 42853
Amount transferred to General Reserves 900 835
Dividend paid * 11581 10809
Corporate Dividend Tax thereon 2358 2201
Balance in retained earnings 32358 29008

* Note :- The financial statement for financial year 2017-18 are prepared under Ind AS(Indian Accounting Standard) for the first time. The financial statement for financialyear 2016-17 has been reinstated in accordance with Ind AS for comparative information.

KEY RATIOS
Earnings Per Share (Rs.) 117.79 98.13
Dividend Per Share (Rs.) 75.00 70.00

• Value creation during the decade has been Compounded Annual Growth Rate (CAGR)11.4% in Earnings Per

DIVIDEND

The Directors are pleased to recommend a dividend of `77.50 per equity share of `10each on the paid up equity share capital of the Company for consideration and approval ofMembers at the Annual General Meeting (AGM). It is proposed to carry forward an amount of`900 lakhs to General Reserve.

Pursuant to Regulation 43A of the SEBI (Listing Obligations and DisclosureRequirements) Regulations 2015 top five hundred listed entities based on marketcapitalization are required to formulate a Dividend Distribution Policy.

The Board has approved and adopted a Dividend Distribution Policy and the same isdisclosed on the Company's website at http://www.vsthyd.com/i/Dividend-Distribution-Policy.pdf.

MATERIAL CHANGES AND COMMITMENTS

Except as disclosed elsewhere in the Report there have been no material changes andcommitments made between the end of the financial year of the Company and the date of thisReport.

SHARE CAPITAL

The paid up Equity Share Capital as on 31st March 2018 was `1544.19 lakhs. The Companyhas neither issued shares with differential rights as to dividend voting or otherwise norissued shares (including sweat equity shares) to the employees or Directors of theCompany under any Scheme.

No disclosure is required under Section 67(3)(c) of Companies Act 2013 in respect ofvoting rights not exercised directly by the employees of the Company as the provisions ofthe said Section are not applicable.

INDUSTRY STRUCTURE & DEVELOPMENT

2017-18 was a landmark year as the much anticipated Goods and Services Tax (GST) cameinto effect in July 2017. GST brought in an uniform tax rate subsuming various central andstate level taxes and duties (including VAT).

For the cigarette industry GST implementation was the second tax increase in 2017-18following the excise revision announced in the Union Budget in February. It continued thetrend of year-on-year tax hikes. Cigarettes were placed in the highest tax slab andcompensatory cess was also introduced. Subsequent price hikes affected overall legalindustry volumes and provided further impetus to non-duty paid cigarettes.

Regulatory pressures encompassing 85% pictorial warning on front and back panels ofpacks selling restrictions in Kerala and Tamil Nadu and ban on sale of loose sticks inUttar Pradesh Maharashtra Uttarakhand etc. continue to pose challenges for theindustry. FCTC (Framework Convention on Tobacco Control) continues to promote stricterregulations without considering views of major stakeholders.

COMPANY PERFORMANCE

Two successive tax increases in 2017-18 and increasing regulatory pressures made theoperating environment more challenging.

Your Company's strategy of portfolio expansion through relevant differentiation in theform of new age brands such as Editions and Total has resulted in consolidating its marketposition. Your Company's heritage trademarks such as Red Special and Red Charms have alsodelivered a strong performance in key markets.

Your Company remains committed to nurture and develop a vibrant brand portfolioappealing to consumers across socio economic strata in different geographies. It is alsoyour Company's ongoing endeavor to increase its presence in existing and new marketsthrough continued investments in distribution infrastructure and robust traderelationships.

MARKET SCENARIO

Cigarette volumes of your Company during 2017-18 stood at 7368 mnc compared to 7283 mncin 2016-17. Your Company has slightly increased its volume base basis performance of keytrademarks and increased market presence.

LEAF TOBACCO

Your Company procured quality tobaccos for own manufacturing and also recorded leafsales turnover of `250 crore in the year 2017-18 leveraging its expertise in allvarieties of tobacco. Your Company is continuing domestic sales in addition to exports.

The focus on the development of niche varieties and high nicotine tobaccos continued inview of the changing requirements of tobacco in the international market with establishedcustomers. Besides helping develop backward regions it has also helped in improving theCompany's profitability.

It is satisfying to note that your Company's farmers continue to grow tobacco with thelowest pesticide residue levels and low TSNAs (Tobacco Specific Nitrosamines) that arewell within international standards.

Your Company's leaf tobacco function continues to be certified by Registro ItalianoNavale Genova Italy for SA8000 reflecting Company's resolve to follow best internationalpractices in its operations.

PRODUCTION AND PLANT MODERNISATION

Your Company continues to give competitive edge to its products in the market place byoffering innovative products to consumers which have been well received. A state of artplant has been commissioned at Toopran which has received "Gold Rating GreenBuilding" award from CII.

RESEARCH & DEVELOPMENT ACTIVITY

Your Company continued to focus on R&D activity by way of developing blends fornew brands which have been well accepted by consumers in market place.

The R&D lab of your Company received "Certificate of continuation" of ISO17025:2005 from NABL Quality Council of India Govt. of India from April 2017 to March2019.

HUMAN RESOURCE DEVELOPMENT

Your Company's Human Resource Management focus continues to attract and retain the besttalent in an increasingly competitive market place.

Development plans have been drawn up for key managers to assume higher responsibilitiesas well as to enhance their job effectiveness.

As on 31st March 2018 your Company had a strength of 786 employees with 335management staff and 451 workmen.

Your Company has constituted an Internal Complaints Committee as per the SexualHarassment of Women at Workplace (Prevention Prohibition and Redressal) Act 2013 and theRules framed there under. No cases were filed during the year under the above Act.

ENVIRONMENT HEALTH & SAFETY (EHS) AND COMMUNITY SERVICES

272 employees and 53 contractors and contract workmen have undergone EHS training and275 employees and 75 contract workmen have undergone firefighting training. Mock drillswere also conducted for workers and management during the period to comply with theCompany's EHS guidelines.

Quarterly and Annual EHS audits of the Company's operations were carried out to ensurecompliance of EHS requirements. ISO 14001:2015 & OHSAS 18001:2007 RecertificationAudit was held at Azamabad & Toopran premises by M/s. Rina India Private limited inthe month of December 2017 and received renewed certificate for ISO 14001:2015 & OHSAS18001:2007 for both premises in the month of January 2018.

Your Company received "Safety Innovation Award 2017" for Azamabad factoryfrom Institute of Engineers New Delhi.

Your Company also received "Green Factory Building Certification with Goldrating" for Toopran factory from CII-Indian Green Building Council Hyderabad.

CFO Renewal Application for Azamabad factory was submitted to TSPCB for the period of 5years (2018 to 2023) in the month of March 2018.

FINANCE

a. Profits

The Profit after Tax of your Company for the year is ` 181.89 crore.

The continuous increase in taxation over the last several years including under GSThas brought about increased pressure on margins.

b. Treasury Operations

Your Company follows a SLR model (Safety Liquidity and Return) in deployment ofearmarked funds.

PARTICULARS OF LOANS GUARANTEES OR INVESTMENTS

The Company has not taken any loans or given guarantees or made investments in anyother company.

RATING

The Credit Rating Information Services India Limited (CRISIL) has re-affirmed therating of your Company to "FAAA/Stable" for Fixed Deposit Schemes"AA+/Stable" for Long Term Non-convertible Debentures and

"A1+" for Non-fund based liabilities (Letter of Credit and Bank Guarantee).Your Company has stopped accepting fresh deposits for the past several years.

UNCLAIMED DIVIDENDS

Pursuant to the provisions of Sections 124 and 125 of the Companies Act 2013 theCompany has transferred on due dates the unpaid or unclaimed dividends for the financialyear ended 31st March 2010 to the Investor Education and Protection Fund (IEPF)established by the Central Government.

Further as per the provisions of Investor Education and Protection Fund (Uploading ofInformation regarding unpaid and unclaimed amounts lying with Companies) Rules 2012 theCompany has uploaded the details of unpaid and unclaimed amounts lying with the Company ason 31st March 2017 on the website of the Company (www.vsthyd.com) and also on thewebsite of the Ministry of Corporate Affairs Government of India.

The details of the dividend due for transfer to IEPF as on 31st March 2018 is given inthe Report on Corporate Governance.

The Company has also completed the process of complying with the provisions of Section124(6) of the Companies Act 2013 read with the IEPF Authority (Accounting AuditTransfer and Refund) Rules 2016 and Amendments thereof by transferring 68386 sharespertaining to 734 shareholders on 30th November 2017 whose dividend has been unclaimedfor a continuous period of seven years after following the procedure specifiedthereunder.

UNCLAIMED SHARE CERTIFICATES

Your Company has communicated to the Members whose share certificates have beenreturned undelivered to the Company that these would be transferred to the UnclaimedSuspense Account if not claimed by them as required under Regulation 34(3) read withSchedule V[F] of the Securities & Exchange Board of India (Listing Obligations andDisclosure Requirements) Regulations 2015 (hereinafter referred as ‘ListingRegulations').

The status of unclaimed shares as on 31st March 2018 is given in the Report onCorporate Governance.

CORPORATE GOVERNANCE

In terms of Regulation 34 of the Listing Regulations a Report on Corporate Governancealong with Compliance Certificate issued by Statutory Auditor's of the Company is annexedas "Annexure A" and forms part of this Report.

Your Company has taken adequate steps for strict compliance with the CorporateGovernance guidelines as amended from time to time.

MEETINGS

The Board and Committee Meetings are pre-scheduled and a tentative calendar of theMeetings finalized in consultation of the Directors are circulated to them in advance tofacilitate them to plan their schedule. However in case of special and urgent businessneeds the approval is obtained by way of circular resolution. During the year four BoardMeetings and four Audit Committee Meetings were convened and held. The details of theMeetings including composition of Audit Committee are given in the Corporate GovernanceReport. During the year all the recommendations of the Audit Committee were accepted bythe Board.

INTERNAL CONTROL SYSTEMS

a. Your Company maintains an adequate and effective internal control systemcommensurate with the size and complexity. Your Company also has well documented StandardOperating Procedures (SOPs) for various processes which are periodically reviewed forchanges warranted due to business needs.

b. Your Company remains committed to improve effectiveness of internal financialcontrols and processes which would help in efficient conduct of its business operationsensure security to its assets and timely preparation of reliable financial information.

The policies and procedures laid out by your Company capture the control environmentprevalent in the organization. Over a period of three years the business processes ofyour Company is reviewed through an internal audit process which reviews the systems on acontinuous basis. The objective being to identify potential risk areas and come up with acomprehensive risk mitigation plan.

The Audit Committee of your Board met four times during the year. Review of auditobservations covering the operations consideration of accounts on a quarterly basis andmonitoring the implementation of audit recommendations were some of the key areas whichwere dealt with by the Committee. The Statutory Auditors/

Internal Auditors were invited to attend the Audit Committee meetings and makepresentations covering their observation on adequacy of internal financial controls andthe steps required to bridge gaps if any. Chief Financial Officer is a permanent inviteeto the Audit Committee and other executives of the Company are invited to address respondor provide clarifications to relevant issues as and when required.

Risk Management

Your Company has always endeavored to bring together elements of best practices forrisk management in relation to existing and emerging risks faced by it at both strategiclevel and in operations. The Company faces a variety of risks from external and internalsources however the objective is to be aware of different kinds of risks affecting thebusiness. Rather than eliminating these risks the decision making process at your Companyconsiders sensible risk taking and thereby proactive steps are taken to ensure thatbusiness is undertaken in an environment which encourages a reasonable amount of risktaking and enables the Company to leverage market opportunities effectively.

The Board is responsible for determining the nature and extent of the principal risksthat your Company is willing to take to achieve its strategic objectives and formaintaining sound risk management system. With the support of the Audit Committee itcarries out a review of the effectiveness of your Company's risk management processcovering all material risks including strategic financial operational and alsocompliance levels.

Your Company has substantial operations all over the country and competes on basis ofbrand appeal and loyalty product quality and taste packaging marketing and price. Thiscompetitive position is influenced by the economic regulatory and political situationsboth on an all India basis as well as that prevailing at the state level and actions ofthe competitors. The principal risks impacting your Company's business and stepsundertaken to mitigate them are as under:

i) Regulatory restrictions could have an impact on long term revenue growth of theCompany

The Company operates under increasingly stringent regulatory regime (COTPA guidelineson packaging and labeling advertising and promotion). This further gets complicated withadoption of differing regulatory regime in different states and/or lack of consensus oninterpretation/application.

Such restrictive regulations which are subjected to interpretation could result in notonly penalties being imposed/loss of reputation but also impair the Company's ability tocommunicate with adult smokers and/or to meet consumer expectations through new/innovative brand launches or geographic expansion.

The Company addresses this risk by engaging in continuous social dialogue withstakeholders and regulatory community through industry bodies. At the same time it workson developing strategies and capabilities to be able to launch competitive and consumeracceptable brands within the changing regulatory environment.

(ii) Taxation changes could have an impact on short-term revenue growth of the Company

The Company's business is subjected to substantial central and state level taxeswhereby due to differential increase in excise duties in various segments; change inlength of cigarette stick on which excise duty is payable could require the Company totake up product prices and in absence of such action impact its business. The impactincreases when due to change in economic situation consumers disposal income reducesresulting in down-trading to cheaper cigarettes or alternative tobacco products.

Such risks are addressed by the Company through: (a) engagement with tax authoritiesboth at centre as well as state level where appropriate; (b) regular management review tobuild a brand portfolio across segments as well as across geographies and focus on newbrand creation; and (c) capability build-up through investments in distributioninfrastructure to increase geographical spread.

(iii) Regional disruptions could have an impact on short-term revenue growth of theCompany as well as reputation

Regional disturbances through state level restriction on trade or through terrorism andpolitical violence including bandhs strikes has the potential to disrupt the Company'sbusiness operations. Such disruptions result in potential loss of assets and increasedcosts due to more complex supply chain arrangements and/or maintaining inefficientfacilities.

The Company addresses this risk through developing secure multiple sourcing/delivery(supply chain) strategy and through Insurance cover and business continuity planning.

(iv) Counter party risk could have a potential impact on Company's capital andprofitability

The Company generates positive cash flows which are predominantly invested withfinancial institutions and mutual funds. Delay and/or default in settlement on maturity ofsuch investments could result in liquidity and financial loss to Company.

Such risks are mitigated through investment based on principle of Safety; Liquidity& Returns (SLR) and with institutions having strong short-term and long-term ratingsassigned by CRISIL.

(v) Data risks

The loss or misuse of sensitive information or its disclosure to outsiders includingcompetitors and trading partners could potentially have a significant adverse impact onthe Company's business operations and/or give rise to legal liability. For this purposethe Company has put in place information technology policies and procedures which arereviewed regularly. Further information technology controls like data back-up mechanismdisaster recovery center authorization verification etc. have also been established.

CORPORATE SOCIAL RESPONSIBILITY INITIATIVES

Your Company has formulated a Corporate Social Responsibility Policy with the objectiveto promote inclusive growth and equitable development of identified areas by contributingback to the society. Over the years your Company has been involved in social activitieslike provision of clean water etc.

Your Company has been actively discouraging child labour involvement in tobaccogrowing/processing. Your Company has also facilitated installation of solar lights in thetobacco growing areas in association with the village panchayats.

Pursuant to the provisions of Section 135 and Schedule VII of the Companies Act 2013the Corporate Social Responsibility (CSR) Committee of the Board of Directors was formedto recommend the policy on Corporate Social Responsibility and monitor its implementation.The CSR policy is available on the Company's website at : www.vsthyd.com/i/CSRPolicy.pdf.Your Company has initially decided to focus on "Sanitation" as a key area.

The Company has with the help of Gramalaya a non-profit organization constructedtoilets in individual homes (of farmers living) in and around Jogulamba–Gadwal andMedak districts of Telangana where your Company has its operations under the ‘SwachhGhar' programme of your Company. In addition to construction of toilets the villages andthe communities in the area are also sensitized about the importance of health &sanitation. Over 1200 toilets have already been constructed during the financial year andyour Company has plans to extend it further to other houses in the same area andthereafter extend it to other areas. Your Company has also taken up the identified projectof installing more than 300 solar street lights in villages in the above Districts. TheCSR Policy and the Annual Report on CSR activities is annexed herewith as "AnnexureB" and forms part of this Report.

BUSINESS RESPONSIBILITY REPORT

The Listing Regulations mandates inclusion of Business Responsibility Report (BRR) aspart of the Annual Report for top 500 listed entities based on market capitalization. Incompliance with the Regulation the BRR is provided as part of this Annual Report.

RELATED PARTY TRANSACTIONS

There were no related party transactions during the year except that in the ordinarycourse of business and on arms length basis. There were no materially significant relatedparty transactions between your Company and the Directors Promoters Key ManagerialPersonnel and other designated persons which may have a potential conflict with theinterest of your Company at large.

Form AOC-2 for disclosure of particulars of contracts/arrangements entered into byyour Company with related parties is annexed herewith as "Annexure C" and formspart of this Report.

BOARD EVALUATION

Pursuant to the provisions of the Companies Act 2013 and Listing Regulations theperformance evaluation of the Board the Committees of the Board and individual Directorshas been carried out. The manner in which the evaluation has been carried out has beenexplained in the Corporate Governance Report.

REMUNERATION POLICY

Nomination and Remuneration Committee has formulated a policy relating to remunerationof directors key managerial personnel and other employees which has been approved by theBoard.The Remuneration Policy and the criteria for determining qualification positionattributes and independence of a director are stated in the Corporate Governance Report.

MEETING OF INDEPENDENT DIRECTORS

The performance of the Non-Executive Director the Chairman and the Board as a whole isdone by the Independent Directors in their exclusive Meeting as per the policy formulatedby the Board in this regard. In addition the Independent Directors in such Meeting alsoreview their role functions and duties under the Companies Act 2013 and the flow ofinformation from the management.

VIGIL MECHANISM

In terms of Section 177 of the Companies Act 2013 the Company has formulated aWhistle Blower Policy as a vigil mechanism to encourage all employees and directors toreport any unethical behavior actual or suspected fraud or violation of the Company's‘Code of Conduct and Ethics Policy' which also provides for adequate safeguardagainst victimization of person who use such mechanism and there is a provision for directaccess to the chairman of the Audit Committee in appropriate/exceptional cases. Thedetails of the Whistle Blower Policy is given in the Corporate Governance Report and alsoposted on the Company's website at : www.vsthyd.com/i/WhistleBlower Policy.pdf.

DIRECTORS AND KEY MANAGERIAL PERSONNEL

Directors retiring by rotation

Mr. Ramakrishna V. Addanki

In accordance with Article 93 of the Articles of Association of your Company Mr.Ramakrishna V. Addanki retires from the Board and being eligible offers himself forre-election. Your Board recommends his re-appointment.

Mr. Ramakrishna V. Addanki a nominee of Raleigh Investment Company Limited a BritishAmerican Tobacco (BAT) group Company has been appointed as a Director of the Company witheffect from 21st April 2015 and by the Members at their Meeting held on 12th August 2015and re-appointed at their Meeting held on 2nd August 2017.

Mr. Ramakrishna V. Addanki [48] is a Commerce graduate from Osmania University and anassociate member of the Institute of Cost Accountants of India and has over 24 years ofexperience in the tobacco industry. Having started his career in India Mr. Addanki forthe past 19 years has been with British American Tobacco Group in different countries withexperiences in finance and general management. Mr. Addanki is currently the Area Director– South Central Europe based in Romania covering 10 markets including RomaniaBulgaria and Former Yugoslavia. Prior to this he was the General Manager for the Group'sAdria cluster headquartered in Croatia covering markets of Bosnia Herzegovina andSlovenia. Before this assignment he was the Finance Director for Group's subsidiary inTurkey and before that was the CEO of the Group's business in the Czech Republic and wasresponsible for the Czech Cluster as a whole. He specializes in finance and generalmanagement functions.

He is not a Member of any Committee of the Board and is not a Director of any otherCompany in India.

Mr. Addanki does not hold any shares in the Company and is not related to any otherDirector of the Company.

Directors' Retirement/ Resignation/Appointments

Mr. Raymond S. Noronha

Mr. Raymond S. Noronha resigned as Director and Chairman of your Company to beeffective from the close of business hours on 12th April 2018. The Board of Directorsplace on record their deep appreciation of the outstanding contribution made to yourCompany by Mr. Raymond S. Noronha.

Mr. N. Sai Sankar

Mr. N. Sai Sankar retired as Managing Director of your Company with effect from theclose of business hours on 27th November 2017. The Board of Directors place on recordtheir deep appreciation of the contribution made to your Company by Mr. N. Sai Sankar.

Mr. Devraj Lahiri

The Board of Directors of your Company ("the Board") at its Meeting held on20th April 2016 on the recommendation of Nomination & Remuneration Committeeappointed Mr. Devraj Lahiri as Deputy Managing Director of the Company with effect from.1st July 2016 to 27th November 2017 (both days inclusive) and was approved by theMembers at the Annual General Meeting held on 11th August 2016. At the Meeting of theBoard of Directors held on 31st October 2017 on the recommendation of the Nomination& Remuneration Committee Mr. Devraj Lahiri was appointed as Managing Director of theCompany subject to the approval of the Members. He shall also be a Key Managerialpersonnel under Section 203 of the Companies Act 2013.

Mr. Devraj Lahiri [45] is a Commerce Graduate from St. Xavier's College Kolkata andMasters in Business Administration from Indian Institute of Social Welfare and BusinessManagement Kolkata. He joined the Company in the year 2001 and has made significantcontributions during his association with the Company. He was elevated to the level ofMarketing Head and was appointed as Wholetime Director of the Company with effect from 1stAugust 2011. He is a Member of the Corporate Social Responsibility Committee Committeeof Directors and Stakeholders Relationship Committee of the Company and is also a directoron the board of The Tobacco Institute of India. He has been instrumental in the growth ofthe Company and has successfully launched various new brands. Mr. Lahiri does not hold anyshares in the Company and is not related to any other Director of the Company.

A suitable Resolution is being put up for your approval.

Mr. Pradeep V. Bhide

The Board of Directors of your Company at its Meeting held on 12th April 2018 on therecommendation of the Nomination & Remuneration Committee appointed Mr. Pradeep V.Bhide as an Additional Director of the Company with effect from 12th April 2018.

Mr. Pradeep Bhide [68] is a former Senior lAS Official and former Secretary in theMinistry of Finance. He spent 27 years in the Indian Government/ Administrative Serviceand has worked both at National and State levels.

Mr. Bhide was Secretary of the Department of Revenue Ministry of Finance from2007-2010. He has also held other senior roles in the Ministry including Joint Secretaryand subsequently Secretary Department of Disinvestment and Deputy Secretary Departmentof Economic Affairs. In addition he has also served as Special Secretary Ministry ofHome Affairs and as Advisor to India's Executive Director to the International Board forReconstruction and Development in Washington D.C.

Mr. Bhide was Managing Director of the Apex Cooperative Marketing Society for Handloom(APCO) from 1981-1983 and was Managing Director for listed fertiliser manufacturerGodavari Fertilisers from 1997-2002. Since retiring from Government service in 20I0 Mr.Bhide has been active in the private sector serving in a number of Non-Executive rolesprimarily in Indian listed companies and subsidiaries of multinational companies across avariety of industries. Mr. Bhide is Chairman of the Hyderabad-based privately-ownedventure capital group APIDC Venture Capital Ltd. He presently is a Director for HeidelbergCements (India) Ltd. GlaxoSmithKline (India) Pharmaceuticals Ltd. NOCIL Ltd. TubeInvestments India Ltd. L&T Finance Holdings Ltd. L&T Finance

Ltd. BILT Paper B.V. and in addition he has served as Advisor on the India AdvisoryBoard for Joshi Technologies International Inc. Deutsche Telekom and Citibank (India).Mr. Bhide obtained his B.Sc. in Chemistry (Hons.) in 1970 and his LL.B in 1973 both fromDelhi University. He later obtained his M.B.A. with specialisation in Financial Managementfrom Indira Gandhi National Open University in 2002.

Mr. Bhide does not hold any shares in the Company and is not related to any otherDirector of the Company.

A suitable Resolution is being put up for your approval.

Independent Directors

At the Annual General Meeting held on 12th August 2014 the Members of your Companyappointed Ms. Mubeen Rafat and Mr. S. Thirumalai as Independent Directors under theCompanies Act 2013 for a period of five years with effect from 12th August 2014 and 1stOctober 2014 respectively.

All Independent Directors have given declarations as required under Section 149(7) thatthey meet the criteria of independence as laid down under Section 149(6) of the CompaniesAct 2013. None of the Independent Directors are related to any other Director of theCompany.

Key Managerial Personnel

The Managing Director Mr. Devraj Lahiri the Chief Financial Officer Mr. Anish Guptaand the Company Secretary Mr. Phani K. Mangipudi are the Key Managerial Personnel as perthe provision of the Companies Act 2013.

DIRECTORS' RESPONSIBILITY STATEMENT

Pursuant to Section 134(5) of the Companies Act 2013 your Directors confirm that :

1. in the preparation of the annual accounts the applicable accounting standards havebeen followed along with proper explanation relating to material departures if any;

2. appropriate accounting policies have been selected and applied consistently.Judgement and estimates which are reasonable and prudent have been made so as to give atrue and fair view of the state of affairs of your Company as on 31st March 2018 and ofthe statement of profit and loss and cash flow of your Company for the period ended 31stMarch 2018;

3. proper and sufficient care has been taken for the maintenance of adequate accountingrecords in accordance with the provisions of the Companies Act 2013 for safeguarding theassets of your Company and for preventing and detecting fraud and other irregularities;

4. the annual accounts have been prepared on a going concern basis.

5. proper internal financial controls have been laid down to be followed by yourCompany and such internal financial controls are adequate and were operating effectively;and

6. proper systems to ensure compliance with the provisions of all applicable laws havebeen devised and such systems were adequate and operating effectively.

SIGNIFICANT & MATERIAL ORDERS PASSED BY THE REGULATORS OR COURTS OR TRIBUNALS

There are no significant or material orders passed by the Regulators Courts orTribunals which impact the going concern status of the Company and its future operations.However Members' attention is drawn to the following :

TAXATION

i. Income Tax

Financial Services Business

Your Company had diversified into Financial Services Business and Foods Business in theearly nineties. Subsequently in the year 1998-99 your Company incurred a total loss of`38.67 crore in the financial services business of which `29.70 crore was claimed as lossunder the head "Income from Business" and `8.97 crore was claimed as a capitalloss under the provisions of the Income Tax Act.

The Income Tax Appellate Tribunal allowed the entire amount of `38.67 crore as acapital loss. It may be noted that the department had treated the entire loss as a"Speculation Loss".

Your Company has filed an appeal before the then Hon'ble High Court of Andhra Pradeshwhich has been admitted. The matter is yet to be heard.

Further in connection with its divestment from the Foods Business in the financial year1999-00 your Company had incurred a total loss of `53.68 crore of which `44.18 crore wasclaimed as a loss under the head "Income from Business" and `9.50 crore wasclaimed as a capital loss under the provisions of the Income Tax Act. The Income TaxDepartment has disallowed the entire amount excepting `5.70 crore which was allowed as acapital loss. The Commissioner of Income Tax (Appeals) further allowed `11.24 crore out ofthe balance amount of `47.98 crore on appeal before him and the same was upheld by theIncome Tax Appellate Tribunal. Your Company has preferred an appeal against the aboveorder before the then Hon'ble High Court of Andhra Pradesh.

Consequent to the above orders the Income Tax Department had issued consequentialorders under Section 154 of the Income Tax Act demanding `28.86 crore (revised) which waspaid by your Company.

ii. Luxury Tax

The Hon'ble Supreme Court by its judgement dated 20th January 2005 set aside levy ofluxury tax on tobacconists by various states. The Court had also directed the Companies topay back to the state any amount of luxury tax recovered from the customers afterobtaining stay orders from the Court. The Department has alleged that your Company hasfailed to pay an amount of `34.86 crore being the luxury tax collected from customers byyour Company after passing of the interim order dated 1st June 1999 to the thenundivided State Government of Andhra Pradesh which is in violation of the said judgementdated 20th January 2005 and filed the contempt petition against the then ManagingDirector of your Company. The contempt charges were dismissed by the Hon'ble Supreme Courtin March 2010.

The State decided to continue with the legal proceedings for recovery of luxury taxfrom your Company by substituting the Company's Managing Director with your Company as theRespondent. The Supreme Court appointed an independent Auditor to examine and verify theaccounts of your Company for the period 1st April 1999 to 20th January 2005 and submittheir report as to whether any sum was collected by your Company towards luxury tax duringthe operation of the Stay Order dated 1st April 1999. The Auditor forwarded its report tothe Supreme Court endorsing your Company's stand. The Supreme Court after examining thereport of the Auditor disposed off the petition with an observation that no contempt liesagainst your Company. However the State Government has been given an opportunity to issuea show cause notice to your Company for refund of the luxury tax collected after obtaininginterim order from the Supreme Court. Show cause notice should be backed and supported bythe evidence the department wishes to rely upon in support of its case and is subject tocontest by the parties as per Law.

The Commercial Tax Department has issued a show cause notice and reply to the same hasbeen filed by your Company. The matter was adjudicated on 11th March 2017 and anAssessment Order A.O.No.4208 RC No.LT/SEC/01/1/1001/1996-97 dated 13th February 2017 waspassed by the department confirming the demand. Against the same a Writ Petition in WPNo. 8240 of 2017 was filed by your Company in the High Court of Judicature at Hyderabadpraying to issue a writ of certiorari quashing the above mentioned Assessment Order. Thematter came up for admission on 9th March 2017 before the Hon'ble High Court of Telangana& Andhra Pradesh. The Hon'ble High Court was pleased to admit the Writ but at the sametime remanded the matter to be adjudicated by the Appellate Authority as factualinformation was also involved and directed the Petitioners to file the appeal within twoweeks from the date of receipt of the Order. Your Company approached the Hon'ble SupremeCourt and had withdrawn the SLP and filed an appeal with a delay of one day before theAppellate Authority. The said Appellate Authority had issued a show cause notice to yourCompany asking why the delay of one day in filing the appeal should be condoned andagainst which your Company has approached the Hon'ble High Court of Telangana & AndhraPradesh for condonation of delay of one day. The matter is pending before the said HighCourt.

iii. Entry Tax

Several High Courts in the country including those of Andhra Pradesh Kerala TamilNadu and Assam have struck down the levy of entry tax on the ground that it is violativeof Article 301 and not saved under Article 304(b) of the Constitution as it is notcompensatory in the manner required in terms of the Supreme Court judgement in the case ofM/s. Jindal Stainless Limited. Thereafter several states such as Uttar Pradesh BiharWest Bengal Haryana and Assam have attempted to re-introduce entry tax by amending theoriginal Acts sparking a fresh round of legal challenges in the high courts. Most of theappeals filed by the various states and individual companies have been clubbed together.

The Hon'ble Supreme Court in the batch of cases headed by Jai Prakash

Associates Vs the State of MP has referred a number of vital questions on levy of entrytax to the Constitutional Bench in terms of Article 145(3) of the Constitution.

The Hon'ble Supreme Court constituted a 9 Judges Bench and heard the matter and videits Judgment dated 11th November 2016 held that relevant State Entry Tax matters are notviolative on compensatory grounds but if the Act is found to be discriminatory then it isviolative of Article 304(a) of the Constitution. Certain tests have been laid out in theaforesaid judgement namely discrimination and local area applicability to ascertainwhether the respective state acts are unconstitutional or not and remanded the matter tobe heard by the Regular Bench of the Supreme Court. Your Company believes based on legaladvice that it has defendable grounds on merits and intends to file necessary petitionsif required before the regular bench of the Supreme Court or the respective State HighCourts and contest the matter on the grounds of discrimination and local area.

The Single Bench of Hon'ble High Court of Calcutta struck down the levy of entry taximposed by the State Government of West Bengal in the case of Bharti Airtel and others andaggrieved by the same the State Government has preferred an appeal before the DivisionBench. On identical grounds the Single Bench of Hon'ble High Court of Calcutta allowedthe Writ Petition in favour of your Company with a direction to file implead petition andan early hearing petition before the division bench.

Your Company as directed has filed an implead petition and an early hearingapplication which is pending before the Division Bench of High Court of Calcutta.Subsequently the State of West Bengal amended the Entry Tax Act to give retrospectiveeffect of levy on locally manufactured goods in order to avoid discrimination of local andoutside manufacturers. There was also an amendment to the State Finance Act and effect ofthe same being that all Entry Tax matters to be heard by the Tribunal. Hence your Companyintends to file an application before the Tribunal to contest the West Bengal Entry taxmatter.

Your Company has filed fresh petitions before the Allahabad and Ranchi High Courts tocontest the entry tax matter pertaining to Uttar Pradesh and Jharkhand and also filedamendment petitions before the High Court of Patna and Guwahati to contest the matterspertaining to Bihar and Assam Entry Tax.

iv. Excise

a. Wrapping Materials

The Excise department claimed a sum of `3.62 crores on the ground that Gay Wrappers(printed paper used for wrapping cigarette packets) had been manufactured and consumed byyour Company without payment of duty during the period April 1996 to March 2002. TheCustoms Excise and Service Tax Appellate Tribunal (CESTAT) Bangalore had allowed yourCompany's appeal against the said demand and set aside the demand of the ExciseDepartment. An appeal against the said Order was filed by the Excise Department and theHon'ble Supreme Court was pleased to allow the appeal by way of remand to CESTAT to decidethe matter afresh and pass an order on merits. The Hon'ble CESTAT heard the matter andallowed the appeal in favour of your Company. Against the CESTAT's order the departmentfiled an appeal before the Supreme Court and when the matter came up for admission theHon'ble Supreme Court tagged your Company matter to be heard along with another identicalmatter pending before it.

b. Cigarette manufacture in North Eastern states

The Excise Department had demanded a sum of `31.20 crore along with interest of `12.69crore from the Company's former contract manufacturers consequent upon the judgement ofthe Hon'ble Supreme Court upholding the withdrawal of exemptions granted in the NorthEastern states. Thereafter a total sum of `39.06 crore was paid to the Department. ADivision Bench of the Gauhati High Court confirmed the judgement of the single judge andheld that interest was also payable for the period 1st August 2003 to 7th February 2006on the principal amount already repaid. Appeals have been filed in the Supreme Courtagainst the said judgements of the Gauhati High Court which were admitted but no stay ofthe said judgements was granted.

c. Tobacco Refuse

Your Company has been receiving periodical show cause notices demanding recovery ofduty on cut tobacco used in the manufacture of tobacco refuse together with interest andpenalty thereon from January 2005 to October 2013 amounting to `15.92 crore. All thepending appeals before CESTAT in this matter until October 2013 were allowed in favour ofyour Company. Against the said orders the department preferred an appeal before theHon'ble Supreme Court on which hearing is pending. Show cause notices for subsequentperiod have been received and same are pending before original authority.

d. Service Tax

Your Company has received show cause notices from the Excise Department seeking to denyCENVAT credit availed on service tax paid by various service providers on the ground thatthe same are not in relation to the manufacture of final products. Upon adjudicationcredit on most of the services were allowed in favour of your Company however some ofthem are contested by the department before CESTAT. Cross appeal has been filed by yourCompany before CESTAT. One of the appeals filed by your Company for the period April 2008was heard and allowed by CESTAT by way of remand to the original authority to be decidedin light of earlier judicial pronouncements.

PUBLIC INTEREST LITIGATION (PIL)

i] The two PILs filed in the Madras High Court and the Andhra Pradesh High Courtagainst the Central Government and the cigarette manufacturers including your Companyseeking strict implementation of Cigarettes and Other Tobacco Products (Prohibition ofAdvertisement And Regulation of Trade and Commerce Production Supply and Distribution)Act 2003 (COTP

Act) and Rules are pending.The Madras High Court disposed off the PIL on the lines thatthe Government has to take necessary steps to build laboratories to check the tar andnicotine content in the cigarettes.

ii) Your Company has been impleaded in the petition filed in the Supreme Court by anNGO called ‘Centre for Transforming India' against the Union of India along withother cigarette manufacturers Tobacco Institute of India Bidi Manufacturers and BidiManufacturers' Association seeking prohibition/ban of the manufacture storage and sale ofall forms of tobacco within the territory of India.

iii) A PIL was filed before the Uttarakhand High Court in India relating to printing ofTar-Nic contents on cigarette packets. The High Court passed an Order allowing thepetition and directing ban on sale of loose cigarettes without printing health warning.

The Court has also ordered ban on sale of cigarettes in the state of Uttarakhand if theunion does not prescribe safe or maximum permissible limit of nicotine & tar contentsin each cigarettes or label or package.

A review petition has been filed by your Company along with others against the orderand it was disposed off by the High Court of Uttarakhand in favour of your Company.

Petitions have also been filed in other courts such as High Court of Jabalpur NationalGreen Tribunal Delhi seeking ban on sale of cigarettes and before High Court of MadhyaPradesh Indore Bench seeking directions to mention tar and nicotine content on cigarettepacks by the manufacturers and a PIL before the High Court of Mumbai seeking directionsthat the Insurance

Companies shall not invest in the cigarette companies.

INTELLECTUAL PROPERTY

The suit for infringement and passing off filed by ITC Limited against your Companyalleging that your Company had violated ITC Limited's 'Gold Flake' trade mark by using adeceptively similar get up and trade dress consisting of a combination of red and goldcolors on its 'Special' brand of cigarettes is still pending in the Hon'ble Calcutta HighCourt and the trial is yet to begin. ITC's application for temporary injunction wasrefused by the single bench of the Hon'ble Calcutta High Court. Appeal was filed by ITCand the Division Bench without allowing the appeal directed the hearing of the Suit to beexpedited. Your Company however has been directed to submit the sales figures of the‘Special' brand of cigarettes every month to the Court which is being duly compliedwith.

FINANCIAL SERVICES BUSINESS

The Company Petition filed by the Official Liquidator in the Hon'ble High Court ofAndhra Pradesh seeking directions against some of the Ex-Directors of ITC Agro TechFinance and Investments Limited (ITCATF) the Company in liquidation into which one ofthe subsidiaries of your Company viz. VST Investments Limited was amalgamated to file aStatement of Affairs is still pending.

In terms of the Order dated 10th July 2007 the Division Bench of the Hon'ble HighCourt of Andhra Pradesh had directed the Regional Director Department of CorporateAffairs Chennai to conduct an investigation and submit a report showing the persons whopromoted ITCATF and the persons who were responsible in conducting its affairs until itswinding up. A comprehensive report was prepared and filed in the Court by the RegionalDirector in July 2008. Further the Division bench against the appeal filed by one of theEx-Directors of ITCATF remanded the matter to the Company Judge to decide afresh keepingin view the report submitted by the Regional Director. All the matters are still pendingfinal adjudication.

THE CIGARETTES AND OTHER TOBACCO PRODUCTS (PROHIBITION OF ADVERTISEMENT AND REGULATIONOF TRADE AND COMMERCE PRODUCTION SUPPLY AND DISTRIBUTION) ACT 2003 (COTPA)

i. In view of the provisions of COTPA various restrictions such as ban on advertisingin print and visual media ban on outdoor advertising regulation of in-store advertisingprohibition of sale of cigarettes to persons below the age of 18 years etc. have been inforce. Printing of pictorial warnings on cigarette packets which came into effect from31st May 2009 were further revised with effect from 1st December 2011. A new set ofpictorial warnings were notified to come into force with effect from 1st April 2013. InOctober 2014 the Government notified a new set of pictorial warning covering 85% of thefront and back side of the packets with effect from 1st April 2015. However afterextension the same have now been implemented from 1st April 2016 and is being dulycomplied with by your Company.

ii. Some Tobacco manufacturers have challenged various provisions of COTPA and Rulesmade thereunder in different high courts across the country. The Union Government filedtransfer petitions in the Hon'ble Supreme Court seeking to transfer 31 pending writpetitions from various high courts to the Hon'ble Supreme Court. All the transferpetitions were allowed and the writ petitions have thus been moved to the Hon'ble SupremeCourt for final adjudication.

iii. Your Company had also filed a writ petition before the then Hon'ble High Court ofAndhra Pradesh challenging The Cigarettes and Other Tobacco Products (Packaging &Labelling) Rules 2006 and the Amendment Rules 2008 on the grounds inter alia that theyare ultra vires of COTPA and therefore the notifications issued there under (includingthose seeking implementation of graphic health warnings) should be quashed. The said writpetition has been admitted but no interim orders were passed by the Hon'ble Court.

iv. The Government of India Ministry of Health and Family Welfare on 13th January2015 as part of pre-legislative consultation invited views and comments from thestakeholders and the public on the proposed Cigarettes and Other Tobacco Products(Prohibition of Advertisement and Regulation of Trade and Commerce Production Supply andDistribution) Amendment Bill 2015 which proposes further restrictions on the industry andmore stringent penalty provisions. Your Company as a stakeholder has expressed objectionsto the said amendment bill.

v. Before the High Court of Karnataka a Writ Petition was filed by Tobacco Instituteof India (TII) on behalf of your Company and other manufacturers against the proposednotification dated 15th October 2014 by Health Ministry to print health warning on bothsides of the pack occupying 85% of space. The 85% health warning to come into effect from1st April 2016. Your Company also filed a Writ Petition before the High Court bench atDharwad against the implementation of 85% health warning. The Hon'ble Supreme Court onhearing a PIL filed by Health for Millions constituted a Bench before the Karnataka HighCourt to hear all the matters relating to graphical health warning. The Writ Petitionsfiled by TII and your Company are being heard before the Bangalore Bench. The Benchcontinuously heard the matters till 28th February 2017 and the Karnataka Bench held on15th December 2017 that the amendment made to the Packaging Rules imposing 85% graphichealth warning is ultra vires the Constitution. Against the said Judgment the aggrievedparties filed SLP before the Supreme Court seeking stay and the same was granted. Thematter is scheduled for hearing shortly.

REAL ESTATE

The Government of Andhra Pradesh had filed a land grabbing case against your Company in1991 in relation to a piece and parcel of vacant land which has been under possession andoccupation by your Company for over four decades. By its judgement dated 28th July 2010the Special Court had held that your Company is not a land grabber but had given the StateGovernment the right to initiate proceedings to recover possession of the land at somefuture date. Against this part of the judgement your Company had filed a writ petitionbefore the Hon'ble High Court of Andhra Pradesh to expunge that part of the Order givingsuch liberty to the Department despite the fact that your Company has already beendeclared not to be a land grabber. The writ petition is still pending. The StateGovernment has also filed a writ petition in the Hon'ble High Court of Telangana andAndhra Pradesh seeking to set aside the said judgement of the Land Grabbing Court. Aninterim Order was passed restraining your Company from changing the status of the land orcreating any third party interest therein. Your Company has taken all the necessary stepsfor speedy disposal of the above writ petitions which are pending before the Court.

One more case of land grabbing was filed by the then Government of Andhra Pradeshagainst your Company in the year 1989 on a piece of land along with building called‘Lal-e-Zar' before the Special Court and in the year 2010 the Special Court passeda judgment stating that your Company is not a land grabber. After 7 years the Governmentof Telangana filed an appeal before the Hon'ble High Court of Telangana and Andhra Pradeshseeking a direction from the court that the nature of the land should not be altered andno third party interest to be created. Your Company filed a counter and a vacate stayapplication. Order was pronounced on the vacate stay petition allowing your Company tocontinue to carry on construction activities subject to the Writ Petition and not tocreate any third party rights.

PARTICULARS OF EMPLOYEES

The information required pursuant to Section 197 of the Companies Act 2013 read withRule 5(1) of the

Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014 in respectof employees of the Company are annexed herewith as "Annexure D" and forms partof this Report. The statement containing particulars of employees as required underSection 197 of the Act read with Rule 5(2) of Companies (Appointment and Remuneration ofManagerial Personnel) Rules 2014 is provided in a separate annexure forming part of thisReport. However in terms of Section 136 of the Act the Report and Accounts are beingsent to the Members and others entitled thereto excluding the information on employees'particulars which is available for inspection by the Members at the Registered Office ofthe Company during business hours on working days of the Company up to the date of theensuing AGM. In case any Member is interested in obtaining a copy thereof such Member maywrite to the Company Secretary of the Company.

The Nomination and Remuneration Committee of the Company has affirmed that theremuneration is as per the Remuneration Policy of the Company.

Your Directors take this opportunity to record their deep appreciation of thecontinuous support and contribution from all employees of your Company.

EXTRACT OF ANNUAL RETURN

As required under Section 92(3) of Companies Act 2013 and Rule 12(1) of Companies(Management and Administration) Rules 2014 an extract of Annual Return in Form MGT-9 isannexed as "Annexure E" and forms part of this report.

AUDITORS

Statutory Auditors

M/s. B S R & Associates LLP Chartered Accountants were recommended forappointment as the Statutory Auditors of the Company to hold office from the conclusion ofthe 85th AGM to the conclusion of the 90th AGM. In terms of the first proviso to Section139 of the Companies Act 2013 the Auditors' appointment has to be ratified at every AGM.Accordingly the appointment of M/s. B S R & Associates LLP Chartered AccountantsFirm's Registration Number:116231W/W-100024 as the statutory auditors of the Company isplaced for ratification by the Members. The Company has received a certificate from M/s. BS R & Associates LLP to the effect that they are not disqualified from continuing toact as Auditors and would be in accordance with the provisions of Section 139 and 141 ofthe Companies Act 2013 and Companies (Audit and Audit Rules) 2014. The Report given bythe Auditors on the financial statements of the Company is part of the Annual Report.There has been no qualification reservation or adverse remark or disclaimer in theirReport. During the year under review the Auditors had not reported any matter underSection 143(12) of the Companies Act 2013 and hence no detail is required to bedisclosed under Section 134(3)(ca) of the Companies Act 2013.

Secretarial Auditor

Pursuant to the provisions of Section 204 of the Companies Act 2013 and Rule 9 of theCompanies (Appointment and Remuneration of Managerial Personnel) Rules 2014 the Companyhad appointed Dr. K.R. Chandratre Company Secretary in Whole-time Practice asSecretarial Auditor of the Company for the financial year 2017-18. The Secretarial AuditReport is annexed herewith as "Annexure F" and forms part of this Annual Report.

There are no qualifications reservations or adverse remarks in the Secretarial AuditReport.

CONSERVATION OF ENERGY TECHNOLOGY ABSORPTION FOREIGN EXCHANGE EARNINGS AND OUTGO

Information in accordance with clause (m) of sub-section (3) of Section 134 of theCompanies Act 2013 read with Rule 8 of Companies (Accounts) Rules 2014 is given in the"Annexure G" forming part of this Report.

DEPOSITS

Your Company has stopped accepting fresh deposits for several years now. As on 31stMarch 2018 your Company does not have any deposits for the purpose of its business.

THE FUTURE

Despite adverse market conditions your Company is well placed to exploit opportunitiesthrough innovative new brand launches coupled with expansion of operational areas.

ACKNOWLEDGEMENTS

The Directors are grateful to all valuable stakeholders of the Company viz. customersshareholders dealers vendors banks and other business associates for their excellentsupport rendered during the year. The Directors also acknowledge the unstinted commitmentand valued contribution of all employees of the Company.

On behalf of the Board

RAYMOND S. NORONHA

Chairman

DIN : 00012620

Dated this 12th day of April 2018

Azamabad Hyderabad - 500 020