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Dr Reddys Laboratories

BSE: 500124|NSE: DRREDDY|ISIN: INE089A01023|SECTOR: Pharmaceuticals
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Directors Report Year End : Mar '17    Mar 16

Dear members,

The directors are pleased to present the 33rd annual report for the year ended 31 March 2017.

FINANCIAL HIGHLIGHTS

Table 1 gives the financial highlights of the company for FY2017 as compared to the previous financial year, on Ind AS consolidated and standalone basis.

COMPANY AFFAIRS

The company''s standalone net revenue for the year was '' 103.11 billion, a decline of 2.88% over the previous year. In US$ terms, this amounted to $ 1.59 billion. Profit before tax (PBT) was '' 15.45 billion, a decline of 7.88% over the previous year. In US$ terms, this translates into $ 238 million.

Consolidated net revenue for the year was '' 143.68 billion, a decline of 9.43% over the previous year. In US$ terms, this amounted to $ 2.21 billion. PBT was '' 15.54 billion, a decline of 45.65% over the previous year. In US$ terms, this translates into $ 240 million.

TABLE ij FINANCIAL HIGHLIGHTS ('' Million)

CONSOLIDATED

STANDALONE

FY2017

FY2016

FY2017

FY2016

Total revenue

143,676

158,633

103,110

106,168

Profit before depreciation, amortization and tax

25,803

37,977

22,796

23,261

Depreciation and amortization

10,266

9,389

7,351

6,495

Profit before tax

15,537

28,588

15,445

16,766

Tax expense

2,965

7,511

1,604

3,023

Profit after tax

12,572

21,077

13,841

13,743

Share of profit of equity accounted investees, net of tax

349

229

-

-

Net profit for the year

12,921

21,306

13,841

13,743

Add: surplus at the beginning of the year

82,595

67,074

79,930

72,058

Total available for appropriation

95,516

88,380

93,771

85,801

Appropriations:

Dividend paid during the year

3,312

3,411

3,312

3,411

Tax on dividend paid

674

694

674

694

Credit of dividend distribution tax

(596)

-

(633)

(32)

Transfer to general reserve

1,355

1,679

1,355

1,679

Others

-

-

-

119

Balance carried forward

90,771

82,595

89,063

79,930

Revenue from Global Generics declined by 10% and stood at '' 115.41 billion, driven largely by North America and Emerging Markets.

Revenue from North America declined by 16% and stood at '' 63.6 billion. This is primarily on account of increased competition in our key products namely Valganciclovir, Decitabine, Azacitidine etc. coupled with discontinuation of the McNeil business. During the year, the company launched 10 products, the major ones being Omeprazole Sodium Bicarbonate and Nitroglycerin Sublingual tablets. FY2017 also saw 26 ANDA filings in the USA. As of 31 March 2017, cumulatively 101 generic filings are pending for approval with the USFDA (99 ANDAs and two NDAs under 505(b)(2) route). Of these 99 ANDAs, 62 are Para IVs out of which we believe 21 have ''First to File'' status.

Revenue from Emerging Markets was '' 21.1 billion, a decline of 11% on a year-on-year basis. Revenue from India stood at '' 23.1 billion, registering a year-on-year growth of 9%.

Revenues from PSAI stood at '' 21.3 billion, a decline of 5% on a year-on-year basis. During the year, 82 DMFs were filed globally of which nine were in the US. The cumulative number of DMF filings as of 31 March 2017 was 754.

DIVIDEND

Your directors are pleased to recommend a dividend of '' 20/- on every equity share of '' 5/- (400%) for FY2017. The dividend, if approved at the 33rd annual general meeting (AGM), will be paid to those shareholders whose names appear on the register of members of the company as of the end of day on 18 July 2017.

In terms of regulations 43A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations), the company has revised its dividend distribution policy. This policy was originally adopted on 18 May 2009. The policy is attached as Annexure I to the board''s report.

TRANSFER TO RESERVES

The company proposes to transfer '' 1,355 million to the general reserve.

SHARE CAPITAL

The paid-up share capital of your company decreased by '' 24.33 million to '' 828.71 million in FY2017 due to the following:

(a) Buyback and extinguishment of 5,077,504 equity shares,

(b) Allotment of 211,564 equity shares, on exercise of stock options by eligible employees of Dr. Reddy''s, through the ''Employees Stock Option Scheme, 2002'' and ''Dr. Reddy''s Employees ADR Stock Option Scheme, 2007''.

FIXED DEPOSITS

The company has not accepted any deposits covered under chapter V of the Companies Act, 2013. Accordingly, no disclosure or reporting is required in respect of details relating to deposits.

CHANGE IN THE NATURE OF BUSINESS, IF ANY

During the year, there was no change in the nature of business of the company or any of its subsidiaries.

MATERIAL CHANGES AND COMMITMENTS AFFECTING THE FINANCIAL POSITION OF THE COMPANY

None.

SUBSIDIARIES AND ASSOCIATES

The company had 47 subsidiaries and three joint venture companies as on

31 March 2017. During FY2017,

Imperial Credit Private Limited and Dr. Reddy''s Laboratories Kazakhstan LLP, have become subsidiary companies and Reddy Cheminor SA in France, was closed and ceased to be a wholly-owned subsidiary. Further, OctoShare BV, OctoPlus Development BV, OctoPlus Technologies BV, OctoPlus Science BV, OctoPlus PolyActive Science BV and Chienna BV ceased to be subsidiaries of the company, upon their merger with Dr. Reddy''s Research and Development BV (formerly known as OctoPlus BV).

As per section 129(3) of the Companies Act, 2013, where the company has one or more subsidiaries, it shall, in addition to its financial statements, prepare a consolidated financial statement of the company and of all subsidiaries in the same form and manner as that of its own and also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiaries.

In accordance with the above, the consolidated financial statements of the company and all its subsidiaries and joint ventures, prepared in accordance with Indian Accounting Standards (Ind AS) 110 and 111 as specified in the Companies (Indian Accounting Standards) Rules, 2015, form part of the annual report. Further, a statement containing the salient features of the financial statement of our subsidiaries and joint ventures in the prescribed form AOC-1, is attached as Annexure II to the board''s report. This statement also provides details of the performance and financial position of each subsidiary.

In accordance with section 136 of the Companies Act, 2013, the audited financial statements and related information of the subsidiaries, where applicable, will be available for inspection during regular business hours at our registered office in Hyderabad, India. These are also available on the company''s website: www.drreddys.com.

PARTICULARS OF LOANS, GUARANTEES OR INVESTMENTS

The company makes investments or extends loans/guarantees to its wholly owned subsidiaries for their business purposes. Details of loans, guarantees and investments covered under section 186 of the Companies Act, 2013, along with the purpose for which such loan or guarantee was proposed to be utilized by the recipient, form part of the notes to the financial statements provided in this annual report.

CORPORATE GOVERNANCE AND ADDITIONAL SHAREHOLDERS'' INFORMATION

A detailed report on the corporate governance systems and practices of the company is given in a separate chapter of this annual report. Similarly, other information for shareholders is provided in the chapter additional shareholders'' information. A certificate from the statutory auditors of the company confirming compliance with the conditions of corporate governance is attached to the corporate governance report.

MANAGEMENT DISCUSSION AND ANALYSIS

A detailed report on the management discussion and analysis in terms of the provisions of regulation 34 of the Listing Regulations, is provided as a separate chapter in the annual report.

BOARD OF DIRECTORS AND KEY MANAGERIAL PERSONNEL

The term of Mr. Ravi Bhoothalingam as an independent director of the company ended on 27 July 2016. The board places on record its appreciation for the services rendered by Mr. Bhoothalingam during his tenure as a member of the board and its committees.

The board of directors at its meeting held on 12 May 2017, had re-appointed Mr. K Satish Reddy as whole-time director designated as chairman of the company (or such other designation as the board may deem fit), for a further period of five years with effect from 1 October 2017 (including terms and conditions of the appointment), subject to approval of the shareholders at the forthcoming 33rd AGM scheduled on 28 July 2017.

In accordance with section 149(7) of the Companies Act, 2013, each independent director has confirmed to the company that he or she meets the criteria of independence laid down in section 149(6) of the Companies Act, 2013 and regulation 16(1)(b) of the Listing Regulations.

Mr. G V Prasad, retires by rotation at the forthcoming 33rd AGM and being eligible, seeks re-appointment.

Brief profiles of Mr. K Satish Reddy and Mr. G V Prasad are given in the corporate governance section of the annual report and notice convening the 33rd AGM for reference of the shareholders.

BOARD EVALUATION

As per provisions of the Companies Act, 2013 and regulation 17(10) of the Listing Regulations, an evaluation of the performance of the board and members was undertaken. For details, please see the chapter on corporate governance in this annual report.

APPOINTMENT OF DIRECTORS AND REMUNERATION POLICY

The assessment and appointment of members to the board is based on a combination of criteria that includes ethics, personal and professional stature, domain expertise, gender diversity and specific qualification required for the position. A potential board member is also assessed on the basis of the independence criteria defined in section 149(6) of the Companies Act, 2013 and regulation 16(1)(b) of the Listing Regulations.

In accordance with section 178(3) of the Companies Act, 2013, regulation 9(4) of the Listing Regulations and on recommendations of the nomination, governance and compensation committee, the board adopted a remuneration policy for directors, key managerial personnel (KMPs) and senior management. The policy is attached to the corporate governance report.

NUMBER OF BOARD MEETINGS

The board of directors met four times during the year. In addition, an annual board retreat was held to discuss strategic matters. Details of board meetings are given in the corporate governance report.

AUDIT COMMITTEE

The audit committee of the board of directors consists entirely of independent directors. Presently, the committee comprises Mr. Sridar Iyengar (chairman), Ms. Kalpana Morparia, Dr. Omkar Goswami and Mr. Bharat N Doshi. Further details can be seen in the corporate governance report. The board has accepted all recommendations made by the audit committee during the year.

BUSINESS RISK MANAGEMENT

The company has a risk management committee of the board, consisting entirely of independent directors.

Details of the committee and its terms of reference are set out in the corporate governance report.

The audit and risk management committees review key risk elements of the company''s business, finance, operations and compliance and respective mitigation strategies. The risk management committee reviews key strategic, business, compliance and operational risks, while issues around ethics and fraud, internal control over financial reporting (ICOFR), as well as process risks and their mitigation are reviewed by the audit committee.

The company''s finance, investment and risk management council (FIRM council) is a management level committee which operates under a charter and focuses on risks associated with the company''s business and investments. The FIRM council periodically reviews matters pertaining to ethics and fraud, compliance and internal audit. Additionally, the enterprise-wide risk management (ERM) function helps the management and the board to periodically prioritize, review and measure business risks against a pre-determined risk appetite and their suitable response, depending on whether such risks are internal, strategic or external.

During FY2017, focus areas of risk management included progress on strategy execution, quality and regulatory, geo-political, compliance and patent infringement risk exposures, safety and health.

ADEQUACY OF INTERNAL FINANCIAL CONTROL SYSTEMS

The company has in place adequate internal financial controls with reference to financial statements. These controls ensure the accuracy and completeness of the accounting records and preparation of reliable financial statements.

DIRECTORS'' RESPONSIBILITY STATEMENT

In terms of section 134(5) of the Companies Act, 2013, (''the Act''), your directors state that:

1. applicable accounting standards have been followed in the preparation of the annual accounts;

2. accounting policies have been selected and applied consistently. Judgments and estimates made are reasonable and prudent, so as to give a true and fair view of the state of affairs of the company at the end of the FY2017 and of the profit of the company for that period;

3. proper and sufficient care has been taken to maintain adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

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

5. adequate internal financial controls for the company to follow have been laid down and these are operating effectively; and

6. proper and adequate systems have been devised to ensure compliance with the provisions of all applicable laws and these systems are operating effectively.

RELATED PARTY TRANSACTIONS

In accordance with section 134(3)(h) of the Companies Act, 2013 and rule 8(2) of the Companies (Accounts) Rules, 2014, the particulars of contract or arrangement entered into by the company with related parties referred to in section 188(1) in form AOC-2 is attached as Annexure III. All such contracts or arrangements are in the interest of the company. Details of related party disclosures form part of the notes to the financial statements provided in this annual report.

VIGIL MECHANISM/WHISTLE BLOWER POLICY

The company has an ombudsperson policy (whistle blower/vigil mechanism) to report concerns. The vigil mechanism consists of a hotline - a dedicated email-ID and a phone number. The ombudsperson policy safeguards from victimization of those who use this mechanism. An audit committee member is the chief ombudsperson. The policy also provides access to the chairperson of the audit committee under certain circumstances. Details of the policy are also available on the company''s website: www.drreddys.com/investors/ governance/ombudsperson-policy

STATUTORY AUDITORS

M/s. S R Batliboi & Associates LLP, chartered accountants (firm registration no. 101049W/E300004) were appointed as statutory auditors of the company at the 32 nd AGM held on 27 July 2016, for a period of 5 years commencing from the conclusion of 32nd AGM till the conclusion of the 37th AGM, subject to ratification by shareholders every year, as may be applicable. The firm has consented and confirmed that the appointment is within the limits specified under section 141(3)(g) of the Companies Act, 2013. The statutory auditors have also confirmed that they are not disqualified to be appointed as such in terms of the proviso to section 139(1), section 141(2) and section 141(3) of the Companies Act, 2013 and the Companies (Audit and Auditors) Rules, 2014.

The audit committee and the board of directors recommend to the shareholders the ratification of appointment of M/s. S R Batliboi & Associates LLP, chartered accountants, as statutory auditors of the company from the conclusion of the 33rd AGM till the conclusion of 34th AGM.

SECRETARIAL AUDITOR

Pursuant to section 204 of the Companies Act, 2013 and the Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014,

Dr. K R Chandratre, practicing company secretary (membership no. FCS 1370 and certificate of practice no. 5144) was appointed to conduct the secretarial audit of the company for FY2017. The secretarial audit report for FY2017 is attached as Annexure IV.

Based on the consent received from Dr. K R Chandratre, and on the recommendations of the audit committee, the board has appointed him as the secretarial auditor of the company for FY2018.

COST AUDITORS

Pursuant to section 148 of the Companies Act, 2013 read with the Companies (Audit and Auditors) Rules, 2014 and the Companies (Cost Records and Audit) Amendment Rules, 2014, the company maintains the cost audit records in respect of its pharmaceutical business. On recommendation of the audit committee, your board has appointed M/s. Sagar & Associates, cost accountants (firm registration no. 000118) as cost auditors of the company for the FY2018 at a remuneration of '' 7 lakhs plus reimbursement out of pocket expenses at actuals and applicable taxes. The provisions also require that the remuneration of the cost auditors be ratified by the shareholders. As a matter of record, relevant cost audit reports for FY2016 were filed with the Central Government on 24 August 2016, within the stipulated timeline. The cost audit reports for FY2017 will be also filed within the timeline.

BOARD''S RESPONSE ON AUDITOR''S QUALIFICATION, RESERVATION OR ADVERSE REMARK OR DISCLAIMER MADE

There are no qualifications, reservations or adverse remarks made by the statutory auditors in their report or by the practicing company secretary in the secretarial audit report. During the year, there were no instances of frauds reported by auditors under section 143(12) of the Companies Act, 2013.

SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE COURTS/REGULATORS

None.

INFORMATION REQUIRED UNDER SEXUAL HARASSMENT OF WOMEN AT WORKPLACE (PREVENTION, PROHIBITION AND REDRESSAL) ACT, 2013

The company has an apex complaints committee and an internal complaints committee which operate under a defined redressal system for complaints pertaining to sexual harassment of women at workplace. Details are available in the principle 3 under section 7 of the business responsibility report forming a part of this annual report.

CORPORATE SOCIAL RESPONSIBILITY (CSR) INITIATIVES

As per section 135 of the Companies Act, 2013, the company has a board level CSR committee consisting of Mr. Bharat N Doshi (chairman), Mr. G V Prasad and Mr. K Satish Reddy. The company''s CSR policy provides a constructive framework to review and organize our social outreach programs in health, livelihood and education. During the year, the committee monitored implementation and adherence to the CSR policy. Details about the CSR policy and initiatives taken by the company during the year are available on the company''s website: www.drreddys.com. The report on CSR activities is attached as Annexure V.

BUSINESS RESPONSIBILITY REPORT

A detailed business responsibility report in term of the provisions of regulation 34 of the Listing Regulations, is available as a separate section in this annual report.

TRANSFER OF UNPAID AND UNCLAIMED AMOUNTS TO INVESTOR EDUCATION AND PROTECTION FUND (IEPF)

Pursuant to the provisions of the Companies Act, 2013, read with IEPF Authority (Accounting, Audit, Transfer and Refund) Rules, 2016, as amended, declared dividends which remained unpaid or unclaimed for a period of seven years have been transferred by the company to the IEPF, which has been established by the central government.

The above referred rules now mandate transfer of dividends lying unpaid and unclaimed for a period of seven years as well as the underlying equity shares to IEPF. The company has issued individual notices to the shareholders whose equity shares are liable to be transferred to IEPF, advising them to claim their dividend on or before 31 May 2017.

EMPLOYEES STOCK OPTION SCHEMES

During the year, there has been no material change in the ''Dr. Reddy''s Employees Stock Option Scheme, 2002'' and the ''Dr. Reddy''s Employees ADR Stock Option Scheme, 2007'' (both collectively referred as ''the schemes''). The schemes are in compliance with the SEBI (Share Based Employee Benefits) Regulations,

2014. The details are available on the company''s website: www.drreddys.com/ pdf/ESOP_details.pdf.

The details also form part of note 2.28 of the notes to accounts of the standalone financial statements.

PARTICULARS OF EMPLOYEES

Disclosures pertaining to remuneration and other details as required under section 197(12) of the Companies Act, 2013, read with rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are attached as Annexure VI.

In terms of section 197(12) of the Companies Act, 2013, read with rule 5(2) and 5(3) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a statement showing the names and other particulars of the employees drawing remuneration in excess of limits set out in said rules forms part of the annual report.

Considering the first proviso to section 136(1) of the Companies Act, 2013, the annual report, excluding the aforesaid information, is being sent to the shareholders of the company and others entitled thereto. The said information is available for inspection at the registered office of the company during business hours on working days up to the date of the forthcoming 33rd AGM. Any shareholder interested in obtaining a copy thereof may write to the company secretary in this regard.

CONSERVATION OF ENERGY, RESEARCH & DEVELOPMENT, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO

The particulars as prescribed under section 134(3)(m) of the Companies Act, 2013, read with rule 8(3) of the Companies (Accounts) Rules, 2014 are attached as Annexure VII.

EXTRACT OF THE ANNUAL RETURN

Details forming part of the extract of the annual return in form MGT-9 are attached as Annexure VIII.

ACKNOWLEDGEMENT

Your directors place on record their sincere appreciation for the significant contribution made by our employees through their dedication, hard work and commitment, as also for the trust reposed in us by the medical fraternity and patients. We also acknowledge the support extended to us by the analysts, bankers, government agencies, media, customers, suppliers, shareholders and investors at large. We look forward to your continued support in our endeavor to accelerate access to innovative and affordable medicines because Good Health Can''t Wait.

for and on behalf of the

board of directors

K Satish Reddy

Chairman

Place: Hyderabad Date: 12 May 2017

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