Chemplast Sanmar Limited - Morningstar, Inc.

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Chemplast Sanmar Limited

BOARD OF DIRECTORS

P.S. Jayaraman, Managing DirectorM.K. KumarC.H. MahadevanS.V. MonyB. NatrajV.K. ParthasarathyM.N. RadhakrishnanM.S. Sekhar

REGISTERED OFFICE

9, Cathedral RoadChennai 600 086

MANUFACTURING LOCATIONS

Mettur Dam PVC

Chlorochemicals:Caustic Soda, Chlorine,Chlorinated Solvents,Refrigerant Gases andSilicon Wafers

Krishnagiri & Panruti Industrial Alcohol

Vedaranyam Industrial Salt

Karaikal Caustic Soda and Chlorine

BANKERS

ICICI Bank LimitedIndian Overseas BankState Bank of IndiaStandard Chartered Bank

AUDITORS

Price Waterhouse & Co.Chartered AccountantsChennai

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CONTENTSPage

Board of Directors 1Directors‘ Report 3Annexure to the Directors’ Report 11Corporate Governance 14Auditors’ Report 26Five Year Summary 29Profit and Loss Account 30Balance Sheet 31Schedules forming part of the Accounts 32Cash Flow Statement 48

Information Regarding Listed Securities as required under Clause 32 of the Listing Agreement

NAME AND ADDRESS OF THE STOCK EXCHANGES DETAILS OF SECURITIES LISTED

1) Madras Stock Exchange Limited Equity SharesExchange Buildings,New No.30 (Old No.11), Second Line Beach,Chennai 600 001

2) Bombay Stock Exchange Limited Equity SharesPhiroze Jeejeebhoy Towers, Dalal Street,Fort, Mumbai 400 001

3) National Stock Exchange of India Limited Equity SharesExchange Plaza,Plot No. C/1, G BlockBandra-Kurla Complex,Bandra (E), Mumbai 400 051

The listing fees to these Stock Exchanges have been paid.

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Directors’ ReportThe Directors have pleasure in presenting their report along with the accounts for the year ended 31st March2006.

Corporate Results

2005-06 2004-05Rs. Crores Rs. Crores

Sales and other income 699.49 612.37

Profit before interest, depreciation and taxes 98.50 81.16

Interest 16.47 24.25

Depreciation 36.01 26.31

Profit before tax 46.02 30.60

– Current tax (12.84) (4.90)

– Deferred tax 3.86 (0.02)

– Fringe benefit tax (0.33) –

Profit after tax 36.71 25.68

Profit brought forward 83.41 73.54

Transfer from Debenture Redemption Reserve – 5.13

120.12 104.35

Appropriations:

Capital Redemption Reserve – 20.50

Preference Dividend – 0.39

Tax on Dividend – 0.05

Profit carried to Balance Sheet 120.12 83.41

The company continued to maintain its all-round good performance during the year under review. Sales andother income increased by 14% over the previous year. The Profit before tax for the year at Rs.46.02 croresinclusive of Montreal Protocol compensation receipts of Rs.18.40 crores registered a healthy growth of 50%over the previous year. The performance of the company could have been substantially better but for theincrease in the fuel cost due to steep increase in oil prices which had a negative impact of Rs.35 crores onthe profits for the year. The company has drawn up plans to address this issue. With a view to conservingresources to meet the capital expenditure programmes of the company, the Directors do not recommendpayment of dividend on equity shares for the year 2005-06.

MANAGEMENT DISCUSSION AND ANALYSIS

The year under reference was a representative year demonstrating the cyclical nature of the businesses yourcompany is engaged in.

The uptrend seen in the realizations for the products manufactured such as Poly Vinyl Chloride (PVC), CausticSoda and Chloromethanes witnessed a reversal of trends in the second half of the year. With escalatingfeedstock prices, the margins came under pressure during this period. The focus laid by the management inrecent years on strengthening the backward integration strategy, the acquisition of the Caustic soda facilityat Karaikal which made available low cost chlorine for operations, and the continuous investments beingmade to bring in more flexibility in feedstock management, are all steps in the right direction to manageefficiently the cyclical nature of the business. Several investment proposals, discussed elsewhere in thisreport, are now under implementation and these initiatives will further strengthen the fundamentals of thecompany.

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PVC Business

The company has an integrated facility at Mettur Dam to produce 64,000 TPA of PVC. Ethylene Di-chloride(EDC), the feedstock required to manufacture PVC is also produced in this location.

The company continues to be the only manufacturer with capability to produce four major PVC productgroups. This has given it the flexibility to quickly change its product mix based on comparative contribution.

Suspension Resin:

Demand for Suspension resin in the country peaked to nearly 11.5 lac tons in the year 2005-06, registeringa high growth of 25% over the previous year. During this year, the country imported nearly 2.50 lac tonsof Suspension resin. The main driver for PVC demand continues to come from the Pipes & Fittings sectorwhere nearly 70% of Suspension PVC is consumed in the country. Implementation of several irrigation, watersupply and sewerage schemes by various Governments, and the boom in the housing, construction andinfrastructure sectors will continue to drive Pipes and PVC demand in the coming years.

Paste Resin:

Demand for Paste resin (a speciality resin) in India is at present around 65,000 MT and growing at a modestrate of 5% per year. Leather cloth production consumes a major portion of Paste resin. With the growth inthe automobile sector, increase in leather cloth production is expected to result in higher demand for Pasteresin. The Paste resin produced by your company continues to remain the preferred grade and is in gooddemand.

Battery Separator Resin (BSR):

The country’s BSR demand continues to be around 6000 MT per year. Your company continues to be thesole manufacturer of BSR in India.

Copolymer Resin:

Growth in demand for Copolymer resins in the major sectors – inks and adhesives – continues to remainmodest. Your company is the only manufacturer of Copolymer resin in South Asia.

Raw Materials and Intermediates:

EDC is the key intermediate to produce PVC. Though the company has an EDC production facility at MetturDam to meet its entire requirement to produce PVC, actual production of EDC depends on the price/ costof raw materials i.e., Denatured Spirit (DNS) and Chlorine. While the cost of chlorine has been minimisedwith the enhanced captive production at the Karaikal facility, the cost of DNS depends upon the vicissitudesof the sugar industry, which determines availability of molasses for alcohol production, demand of alcoholfrom the potable sector and the Gasohol programme of the Government of India. These factors have poseda question mark on the availability of DNS to the industrial sector on a sustained basis at affordable prices.Also, the international price of DNS has increased to high levels making imports prohibitive. To find a long-term solution to this problem and ensure availability of EDC at an appropriate cost, the company, asinformed, is setting up an 84,000 TPA EDC production facility at Karaikal to produce EDC from importedethylene, using the chlorine available at this location. Towards this end, Ethylene storage and Marine Terminalfacilities are under construction. The project to be completed by end of 2006 will make available about84,000 tonnes of EDC at a low cost for the PVC production at Mettur Dam. The balance requirement of EDCof around 25,000 TPA will be met from the Oxychlorination facility operating at Mettur Dam, for which therequired DNS will come from the company’s Industrial Alcohol plant.

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As regards the Caustic soda facility at Karaikal, a shore based location in the Union Territory of Pondicherryacquired in August ’03, your company has taken several initiatives. The capacity of Caustic soda was rampedup to 100 TPD last year and has been further expanded to 150 TPD in March ’06. Power is the predominantraw material in the manufacture of Caustic soda, and the company has installed an 8.5 MW power plantwith natural gas as fuel. The captive power source through natural gas is being further augmented. Thus,Chlorine is made available at this location for captive consumption at an attractive low cost.

Risks and concerns:

a) The Government of India has been continuously reducing the customs duty on PVC imports and thespread between import duty on PVC and the intermediate (EDC) has reduced substantially as under:

Year MonthImport Duty %

Spread %PVC EDC

2002 March 30 15 15

2003 March 25 15 10

2004 January 20 15 5

2004 September 15 10 5

2005 March 10 5 5

2006 March 5 2 3

b) Imported DNS prices have increased to unviable levels. The company is now forced to depend ondomestic DNS at least till commissioning of the EDC facility at Karaikal.

c) High cost of power mainly due to increase in LSHS cost, which follows the trend of International crudeoil prices is putting pressure on margins.

Review of operations:

PVC production during the year 2005-06 was 60,177 MT. During the beginning of the year, PVC productionwas moderated by availability of EDC. However, with the imported parcels of EDC landing from June ’05,PVC production volume was maintained to the capacity. In line with the international price of SuspensionPVC, domestic prices started falling substantially from October ’05. Such a drop in selling price and increasein feedstock cost affected the margins during the year.

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As stated earlier, the PVC Division was benefited by the low cost chlorine from Karaikal facility and thetimely import of DNS and EDC, but for which the operations of the Division would have been severelyaffected.

Chlorochemicals Business

The Chlorochemicals business is again a highly integrated operation. The company produces at Mettur Dam,Caustic soda, Chloromethane products, Silicon Wafers and Refrigerant gases (CFC and HCFC). The salt andpower required for Caustic production are available from captive sources. Chlorine produced in the Chloralkaliplant in this location is used for making Chloromethane products. Some of these products find applicationin the manufacture of Refrigerant gases.

Caustic Soda:

The highly buoyant market for Caustic soda prevalent in the year 2004-05 encouraged several capacityadditions coming on stream not only in India, but also in the entire Asian region. In India alone, almost 2.60lac MT of capacity was added during the year 2005-06.

Consequently, even though demand remained quite strong, the surplus capacity resulted in pressure onrealization. With import prices, especially from China, falling drastically during the year, there was a continuousdownward movement on realization.

The trend in net realization of Caustic soda is shown below:

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Solvents:

The sustained growth in the pharmaceutical sector in India helped in demand for Chloromethane Solventsgrowing at a nominal 6%. However, the removal of the antidumping duty on import of Methylene Chloridefrom Europe in December ’05 and the falling international prices for HCFC from October ’05 resulted inrealization on Chloromethanes coming under severe pressure in the last two quarters of the year.

The escalating energy price and the global shortage of gas have resulted in Methanol price going up steeplyaffecting the margins on Chloromethane sales.

The company is phasing out the production of Carbon Tetrachloride (CTC) for non-feedstock applications inline with the Montreal Protocol guidelines. As a compensation towards the same, the company received asum of Rs.16.71 crores from the Montreal Fund during the year.

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Mettron:

The CFC production is in line with the phase out schedule agreed under the Montreal Protocol arrangement.

The robust growth in demand in the white goods sector in the country is propelling demand forair-conditioner and HCFC-22 in the Asian region. Both in India and rest of Asia the demand for HCFC-22is expected to grow at 20% per annum in the medium term. In order to take advantage of this growthopportunity, the company would produce HCFC-22 at its Mettur Plant.

The company is also in the process of implementing a CDM (Clean Development Mechanism) project inincinerating the by-product HFC-23 that arises during the manufacture of HCFC-22 at cost of Rs.9 crores.The project when completed by end 2006 will enable the company to earn Certified Emission Reductions(CERs), which are tradable. The company has already obtained Host Country approval and is in the processof obtaining the final approval from the United Nations Framework Convention for Climate Change (UNFCCC).

Metkem:

The international photovoltaic market is characterized by severe scarcity of raw material polysilicon. Despitethis, the company has been quite successful in operating this division at full capacity. The strong growth inphotovoltaic demand in several European countries like Germany, Italy and Spain has resulted in improvedprices for wafer sales for the company. This trend is expected to continue in the medium term.

To address the raw material shortage, the company’s Polysilicon facility at Mettur Dam is being revamped,with the adaptation of a more energy efficient process, to produce 30 TPA of Polysilicon at a cost ofRs.11.5 crores. This initiative will be completed by March ’07. The capacity of the plant will be sufficientto meet the raw material requirements of the division. This project is once again a demonstration of thecompany’s strong belief in the backward integration strategy.

Risks and concerns:

(i) The huge spike in international crude prices is a matter of extreme concern as this directly affectscaptive generation cost in the form of high fuel cost.

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(ii) Sale volume of both CFC and CTC will continue to shrink on account of phase out schedule underthe Montreal Protocol.

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Review of operations:

The Chlorochemicals business continued to operate at 100% capacity during the year. The division has beenthe beneficiary of low cost captive Chlorine. The drop in realization for the products following the internationaltrend and the increase in methanol prices witnessed in the second half of the year placed a pressure onmargins. Despite an increase in overall cost, contributed essentially by the increase in captive power generationcost consequent to high international crude oil prices and increased methanol cost, the Chlorochemicalsbusiness achieved satisfactory results. With good demand coming from the pharma sector, the demand forthe Chloromethane products is expected to remain steady in the medium term.

PROJECTS

Karaikal:

The expansion of the Caustic Soda plant at Karaikal from 100 TPD to 150 TPD was successfully completedin March ’06 without any cost or time overrun. The company has also commissioned a desalination plant,based on the Reverse Osmosis technology, with a capacity to produce 1200 m3/ day of treated water to meetthe needs of the expanded Caustic Soda facility and the EDC project under implementation.

As discussed earlier, work on the 84,000 TPA EDC plant at Karaikal using imported Ethylene and a marineterminal facility is in progress. The project completion is expected by end of 2006.

The company has acquired the assets including 77 acres of land located adjacent to the existing Chloralkalifacility at Karaikal from Kothari Sugars and Chemicals Limited.

The company is also evaluating various other projects at Karaikal to leverage on the port infrastructure beingset up there.

Mettur:

The company’s Chloralkali facility at Mettur Dam has been operating with the Mercury Cell process for morethan six decades. In line with the Corporate Responsibility for Environment Protection (CREP) guidelinesissued by the Ministry of Environment and Forests, the company has, in the past couple of years, carried outseveral improvements in the plant operations. However, in line with the Sanmar group’s philosophy of ‘carefor the environment’ and as a responsible corporate citizen, the company has, decided to convert to MembraneCell technology at Mettur Dam well ahead of time. However, to make this project viable, the captive powercost, which has gone up quite significantly has to be brought down now. The company has therefore decidedto convert the LSHS based power generation to coal based power generation. Both these conversion projectswhen completed would contribute significantly to the bottom line.

Cuddalore:

All the necessary statutory approvals for setting up the greenfield PVC project of 170,000 TPA capacity, withVCM as feedstock have been obtained. Land required for the project has been allotted. Technology sourcingagreements are being concluded. The project, estimated to cost around Rs.450 crores, is likely to be completedin twenty four months.

Environment

The company lays great emphasis in integrating its business objectives with a clean environment. This isrealized through a continuous focus on the exploration and implementation of pollution prevention measures,resource conservation as well as recycle and reuse initiatives. Towards this end, over a period of time, thecompany has invested in a number of infrastructure projects aggregating over Rs.50 crores resulting ineffective management of air emissions as well as solid and hazardous wastes.

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The programme to implement the ‘Zero Discharge’ project at Mettur Dam is receiving considerable attention.Technology selection for this purpose is expected to be completed shortly. Chloralkali plant at Karaikal hasalready achieved ‘Zero Discharge’ of process effluents. Water required at this plant is largely being met fromthe desalination plant set up in this facility.

Both the PVC and the Chlorochemicals plants at Mettur Dam are the recipients of ISO 14001 certification.

Green belt development is a major focus area for the company with more than 40% green cover in place.

The Karaikal facility was awarded the first prize for its industrial garden in Farm Fest 2006 conducted by theAgricultural Department of the Pondicherry Government.

The Chlorochemicals plant at Mettur and the Salt Works at Vedaranyam were the recipients of the Tamil NaduState Safety Awards for the years 2001 and 2002 that were distributed in March ’05.

Personnel

Industrial relations with employees remained cordial during the year. Human Resource Development activitiesreceived considerable focus. The emphasis was on imparting training and development of the skill-set of theemployees to enable them to face the challenges in the work environment.

Internal Control Systems

Your company has adequate internal control procedures commensurate with the size and nature of itsoperations. The audit committee constituted by the Board of Directors is functioning effectively. Internal auditfor the year 2005-06 was carried out by Deloitte Haskins & Sells covering all areas of operations. Allsignificant audit observations were discussed in the audit committee, which met four times during the yearunder review.

FINANCE

Your company has established a good track record with the bankers and financial institutions, therebyenjoying their confidence fully. The increase in interest cost in recent period is a matter of concern, howeverwith good standing of your company with the lenders, the company is confident of securing loans at optimumcosts.

With a view to enhance liquidity of company’s shares on the stock exchanges and facilitate easier accessibilityto the company’s equity shares by small investors, during the year, the company carried out a stock split bysub-dividing each equity share of Rs.10 of the company into 10 equity shares of Re.1 each.

DIRECTORS

During the year, Mr M S Sekhar, Mr M N Radhakrishnan, Mr S V Mony and Mr B Natraj were co-opted tothe Board and Mr V V Subramanian resigned from the Board. The Directors place on record their appreciationof Mr Subramanian’s services during his tenure.

Mr C H Mahadevan, Director, retires by rotation at the ensuing Annual General Meeting and is eligible forre-appointment.

Mr V K Parthasarathy and Mr M S Sekhar who were appointed in casual vacancies caused by the resignationsof Mr N Kumar and Mr Vijay Sankar, respectively, hold office up to the date of the ensuing Annual GeneralMeeting. Mr M N Radhakrishnan, Mr S V Mony and Mr B Natraj who were appointed as additional directorshold office up to the date of the ensuing Annual General Meeting.

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Notices under Section 257 of the Companies Act, 1956 have been received from members proposing theappointments of Mr V K Parthasarathy, Mr M S Sekhar, Mr M N Radhakrishnan, Mr S V Mony and Mr B Natrajand the Directors commend these proposals to the shareholders.

AUDITORS

Price Waterhouse & Co., Chartered Accountants, Chennai, retire and are eligible for re-appointment.

STATUTORY INFORMATION

Information in accordance with the provisions of Section 217(2A) of the Companies Act, 1956, read with theCompanies (Particulars of Employees) Rules, 1975, as amended regarding employees, is given in Annexure‘B’ to the Directors’ Report. However, as per the provisions of Section 219 of the Companies Act, 1956, theReport and Accounts are being sent to all shareholders of the company, excluding the aforesaid information.Any shareholder interested in obtaining such particulars may write to the Secretary at the Registered Officeof the company.

Particulars under Section 217(1)(e) relating to energy conservation and technology absorption are furnishedin a separate statement annexed to, and forming part of this report.

DIRECTORS’ RESPONSIBILITY STATEMENT

a) In the preparation of the annual accounts for the year ended 31st March 2006, the applicableaccounting standards have been followed by the company.

b) The Directors have selected such accounting policies and applied them consistently and made judgmentsand estimates that are reasonable and prudent so as to give a true and fair view of the state of affairsof the company as at 31st March 2006 and of the profit of the company for the year ended that date.

c) The Directors have taken proper and sufficient care for the maintenance of adequate accountingrecords in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets ofthe company and for preventing and detecting fraud and other irregularities.

d) The accounts of the company have been prepared on a going concern basis.

CAUTIONARY STATEMENT

Statements made in the report, including those stated under the caption “Management Discussion andAnalysis” describing the company’s plans, projections and expectations may constitute “forward lookingstatements” within the meaning of applicable laws and regulations. Actual results may differ materially fromthose either expressed or implied.

For and on behalf of the BoardChennai P.S. JAYARAMAN M.K. KUMARApril 25, 2006 Managing Director Director

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Annexure to the Directors’ ReportInformation under Section 217(1)(e) of the Companies Act, 1956 read with Companies (Disclosure ofparticulars in the Report of Board of Directors) Rules, 1988 and forming part of the Directors’ Report forthe year ended March 31, 2006.

1. CONSERVATION OF ENERGY:

a. Measures taken:

The company continues to accord high priority to conservation of energy. Details of some of themeasures undertaken during the year to optimise energy conservation are:

1. By Installing feed pre-heaters at a cost of Rs.32 lacs in Monomer section, steam saving of28 MT per day was achieved.

2. Freon compressor in Monomer section was replaced with a lower capacity compressor at a costof Rs.17 lacs. This has resulted in a reduction in power consumption to the extent of 900 Kwhper day.

3. Ethylene Di Chloride (EDC) production through Oxy Chlorination process is increased withimprovement in catalyst and air compressor. This has led to reduction in specific powerconsumption norm by 46 Kwh per Metric Ton of EDC.

4. Reduction in circuit voltage was achieved by eliminating high voltage cells resulting in energysavings at our Caustic Soda plant at Mettur. Combined with the optimum production of CausticLye helped in achieving better power consumption norms, resulting in reduction of 19.70 lacsKwh per annum.

5. In Chloromethanes plant, process modifications were carried out by judiciously switching overto vapour feed in specific product separation column from the erstwhile condensed productfeed. Modification of steam traps, optimization of reflux ratios in columns and resultant reducedreflux flow has helped in reducing the operating pressure of the column. This has resulted inlower steam consumption to the extent of 450 Kgs per Metric Ton of Chloromethanes.

b. Additional investment proposals:

Presently Caustic Soda plant at Mettur is operated with Mercury based technology. It has beendecided to convert the technology from Mercury to Membrane. Post conversion of technology therewill be a savings in power consumption in Caustic soda plant.

c. Impact of measures taken under (a) above:

Substitution/ Savings inReduction in energy cost of

consumption productionPer Annum (Rs.Lacs)

1. Reduction in steam consumption byinstallation of pre heater in Monomer section Steam 9520 MT 102

2. Reduction in energy consumption byreplacing the compressor Power 3.06 lac Kwh 11

3. Reduction in energy consumption byimprovement in catalyst and air compressor Power 14.24 lac Kwh 51

4. Reduction in energy consumption byelimination of high voltage cells caustic plant Power 19.70 lac Kwh 70

5. Reduction in steam consumption by carryingout process modifications in Chloromethanesseparation columns Steam 15750 MT 169

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2. TECHNOLOGY ABSORPTION, ADAPTATION AND INNOVATION

Technology has been fully absorbed.

RESEARCH AND DEVELOPMENT (R&D)

The company’s R&D laboratory is engaged in carrying out process/ product improvement programmes.In particular, the areas of focus have been on import substitution, optimising the utilisation of availableresources, evolving alternative and more economic processes for the existing range of products andenvironment conservation.

3. FOREIGN EXCHANGE EARNINGS AND OUTGO

(Rs.Lacs)

a. Foreign exchange outgo 13948.22

b. Foreign exchange earnings 2166.12

For and on behalf of the BoardChennai P. S. JAYARAMAN M.K. KUMARApril 25, 2006 Managing Director Director

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Annexure IA. POWER AND FUEL CONSUMPTION 2005-06 2004-051) Electricity

(a) PurchasedUnits – lacs kwh 576.65 806.20Amount – Rs. lacs 2,051.56 2,651.76Rate per unit – Rs. 3.56 3.29

(b) Own GenerationI) Through generators

a) With LSHS as fuelUnits – lacs kwh 2,369.86 2,435.49Units per KG of LSHS or equivalent 4.10 4.28Cost per unit – Rs. 3.95 2.81

b) With Natural Gas as fuelUnits – lacs kwh 554.87 141.45Cost per unit – Rs. 1.07 1.11

II) Through turbinesSteam turbineUnits – lacs kwh 8.51 24.76Windmill powerUnits – lacs kwh 100.51 107.30

2) Furnace oilQuantity – KL 10,055.09 10,157.85Amount – Rs. lacs 1,500.21 1,171.58Average – Rs./ KL 14,920 11,534

3) DieselQuantity – KL 135.22 161.15Amount – Rs. lacs 42.64 41.72Average – Rs./ KL 31,534 25,890

4) LSHSQuantity – MT 72,308.54 71,865.77Amount – Rs. lacs 11,394.26 8,724.71Average – Rs./ MT 15,758 12,140

5) Natural gasQuantity – 1000 Scm 122.19 32.73Amount – Rs. lacs 516.76 138.39Average – Rs./ Scm 4.23 4.23

6) Superior keroseneQuantity – KL 8,727.07 7,303.79Amount – Rs. lacs 1,990.01 1,317.21Average – Rs./ KL 22,803 18,035

7) Others – Internal generationMethane gas – lac M3 2.01 29.49Hydrogen – MT 579 664

B. CONSUMPTION PER UNIT OF PRODUCTION1) PVC resin

Electricity – (Kwh) 1,192 1,302Superior kerosene – (ltr) 145 149Furnace oil – (Kg) 394 393

2) Caustic sodaElectricity – (Kwh) – Mercury cell plant 3,193 3,242Electricity – (Kwh) – Membrane cell plant 2,532 2,572

3) ChloromethanesElectricity – (Kwh) 420 421LSHS – (Kg) 214 225

NOTE:Electricity for Caustic soda is for electrolysis. LSHS denotes the LSHS equivalent of steam consumption.

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Corporate GovernanceThe Securities and Exchange Board of India (SEBI) has introduced a code of corporate governance for listedcompanies which is implemented through the Listing Agreements with the Exchanges with which the companyis listed. The company has complied with the corporate governance requirements set out in Clause 49 of theListing Agreement.1. Brief statement on company’s philosophy on code of governance

The company believes that good corporate governance leads to corporate growth and long termgain in shareholder value. The company is committed to maintaining the highest standards ofcorporate governance in its conduct towards shareholders, employees, customers, suppliers andother stake holders.

2. Board of DirectorsComposition

The Board of Directors consists of 7 Non-executive Directors, of whom five are independent, andone wholetime Director. The composition of the Board is in conformity with the Listing Agreement.

Board Meetings

During the year 2005-06, the Board met six times on 15th April 2005, 8th June 2005, 30th July2005, 21st October 2005, 16th January 2006, and 21st February 2006.The following table gives details of the Directors, attendance of the Directors at the board meetingsand at the last annual general meeting, number of memberships held by Directors in Board/Committees of various companies as on 31st March 2006.

Name and number Category Attendance Number of directorshipsof equity shares, if Particulars in public companies and

any, held in the Committee Memberships/company Chairmanships (only Audit

Committee and Shareholders/Investors Grievance

Committees considered)

Board Last Director- Committee CommitteeMeetings AGM ships Member- Chairman-

held on ships ships8th June

2005

Mr P S Jayaraman Managing Director, Executive 6 Yes 3 2 1Mr M K Kumar Non-executive, Independent 6 Yes 3 2 2Mr C H Mahadevan* Non-executive, Independent 6 Yes 1 1 –Mr S V Mony Non-executive, Independent 1 No @ 1 – –(appointed at theBoard meeting heldon 16th January 2006)Mr B Natraj (appointed Non-executive 2 No @ 13 2 1at the meeting held on16th January 2006)Mr V K Parthasarathy Non-executive, Independent 6 Yes 3 2 –(20,900 equity shares)Mr M N Radhakrishnan Non-executive 5 No @ 13 5 2(360 equity shares)Mr M S Sekhar Non-executive, Independent 6 Yes 1 1 –* Represents Life Insurance Corporation of India, a shareholder of the company.@ Appointed after the last AGM.

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The following director resigned from the Board of Directors of the company in July 2005:

Name Category Attendance at the Attendance at theBoard meetings last AGM held on

8th June 2005

Mr V V Subramanian Non-executive 2 Yes

Board Procedure

The Board meets at least once a quarter and the interval between two meetings was not more thanfour months.

The Board is presented with extensive information on vital matters affecting the working of thecompany and risk assessment and mitigation procedures. Among others, this includes:• Operating plans, capital budgets and updates and reviews thereof,• quarterly results of the company and its business segments,• financial statements such as cash flow, inventories, sundry debtors and/ or other liabilities or

claims of substantial nature,• performance against operating plans,• opportunities for expansion, modernisation, new projects, acquisition and disinvestments,• risks faced and steps taken to mitigate/ minimise the risks,• minutes of meeting of audit committee and other committees,• details of any joint venture or collaboration agreement,• developments in the industrial and human relations front,• important show cause, demand and penalty notices,• materially relevant defaults in financial obligations to and by the company or substantial non

payment for goods sold by the company,• significant effluent or pollution problems,• any issue which involves possible public or product liability claims of a substantial nature,• foreign exchange exposure and steps taken by management to limit the risks of adverse exchange

rate movement,• proposals for diversification, investment, disinvestments and restructuring, and• compliance of all laws applicable to the company including requirements of Listing Agreement

with the Stock Exchanges and steps taken to rectify instances of non compliances, if any.

3. Audit Committee

The company’s Audit Committee consists of four Non-executive Directors – 3 (three) of them beingindependent. The composition of the Committee and the qualification of the members of the Committeeare in compliance with the requirements of Clause 49 of the Listing Agreement.

During the year, the Audit Committee was reconstituted consequent to the changes in the Board ofDirectors. Mr M N Radhakrishnan in the place of Mr V V Subramanian, and Mr M S Sekhar were co-opted.

The members of the Committee are Mr M K Kumar, (Chairman), Mr V K Parthasarathy,Mr M N Radhakrishnan and Mr M S Sekhar.

During 2005-06, the Audit Committee met four times –15th April 2005, 30th July 2005, 21st October2005 and 16th January 2006. All the members attended the meetings. The interval between twomeetings convened was not more than four months.

The Audit Committee adheres to the SEBI guidelines in terms of quorum for its meetings, functioning,role and powers as also those set out in the Companies Act, 1956.

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4. Remuneration Committee

The company’s Remuneration Committee consists of three Non-executive independent directors.

The members of the Committee are Mr M K Kumar (Chairman), Mr C H Mahadevan andMr V K Parthasarathy.

The scope/ role of the Remuneration Committee is to recommend to the Board of Directors theremuneration payable to the Wholetime Directors of the company as and when they come for review.

Remuneration of Directors

The compensation of the wholetime directors comprises of a fixed component and commission. Thewholetime directors are not paid sitting fees for any board/ committee meetings attended by them.

Non-executive Directors are paid sitting fees of (i) Rs.10,000 for every meeting of the Board and AuditCommittee (the fees was enhanced from Rs.5,000 to Rs.10,000 effective 16th January 2006), (ii)Rs.5,000 for every meeting of Shareholders/ Investors Grievance Committee and RemunerationCommittee, and (iii) Rs.500 for every meeting of Share and Debenture Committee, attended by them.

During the year 2005-06, the Remuneration Committee met once on 30th July 2005 and recommendedto the Board the re-appointment of and remuneration payable to Mr P S Jayaraman, Managing Director,for a further period of three years from 1st April 2005. All the members of the Committee attendedthe meeting.

Details of remuneration paid or payable to Directors for the year ended 31st March 2006:

Director Sitting Fees Salary Retirement Perquisites Commission TotalBenefits

Rs. Rs. Rs. Rs. Rs. Rs.

Mr P S Jayaraman Nil 42,63,798 3,06,000 3,689 Nil 45,73,487

Mr M K Kumar 75,000 Nil Nil Nil Nil 75,000

Mr C H Mahadevan 50,000 Nil Nil Nil Nil 50,000

Mr S V Mony 10,000 Nil Nil Nil Nil 10,000

Mr B Natraj 20,000 Nil Nil Nil Nil 20,000

Mr V K Parthasarathy 76,500 Nil Nil Nil Nil 76,500

Mr M N Radhakrishnan 54,500 Nil Nil Nil Nil 54,500

Mr M S Sekhar 55,000 Nil Nil Nil Nil 55,000

Mr V V Subramanian 17,000 Nil Nil Nil Nil 17,000

5. Shareholders/ Investors Grievance Committee

The Board of Directors has constituted a Shareholders/ Investors Grievance Committee, which looksinto shareholders and investors grievances. The members of the Committee are Mr M K Kumar(Chairman), Mr C H Mahadevan and Mr P S Jayaraman, Managing Director. The Compliance officeris Mr P U Aravind, Secretary.

During the year 2005-06, the Shareholders/ Investors Grievance Committee met once on 16th January2006 and all the members attended the meeting.

During the year 2005-06, the company received 20 complaints from the investors and all of them wereresolved to the satisfaction of the investors concerned. As on 31st March 2006 there were no investorgrievances pending for a period exceeding one month and no transfers were pending for approval.

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6. Code of ConductThe company’s Code of Conduct has been complied with by all the members of the Board and selectemployees of the company.

The company has in place a Prevention of Insider Trading Code based on SEBI (Insider Trading)Regulations, 1992. This code is applicable to all Directors and designated employees. The codeensures prevention of dealing in shares by persons having access to unpublished price sensitiveinformation.

7. General Body MeetingsThe last three Annual General Meetings of the company were held as under:

Year Location Date Time Number of specialresolutions passed

2002-03 Sathguru Gnanananda Hall,Narada Gana Sabha Trust Complex,314, T T K Road, Chennai 600018 10.09.2003 10.00 AM 3

2003-04 Sathguru Gnanananda Hall,Narada Gana Sabha Trust Complex,314, T T K Road, Chennai 600018 08.06.2004 10.30 AM 1

2004-05 Sathguru Gnanananda Hall,Narada Gana Sabha Trust Complex,314, T T K Road, Chennai 600018 08.06.2005 10.00 AM -

Except for one special resolution which was passed by postal ballot at September 2003 AnnualGeneral Meeting, all special resolutions were passed by show of hands.

At the forthcoming AGM, there is no item on the Agenda that needs approval by postal ballot.During the year 2005-06, the shareholders of the company, through postal ballot process approved thefollowing special resolutions:

Votes for the Votes against theSubject Name of resolution (Number resolution (Number

Scrutineer of shares of of shares ofRs.10 each and %) Rs.10 each and %)

Re-appointment of Mr P S Jayaraman B Ravi 4,09,10,613 13,937as Managing Director of the company 99.97% 0.03%for 3 years from 1st April 2005

Sub-division of each equity share of B Ravi 3,66,60,509 22,275Rs.10 of the company into 10 equity 99.94% 0.06%shares of Re.1 each and consequentialamendments to the capital clauses inthe Memorandum and Articles ofAssociation of the company

8. DisclosuresIn preparation of the financial statements, the company has followed the Accounting Standards issuedby the Institute of Chartered Accountants of India. The significant accounting policies which areconsistently applied have been set out in the Notes to the Accounts.

Related party transactions during the year have been disclosed as required under Accounting Standard18 issued by the Institute of Chartered Accountants of India. Details of related party transactions wereperiodically placed before the Audit Committee. These transactions are not likely to have any conflictwith the company’s interest.

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Business risk evaluation and managing such risks is an ongoing process within the organisation. TheBoard is regularly briefed of risks assessed and the measures adopted by the company to mitigate therisks.

No strictures/ penalties have been imposed on the company by the Stock Exchanges or SEBI or anystatutory authority on any matters related to the capital market during the last 3 years.

The company’s code of conduct has clearly laid down procedures for reporting unethical behaviour,actual or suspected fraud or violation of the ethics policies. No employee of the company was deniedaccess to the Audit Committee.

Of the non mandatory requirements relevant to the company, training of the Board Members andmechanism for evaluation of non-executive Board members have not been put in place. Of the fiveindependent directors, only one director has a tenure exceeding nine years. The half yearly declarationof financial performance is not sent individually to each household of the shareholders but posted onWebsite- www.sanmargroup.com and on the Electronic Data Information Filing and Retrieval (EDIFAR)website maintained by National Informatics Centre.

9. Information pursuant to Clause 49 IV(G) of the Listing Agreement: A brief resume and name of thecompanies in which Directors, who are being re-appointed, hold Directorships/ CommitteeMemberships are given below:

1. Mr C H Mahadevan, 64, is a M.Sc (Statistics) and a Fellow of The Insurance Institute of India. Hejoined the Life Insurance Corporation of India in 1965 and retired from service as ExecutiveDirector.

Mr Mahadevan holds the following Directorships/ Committee Memberships. Mr Mahadevan has noshareholding in the company.

Chemplast Sanmar Limited Director

Committee positionChemplast Sanmar Limited Remuneration Committee – Member

Shareholders/ InvestorsGrievance Committee – Member

2. Mr V K Parthasarathy, 67, a Commerce graduate has extensive experience in diverse fields. He hasheld various positions in different businesses such as Shipping, Sugar, Fertilizer, Pesticides, SecuritiesTrading and Merchant Banking. He has good exposure in financial and securities market.

Mr Parthasarathy holds the following Directorships/ Committee Memberships. Mr Parthasarathyholds 20,900 equity shares of the company.


Reed Relays & Electronics India Limited Director

Indchem Software Technologies Limited Director

Committee Position

Chemplast Sanmar Limited Audit Committee – MemberShare & Debenture Committee – MemberRemuneration Committee – Member

Indchem Software Technologies Limited Audit Committee – Member

3. Mr M S Sekhar, 57, is a Chartered Accountant and Post graduate Diploma in Business Management,Indian Institute of Management, Kolkata. He has over three decades of industrial experience andhas served in various positions from Finance Manager to Managing Director and is currently aConsultant in the field of Corporate Governance.

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Mr Sekhar holds the following Directorships/ Committee Memberships. Mr Sekhar has no shareholdingin the company.Chemplast Sanmar Limited Director

Three D Management Services Private Limited Managing Director

Committee Position

Chemplast Sanmar Limited Audit Committee – Member

4. Mr S V Mony, 68, is a B.Sc (Honours) and F.C.I.I (London). Mr Mony has over four decades ofexperience in the insurance and general management field. He was the Chairman of GeneralInsurance Corporation of India, and has held Chairmanship/ directorship in institutions such as AsianReinsurance Corporation, Bangkok, LIC of India, Securities Trading Corporation, UTI Bank and CRISIL.He was a Regional Insurance Advisor to 13 Caribbean countries in West Indies with the associationof Government of India and UNCTAD, Geneva. He was a member of Indian delegation representingIndia on Financial Services in the Uruguay Round Talks.

Mr Mony holds the following Directorships. Mr Mony has no shareholding in the company.


Medi Assist India Private Limited Director

5. Mr B Natraj, 59, a Chartered Accountant with over three decades of experience in the financialand general management field. He was a partner of A.F.Ferguson & Co (AFF), Chartered Accountantsfor over a decade. He has worked with a Middle East conglomerate and Reliance Life InsuranceCompany Limited. He has been associated with the Sanmar Group for over 15 years and handledvarious functions including Finance, HR & Personnel, Legal and has been managing the Group’srelationship with its joint venture partners.

Mr Natraj holds the following Directorships/ Committee Memberships. Mr Natraj has no shareholdingin the company.

Asco (India) Limited DirectorBS&B Safety Systems (India) Limited DirectorCabot Sanmar Limited DirectorChemplast Sanmar Limited DirectorFisher Sanmar Limited DirectorFlowserve Sanmar Limited DirectorSanmar Engineering Corporation Limited DirectorSanmar Engineering Services Limited DirectorSanmar Foundries Limited DirectorSanmar Shipping Limited DirectorSanmar Speciality Chemicals Limited DirectorSensortronics Sanmar Limited DirectorXomox Sanmar Limited Director

Committee PositionCabot Sanmar Limited Audit Committee – MemberSanmar Foundries Limited Audit Committee – ChairmanSanmar Shipping Limited Remuneration Committee – Member

6. Mr M N Radhakrishnan, 62, is a Mechanical Engineer with over four decades of experience ingeneral management field. He has been with the Sanmar Group for over 25 years. He had beenresponsible for growth of Sanmar Engineering Corporation and was actively involved in establishingand implementing the joint ventures forming part of Sanmar Engineering Corporation.

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Mr Radhakrishnan holds the following Directorships/ Committee Memberships. Mr Radhakrishnanholds 360 equity shares of the company.Asco (India) Limited DirectorBS&B Safety Systems (India) Limited DirectorCabot Sanmar Limited DirectorChemplast Sanmar Limited DirectorFisher Sanmar Limited DirectorFlowserve Sanmar Limited DirectorSanmar Engineering Corporation Limited ChairmanSanmar Engineering Services Limited DirectorSanmar Shipping Limited DirectorSanmar Speciality Chemicals Limited DirectorSensortronics Sanmar Limited DirectorTyco Sanmar Limited DirectorXomox Sanmar Limited Director

Committee PositionCabot Sanmar Limited Audit Committee – MemberChemplast Sanmar Limited Audit Committee – Member

Share & Debenture Committee – MemberCommittee of Directors – Member

Sanmar Shipping Limited Audit Committee – ChairmanRemuneration Committee – Chairman

Sanmar Speciality Chemicals Limited Audit Committee – ChairmanTyco Sanmar Limited Audit Committee – Member

10. Means of communicationThe quarterly/ half yearly/ annual results are published in Financial Express and Dina Malar. Thefinancial results of the company are posted on Website – www.sanmargroup.comAs per Clause 51 of the Listing Agreement financial results and shareholding pattern are filed on theElectronic Data Information Filing and Retrieval (EDIFAR) website maintained by National InformaticsCentre. These are not sent individually to the shareholders.There has been no presentation to analysts.Management Discussion and Analysis highlighting individual businesses has been included in theDirectors’ Report.

11. General Shareholder information

Registered Office : 9, Cathedral Road, Chennai 600 086Web: www.sanmargroup.comE-mail: [email protected]

Annual General Meeting

Day : FridayDate : 02.06.2006Time : 10.00 A.M.Venue : Sathguru Gnanananda Hall,

Narada Gana Sabha Trust Complex,314, T T K Road, Chennai 600018.

Financial Year : 1st April to 31st March

Date of Book Closure

The Register of Members of the company will be closed from Thursday, the 25th May 2006 to Friday,the 2nd June 2006, both days inclusive, for the purpose of Annual General Meeting.

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Stock Split

To enhance the liquidity of the company’s shares on the Stock Exchanges and facilitate easier accessibilityto the company’s equity shares by small investors, each equity share of Rs.10 of the company was splitinto 10 equity shares of Re.1 each.New share certificates with the face value of Re.1 each in lieu of old equity share certificates of facevalue of Rs.10 each have been issued to the persons who held the company’s shares in physical formand whose names appeared in the Register of Members of the company on the record date fixed forthis purpose i.e., 15th March 2006. The share certificate(s) of the company in respect of the pre splitholding stood cancelled with effect from 15th March 2006.New folio numbers have been allotted to all shareholders holding share(s) in physical form. Shareholdersare requested to quote the new folio number in all future correspondence.For members holding shares in demat form, new equity shares of face value of Re.1 each in lieu ofold equity shares of Rs.10 each of the company have been issued by crediting the demat account ofthe respective beneficiary holders (including persons who have opted for demat) whose names appearedin the List of Beneficiaries submitted by National Securities Depository Limited and Central DepositoryServices (India) Limited on 15th March 2006.The new ISIN code of the company is INE488A01027. The old ISIN code INE488A01019 of thecompany has been deactivated.

Listing of Equity shares on Stock ExchangesStock Code

(1) Madras Stock Exchange Limited ChemplastExchange BuildingsNew No. 30 (Old No.11), Second Line Beach, Chennai 600001

(2) Bombay Stock Exchange Limited 506355Phiroz Jeejeebhoy Towers, Dalal Street, Fort, Mumbai 400001

(3) National Stock Exchange of India Limited Chemplast EQExchange Plaza, Plot No. C/1, G Block, Bandra-Kurla Complex,Bandra (E), Mumbai 400051

The listing fee has been paid up to date to these Stock Exchanges.

Market Price Data

Pre Stock Split:

Month Bombay Stock Exchange National Stock Exchange

High(Rs.) Low(Rs.) High(Rs.) Low(Rs.)

April 2005 51.00 38.50 50.80 37.60May 2005 73.30 43.50 73.65 43.15June 2005 76.00 58.70 76.00 58.65July 2005 110.70 65.50 111.05 65.55August 2005 104.05 84.60 105.80 84.50September 2005 105.35 87.00 106.00 86.10October 2005 91.50 67.50 94.00 66.00November 2005 91.00 78.90 91.80 78.50December 2005 87.95 74.50 88.00 70.60January 2006 103.00 81.00 103.35 80.60February 2006 95.00 80.00 93.00 80.10March 2006(till 7th March 2006) 97.35 86.10 97.85 86.20

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Post Stock Split:

Month Bombay Stock Exchange National Stock Exchange

High(Rs.) Low(Rs.) High(Rs.) Low(Rs.)

March 2006(from 8th March 2006till 31st March 2006) 9.80 7.60 9.70 7.60

0

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Equity Pr BSE SENSEX NSE NIFTY

Relative Performance Chemplast vs BSE Sensex & NSE Nifty

Inde

x

Chemplast Share Price 100 = 8.85BSE SENSEX 100 = 10508.85NSE NIFTY 100 = 3116.70

POST SPLIT

0

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-06

Equity Pr BSE SENSEX NSE NIFTY

Relative Performance Chemplast vs BSE Sensex & NSE Nifty

Inde

x

Chemplast Share Price 100 = 45.10BSE SENSEX 100 = 6154.44NSE NIFTY 100 = 1902.50

PRE SPLITUpto 7th March 06

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Code of conduct for prevention of Insider TradingThe company has framed a Code of Conduct for Prevention of Insider Trading based on SEBI (InsiderTrading) Regulations, 1992. This code is applicable to all Directors and designated employees. Thecode ensures the prevention of dealing in shares by persons having access to unpublished pricesensitive information.

Registrar and Transfer AgentsIntegrated Enterprises (India) Limited,2nd Floor, Kences Towers, No.1, Ramakrishna Street,North Usman Road, T Nagar, Chennai 600 017Telephone: 28140801-03 Fax: 28142479Contact person: K Suresh Babu, General ManagerE-mail: [email protected]

Share Transfer System

A Committee of Board approves share transfers in the physical form on a monthly basis.The distribution of shareholding and shareholding pattern are given below:

Distribution of Shareholding

Shares Shareholders % No. of shares held %Up to 500 4,873 28.31 11,19,848 0.23501 - 1000 3,197 18.57 28,34,141 0.591001 - 2000 3,413 19.83 51,72,345 1.082001 - 3000 1,661 9.65 42,29,541 0.883001 - 4000 805 4.68 28,61,500 0.604001 - 5000 815 4.74 38,86,106 0.815001 - 10000 1,447 8.41 1,06,30,635 2.2210001 & above 1,001 5.81 44,90,85,324 93.59TOTAL 17,212 100.00 47,98,19,440 100.00

Shareholding pattern

Category No. of shares heldPercentage ofshareholding

A. Promoters’ holding1. Indian Promoters 35,98,64,580 75.00

Foreign Promoters – –2. Persons acting in concert – –

Sub-total 35,98,64,580 75.00B. Non Promoters’ Holding3. Institutional Investors

a) Mutual Funds & UTI 3,89,500 0.08b) Banks, Financial Institutions, 5,35,99,710 11.18

Insurance Companiesc) Foreign Institutional Investors 22,600Sub-total 5,40,11,810 11.26

4. Othersa) Private Corporate Bodies 93,58,094 1.95b) Indian Public 5,56,26,756 11.59c) NRIs/ OCBs 8,99,810 0.19d) Foreign Nationals 58,390 0.01Sub-total 6,59,43,050 13.74

GRAND TOTAL 47,98,19,440 100.00

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Dematerialisation of Shares

The shares of the company are compulsorily traded in dematerialised form. The Code Number allottedby National Securities Depository Limited and Central Depository Services (India) Limited isINE488A01027.

Outstanding GDRs/ ADRs/ Warrants or Convertible Bonds

There are no outstanding convertible warrants/ instruments.

Plant Locations

Mettur Dam, Tamil Nadu : PVC

: Chlorochemicals:Caustic Soda, Chlorine,Chlorinated Solvents,Refrigerant Gases andSilicon Wafers

Krishnagiri & Panruti, Tamil Nadu : Industrial Alcohol

Vedaranyam, Tamil Nadu : Industrial Salt

Karaikal, Pondicherry : Caustic Soda & Chlorine

Investor Correspondence

(i) For all matters relating to : Integrated Enterprises (India) Limitedshares, dividends, 2nd Floor, Kences Towersannual report No.1, Ramakrishna Street

North Usman Road, T Nagar,Chennai 600017Telephone : 28140801-03Fax : 28142479E-mail : [email protected] Person: K Suresh Babu,General Manager

(ii) For any other general matters : The Secretaryor in case of any difficulty/ Chemplast Sanmar Limitedgrievance. 9, Cathedral Road, Chennai 600086

Telephone : 28128500/ 2812872328128724/ 2812872228128720

Fax : 28112627E-mail : [email protected] (or)

[email protected]

DECLARATION

As Provided under Clause 49 of the Listing Agreement with the Stock Exchanges, The Board Members andSelect employees have confirmed compliance with the Code of Conduct.

For Chemplast Sanmar LimitedP.S. JAYARAMAN

April 25, 2006 Managing Director

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Auditors’ Certificate on compliance with the conditions of Corporate Governanceunder Clause 49 of the Listing Agreements

1. We have examined the compliance with the conditions of Corporate Governance by ChemplastSanmar Limited (the company) for the year ended March 31, 2006 with the relevant records anddocuments maintained by the company and furnished to us for our examination and the report onCorporate Governance as approved by the Board of Directors.

2. The compliance with conditions of corporate governance is the responsibility of the management. Ourexamination was limited to procedures and implementation thereof, adopted by the company forensuring the compliance with the conditions of the Corporate Governance. It is neither an audit noran expression of opinion on the financial statements of the company.

3. Based on the aforesaid examination and according to information and explanations given to us, wecertify that the company has complied with the conditions of Corporate Governance as stipulated inClause 49 of the Listing Agreements with the Stock Exchanges.

4. We further state that such compliance is neither an assurance as to the future viability of the companynor the efficiency or effectiveness with which the management has conducted the affairs of thecompany.

S. DATTAPartner

(Membership No.F14128)For and on behalf of

Chennai PRICE WATERHOUSE & Co.April 25, 2006 Chartered Accountants

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Auditors’ ReportTo the Members ofCHEMPLAST SANMAR LIMITED

1. We have audited the attached Balance Sheet of Chemplast Sanmar Limited as at March 31, 2006 andthe related Profit and Loss Account and Cash Flow Statement for the year ended on that date, whichwe have signed under reference to this report. These financial statements are the responsibility of thecompany’s management. Our responsibility is to express an opinion on these financial statementsbased on our audit.

2. We have conducted our audit in accordance with auditing standards generally accepted in India.Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An audit includes examining, ona test basis, evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believe that our audit provides areasonable basis for our opinion.

3. As required by the Companies (Auditor’s Report) Order, 2003 as amended by the Companies (Auditor’sReport) (Amendment) Order, 2004, issued by the Government of India in terms of Section 227(4A) ofthe Companies Act, 1956 of India (the Act) and on the basis of such checks of the books and recordsof the company as we considered appropriate and according to the information and explanationsgiven to us, we set out in the Annexure a statement on the matters specified in paragraphs 4 and 5of the said Order.

4. Further to our comments in the Annexure referred to in paragraph 3 above, we report that:

(a) we have obtained all the information and explanations which to the best of our knowledge andbelief were necessary for the purposes of our audit.

(b) in our opinion, proper books of account as required by law have been kept by the company sofar as appears from our examination of those books.

(c) the Balance Sheet, Profit and Loss Account and Cash Flow Statement dealt with by this report arein agreement with the books of account.

(d) in our opinion, the Balance Sheet, Profit and Loss Account and Cash Flow Statement dealt withby this report have been prepared, in all material respects, in compliance with the applicableaccounting standards referred to in Section 211 (3C) of the Act.

(e) on the basis of written representations received from the directors and taken on record by the Boardof Directors, none of the directors is disqualified as on March 31, 2006 from being appointed asa director in terms of Section 274 (1)(g) of the Act.

(f) in our opinion and to the best of our information and according to the explanations given to us,the said financial statements together with the notes thereon and attached thereto give in theprescribed manner the information required by the Act and also give a true and fair view inconformity with the accounting principles generally accepted in India:(i) in the case of the Balance Sheet, of the state of affairs of the company as at March 31, 2006;(ii) in the case of the Profit and Loss Account, of the profit for the year ended on that date; and(iii) in the case of the Cash Flow Statement, of the cash flows for the year ended on that date.

S. DATTAPartner



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Annexure to the Auditors’ Report

(Referred to in paragraph 3 of our report of even date to the members of Chemplast Sanmar Limited on thefinancial statements for the year ended March 31, 2006)

(i) (a) The company has maintained proper records to show full particulars including quantitative detailsand situation of its fixed assets.

(b) The fixed assets of the company have been physically verified during the year by the managementand no material discrepancies between the book records and the physical inventory have beennoticed.

(c) No substantial part of fixed assets of the company has been disposed of during the year. In ouropinion, the frequency of verification is reasonable.

(ii) (a) The inventories of the company at all its locations have been physically verified by the managementduring the year. In our opinion, the frequency of verification is reasonable.

(b) In our opinion, the procedures of physical verification of inventories followed by the managementare reasonable and adequate in relation to the size of the company and nature of its business.

(c) The company has maintained proper records in respect of inventories and the discrepancies betweenthe physical inventories and the book records, which have been properly dealt with in the booksof account, were not material.

(iii) (a) The company has not granted any loans, secured or unsecured, to companies, firms or other partiescovered in the register maintained under Section 301 of the Act.

(b) The company has not taken any loans, secured or unsecured, from companies, firms or otherparties covered in the register maintained under Section 301 of the Act.

(iv) In our opinion, there is an adequate internal control system commensurate with the size of thecompany and the nature of its business for the purchase of inventories and fixed assets and for thesale of goods. We have not observed any major weaknesses in the aforesaid internal control systemduring the course of our audit.

(v) (a) In our opinion, the particulars of contracts or arrangements referred to in Section 301 of the Acthave been entered in the register required to be maintained under that section.

(b) In our opinion, the transactions in pursuance of such contracts or arrangements have been madeat prices which are reasonable having regard to the prevailing market prices.

(vi) The company has not accepted any deposits from the public within the meaning of Sections 58A and58AA of the Act and the rules framed thereunder.

(vii) In our opinion, the company has an internal audit system commensurate with its size and nature ofits business.

(viii) On the basis of the records produced, we are of the opinion that, prima facie, the cost records andaccounts prescribed by the Government of India under Section 209(1)(d) of the Act in respect ofindustrial alcohol, ethylene di chloride, caustic soda, chloromethanes and poly vinyl chloride havebeen maintained. However, we are not required to and have not carried out any detailed examinationof such accounts and records.

(ix) (a) The company has been regular in depositing undisputed statutory dues including Provident Fund,Investor Education and Protection Fund, Employees’ State Insurance, Income Tax, Sales Tax, WealthTax, Service Tax, Customs Duty, Excise Duty, Cess and other material applicable statutory dues withthe appropriate authorities in India.

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(b) According to the records produced, at the end of the financial year there were no dues of SalesTax, Income Tax, Customs Duty, Wealth Tax, Service Tax, Excise Duty and Cess which have notbeen deposited on account of any dispute except as set out below:

Name of the Statute Nature of the Amount Forum where dispute is pendingdues Rs. lacs

Tamil Nadu General Sales Tax Act, 1955 Sales Tax/ Penalty 180 Sales Tax Appellate Tribunal

Central Sales Tax Act, 1956 Sales Tax/ Penalty 303 Appellate Assistant Commissioner -Commercial Taxes

Central Sales Tax Act, 1956 Sales Tax/ Penalty 112 Commercial Tax Officer

Central Excise Act, 1944 Excise Duty 336 Customs, Excise and Service Tax Tribunal

Central Excise Act, 1944 Excise Duty 94 Commissioner of Central Excise

Central Excise Act, 1944 Excise Duty 4 Madras High Court

Central Excise Act, 1944 Excise Duty 3 Assistant Commissioner of Central Excise

(x) The company has no accumulated losses as at March 31, 2006 and it has not incurred any cash lossduring the financial year ended on that date or in the immediately preceding financial year.

(xi) According to the records produced, the company has not defaulted in repayment of its dues to anybank or financial institution as at the balance sheet date.

(xii) The company has not granted any loans and advances on the basis of security by way of pledge ofshares, debentures and other securities.

(xiii) The company has not given any guarantee for loans taken by others from banks and financial institutionsduring the year.

(xiv) On the basis of review of utilisation of funds on an overall basis, in our opinion, the term loans takenby the company were applied for the purposes for which the loans were obtained.

(xv) On the basis of review of utilisation of funds on an overall basis, in our opinion, the funds raised onshort term basis have not been used for long term investment.

(xvi) The company has not made any preferential allotment of shares during the year to parties andcompanies covered in the register maintained under Section 301 of the Act.

(xvii) The company has not issued any debentures during the year.

(xviii) During the course of our examination of the books of account carried out in accordance with thegenerally accepted auditing practices in India, we have neither come across any instance of fraud onor by the company, noticed or reported during the year, nor have we been informed of such case bythe management.

(xix) Clauses (xiii), (xiv) and (xx) of the aforesaid Order are not applicable to the company.

S. DATTAPartner



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Five Year Summary(Rs.Crores)

Particulars 2005-06 2004-05 2003-04 2002-03 2001-02

Results for the year

Sales, freight earnings and other income 699.49 612.37 581.43 540.03 512.61

Profit for the year 46.02 30.60 8.22 24.45 33.55

Profit after tax 36.71 25.68 4.62 20.63 20.82

Dividend (Equity and Preference) – 0.39 2.13 6.48 17.64

Year end position

Capital Employed

Fixed Assets 473.07 392.09 361.36 350.74 252.05

Net Current Assets 71.27 56.88 87.92 67.18 163.15

544.34 448.97 449.28 417.92 415.20

Sources of funds

Shareholders’ funds

Equity share capital 47.98 47.98 47.98 35.18 35.18

Preference share capital – – 20.50 22.50 29.50

Reserves 179.91 142.50 117.41 78.86 61.92

227.89 190.48 185.89 136.54 126.60

Deferred Tax Liability – Net 45.16 49.02 49.00 47.30 48.29

Borrowed funds 271.29 209.47 214.39 234.08 240.31

544.34 448.97 449.28 417.92 415.20

Equity share statistics (*)

(for face value of Re. 1/- per share) (Rs. per share)

Earnings 0.77 0.53 0.06 0.50 0.48

Dividend – – – 0.10 0.40

Book value 4.75 3.97 3.45 3.24 2.76

Figures have been regrouped where required.

(*) Consequent upon the stock split effected during the year by the company by subdividing each equity shareof Rs.10/- into 10 equity shares of Re.1/- each, the equity share statistics of previous years have been restated.

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Profit and Loss Account for the year ended March 31, 2006Schedule 2005-06 2004-05

Rs.Lacs Rs.LacsINCOMESales 1 67601.29 60303.76Less: Excise duty 8882.60 7983.69

58718.69 52320.07Other income 2 2347.61 933.60

61066.30 53253.67

EXPENDITURECost of goods sold 3 39936.98 33062.03Salaries, wages and amenities to staff 4 4776.74 5083.91Repairs and maintenance 5 2707.08 3400.62Other expenses 6 3795.06 3590.98Interest and finance charges 7 1647.37 2424.62Depreciation 3600.99 2631.19

56464.22 50193.35

Profit before tax 4602.08 3060.32Provision for current tax (1284.00) (490.00)Provision for deferred tax 386.00 (2.00)Provision for fringe benefit tax (32.88) –

(930.88) (492.00)

Profit after tax 3671.20 2568.32Profit brought forward 8340.55 7354.38

12011.75 9922.70Transfer from Debenture Redemption Reserve – 512.50

12011.75 10435.20

Transfer to Capital Redemption Reserve – (2050.00)Interim Dividend– Preference dividend – (39.48)– Tax on dividend – (5.17)

Profit carried to Balance Sheet 12011.75 8340.55

Earnings per share (In Rupees) Rs. 0.77 Rs. 0.53(Nominal Value – Re.1 per share)Notes on Accounts 21Schedules referred to above form an integral part of these accounts.This is the Profit and Loss Account referred to in our report of even date.

S. DATTA M.K. KUMARPartner C.H. MAHADEVAN(Membership No.F14128) S.V. MONYFor and on behalf of P.S. JAYARAMAN B. NATRAJPRICE WATERHOUSE & Co. Managing Director V.K. PARTHASARATHYChartered Accountants M.N. RADHAKRISHNANChennai P.U. ARAVIND M.S. SEKHARApril 25, 2006 Secretary Directors

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Balance Sheet as at March 31, 2006Schedule 31.03.2006 31.03.2005

Rs.Lacs Rs.Lacs Rs.Lacs Rs.LacsSOURCES OF FUNDSSHAREHOLDERS’ FUNDSCapital 8 4798.19 4798.19Reserves and surplus 9 18033.60 22831.79 14362.40 19160.59LOAN FUNDSSecured loans 10 22914.46 20946.63Unsecured loans 11 4214.16 27128.62 – 20946.63DEFERRED TAX LIABILITY – NET 4516.00 4902.00

54476.41 45009.22

APPLICATION OF FUNDSFIXED ASSETS 12Gross block 65391.57 59585.15Less: Depreciation 26310.72 22873.97Net block 39080.85 36711.18Capital work in progress 8226.26 47307.11 2498.06 39209.24INVESTMENTS 13 2.74 2.74

CURRENT ASSETS,LOANS AND ADVANCESInventories 14 4894.49 3522.98Sundry debtors 15 5239.96 6513.01Cash and bank balances 16 533.44 497.77Other current assets 17 61.05 24.80Loans and advances 18 5950.74 5130.06

16679.68 15688.62Less: CURRENT LIABILITIES

AND PROVISIONSLiabilities 19 9277.15 8652.27Provisions 20 278.26 1351.05

9555.41 10003.32NET CURRENT ASSETS 7124.27 5685.30MISCELLANEOUS EXPENDITURETO THE EXTENT NOTWRITTEN OFF OR ADJUSTED(Note 16 in Schedule 21) 42.29 111.94

54476.41 45009.22Notes on Accounts 21Schedules referred to above form an integral part of these accounts.This is the Balance Sheet referred to in our report of even date.


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Schedules forming part of the Accounts for the year ended March 31, 2006

2005-06 2004-05

Quantity Value Quantity ValueMT Rs.Lacs MT Rs.Lacs

SCHEDULE 1

SALES

Polyvinyl chloride 59376 33552.39 48825 30327.93

Caustic soda 79231 13657.60 75252 10522.76

Chloromethanes 33274 12615.96 32770 12439.74

Trichloroethylene 3081 1514.50 2963 1540.81

Hydrochloric acid 51491 878.38 40444 779.93

Refrigerant gases 1152 2208.11 1288 1811.26

Ethyl silicate 374 323.40 403 392.72

Hydrogen gas 114 122.56 106 111.37

Silicon wafers (in ‘000 Nos) 1251 1737.20 1240 1422.62

Others 991.19 954.62

67601.29 60303.76

SCHEDULE 2

OTHER INCOME

Share of income from partnership firm 27.38 40.70

Montreal Protocol compensation 1839.80 174.25

Profit on sale of fixed assets (net) 183.49 11.40

Profit on sale of non-trade long term investments – 431.00

Commission 78.14 67.22

Reversal of provision for asset impairment (net) 11.24 –(Note 8 in Schedule 21)

Liabilities no longer required written back 82.87 69.06

Miscellaneous income 124.69 139.97

2347.61 933.60

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2005-06 2004-05

Rs.Lacs Rs.Lacs Rs.Lacs Rs.Lacs

SCHEDULE 3

COST OF GOODS SOLD

Materials

Opening stock

Raw materials 443.08 624.66

Intermediates 1857.99 2669.09

Work in process 126.96 132.38

Finished goods 309.21 2737.24 459.20 3885.33

Add: Purchases


Intermediates 14347.18 20481.95 8281.91 15015.55

Less: Closing stock




Finished goods 778.02 (3962.56) 309.21 (2737.24)

Excise duty on closing stock of finished goods 131.50 55.18

Less: Excise duty on opening stock of finished goods 55.18 76.32 56.80 (1.62)

19332.95 16162.02

Power and fuel 18924.56 15317.89

Stores 1679.47 1582.12

39936.98 33062.03

SCHEDULE 4

SALARIES, WAGES AND AMENITIES TO STAFF

Salaries, wages and bonus 4418.05 4100.95

Contribution to provident and other funds 193.55 198.18

Gratuity 131.82 722.47

Staff welfare expenses 33.32 62.31

4776.74 5083.91

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2005-06 2004-05Rs.Lacs Rs.Lacs

SCHEDULE 5

REPAIRS AND MAINTENANCE

Machinery 2243.39 2609.43

Buildings 144.18 143.03

Others 319.51 648.16

2707.08 3400.62

SCHEDULE 6

OTHER EXPENSES

Rent (net of recovery Rs.167.24 lacs; Previous year Rs.204.64 lacs) 449.09 227.30

Insurance 362.47 345.37

Rates and taxes 503.79 763.92

Sales commission 32.20 30.29

Freight and handling 941.92 924.05

Miscellaneous expenses 1505.59 1300.05

3795.06 3590.98

SCHEDULE 7

INTEREST AND FINANCE CHARGES

Interest (net of interest on deposits etc. * Rs.76.80 lacs ;Previous year Rs.97.99 lacs)

– On fixed loans (including Rs.Nil on Debentures; 1257.46 1455.43Previous year Rs.86.04 lacs)

– Others 136.05 230.30

Lease rent – 430.03

Difference in exchange (net) 46.88 104.67

Finance charges (includes amortisation of Rs.94.65 lacs; 206.98 204.19Previous year – Rs.24.26 lacs)

1647.37 2424.62

* Includes tax deducted at source 6.19 6.92

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31.03.2006 31.03.2005Rs.Lacs Rs.Lacs

SCHEDULE 8

CAPITAL

AUTHORISED

75,00,00,000 Equity shares of Re.1/- each 7500.00 7500.00(Previous year 7,50,00,000 Equity shares of Rs.10/- each)

35,00,000 Cumulative redeemable preference shares of Rs.100/- each 3500.00 3500.00

11000.00 11000.00

ISSUED, SUBSCRIBED AND FULLY PAID UP

47,98,19,440 Equity shares of Re.1/- each 4798.19 4798.19(Previous year 4,79,81,944 Equity shares of Rs.10/- each)

4798.19 4798.19Note:

(a) During the year the company effected a stock split by subdividing eachequity share of Rs.10/- into 10 equity shares of Re.1/- each

(b) Of the above:

(i) Number of equity shares issued and allotted as fully paid up pursuantto schemes of amalgamation without payment being received in cash

– of face value of Re.1/- each 21,67,26,150– previous year of face value of Rs.10/- each 2,16,72,615

(ii) Number of equity shares allotted as bonus shares by way ofcapitalisation of Reserves (Rs.443.64 lacs) and from share premiumaccount (Rs.1407.29 lacs)

– of face value of Re.1/- each 18,50,93,290– previous year of face value of Rs.10/- each 1,85,09,329

(iii)Number of equity shares held by Sanmar Holdings Limited,the holding company– of face value of Re.1/- each 35,86,52,480

74.75%– Previous year, together with subsidiary, of face value of Rs.10/- each 3,58,65,384

74.75%

As at As at31.03.2005 Additions Deductions 31.03.2006

Rs.Lacs Rs.Lacs Rs.Lacs Rs.Lacs

SCHEDULE 9

RESERVES AND SURPLUS

General Reserve 2308.90 – – 2308.90Capital Redemption Reserve 3712.95 – – 3712.95Profit and Loss Account 8340.55 12011.75 8340.55 12011.75

14362.40 12011.75 8340.55 18033.60

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31.03.2006 31.03.2005Rs.Lacs Rs.Lacs

SCHEDULE 10SECURED LOANSTerm loans from

Banks 12661.30 11671.98Others 6800.00 9200.00

Cash credit and working capital demand loan from Banks 3453.16 74.65

22914.46 20946.63For security particulars refer Note 11 in Schedule 21

SCHEDULE 11UNSECURED LOANSShort term loans from banks 4214.16 –

4214.16 –SCHEDULE 12FIXED ASSETS

Rs.LacsGROSS BLOCK DEPRECIATION NET BLOCK

As at As at For the Up to As at As at31.03.2005 Additions Deletions 31.03.2006 year 31.03.2006 31.03.2006 31.03.2005

Land 3366.86 421.66 – 3788.52 – 25.76 3762.76 3341.10Buildings 4767.20 625.97 160.69 5232.48 156.42 1175.38 4057.10 3703.84Plant andmachinery 49920.98 6097.58 1302.41 54716.15 3278.81 23780.37 30935.78 29355.21Furniture andoffice equipment 1206.51 41.85 18.53 1229.83 82.74 1080.08 149.75 191.37Vehicles 277.64 148.23 47.63 378.24 67.38 211.93 166.31 95.26Intangible assetsSoftware 45.96 0.39 – 46.35 15.64 37.20 9.15 24.40

59585.15 7335.68 1529.26 65391.57 3600.99 26310.72 39080.85 36711.18

Previous year 55747.59 4117.04 279.48 59585.15 2631.19 22873.97Capital work inprogress 8226.26 2498.06

47307.11 39209.24

a) For details of revaluation of certain fixed assets refer Note 12 in Schedule 21.b) Additions include Rs.31.19 lacs and capital work in progress includes Rs.85.76 lacs being adjustment due to

restatement of foreign currency liabilities (net).c) Deletion of plant and machinery represents assets subject to impairment loss of Rs.1238.76 lacs

(Gross value – Rs.1302.41 lacs less depreciation – Rs.63.65 lacs).

31.03.2006 31.03.2005Rs.Lacs Rs.Lacs

SCHEDULE 13INVESTMENTSLong Term Investments at cost (non trade – unquoted)

i) In shares of body corporate 2.51 2.51ii) In a partnership firm (Rs.100)iii) In Government securities 0.23 0.23

2.74 2.74For details of investments refer Note 13 in Schedule 21

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31.03.2006 31.03.2005Rs.Lacs Rs.Lacs

SCHEDULE 14

INVENTORIES

Stores and spares 931.93 785.74




Finished goods 778.02 309.21

4894.49 3522.98

SCHEDULE 15

SUNDRY DEBTORS

(Unsecured, considered good)

Debts outstanding for a period of less than six months 5239.96 6513.01

5239.96 6513.01

SCHEDULE 16

CASH AND BANK BALANCES

Cash and cheques on hand 104.29 62.00

Balances with scheduled banks

on current accounts 400.11 431.32

on deposit accounts 27.80 3.44

Balance in Post Office Savings Bank Account 1.24 1.01

533.44 497.77

SCHEDULE 17

OTHER CURRENT ASSETS

(Unsecured, considered good)

Interest accrued on deposits etc. 53.42 17.63

Claims receivable 7.63 7.17

61.05 24.80

SCHEDULE 18

LOANS AND ADVANCES(Unsecured, considered good)

Advances recoverable in cash or in kind or forvalue to be received 3479.68 2747.67

Deposits 1927.60 1852.20

Balances with customs and excise authorities 543.46 530.19

5950.74 5130.06

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31.03.2006 31.03.2005Rs.Lacs Rs.Lacs

SCHEDULE 19

LIABILITIES

Sundry creditors

Small scale industrial undertakings 27.54 5.90

Others 9022.02 8532.65

Unclaimed dividends 26.27 29.26

Unclaimed matured deposits 1.82 2.28

Interest on unclaimed matured deposits 0.25 0.25

Interest accrued but not due on loans 199.25 81.93

9277.15 8652.27

Note:

There is no amount due to be credited to Investor Education and Protection Fund

SCHEDULE 20

PROVISIONS

Provision for current tax 2677.02 1535.56

Provision for fringe benefit tax 32.88 –

2709.90 1535.56

Less: Advance income tax and tax deducted at source (2400.97) (1434.51)

Less: Advance fringe benefit tax (30.67) –

278.26 101.05

Provision for asset impairment – 1250.00(Note 8 in Schedule 21)

278.26 1351.05SCHEDULE 21

NOTES ON ACCOUNTS

1. SIGNIFICANT ACCOUNTING POLICIES:

1.1 Revenue recognition:

Sales are recognised on despatch of products to customers, which generally coincides with transfer ofownership. Sales are net of returns, trade discounts and allowances.

1.2 Valuation of assets:

a) Inventories

Stores and spares : At weighted average cost

Raw materials : At weighted average costIntermediates

– Purchased : At weighted average cost

– Own manufactured : At cost

Work in process : At costFinished goods : At lower of cost and net realisable value

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b) Fixed assets

– Revalued Land, Buildingsand Plant and Machineryof PVC division : At revalued value

– Others : At cost

1.3 Depreciation:

Depreciation on fixed assets is provided on a straight line basis at the rates (other than the assets statedbelow) specified in Schedule XIV of the Companies Act, 1956:

i) On all assets whose actual cost does not exceed Rs.5,000/- – 100%.

ii) On computers and peripherals and motor cars – 33.33%.iii) On furniture and office equipment – 20%.

iv) In the event the useful life of any fixed asset being assessed to be lower than the life derived fromSchedule XIV rates, the book value of such assets is charged off as depreciation during the balanceuseful life of such assets.

1.4 New project expenses/ Borrowing costs:

Salaries and related costs, travel and other direct costs relating to new projects incurred prior to theircommencement of operation are capitalised.

Borrowing costs that are directly attributable to the acquisition, construction or production of aqualifying asset are capitalised as part of the cost of the asset.

1.5 Employee benefits:

Contributions to the Provident Fund are paid to the funds maintained by the Commissioners andEmployees’ Provident Fund Trust and charged off to revenue.

Gratuity liability is ascertained and provided based on actuarial valuation carried out as of 1st Marchof every year. The incremental liability for the period 1st March to 31st March is determined andaccrued on total liability basis.

1.6 Foreign currency transactions:

Foreign currency transactions are recorded at the rate of exchange prevailing on the date of therespective transactions.

Foreign currency assets and liabilities are converted at contracted/ year end rates as applicable.

Exchange differences on settlement/ conversion are adjusted to:

i) Cost of Fixed Assets, if the foreign currency liability relates to imported fixed assets.ii) Profit and Loss Account in other cases. Wherever forward contracts are entered into, the exchange

difference is dealt with in the Profit and Loss Account over the period of the contracts.

Realised gains or losses on cancellation of forward contracts are recognised in the Profit and LossAccount of the year in which they are cancelled except in case of forward exchange contracts relatingto liabilities incurred for import of fixed assets, in which case the gain or loss is adjusted to the carryingcost of such assets.

1.7 Income tax:

Provision for current tax and fringe benefit tax is made based on the liability computed in accordancewith the relevant tax rates and tax laws. Deferred tax is accounted for by computing the tax effect ofthe timing difference which arise during the year and reverse out in the subsequent periods. Deferredtax is calculated at the tax rates enacted or substantively enacted by the Balance Sheet date. Deferredtax assets are recognised only if there is a virtual certainty that they will be realised.

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1.8 Research and Development:Revenue expenditure on research and development is charged as an expense for the period in whichit is incurred.

2. Information in respect of each class of goods manufactured:

Installed Production Captive Opening Opening Closing ClosingCLASS OF GOODS Capacity Consumption/ Stock Stock Stock Stock

Samples etc Value ValueMT MT MT MT Rs.Lacs MT Rs.Lacs

1. Caustic soda 101775 83919 4227 382 64 843 126(79200) (78985) (4158) (807) (94) (382) (64)

2. Chlorine 90055 74929 74704 373 20 501 24(70080) (70421) (70207) (241) (12) (373) (20)

3. Chloromethanes 34500 35051 1808 373 69 342 90(34500) (34731) (1701) (113) (32) (373) (69)

4. Trichloroethylene 5000 3073 11 62 25 43 21(5000) (2992) (5) (38) (20) (62) (25)

5. Polyvinyl chloride 64000 60177 1 177 100 977 495(64000) (48889) (1) (114) (59) (177) (100)

6. Refrigerant gases 2500 1159 8 2 2 1 2(2500) (1279) (19) (30) (39) (2) (2)

7. Hydrogen gas 1781 1943 1829 – – – –(1386) (1823) (1717) (–) (–) (–) (–)

8. Silicon wafers (‘000 Nos) 1200 1251 – 1 1 1 –(1200) (1134) (3) (110) (101) (1) (1)

9. Ethyl silicate 600 391 – 6 7 23 28(600) (374) (–) (35) (34) (6) (7)

10. Silicon tetrachloride 600 560 576 38 15 22 10(600) (513) (500) (25) (11) (38) (15)

(a) Licensed Capacity is not applicable to any of the goods manufactured by the company.

(b) Installed Capacities are as certified by the management.

(c) Figures for the previous year are shown in brackets.


3. Value of Imports on CIF basis:

Raw materials/ Intermediates 12819.70 4319.96Components and spare parts 715.54 274.47

Capital goods 395.52 63.56

13930.76 4657.99

4. Expenditure in foreign currency (on payment basis):Commission 4.94 5.26

Travelling 8.79 14.22

Others 3.73 4.91

17.46 24.39

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5. Value of raw materials and purchased intermediates consumed:

(a) Raw Materials/ Purchased Intermediates

2005-06 2004-05Rs. % of Rs. % of

Lacs Consumption Lacs ConsumptionImported – C I F 10549.46 52% 4264.12 27%

– Duty etc. 3297.27 16% 1526.49 10%Indigenous 6473.29 32% 9751.20 63%

20320.02 100% 15541.81 100%

(b) Consumption of raw materials and purchased intermediates:

2005-06 2004-05Quantity Amount Quantity Amount

MT Rs.Lacs MT Rs.LacsMolasses 22136 330.23 73216 1840.57Alcohol (KL) 44692 8057.29 36358 6461.63Calcium carbide 2358 622.33 2306 618.66Ethylene di chloride 35608 5218.33 3950 604.07Methanol 11764 1955.43 11583 1858.48Chlorine 2577 186.68 10297 791.69Polysilicon (Kgs) 32815 454.67 25014 349.90Salt 39899 384.04 32451 247.40Other raw materials * 3111.02 2769.41

20320.02 15541.81

* Comprising items which in value individually account for less than 10% of materials consumed


6. Earnings in foreign exchange:

FOB Value of exports 2166.12 1730.13

2005-06Rs.Lacs

7. Computation of net profit in accordance with Section 349read with Section 198 of the Companies Act, 1956 andDirectors’ Remuneration

Profit before tax as per Profit and Loss Account 4602.08Add: Directors’ remuneration 45.73

Directors’ sitting fees 3.58 49.31

4651.39

Less: Profit on sale of fixed assets and Investments as per Section 349 120.89

Profit under Section 349 of the Companies Act, 1956 4530.50

Maximum Managerial Remuneration to Wholetime Directorpermitted under the Companies Act, 1956 226.53

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Directors’ Remuneration for the year:Salary and allowances 42.64 38.10Gratuity and contribution to provident and other funds 3.06 3.24Perquisites 0.03 2.63

45.73 43.97

8. Reversal of provision for asset impairment is computed as below:Reversal of provision for asset impairment 1250.00 –Less: Asset impairment loss 1238.76 –

11.24 –

9. Amounts paid/ payable to Auditors:For statutory audit 17.00 13.00For tax audit 2.50 2.50For certification etc. 7.50 6.50Service tax 2.75 2.24Expenses reimbursed 0.61 0.29

30.36 24.53

10. Sitting fees paid to Directors 3.58 2.12

11. Security particulars:

A. Term loans from banks

i) loans aggregating to Rs.11658.41 lacs are secured by first pari passu charge on land, buildingsand plant and machinery of the company subject to prior charges on assets referred to in Cbelow.

ii) loan amounting to Rs.1002.89 lacs is secured by second charge on whole of movable propertiesof the company including its movable plant and machinery, machinery spares, tools andaccessories and other movables both present and future.

B. Term loan from others to the extent of Rs.1300.00 lacs is secured by first pari passu charge on theassets referred to in A (i) above.

C. Term loan from others to the extent of Rs.5500.00 lacs is secured by equitable mortgage of specificland and buildings.

D. Cash credit and working capital demand loans from banks are secured by a first charge oninventories and book debts.

12. Revaluation of fixed assets:

Land, Buildings and Plant and Machinery of the PVC division (other than certain buildings andmachinery) were revalued as at October 1, 2002 on the governing principles of current cost afterconsidering depreciation up to the date of revaluation as per the valuer’s report and the net increasein the book value arising from such revaluation aggregated to Rs.11780.60 lacs.

Change in depreciation ratesDepreciation on revalued Buildings and Plant and Machinery relating to PVC division was providedon the respective revalued amounts over the balance useful life as determined by the valuers up toMarch 31, 2005. Effective April 1, 2005 depreciation on such assets is calculated over the balanceuseful life as derived by applying the rates specified in Schedule XIV of the Companies Act, 1956resulting in increase in depreciation charge and decrease in profit for the year by Rs.222.15 lacs.

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13. Details of Investments:31.03.2006 31.03.2005

Face value No. of Face value No. ofper share shares Amount per share shares Amount

Rs. Rs.Lacs Rs. Rs.Lacs

A. Investment in shares ofbody corporate (unquoted)Fully paid up equity sharesChemplast Chlorochemicals Limited 10 25,000 2.51 10 25,000 2.51

B. Investment in capital of a Partnership firm:– Cathedral Corporate Finance

Partners’ Name Profit sharing ratio AmountRs.

Asco (India) Limited Profits are shared 100BS&B Safety Systems (India) Limited by partners with 100Cabot Sanmar Limited positive aggregate 100Chemplast Sanmar Limited daily balances in 100Fisher Sanmar Limited the proportion of 100Flowserve Sanmar Limited such balances. 100Sanmar Engineering Services Limited Losses are 100Sanmar Foundries Limited shared equally by 100Sanmar Shipping Limited partners. 100Sanmar Speciality Chemicals Limited 100Sensortronics Sanmar Limited 100Tyco Sanmar Limited 100Xomox Sanmar Limited 100

1,300

C. Investment in Government securities

National Defence/ savings certificate 0.23 0.23

2.74 2.74

31.03.2006 31.03.2005Rs.Lacs Rs.Lacs

14. Contingent liabilities:Claims against the company not acknowledged as debts 884.92 912.61

15. Capital commitments:

Estimated amount of contracts remaining to be executedon capital account and not provided for (Net of advances) 7011.00 7332.00

16. Miscellaneous expenditure:

Miscellaneous expenditure to the extent not written off or adjusted represents unamortised balance ofancillary costs related to borrowings, which is being amortised over the currency of the borrowingcommencing from the first withdrawal of the amount borrowed.

17. Montreal Protocol compensation:

The company is eligible to receive compensation from Multilateral Fund under the Montreal Protocolfor phasing out the production of Chlorofluorocarbons and supply of Carbon Tetra Chloride to non feedstock sector. The aforesaid compensation is received in periodic instalments subject to meeting certainconditions stipulated in the Protocol and accordingly the compensation is accounted only after complyingwith such conditions and ensuring that there is no uncertainty in this regard. Following this practicecompensation received during the year alone has been accounted and shown under Other Income.

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18. Taxation:a) Current taxation

The provision for current income tax for the year has been made after considering a deductionof Rs.627.65 lacs (Previous year Rs.929.43 lacs) [tax impact – Rs.211.27 lacs (Previous yearRs.340.10 lacs)] under Section 80 IA of the Income tax Act, 1961. Similar deduction wasavailable for the financial years ended March 31, 2002, 2003 and 2004. The tax provision inthose years was made without considering such deduction (tax impact aggregating Rs.691.65lacs) which was, however, claimed for the first time in the Return of Income for the financialyear ended March 31, 2004 and by filing revised returns/ claims for the preceding two years.Subsequently, the assessing officer has disallowed the claim in respect of the financial yearsended March 31, 2002 and March 31, 2003. Pending an appellate decision against thisdisallowance and also as an abundant caution, the tax provision made in the said three yearshas been retained in the books.

31.03.2006 31.03.2005Rs.Lacs Rs.Lacs

b) Deferred taxationNet deferred tax liability is on account of:

– Timing difference relating to depreciation 5247.00 5334.00– Others (731.00) (432.00)

4516.00 4902.00

19. Dues to Small Scale Industrial Undertakings:There are no Small Scale Industrial Undertakings in respect of whom the company’s dues are outstandingfor more than 30 days. This information and that disclosed in Schedule 19 have been determined tothe extent such parties have been identified on the basis of information available with the company.


20. Foreign exchange contracts:Exchange difference (debit) deferred to be recognisedin subsequent accounting period in respect of forwardexchange contracts 12.91 26.71

21. Interest capitalisation:Interest on fixed loans is net of interest capitalised 304.27 62.58

22. Earnings per share:Profit after taxation as per Profit and Loss Account 3671.20 2568.32Less: Preference dividend and tax thereon – 44.65Adjusted Profit (A) 3671.20 2523.67Weighted average number of equityshares outstanding (B) 47,98,19,440 (**)47,98,19,440Earnings per share (In Rupees) (A)/ (B) 0.77 0.53(Nominal Value – Re.1 per share)

(**) Consequent upon the stock split effected during the year by the company by subdividing each equityshare of Rs.10/- into 10 equity shares of Re.1/- each, the number of equity shares for the previous yearhas been restated as per the requirements of Accounting Standard 20 – “Earnings per Share”

23. Segment Reporting:The company has considered business segment as the primary segment. Segments have been identifiedtaking into account the nature of the products, the differing risks and returns, the organisation structureand internal reporting system.The company caters mainly to the needs of the domestic market. The export sales is not significantin the context of total sales. As such there are no reportable geographical segments.

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Segment Revenue, Segment Results, Segment Assets and Segment Liabilities include the respectiveamounts identifiable to each of the segments as also amount allocated on a reasonable basis.

Assets and Liabilities that cannot be allocated between the segments are shown as part of unallocatedcorporate assets and liabilities respectively.

Inter segment transfer pricing policy – All inter segment transfers are at cost.

INFORMATION ABOUT THE PRIMARY BUSINESS SEGMENTS

Rs.Lacs

PVC Chlorochemicals Others & TotalUnallocated

2005-06 2004-05 2005-06 2004-05 2005-06 2004-05 2005-06 2004-05

REVENUEExternal sales (Net of excise duty) 34832.60 30129.54 23886.09 22190.53 – – 58718.69 52320.07Add: Inter segment sales 169.66 370.91 496.10 487.83 – –Total segment revenue 35002.26 30500.45 24382.19 22678.36 – –Segment result(Profit before interest and tax) 224.77 766.14 6059.51 4247.10 (34.83) 471.70 6249.45 5484.94Interest and finance charges 1647.37 2424.62Profit before tax 4602.08 3060.32Provision for tax

Current 1284.00 490.00Deferred (386.00) 2.00Fringe benefit tax 32.88 –

Profit after tax 3671.20 2568.32OTHER INFORMATIONSegment assets 50174.85 39582.82 12572.56 14921.73 774.22 2.74 63521.63 54507.29Unallocated corporate assets 510.19 505.25Total assets 64031.82 55012.54Segment liabilities 5636.29 4965.50 3405.51 4823.05 – – 9041.80 9788.55Unallocated corporate liabilities 32158.23 26063.40Total liabilities 41200.03 35851.95Capital expenditure 10681.76 5410.61 300.88 311.65 2081.24 – 13063.88 5722.26

Depreciation 2145.41 1804.15 1384.24 827.04 71.34 – 3600.99 2631.19

24. Related party disclosures:(a) List of parties where control exists

Sanmar Holdings Limited Holding Company(b) Associates/ Fellow Subsidiaries

AMP Sanmar Life Insurance Company Limited (Part of the year)Asco (India) Limited Sanmar Foundries LimitedBay View Properties Private Limited Sanmar Group Corporate FinanceBS&B Safety Systems (India) Limited Sanmar Shipping LimitedCabot Sanmar Limited Sanmar Speciality Chemicals LimitedCathedral Corporate Finance Sensortronics Sanmar LimitedFisher Sanmar Limited SHL Property Holdings LimitedFlowserve Sanmar Limited Tyco Sanmar LimitedKalamkriya Limited Xomox Sanmar LimitedSanmar Engineering Services Limited

(c) Key Management Personnel

P S Jayaraman

(d) The above information regarding related parties have been determined to the extent such partieshave been identified on the basis of information available with the company.

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(e) List of transactions with related partiesRs.Lacs

Description Parties where Associates/ Fellow Key ManagementPersonnel

control exists Subsidiaries and Relatives

2005-06 2004-05 2005-06 2004-05 2005-06 2004-05Transactions during the yearPurchases

Fisher Sanmar Limited 69.10 55.79Sanmar Foundries Limited 53.02 84.41Xomox Sanmar Limited 53.46 116.91Kalamkriya Limited 29.98 30.69Others 67.18 134.70Total – – 272.74 422.50 – –

SalesCabot Sanmar Limited 495.09 428.74Sanmar Speciality ChemicalsLimited 171.09 96.14Others 10.23 13.26Total – – 676.41 538.14 – –

Commission receivedCabot Sanmar Limited – – 90.46 67.22 – –

Share of income frompartnership firm

Cathedral Corporate Finance – – 27.38 40.70 – –Expenses recovered

Sanmar Speciality ChemicalsLimited 2.51 17.91Sanmar Foundries Limited 9.89 78.40Flowserve Sanmar Limited 4.62 –Asco (India) Limited 5.61 28.05Others 0.89 5.20Total – – 23.52 129.56 – –

Expenses PaidSanmar Foundries Limited 5.60 5.08Total – – 5.60 5.08 – –

Rent ReceivedTyco Sanmar Limited 27.36 27.36Flowserve Sanmar Limited 57.63 57.63AMP Sanmar Life InsuranceCompany Limited 31.55 62.61Sanmar Shipping Limited 19.40 19.40Others 10.92 11.03Total – – 146.86 178.03 – –

Rent paidSHL Property Holdings Limited 256.36 –Sanmar Realty Limited – 256.36Others 15.88 14.75 – 2.20Total – – 272.24 271.11 – 2.20

Finance charges paidSanmar Group CorporateFinance – – 13.85 0.60 – –

Lease Rent paid – – – 430.03 – –Sale of shares – 862.00 – – – –Remuneration

N Sankar – 17.20P S Jayaraman 45.73 26.77Total – – – – 45.73 43.97

Sitting Fees – – – – – 0.27Guarantees withdrawn 147.41Balances as on 31.03.06

Loans and Advances – – 917.53 914.17 – –Sundry Debtors – – 16.94 45.78 – –Sundry Creditors – – 48.56 86.05 – –

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26.Previous year's figures have been regrouped wherever necessary.(Signatories to Schedules 1 to 21)

M.K. KUMARC.H. MAHADEVAN

S.V. MONYP.S. JAYARAMAN B. NATRAJ

Managing Director V.K. PARTHASARATHYM.N. RADHAKRISHNAN

Chennai P.U. ARAVIND M.S. SEKHARApril 25, 2006 Secretary Directors

25.Balance Sheet abstract and company’s general business profile

I Registration DetailsRegistration No. 11637 State Code 18Balance Sheet Date 31-03-2006

II Capital raised during the year (Amount in Rs.Thousands)Public Issue Rights Issue

– –Bonus Issue Private Placement

– –

III Position of Mobilisation and Deployment of Funds(Amount in Rs.Thousands)

Total Liabilities Total Assets5447641 5447641

Sources of Funds Paid up Capital Reserves and Surplus479819 1803360

Secured Loans Unsecured Loans2291446 421416

Deferred Tax Liability451600

Application of Funds Net Fixed Assets Investments4730711 274

Net Current Assets Misc. Expenditure712427 4229

Accumulated Losses–

IV Performance of the company (Amount in Rs.Thousands)Turnover (including other income) Total Expenditure

6106630 5646422+/ – Profit/ Loss Before Tax +/ – Profit/ Loss After Tax

+ 460208 + 367120Earning per equity share in Rs. Dividend Rate %

0.77 –

V Generic Names of Three Principal Products/ Services of company(As per monetary terms)Item Code No. (ITC Code) 390410Product Description PVC resinsItem Code No. (ITC Code) 290311Product Description ChloromethanesItem Code No. (ITC Code) 291510Product Description Caustic soda

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Cash Flow Statement for the year ended March 31, 20062005-06 2004-05Rs.Lacs Rs.Lacs

A. CASH FLOW FROM OPERATING ACTIVITIES:NET PROFIT BEFORE TAX 4602.08 3060.32

Adjustments for:Add: Depreciation 3600.99 2631.19

Interest and finance charges 1724.17 2522.619927.24 8214.12

Less: Profit on sale of assets/ Investments (Net) 183.49 442.40Reversal of provision for asset impairment (Net) 11.24 –Interest/ Dividend/ share of profit 104.18 138.69

OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES 9628.33 7633.03Adjustments for changes inTrade and other receivables 411.21 (1627.98)Inventories (1371.51) 1480.26Trade and other payables (294.21) 2931.02

CASH GENERATED FROM OPERATIONS 8373.82 10416.33Direct taxes paid (Net) (1139.67) (489.54)

NET CASH FROM OPERATING ACTIVITIES 7234.15 9926.79

B. CASH FLOW FROM INVESTING ACTIVITIES:Purchase of fixed assets (12262.11) (5722.26)Sale of investments – 862.00Sale of fixed assets 309.75 29.06Interest received/ share of profit 109.09 129.53

NET CASH USED IN INVESTING ACTIVITIES (11843.27) (4701.67)

C. CASH FLOW FROM FINANCING ACTIVITIES:Redemption of preference shares – (2050.00)Proceeds from long term borrowings 8736.53 9500.00Repayment of long term borrowings (8650.10) (4350.00)Proceeds/ (Repayment) of short term borrowings (Net) 6095.56 (5642.02)Interest and finance charges paid (1537.20) (2586.09)Dividends/ Tax on dividends paid – (44.65)

NET CASH USED IN FINANCING ACTIVITIES 4644.79 (5172.76)NET INCREASE IN CASH AND CASH EQUIVALENTS (A + B + C) 35.67 52.36

Cash and cash equivalents at the beginning of the year 497.77 445.41Cash and cash equivalents at the end of the year 533.44 497.77

35.67 52.36

Note: Figures in brackets indicate cash outflow

This is the Cash Flow Statement referred to in our report of even date.


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Chemplast Sanmar Limited - Morningstar, Inc.

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