We have audited the attached Balance Sheet of SOUTHERN MAGNESIUM AND
 CHEMICALS LIMITED, HYDERABAD (A.P) as at 31st March, 2012 and also the
 Statement of Profit and Loss for the year ended on that date annexed
 thereto and the cash flow statement for the period ended on that date.
 These financial statements are the responsibility of the Company''s
 Management. Our responsibility is to express an opinion on these
 financial statements based on our audit.
 
 We conducted our audit in accordance with the auditing standards
 generally accepted in India. Those Standards require that we plan and
 perform the audit to obtain reasonable assurance about whether the
 financial statements are free of material misstatement. An audit
 includes examining, on a test basis, evidence supporting the amounts
 and disclosures in the financial statements. An audit also includes
 assessing the accounting principles used and significant estimates made
 by management, as well as evaluating the overall financial statement
 presentation. We believe that our audit provides a reasonable basis for
 our opinion and report that:
 
 1.  As required by the Companies (Auditors'' Report) Order, 2003, issued
 by the Central Government of India in terms of Section 227(4A) of the
 Companies Act, 1956, we enclose in the Annexure a statement on the
 matters specified in paragraphs 4 and 5 of the said Order.
 
 2.  Further to our comments in the Annexure referred to in paragraph 1
 above :
 
 a.  We have obtained all the information and explanations which to the
 best of our knowledge and belief 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 so far as appears from our examination of
 those books.
 
 c.  The Balance Sheet, the Statement of Profit and Loss and Cash Flow
 statement dealt with by this report are in agreement with the books of
 account.
 
 d.  In our opinion, the Balance Sheet, the Statement of Profit and Loss
 and Cash Flow Statement dealt with by this report comply with the
 accounting standards referred to in sub-section (3C) of Section 211 of
 the Companies Act, 1956 excepting AS-15, Employee Benefits.
 
 e.  On the basis of the written representations received from the
 Directors as on 31st March, 2012 and taken on record by the Board of
 Directors, we report that, none of the Directors is disqualified as on
 31st March, 2012 from being appointed as a Director in terms of clause
 (g) of sub-section (1) of Section 274 of the Companies Act, 1956.
 
 f.  The company has not adopted and complied with the requirements of
 AS-15 ''Employee Benefits'' in respect of gratuity liability. In view
 of this the liability of the company in this regard could not be
 ascertained. Consequently, we are unable to comment about the impact of
 this on the Loss for the year.
 
 g.  In our opinion and to the best of our information and according to
 the explanations given to us, the said accounts read in conjunction
 with the Schedules annexed therewith and subject to our comments given
 in para f above, 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 principles generally accepted in India :
 
 i) In the case of the Balance Sheet, of the state of affairs of the
 Company as at 31st March, 2012;
 
 ii) In the case of the Statement of Profit and Loss of the Loss of the
 Company for the year ended on that date; and
 
 iii) In the case of Cash Flow Statement of the cash flows for the year
 ended on that date.
 
 ANNEXURE REFERRED TO IN PARAGRAPH 1 OF OUR REPORT OF EVEN DATE
 
 (i) (a) The Company maintains proper records showing full particulars,
 including quantitative details and situation of fixed assets;
 
 (b) The fixed assets have been physically verified by the management at
 reasonable intervals; no material discrepancies were noticed on such
 verification.
 
 (c) During the year the company had disposed off substitutional part of
 factory building. In our opinion, this does not affect the going
 concern assumption, since the company buys magnesium ingots, process
 them and self the processed products.
 
 ii) (a) Management had physically verified the inventory at reasonable
 intervals.
 
 (b) In our opinion the procedures of physical verification of inventory
 followed by the management are reasonable and adequate in relation to
 the size of the company and the nature of its business.
 
 (c) The Company maintains proper records of inventory and no material
 discrepancies were noticed on physical verification.
 
 (iii) (a) to (d) Since the Company has not granted any loans, our
 comments do not arise with regard to the principal recoveries and
 overdue amounts in respect of loans granted.
 
 (e) The Company has taken unsecured loans from two Companies and other
 three parties covered in the register maintained under section 301 of
 the Act. The amount involved in transactions is Rs.262.5 lakhs, year
 end balances was Rs.260.50 lakhs and
 
 (f) In our opinion the terms and conditions on which the unsecured
 loans were availed by the Company are not prima facie prejudicial to
 the interest of the company.
 
 (g) The company has not repaid principal amount and the loans are
 interest free.
 
 (iv) In our opinion there are adequate internal control systems
 commensurate with the size of the company and the nature of its
 business, for the purchase of inventory and fixed assets and for the
 sale of goods and there were no weaknesses in internal control system.
 
 (v) (a) There were no transactions that need to be entered into a
 register required to be maintained under section 301 of the Act during
 the year except acceptance of unsecured loans from directors and
 intercorporate deposits.
 
 (b) In view of the above comment Clause - V(b) is not applicable.
 
 (vi) The Company has not accepted deposits from the public, so the
 directives issued by the Reserve Bank of India and the provisions of
 sections 58A, 58AA or any other relevant provisions of the Act and the
 rules framed there under are not applicable to the Company during the
 year under report.
 
 (vii) The Company has no internal audit system. However, there are
 adequate internal control procedures commensurate with its size and
 nature of its business.
 
 (viii) In our opinion the maintenance of Cost Records rules 2011 are
 not applicable to the company for the year under report.
 
 (ix) (a) The Company is not regular in depositing undisputed statutory
 dues including Provident Fund and Sales Tax.
 
 Undisputed amount of Rs.4,04,665/- in respect of interest on Sales Tax
 was in arrears as at 31.03.2012 for a period of more than six months
 from the date they became payable.
 
 The company deposits regularly Excise Duty, Service Tax and Income Tax.
 During the year under report there were no amounts depositable in
 respect of Investor Protection Fund, Employee''s State Insurance,
 Wealth Tax, Customs Duty.
 
 (b) There are no dues of sales tax, income tax, custom tax, wealth tax,
 cess which have not been deposited on accoun of any dispute.
 
 (x) Company''s accumulated losses at the end of the financial year
 were more than 50% of its net worth and it had not incurred cash loss
 in the period under report and incurred cash loss in the immediately
 preceeding financial year.
 
 (xi) Company has not borrowed money from a financial institution or
 from a bank. Hence, clause (xi), of the above said order is not
 applicable with regard to defaults in repayments of dues.
 
 (xii) The Company has not granted loans and advances on the basis of
 security by way of pledge of shares, debentures and other securities.
 
 (xiii) This clause is not applicable to the Company since this Company
 is neither a Chit Fund nor Nidhi/ mutual benefit fund Society.
 
 (xiv) The Company is not dealing or trading in shares, securities,
 debentures and other investments.
 
 (xv) As per the information given by the Company it has not given any
 guarantee for loans taken by others from bank or financial
 institutions.
 
 (xvi) During the year under report the Company has not availed term
 loans. Hence clause (xvi) of the above said order is not applicable.
 
 (xvii) In our opinion the funds raised on short-term basis were not
 used for long term investment.
 
 (xviii) During the period under report the company had not made any
 preferential allotment of shares to parties and companies covered in
 the Register maintained under section 301 of the Act.
 
 (xix) This clause is not applicable since the Company has not issued
 any Debentures.
 
 (xx) During the period under report the management has not raised any
 money through public issue.
 
 (xxi) During the year under report no fraud on or by the company has
 been either noticed or reported.
 
 
 
                                                   for K.S.Rao & Co.,
                                                Chartered Accountants 
                                             Firms'' Regn. No. 003109S
 
 
 
 
                                                        Sd/-
 Place : Hyderabad                                (P. Govardhan Reddy)
 Date : 30-05-2012                                    Partner
                                                Membership No. 029193