CONTENTS Page EIGHTEENTH ANNUAL REPORT

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1 EIGHTEENTH ANNUAL REPORT CONTENTS Page Notice 2-5 Chairman s Statement 6 Directors Report 7-8 Annexure to Directors Report 8-10 Management Discussion and Anaysis Auditors Report Baance Sheet 16 Profit & Loss Account 17 Schedues 1 to Baance Sheet Abstract 34 Cash Fow Statement 35 Corporate Governance Report Auditors Certificate 42 Five years at a Gance 43 Graphs 44 45

2 EIGHTEENTH ANNUAL REPORT BOARD OF DIRECTORS MR G W ROBINSON MR S K SINHA MR J T ELSASSER MR V K DASARI MR M J HILL MR N MAHANTY MR J S PATHAK MR P S DASGUPTA Chairman Dy. Managing Director Aternate to Mr M J Hi COMMITTEES OF THE BOARD AUDIT COMMITTEE MR V K DASARI MR N MAHANTY MR J S PATHAK Aternate to Mr J T Esasser Chairman INVESTORS RELATION & GRIEVANCE COMMITTEE MR N MAHANTY MR S K SINHA MR J S PATHAK Chairman MANAGEMENT TEAM MR G W ROBINSON MR S K SINHA MR K STHANPATI MR A K DAS MR S HAZRA MR S VERMA Auditors Messrs S R Batiboi & Co. Chartered Accountants 22, Camac Street Bock - C, 3rd Foor, Kokata Registered Office Bara, P. O. Agrico Jamshedpur Ph. No. (0657) Fax No. (0657) Chairman Dy. Managing Director Director - Projects Director - Manufacturing Finance Controer & Company Secretary Chief - Human Resources Members are requested to pease note that with effect from January 1, 2003, Ami Computers (I) Limited has been appointed as the Registrars & Share Transfer Agents of the Company. Any query reating to your sharehoding may aso be forwarded to: Ami Computers (I) Limited, 60A & 60B, Chowringhee Road, Kokata REMUNERATION COMMITTEE MR N MAHANTY Chairman MR P S DASGUPTA MR J S PATHAK As a measure of economy, copies of the Annua Report wi not be distributed at the Annua Genera Meeting. Sharehoders are requested to bring their copies to the meeting. 1

3 NOTICE Notice is hereby given that the Eighteenth Annua Genera Meeting of Timken India Limited wi be hed at Center for Exceence, Jubiee Road, Jamshedpur on Saturday, Apri 23, 2005 at pm to transact the foowing business: 1. To receive and adopt the Profit and Loss Account for the year ended December 31, 2004 and the Baance Sheet as on that date and the reports of the Directors and the Auditors. 2. To eect Directors in pace of those retiring by rotation. 3. To appoint Auditors of the Company and to fix their remuneration. SPECIAL BUSINESS 4. Appointment of Mr. Gordon Wiiam Robinson as Chairman & Managing Director of the Company To consider and, if thought fit, to pass with or without modification, the foowing resoution as an ordinary resoution: RESOLVED THAT pursuant to Sections 269, 309 and other appicabe provisions if any, of the Companies Act, 1956 ( the Act ) and subject to approva of the Centra Government and such other approvas as may be necessary, Mr. Gordon Wiiam Robinson ( Mr. Robinson ) be appointed as the Chairman & Managing Director of the Company effective from the date of his obtaining the requisite empoyment VISA and compiance with such other formaities as may be appicabe on the terms and conditions set out in an Agreement to be entered into between the Company and Mr. Robinson in terms of the draft paced before the meeting and initiaed by the Chairman of the meeting for the purpose of identification and that the Board of Directors of the Company be and is hereby authorized to take a such steps in this regard as may be necessary, proper and expedient, incuding without restriction to entering into an Agreement on behaf of the Company with Mr. Robinson in terms of the said draft. 5. Remuneration payabe to Dy. Managing Director To consider and, if thought fit, to pass with or without modification, the foowing resoution as an ordinary resoution: RESOLVED THAT pursuant to Section 310 and other appicabe provisions if any of the Companies Act, 1956 ( the Act ) and subject to such approvas as may be necessary, the Company hereby accords its approva to the increase in the remuneration payabe to Mr. Shyama Kumar Sinha ( Mr. Sinha ) as the Dy. Managing Director of the Company, as per detais contained in the draft Suppementary Agreement to be entered into between the Company and Mr. Sinha in terms of the draft paced before the meeting and initiaed by the Chairman of the meeting for the purpose of identification and that the Board of Directors of the Company be and is hereby authorized to take a such steps in this regard as may be necessary, proper and expedient, incuding without imitation, entering into an agreement on behaf of the Company with Mr. Sinha in terms of the said draft. 6. Vountary deisting of the Company s Equity Shares To consider and, if thought fit, to pass with or without modification, the foowing resoution as a specia resoution: RESOLVED THAT subject to the provisions of the Companies Act, 1956 as amended, the Securities and Exchange Board of India (Deisting of Securities) Guideines, 2003 and subject to such approvas as may be necessary and subject aso to such conditions and modifications as may be prescribed whie granting such approvas which may be agreed to by the Board of Directors of the Company, consent is hereby accorded to the Board to deist the Equity Shares of the Company from any one or a of the Magadh Stock Exchange Association, Patna and The Cacutta Stock Exchange Association Limited, Kokata. NOTES : 1. A Member entited to attend and vote at the meeting is entited to appoint a Proxy to attend and vote instead of himsef and the Proxy need not be a Member. Proxies, in order to be effective, must reach the Registered Office of the Company not ess than 48 hours before the time for hoding the Meeting. 2. An Expanatory Statement pursuant to Section 173(2) of the Companies Act, 1956 in respect of the Specia Business under items nos. 4 to 6 is annexed hereto. Appicabe detais reating to Directors pursuant to Cause 49 of the Listing Agreement are aso annexed. 3. The Register of Members and the share transfer books of the Company woud remain cosed from Apri 8, 2005 to Apri 23, 2005, both days incusive. 4. Copy of the Draft Agreement to be executed between the Company and Mr. Gordon Wiiam Robinson in terms of the Resoution under Item No. 4 is avaiabe for inspection at the Registered Office of the Company at Bara, P.O. Agrico, Jamshedpur on any working day prior to the date of the aforesaid meeting between the hours of a.m. and noon and wi aso be avaiabe for inspection on Apri 23, 2005 from a.m. at the pace of the meeting. 5. Copy of the Draft Suppementary Agreement to be executed between the Company and Mr. Shyama Kumar Sinha in terms of the Resoution under Item no. 5 is avaiabe for inspection at the Registered Office of the Company at Bara, P.O. Agrico, Jamshedpur on any working day prior to the date of the aforesaid meeting between the hours of a.m. and noon and wi aso be avaiabe for inspection on Apri 23, 2005 from a.m. at the pace of the meeting. Registered Office : Bara, P.O. Agrico Jamshedpur March 26, 2005 By Order of the Board Soumitra Hazra Finance Controer & Company Secretary 2

4 EIGHTEENTH ANNUAL REPORT ANNEXURE TO THE NOTICE EXPLANATORY STATEMENT PURSUANT TO SECTION 173(2) OF THE COMPANIES ACT, 1956 Item No. 4 Mr. Gordon Wiiam Robinson ( Mr. Robinson ) has been appointed by the Board of Directors of the Company ( the Board ) as the Chairman & Managing Director for a period of five years effective from the date of his obtaining the requisite empoyment VISA and compiance with such other formaities as may be appicabe as per the foowing terms and conditions: Saary Term Performance Incentive Gross Rs. 3,75,000/- per month 5 years As per corporate rues Perquisites i) Entrance Fee and Membership Fees of one Cub in Jamshedpur. ii) iii) The Company sha bear a the trave and odging reated expenses to be incurred by Mr. Robinson in connection with business of Timken India Limited ( TIL ). In case, Mr. Robinson incurs any such expenses out of his own pocket, he sha be entited to be reimbursed of a such expenses incurred for the purpose of the business of TIL. In addition, Mr. Robinson wi be entited to be reimbursed of a other expenses incurred by him in connection with the business of TIL. Minimum Remuneration The remuneration incuding the benefits and amenities aforesaid sha nevertheess be paid and aowed as the minimum remuneration for any year in the event of absence or inadequacy of profits for such year. Duties and Conditions: i) Mr. Robinson wi perform the duties and exercise the powers, which from time to time may be assigned to or vested in him by the Board of Directors of the Company. ii) iii) iv) Saary payabe to Mr. Robinson sha be subject to Indian Income Tax. The appointment may be terminated by either party by giving three months notice in writing to that effect uness termination at a shorter notice is mutuay agreed by both Mr. Robinson and the Board of Directors. Mr. Robinson sha not be entited to any Sitting Fees for attending any meetings of the Board or any Committee thereof. The said appointment of Mr. Robinson, incuding his remuneration as referred to above is subject to and requires sharehoders approva. The Board recommends the Resoution set out under Item no. 4 for approva of Members. Memorandum of Interest Except Mr. Robinson, no other Director is concerned or interested in the resoution. This may be treated as an abstract of the terms and memorandum of interest and aso as an abstract of the proposed Agreement between the Company and Mr. Robinson pursuant to Section 302 of the Companies Act, Item No. 5 Members may pease reca that Mr. Shyama Kumar Sinha ( Mr. Sinha ) was appointed as the Dy. Managing Director of the Company with effect from the cose of business on June 8, 2001 as per terms and conditions set out in the draft of an Agreement paced before the Annua Genera Meeting hed on Juy 20, 2001 which was subsequenty modified vide resoutions passed at the Annua Genera Meetings hed on Apri 30, 2003 and Apri 24, It may be noted that the Board of Directors, subject to the requisite approva of the Members of the Company and such other approvas as may be necessary, has approved an increase in remuneration payabe to Mr. Sinha as the Dy. Managing Director of the Company with effect from March 1, 2005 as per detais contained in the draft Suppementary Agreement to be entered into between the Company and Mr. Sinha, an abstract of which is 3

5 set out as foows : The amount of saary & other aowances to be increased from Rs. 90,700/- per month to Rs. 1,11,950/- per month. A the other terms and conditions governing his appointment as the Dy. Managing Director wi however remain unchanged. The Board of Directors recommends the Resoution set out under Item no. 5 for approva of the Members. Memorandum of Interest No Director of the Company, except Mr. Sinha is concerned or interested in the said Resoution. This may be treated as the Abstract of the terms and Memorandum of Interest and aso as an Abstract of the Agreement between the Company and Mr. Sinha pursuant to Section 302 of the Companies Act, Item No. 6 In view of wide and extensive networking centers of The Nationa Stock Exchange, Mumbai which enabes the investors to have access to onine deaings in the Shares of the Company and aso keeping in mind the requests received from some of the members at the ast Annua Genera Meeting, it has been decided to enist the shares of the Company on The Nationa Stock Exchange, Mumbai. A review of the trading voumes of the Company s Equity Shares at the stock exchanges at Kokata and Patna reveaed that the trading voumes are on the decine and it was considered that continued isting of the Company s Equity Shares on these two Stock Exchanges woud not be necessary. Accordingy, it has been decided to deist vountariy the Company s Equity Shares from any one or a of The Cacutta Stock Exchange Association Ltd. and Magadh Stock Exchange Association. Such deisting and the decision to enist on The Nationa Stock Exchange wi enhance benefits and not adversey affect the iquidity options of the investors in the shares of the Company. The isting on The Stock Exchange, Mumbai wi however, continue. The Board recommends the Resoution under Item no. 6 of the accompanying Notice for approva of the members. Memorandum of Interest No Director of the Company is concerned or interested in the said Resoution. Registered Office : Bara, P.O. Agrico Jamshedpur March 26, 2005 By Order of the Board Soumitra Hazra Finance Controer & Company Secretary 4

6 EIGHTEENTH ANNUAL REPORT APPLICABLE DETAILS OF DIRECTORS IN TERMS OF CLAUSE 49 OF THE LISTING AGREEMENT Name of Director Mr. Gordon W Robinson Mr. Michae J. Hi Mr. Jon T. Esasser Date of Birth August 5, 1948 October 9, 1950 August 14, 1952 Date of Appointment Juy 26, 1999 February 3, 2003 September 6, 1995 Expertise in specific functiona areas Saes & Marketing Marketing Communication Goba Manufacturing Suppy Chain Management Genera Management Strategy Genera Management Quaifications Higher Nationa Dipoma in Mechanica Engineering Certificate of Apprenticeship in Genera Mechanica Engineering with Henry Simon Ltd. BSCE MSCE Licensed Professiona Engineer BA Economics Coege of Wiiam & Mary MBA Harvard University Advanced Management Programme INSEAD List of pubic companies in which outside Directorship hed as on December 31, 2004 Yantai Timken Company Ltd. Timken NSK Bearings (Suzhou) Co. Ltd. NRB Bearings Ltd. Timken Romania S.A. Stark State Coege of Technoogy Timken Wuxi Bearing Co. Ltd. Timken Poska Sp.Zo.o Timken Romania S.A. Timken Engineering Products (Shanghai) Co. Ltd. Timken Wuxi Bearing Co. Ltd. Chairman / Member of the Committees of the Board of the Companies on which he is a Director as on December 31, 2004 Sharehoding in the Company 5

7 CHAIRMAN S STATEMENT Dear Sharehoders, The faith paced in Timken India associates to continue the 2003 performance further into 2004 has indeed proved to be justified, as your company has been abe to maintain the growth trend begun in the recent past. Year 2004 witnessed a significant growth in the Indian Economy. Likewise, your company, with increased productivity, reduction in operating and administrative cost and with a strong customer focus coud better the performance compared to the panned target aso witnessed an increase in demand for our products. The Jamshedpur pant being a focused, cost effective factory, coud enarge its roe as a favoured exporter in the Timken network. Growth projections for 2005 ook very encouraging in both our domestic and export markets. However, with capacity getting saturated, capacity expansion programs shoud receive continuous attention. As part of it, TIL has embarked upon expansion projects. During 2004, the company competed the project of introducing a new 8" cone ine. We have aso undertaken a new project for manufacture of cones, which wi be excusivey for exports. The future indeed ooks exciting. We continue to drive Lean Six Sigma projects across a parts of our operations and business processes. Timken India received externa recognition of this commitment to continuay improve customer service at ower costs, when it was awarded a specia award for exceence in ean Six Sigma at the Indian Manufacturing Exceence Awards (IMEA) announced annuay by Frost & Suivan. TIL has over the years strengthened its position from a manufacturer of bearings to a compete Friction Management Soutions Provider. Over the recent years, it broadened its offerings around friction management to incude an array of reated products and soutions. The most significant of these is the Onsite Maintenance Services more popuary known as Mitec which increased its coverage to more customers. The unique repair faciities at the arge bearing service centre in Jamshedpur continued to proong usefu bearing ife for customers in industria and rai segments. Preventive maintenance and machinery heath management technoogies continued to ensure ower operating costs through minimized downtime and improved pant efficiency. Our research faciity in Bangaore grew to be a strong seing point as customers in a industries seek innovative soutions to existing probems and new product deveopment from our experts. However, I consider the foowing issues to be the points of concern for 2005: - Increased input costs, especiay stee must be matched with suitabe recovery in revenue. At the same time, as a focused factory, TIL wi have to stay as cost competitive and with increased exposure in the internationa market, adhere to stringent quaity requirements. Keeping the quaity eve up at high internationa standards wi be an uncompromising commitment for TIL for this year and every year to come. On time deivery of materias shoud continue to be in focus in Whie right quaity materias are to be procured at the right time to keep the production ines moving, we wi continue to ensure that commitments to customers are stricty maintained. This wi not ony be vauabe to customers, it wi aso ensure minimum inventory- resuting in better cash generation to fund business activities. The good work seen in receivabes management by the saes team shoud continue into this year as we. I am peased that the recenty announced budget refects a further move to open the Indian economy to word trade. For TIL, this coud be both an opportunity and a threat. Whie it means ess expensive raw materia imports to support our manufacturing, we wi aso have to face greater goba competition from cheaper imported finished bearings. However, it is my beief that the impeccabe Timken quaity and service standards wi continue to set us apart in the eyes of discerning customers. As one of India s most efficient bearing manufacturers, we are we positioned to take on the chaenge. The year ahead, though chaenging, fis us with excitement as it is abounding in opportunities. I am confident that with the strong support of a our customers, suppiers and associates and with your patronage, TIL woud be abe to do even better to further enhance sharehoder vaue. Thanking you, Yours sincerey, Kokata February 4, 2005 Gordon Wiiam Robinson Chairman 6

8 EIGHTEENTH ANNUAL REPORT DIRECTORS REPORT TO THE MEMBERS The Directors have peasure in presenting the Eighteenth Annua Report on the business and operations of the Company together with the Financia Resuts for the year ended December 31, FINANCIAL RESULTS Year Year ended ended December 31, December 31, (Rs/Lakhs) (Rs/Lakhs) a) Gross Profit b) Less: Depreciation c) Earnings before Interest & Tax (EBIT) d) Less: Interest (Net) e) Profit before Tax (PBT) f) Less: Taxes g) Profit after Tax (PAT) h) Add: Profit brought forward from previous year i) Profit avaiabe for appropriation j) Less: Interim/Proposed Dividend on Preference Shares k) Less: Transfer to Capita Redemption Reserve ) Baance carried forward The Company continued its growth record in 2004 aso. Net saes (excuding other income) grew by 23% from Rs. 218 Crores in 2003 to Rs. 267 Crores in Exports through the Timken network grew even at a faster rate of 42% from Rs. 78 Crores in 2003 to Rs. 111 Crores in These exports mainy had been to USA with part shipments to France, Brazi, South Africa and Austraia. Whie overa saes growth was pegged at 23%, the Company earned PBT of Rs. 51 Crores, an increase of 54% over Such a significant improvement in profitabiity coud be attributabe to enhanced saes voume, better price reaization on export sae, improved pant efficiency, and reduction in operating and administrative costs. During the year, the pant ran at fu capacity enabing distribution of fixed costs over a arger voume of output and better margin. Production during the year in terms of equivaent bearings, had increased by 19% over ast year without any major investments. DIVIDENDS With the kind of growth environment in horizon, your Directors intend to tap the opportunity and utiize the accumuated earnings of the Company for expansion purposes to enhance utimatey the sharehoders vaue in future. Accordingy, your Directors are not recommending payment of any dividend on equity shares for PROJECTS In 2004, the Company has undertaken an expansion project of instaing a new 8 cone ine. This new ine is expected to produce a itte over five acs tapered singe cones annuay necessitating an approximate investment of Rs Crores. Another project to manufacture cones for the purpose of export to US ony has been embarked upon during The project envisages an investment of Rs Crores and is expected to generate saes revenue of Rs. 21 Crores when a the three ces are expected to become fuy operationa. This project is expected to be competed by the end of the first quarter of FINANCE The efficient management of working capita comprising Inventory and Receivabes couped with ow cost LIBOR inked Export Packing Credit have improved the cash fow of the Company. Pending investment of such fund in growth initiative, it has been temporariy parked in shortterm investments in various high secured mutua funds. Such measures, though temporary, have resuted a significant addition to the bottom-ine, further enhancing the profit earning capacity of the Company. LISTING / VOLUNTARY DELISTING OF EQUITY SHARES ON STOCK EXCHANGES In order to enhance trading opportunities to the investors, it has been decided to enist the Equity Shares of the Company on the Nationa Stock Exchange, Mumbai. At the same time, due to ow voume of trading of the Company s Equity Shares on the Cacutta and Magadh Stock Exchanges, it has been decided to deist the Company s Equity Shares from any one or a of these Stock Exchanges. In terms of appicabe provisions of aw, such deisting wi require an approva of the sharehoders and as such the agenda for the forthcoming Eighteenth Annua Genera meeting contains a resoution on this subject for the approva of the sharehoders. The isting of the Company s Equity Shares on The Stock Exchange, Mumbai wi however continue. The isting fees for the year have been paid to the Stock Exchanges. DIRECTORS Mr. Gordon W. Robinson who has been acting as the Chairman of the Board of Directors ( the Board ) since Apri 1999 has been appointed as the Chairman & Managing Director of the Company by the Board effective from the date of his obtaining the requisite empoyment VISA and compiance with such other formaities as may be appicabe. Mr. Scott A. Scherff has resigned as a Director of the Company with effect from 4 February, Directors wish to pace on record their deep appreciation for the vauabe contribution made by Mr. Scherff during his tenure as a Director of the Company. Mr. Gordon W. Robinson and Mr. Michae J. Hi, being Non-Executive Directors as at present and being the ongest in office, are iabe to retire by rotation at the forthcoming Annua Genera Meeting of the Company; and both being eigibe, offer themseves for reappointment. In case Mr. Gordon W. Robinson obtains empoyment VISA before the date of the Annua Genera Meeting, he woud forthwith assume office of the Chairman & Managing Director of the Company and, therefore being an Executive Director, he wi not be iabe to retire at the said Annua Genera Meeting; and in that case, Mr. Michae J. Hi and Mr. Jon T. Esasser, both being Non-Executive Directors of the Company being then the ongest in office, wi be iabe to retire by rotation and being eigibe, sha offer themseves for reappointment at the said Annua Genera Meeting of the Company. AUDITORS Messrs. S R Batiboi and Co., Chartered Accountants, Auditors of the Company retire at the concusion of the Eighteenth Annua Genera Meeting and offer themseves for reappointment. They have furnished to the Company a Certificate, regarding their eigibiity for reappointment. Pursuant to the directions received from the Centra Government, Mr. Prakash Kumar Varma has been reappointed as the Cost Auditor 7

9 to audit the Cost Accounts of the Company for the year ended December 31, CORPORATE GOVERNANCE Pursuant to cause 49 of the Listing Agreements with the Stock Exchanges, Management Discussion and Anaysis, Corporate Governance Report and Auditors Certificate regarding compiance of conditions of corporate governance are made a part of the Annua Report. INDUSTRIAL RELATIONS The performance of the Company during the year ended December 31, 2004 coud be made possibe ony with the dedication, hard work and commitment of a the Associates. The Directors express their appreciation for the whoehearted support received from a sections of the Associates of the Company. SOCIAL RESPONSIBILITY The Company has been activey participating in the promotion of socia wefare activities of the community in the industria town of Jamshedpur and far-fung paces impacted by devastating Tsunami in the recent past. Associates of the Company donated one day s saary for this purpose and your Company donated twice the amount contributed by the Associates. The Timken Company, USA donated US$ 1,00,000 for this purpose. PARTICULARS OF EMPLOYEES No empoyee of the Company, empoyed throughout the year, was in receipt of remuneration which was in excess of the imits referred to in Section 217(2A) of the Companies Act, 1956, and the Rues framed thereunder. A statement pursuant to the aforesaid provisions containing particuars of an empoyee empoyed for the part of the year and receiving remuneration for any part thereof in excess of the prescribed imits is given in Annexure to the Directors Report. CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION & FOREIGN EXCHANGE A the new machineries instaed during the year are energy efficient. Significant cost saving on cutting fuids and consumption of eectricity have been achieved by machine modifications, energy audit and efficient cooant management. Regarding absorption of foreign technoogy, the process is ongoing in the areas of machining, heat treatment and finishing. The Company has now achieved fu indigenisation of a components for Standard Bearings and substantia indigenisation for AP Bearings. It is the intention of the Company to proceed with the process of indigenisation further. Other detais are given in the Annexure, which aso forms part of this report. DIRECTORS RESPONSIBILITY STATEMENT Pursuant to the provision of Section 217(2AA) of the Companies Act, 1956, the Directors give hereunder the Directors Responsibiity Statement reating to the Accounts of the Company: (1) The appicabe Accounting Standards had been foowed, in the preparation of the accompanying Accounts; (2) The Directors had seected such Accounting Poicies and appied them consistenty and made judgments and estimates that are reasonabe and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the year ended December 31, 2004 and of the profit of the Company for the said period; (3) The Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safe guarding the assets of the Company and for preventing and detecting fraud and other irreguarities; and (4) The Directors had prepared the accompanying Accounts on a going concern basis. Kokata February 4, 2005 For and on behaf of the Board of Directors Gordon Wiiam Robinson Chairman ANNEXURE TO THE DIRECTORS REPORT FOR THE YEAR ENDED 31ST DECEMBER 2004 Statement of particuars of empoyees pursuant to the provisions of Sec 217(2A) of the Companies Act, 1956, read with the Companies (Particuars of Empoyees) Rues, S. Name Designation & Remuneration Quaification Age Experience Date of Particuars of Last Empoyment No. Nature of Duty (Rs) (Years) (Years) Commencement (ast post hed, Empoyer, Period of Empoyment of Empoyment) 1 Sinha A. K.* Director 1,603, B.A. (Hons.), L.L.B /8/1995 Dy. Chief Personne Manager, SAIL (H.R. & A.) Dip. in Personne Mgmt. Bokaro, 15 Years * Part of the year. Notes : (1) Gross remuneration comprises Saary, Aowances and Taxabe Vaue of Perquisites, and in appicabe cases, Company s contribution to Provident & Superannuation Funds, but excudes contribution to Gratuity Fund on the basis of actuaria vauation. (2) The Nature of Empoyment of Mr. A. K. Sinha was contractua. (3) Mr. A. K. Sinha is not a reative of any Director of the Company. For and on behaf of the Board of Directors Kokata, February 4, 2005 Gordon Wiiam Robinson Chairman 8

10 EIGHTEENTH ANNUAL REPORT ANNEXURE TO THE DIRECTORS REPORT INFORMATION UNDER SECTION 217(1)(e) OF THE COMPANIES ACT, 1956 READ WITH THE COMPANIES (DISCLOSURE OF PARTICULARS IN THE REPORT OF BOARD OF DIRECTORS RULES), 1988 AND FORMING PART OF DIRECTORS REPORT A. CONSERVATION OF ENERGY (a) Energy conservation measures taken (b) Additiona Investments / proposa, if any (c) Impact of the measures at (a) and (b) above (d) Tota energy consumption and energy consumption per unit of production Comprehensive energy audit was done by The Energy Resources Institute (TERI). Most of the recommendations have been impemented. Overa Pant power factor improved from 0.85 to Efficiency of Centra A.C. Chier improved by heat oss minimization, resuting in energy savings of 2.93 acs KWH. In addition, three gas fired preheaters were instaed heping in increasing energy productivity without any eectrica consumption. Three eectricay heated retort furnaces were repaced by gas fired 4B Furnace with operationa contros put in pace to optimize furnace usage. Overa Pant air pressure requirement was reduced from 5.8 bar to 5.1 bar by improving distribution osses. Air osses were minimized effecting the overa consumption reduced from 1000 cfm to 850 cfm. New equipments / machines added during the year are energy efficient ike earier instaations (Aso pease see Directors Report). As per detais given beow under Form A B. TECHNOLOGY ABSORPTION (e) As per detais given beow under Form B. C. FOREIGN EXCHANGE EARNINGS AND OUTGO (f) Activities reating to exports, initiatives taken to increase exports; deveopment of new export markets for products and services; and export pans During the period under review, exports registered an increase of 42% compared to Some of the Part Numbers hitherto manufactured at other Timken ocations wordwide have now moved to Company s Pant in Jamshedpur. The current indications about the export trend remains encouraging even in (g) Tota foreign exchange used and earned (Rs./Lacs) i) Foreign Exchange Earnings ii) Foreign Exchange Outgo FORM A Form for Discosure of Particuars with respect to Conservation of Energy A. Power and fue consumption 1. Eectricity (a) Purchased Units (KWH) 1,87,92,090 1,86,07,390 Tota amount (Rs.) 7,41,09,955 7,49,68,421 Rate Per Unit (Rs.) (a incusive) (b) Own generation (i) Through diese generator Unit Not used for operations. Ony for emergency ighting and water Unit per tr. of diese oi requirements. Cost / unit (ii) Through steam turbine / generator Units There is no Steam Turbine / Generator. Units per tr. of fue oi/gas Cost / unit 2. Coa (specify quaity and where used) Not Used Quantity (tonnes) Tota Cost Average rate 9

11 3. Furnace Oi Not Used Quantity (k.trs.) Tota amount Average rate 4. Other/interna generation (pease give detais) Not Used Quantity Tota Cost Rate / Unit B. Consumption per unit of production Standards (if any) Products (with detais) unit Standard Bearings Not set (Standard varies with product mix) Eectricity Furnace oi Not Used Not Used Coa (specify quaity) Not Used Not Used Others (specify) Ni Ni FORM B Form for discosure of particuars with respect to absorption TECHNOLOGY ABSORPTION (A) Research and Deveopment (R&D) 1. Specific areas in which R&D carried out by the Company 2. Benefits derived as a resut of the above R&D 3. Future pan of action 4. Expenditure on R&D: a. Capita b. Recurring c. Tota d. Tota R&D expenditure as a percentage of tota turnover (B) Technoogy absorption, adaptation and innovation 1. Efforts, in brief, made towards technoogy absorption, adaptation and innovation. 2. Benefits derived as a resut of the above efforts, e.g., product improvement, cost reduction, product deveopment, import substitution, etc. 3. In case of imported technoogy (imported during the ast 5 years reckoned from the beginning of the financia year), foowing information may be furnished: a) Technoogy imported b) Year of import c) Has technoogy been fuy absorbed? d) If not fuy absorbed, areas where this has not taken pace, reasons therefor and future pans of actions The benefits of Research faciities avaiabe with The Timken Company are extended to Timken India Limited on a continuing basis. Under the Coaboration Agreement, technoogy update is reeased from The Timken Company which is transferred to the shop foor instructions. Any improvement in the technoogy/ process is part of this continuous update and this is being reguary monitored by The Timken Company personne. Manufacture of Tapered Roer Bearings onwards. It is being graduay absorbed. Ongoing in the areas of Machining, heat treatment and finishing. To make further improvements in the manufacturing process, product quaity and production output. Kokata February 4, 2005 For and on behaf of the Board of Directors Gordon Wiiam Robinson Chairman 10

12 EIGHTEENTH ANNUAL REPORT MANAGEMENT DISCUSSION AND ANALYSIS Industry Structure and Deveopment Bearing industry covers both Ba and Roer Bearings. Roer Bearings can further be divided into Tapered Roer, Spherica, Cyindrica Roer, Neede Roer and thrust bearings and other specia appication bearings. Whie some of the manufacturers cater to speciaized appications, the rest are invoved in manufacture of both Ba Bearings and Roer Bearings. Timken India Limited (TIL) speciaizes in the manufacture of Tapered Roer Bearings (TRBs) at its Jamshedpur pant. However through its saes organization, it ses wide range of imported bearings of a kinds manufactured at Timken s various Pants wordwide. The growth in bearing industry is directy reated to the growth of industries having bearing appications ike automotive, eectrica appications, pumps, fans and agricutura machinery. These high voume segments are catered primariy by domestic manufacturers. Heavy duty industria appications in roing stock, roing mis, heavy earth moving equipments, cement mis and other heavy machinery are met from imports. TIL is essentiay catering to heavy automobies and rai segment both in domestic and export markets in TRB appications. It meets the requirements of industria appications stee, heavy machinery from imports from other Timken units. Opportunities and Threats As mentioned above, the growth of bearing industry is inked to the growth of the major bearing appications industry, i.e. the Automobies/ Engineering/ Raiways. Demand growth in bearings wi argey depend on the growth of demand of the origina equipment manufacturers (OEM) in the automobie industry, engineering segment and opportunities in the internationa markets. Since TIL speciaizes in TRBs ony, the demand for growth of TRBs wi heaviy depend on the growth in the demand of trucks, tractors, raiways, etc. both in domestic and internationa markets. New bearings are aso used for repacement of od, worn out bearings. The size of this market is dependent on equipment popuation, frequency of maintenance, etc. TRBs as used in the engineering industry are arge in size and are mosty catered through imports. The growth in demand for arge industria bearings wi depend on the growth of industria and infrastructura activities. Liberaization of industria poicy, rationaization of duty structure, growth in demand in export markets, entry of mutinationas and increasing demand for industria products may resut in an increase in demand for arge bearings. With the acquisition of Torrington, the product offering by Timken has enarged manifod. In addition to the offerings of bearings of other types, seas, reated parts, grease, ubricators and Industria bearing repair services, TIL has got access to the Torrington and Fafnir brand of products comprising neede, spherica, cyindrica bearings, engine bearings and steering products and assembies to name a few. It aunched onsite industria services at two new ocations at Beary at Jinda, Vijaynagar and at Hazira at Essar Stee. Further, TIL introduced range of quaity seaant and adhesives and vaue added offering such as Condition Monitoring to its Industria customers. The units in the unorganized sector of the Bearing Industry mainy cater to the ow tech. appications and repacement market which is price eastic. They are competitive compared to the manufacturers in the organized sector but offer inferior quaity. Though they have got a strict regiona presence, their impact in Bearing Industry cannot be ignored. Segmentwise Performance The Management reviewed the discosure requirement of segmentwise reporting and is of the view that since the Company manufactures bearings and reated components which is a singe business segment in terms of AS-17, a separate discosure on reporting by business segments is not required. The geographica segments however, have been determined on the basis of ocation of major customers of the Company. During 2004, 59% of the Company s turnover was to customers ocated in India and the remaining 41% was to countries outside India. The shipments for exports were mainy to USA though the Company has aso exported its products in Europe and Brazi. Outook Risks and Concern TIL, being part of arge mutinationa Timken Company, enjoys severa advantages which wi become increasingy important in view of a gobaizing Indian economy: The Timken Company s goba reach and its strength in R&D makes TIL the suppier of choice of the many internationa companies operating in India (as compared to oca domestic competitors). The possibiity to export to other countries represents a good growth potentia for TIL and provides a possibiity to partiay compensate variation in demand on the domestic Indian market. The Timken Company s acquisition of Torrington broadens the product range and increases saes opportunities in India. The main risks are: Significant raises in raw materia costs wi impact production costs and, if bearing market prices cannot be raised, wi drasticay impact profit margins uness operating costs can be reduced at unprecedented magnitude and speed. TIL needs to remain profitabe for domestic saes and gobay competitive for exports. Quaity of inputs with on time deivery remained a significant concern to the Company s success in future. To uphod TIMKEN Brand equity, TIL needs to ensure 11

13 that the inputs being used to manufacture its products at the Jamshedpur Pant conform to the exact specification of goba standard. With growing Indian economy couped with the reduction in import duties makes India increasingy a target market for many internationa bearing manufacturers and therefore competitive pressures on the domestic market wi continue to grow faster. Infact, imports from neighbouring countries are increasing over the years. This trend is expected to ead to price pressure in domestic market. The management of TIL is aware of both, opportunities & threats, and wi continue to work to maintain goba competitiveness by reducing costs and improving quaity as we as on growth of saes in the domestic market. Interna Contro Systems The various interna contro systems operating in the company are working satisfactoriy. The adequacy and effectiveness of these systems is continuousy monitored by the Interna Audit team and the findings of these audits are reported to the Audit Committee of the Board and aso to the Board of Directors. The adequacy of the interna contro system has aso been examined by the Statutory Auditors and the Audit Department of The Timken Company, USA and the company has not received any major adverse comments from them on the adequacy of the interna contro systems. Financia Performance vis-à-vis Operationa Performance During 2004, net saes grew by 23%, from Rs. 218 Crores in 2003 to Rs. 267 Crores mainy because of voume increases in both Standard and Raiway Bearings. In 2004, exports have aso increased by about 42% over The exports of the Company mainy constitute shipments to USA. Such voume gains couped with better price reaization on export front, improved utiization of existing capacity and reduction in operating and administrative costs have resuted in improvement of profits of the Company as refected in the accompanying accounts. During the period under review, production has increased by about 19% compared to ast year due to better utiization of capacity. An aggregate of Raiway Bearings were produced in 2004 compared to bearings in In Standard, the production during the period was at nos. compared to nos. of bearings during the previous year. Production of components however, has increased significanty to nos. from nos. HR Front During the year under review, the company did not witness any kind of adverse deveopment on the HR/IR front. The reationship between the Associates of the company and the Management remains congenia a through out the year. The company empoyed 554 Associates (incuding 154 Officers) as on December 31,

14 EIGHTEENTH ANNUAL REPORT AUDITORS REPORT TO THE MEMBERS OF We have audited the attached Baance Sheet of Timken India Limited, as at 31st December 2004 and aso the Profit and Loss Account and the Cash Fow Statement for the year ended on that date, annexed thereto. These financia statements are the responsibiity of the Company s management. Our responsibiity is to express an opinion on these financia statements based on our audit. We conducted our audit in accordance with the auditing standards generay accepted in India. Those Standards require that we pan and perform the audit to obtain reasonabe assurance about whether the financia statements are free of materia misstatement. An audit incudes examining, on a test basis, evidence supporting the amounts and discosures in the financia statements. An audit aso incudes assessing the accounting principes used and significant estimates made by the management, as we as evauating the overa financia statement presentation. We beieve that our audit provides a reasonabe basis for our opinion. As required by the Companies (Auditor s Report) Order, 2003 (as amended) issued by the Centra Government of India in terms of sub-section (4A) of Section 227 of the Companies Act, 1956, we encose in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the said Order. Further to our comments in the Annexure referred to above, we report that : i) We have obtained a the information and expanations, which to the best of our knowedge and beief, were necessary for the purposes of our audit; ii) iii) iv) In our opinion, proper books of account as required by aw have been kept by the company, so far as appears from our examination of those books; The Baance Sheet, Profit and Loss Account and Cash Fow Statement deat with by this report are in agreement with the books of account; In our opinion, the Baance Sheet, Profit and Loss Account and Cash Fow Statement deat with by this report compy with the accounting standards referred to in sub-section (3C) of section 211 of the Companies Act, 1956; v) On the basis of written representations received from the directors, as on 31st December 2004, and taken on record by the Board of Directors, we report that none of the directors is disquaified as on 31st December 2004 from being appointed as a director in terms of cause (g) of sub-section (1) of section 274 of the Companies Act, 1956; vi) In our opinion and to the best of our information and according to the expanations given to us, the said accounts give the information required by the Companies Act, 1956, in the manner so required and give a true and fair view in conformity with the accounting principes generay accepted in India: a. in the case of the Baance Sheet, of the state of affairs of the Company as at 31st December, 2004; b. in the case of the Profit and Loss Account, of the profit for the year ended on that date; and c. in the case of cash fow statement, of the cash fows for the year ended on that date. S. R. BATLIBOI & CO. CHARTERED ACCOUNTANTS Per RAHUL ROY a Partner Pace : Kokata Membership no Date : February 4,

15 ANNEXURE TO THE AUDITORS REPORT TO THE MEMBERS OF REFERRED TO IN OUR REPORT OF EVEN DATE (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) The Company is maintaining proper records showing fu particuars, incuding quantitative detais and situation of fixed assets. Fixed assets have been physicay verified by the management during the year based on a phased programme of verifying a the assets over three years, which in our opinion is reasonabe having regard to the size of the Company and the nature of its fixed assets. No materia discrepancies were noticed on verification. There was no substantia disposa of fixed assets during the year. The management has conducted physica verification of inventory at reasonabe intervas. The procedures of physica verification of inventory foowed by the management are reasonabe and adequate in reation to the size of the Company and the nature of its business. The Company is maintaining proper records of inventory and no materia discrepancies were noticed on physica verification. As informed to us, the Company has neither granted nor taken any oans, secured or unsecured, to / from companies, firms or other parties covered in the register maintained under section 301 of the Companies Act, In our opinion and according to the information and expanations given to us, there is an adequate interna contro procedure commensurate with the size of the Company and the nature of its business, for the purchase of inventory and fixed assets and for the sae of goods and services. During the course of our audit, no major weakness has been noticed in the interna contros in respect of these areas. Based on the information and expanations given to us, the particuars of contracts and arrangements that need to be entered into a register in pursuance of section 301 of the Companies Act, 1956 have been so entered. The company interaia, undertakes transactions of purchase and sae of Goods, Materias, and services with associate and group companies, in pursuance of contracts / arrangements entered in the register maintained under section 301 of the Companies Act, As, a number of such transactions reate to proprietary items manufactured by the Timken Group and Raw Materias in connection thereto, comparative rates are not aways avaiabe; however, consideration of the seing price of such goods, in the market, and reevant transfer pricing guideines, prima facie indicate that the transactions are at reasonabe prices. The Company has not accepted any deposit from pubic within the meaning of sections 58A and 58AA of the Companies Act, The Company has an interna audit system, which in our opinion, is commensurate with the size and nature of its business. We have broady reviewed the books of account maintained by the Company pursuant to the order made by the Centra Government for the maintenance of cost records under section 209(1)(d) of the Companies Act, 1956 and are of the opinion that prima facie the prescribed accounts and records have been made and maintained. The Company is reguar in depositing undisputed statutory dues incuding Provident Fund, Investor Education and Protection Fund, Income tax, Saes tax, Weath Tax, Service Tax, Custom Duty, Excise Duty, Cess and other materia statutory dues with the appropriate authorities. As informed to us, the provisions of ESI Act are not appicabe to the Company. There are no dues outstanding of saes tax, income tax, custom duty, weath tax, service tax, excise duty and cess on account of any dispute, other than the foowing : Name of Statute Nature of Dues Amount Period to which Forum where dispute is (Rs.) it reates pending Income Tax Act, 1961 Income Tax 12,33, Deputy Commissioner of Income Demands Tax, Circe - 1, Kokata Income Tax Act, 1961 Income Tax 2,43, Commissioner of Income Tax Demands (Appeas) - 1, Kokata Assam Genera Saes Loca Saes Tax 1,81, and Deputy Commissioner of Saes Tax Act, 1993 Demands Tax (Appeas), Guwahati, Assam Bihar Saes Tax Act, Loca Saes Tax 7,51, and Joint Commissioner (Assessment), 1981 Demands Jamshedpur Bihar Saes Tax Act, Centra Saes Tax 53,51, and Joint Commissioner (Assessment), 1981 Demands Jamshedpur 14

16 EIGHTEENTH ANNUAL REPORT ANNEXURE TO THE AUDITORS REPORT (Continued) Name of Statute Nature of Dues Amount Period to which Forum where dispute is (Rs.) it reates pending UP Trade Tax Act, Loca Saes Tax 7,83, and Tribuna Bench, Ghaziabad (UP) 1948 Demands Dehi Saes Tax Loca Saes Tax 2,92, Assessing Officer, Bikri Kar Act, 1975 Demands Bhawan, New Dehi Taminadu Genera Loca Saes Tax 27,41, Saes Tax Assessing Officer, Saes Tax Act, 1959 Demands Taminadu Madhya Pradesh Loca Saes Tax 3,04, Commissioner of Saes Tax, Commercia Tax Demands Raipur, Chattisgarh Act, 1994 Centra Excise Act, Excise Duty 52,45, Assistant Commissioner, 1944 Demands Division 2, Jamshedpur Centra Excise Act, Excise Duty 24,52, to Appea fied before CESTAT 1944 Demands (x) (xi) (xii) (xiii) (xiv) (xv) (xvi) (xvii) (xviii) (xix) (xx) (xxi) The Company has no accumuated osses at the end of the financia year and it has not incurred any cash osses in the current and immediatey preceding financia year. As per books and records maintained by the Company and according to the information and expanations given to us, the Company has not defauted in repayment of dues to a financia institution or bank or debenture hoders. According to the information and expanations given to us and based on the documents and records produced to us, the Company has granted oans and advances on the basis of other securities in respect of which adequate documents and records are maintained. As informed and expained to us, the Company has not granted any oans and advances on the basis of security by way of pedge of shares and debentures. In our opinion, the Company is not a chit fund or a nidhi/mutua benefit fund/society. Therefore, the provisions of cause 4(xiii) of the Companies (Auditor s Report) Order, 2003 (as amended) are not appicabe to the Company. As informed and expained to us, the Company has not deat/traded in securities or debentures during the year. In our opinion and according to the information and expanations given to us, proper records have been maintained of the transactions and contracts reating to deaing/tradings in Shares and Other investments and timey entries have been made therein. The shares and other investments have been hed by the Company, in its own name. According to the information and expanations given to us, the Company has not given any guarantee for oans taken by its associates from bank or financia institutions. As informed to us, the Company has no subsidiary companies. The Company did not have any term oans outstanding during the year. According to the information and expanations given to us and on an overa examination of the baance sheet and cash fow statement of the Company, we report that no funds raised on short-term basis have been used for ong-term investment. The Company has not made any preferentia aotment of shares to parties or companies covered in the register maintained under section 301 of the Companies Act, The Company did not have any outstanding debentures during the year. The Company has not raised any money through a pubic issue during the year. Based upon the audit procedures performed for the purpose of reporting the true and fair view of the financia statements and as per the information and expanations given by the management, we report that no fraud on or by the Company has been noticed or reported during the course of our audit. S. R. BATLIBOI & CO. CHARTERED ACCOUNTANTS Per RAHUL ROY Pace : Kokata a Partner Date : February 4, 2005 Membership no