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Dr Reddys Laboratories

BSE: 500124|NSE: DRREDDY|ISIN: INE089A01023|SECTOR: Pharmaceuticals
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« Mar 15
Notes to Accounts Year End : Mar '16
1. HEDGES OF FOREIGN CURRENCY RISK AND DERIVATIVE FINANCIAL
 INSTRUMENTS
 
 The Company is exposed to exchange rate risk which arises from its
 foreign exchange revenues and expenses, primarily in U.S. dollars,
 British pounds sterling, Russian troubles and Euros, and foreign
 currency debt in U.S. dollars, Russian troubles and Euros.
 
 The Company uses forward contracts, option contracts and swap contracts
 (derivatives) to mitigate its risk of changes in foreign currency
 exchange rates.  Further, the Company also uses non derivative 
 financial instruments as part of its foreign currency exposure risk
 mitigation strategy. In respect of the aforesaid foreign exchange
 derivative contracts, the Company has recorded, as part of foreign
 exchange gains and losses, a net gain of Rs. 275 and Rs. 1,040 for the
 years ended 31 March 2016 and 2015 respectively.
 
 Hedges of highly probable forecasted transactions
 
 The Company classifies its derivative contracts that hedge foreign
 currency risk associated with highly probable forecasted transactions
 as cash flow hedges and measures them at fair value. The effective
 portion of such cash flow hedges is recorded as part of reserves and
 surplus within the Company''s hedging reserve, and re-classified in
 the statement of profit and loss as revenue in the period
 corresponding to the occurrence of the forecasted transactions. The
 ineffective portion is immediately recorded in the statement of profit
 and loss.
 
 The Company also designates certain non derivative financial
 liabilities, such as foreign currency borrowings from banks, as hedging
 instruments for the hedge of foreign currency risk associated with
 highly probable forecasted transactions and, accordingly, applies cash
 flow hedge accounting for such relationships. Re-measurement gain/loss
 on such non derivative financial liabilities is recorded as part of
 reserves and surplus within the Company''s hedging reserve, and
 re-classified in the statement of profit and loss as revenue in the
 period corresponding to the occurrence of the forecasted transactions.
 
 In respect of the aforesaid hedges of highly probable forecasted
 transactions, the Company has recorded, in reserves and surplus, a net
 loss of Rs. 66 and a net gain of Rs. 51 for the years ended 31 March
 2016 and 2015, respectively. The Company also recorded, as part of
 revenue, a net gain of Rs. 299 and a net gain of Rs. 810 during the
 years ended 31 March 2016 and 2015, respectively.
 
 The net carrying amount of the Company''s hedging reserve was a loss
 of Rs. 20 as at 31 March 2016, as compared to a gain of Rs. 46 as at 31
 March 2015.
 
 2. HEDGES OF FOREIGN CURRENCY RISK AND DERIVATIVE FINANCIAL
 INSTRUMENTS (CONTINUED)
 
 Hedges of recognised assets and liabilities
 
 Changes in the fair value of derivative contracts that economically
 hedge monetary assets and liabilities in foreign currencies and for
 which no hedge accounting is applied are recognised in the statement of
 profi t and loss. The changes in fair value of such derivative
 contracts as well as the foreign exchange gains and losses relating to
 the monetary items are recognised as part of foreign exchange gains and
 losses.
 
 The Company''s activities expose it to a variety of financial risks,
 including market risk, credit risk and liquidity risk. The Company''s
 primary risk management focus is to minimize potential adverse effects
 of market risk on its financial performance. The Company''s risk
 management assessment and policies and processes are established to
 identify and analyze the risks faced by the Company, to set appropriate
 risk limits and controls, and to monitor such risks and compliance with
 the same. Risk assessment and management policies and processes are
 reviewed regularly to reflect changes in market conditions and the
 Company''s activities. The Board of Directors and the Audit Committee
 are responsible for overseeing Company''s financial risk assessment and
 management policies and processes.
 
 a.  Credit risk
 
 Credit risk is the risk of financial loss to the Company if a customer
 or counterparty to a financial instrument fails to meet its
 contractual obligations, and arises principally from the Company''s
 receivables from customers. Credit risk is managed through credit
 approvals, establishing credit limits and continuously monitoring the
 credit worthiness of customers to which the Company grants credit terms
 in the normal course of business. The Company establishes an allowance
 for doubtful debts and impairment that represents its estimate of
 incurred losses in respect of trade and other receivables.
 
 Trade receivables
 
 The Company''s exposure to credit risk is influenced mainly by the
 individual characteristics of each customer. The demographics of the
 customer, including the default risk of the industry and country, in
 which the customer operates, also has an influence on credit risk
 assessment. As at 31 March 2016 and 31 March 2015, the maximum exposure
 to credit risk in relation to trade receivables isRs.38,935 and
 Rs.47,117, respectively (net of allowances).
 
 Trade receivables that are neither past due nor impaired
 
 Trade receivables amounting to Rs.25,826 and Rs.28,687 were neither
 past due nor impaired as at 31 March 2016 and 31 March 2015
 respectively.
 
 b.  Liquidity risk
 
 Liquidity risk is the risk that the Company will not be able to meet
 its financial obligations as they become due. The Company manages its
 liquidity risk by ensuring, as far as possible, that it will always
 have sufficient liquidity to meet its liabilities when due, under both
 normal and stressed conditions, without incurring unacceptable losses
 or risk to the Company''s reputation.
 
 As at 31 March 2016 and 2015, the Company had unutilized credit limits
 from banks ofRs.12,304 and Rs.10,438, respectively.
 
 As at 31 March 2016, the Company had working capital (i.e. current
 assets less current liabilities) of Rs.52,962 including cash and bank
 balances ofRs.12,680 and current investments ofRs.21,122. As at 31
 March 2015, the Company had working capital ofRs.57,247 including cash
 and bank balances of Rs.9,014 and current investments of Rs.21,022.
 
 c.  Market risk
 
 Market risk is the risk of loss of future earnings or fair values or
 future cash flows that may result from a change in the price of a 
 financial instrument. The value of a financial instrument may change as
 a result of changes in the interest rates, foreign currency exchange
 rates and other market changes that affect market risk-sensitive
 instruments. Market risk is attributable to all market risk-sensitive
 financial instruments including foreign currency receivables and
 payables and long term debt. The Company is exposed to market risk
 primarily related to foreign exchange rate risk, interest rate risk and
 the market value of its investments. Thus, the Company''s exposure to
 market risk is a function of investing and borrowing activities and
 revenue generating and operating activities in foreign currencies.
 
 3. FINANCIAL RISK MANAGEMENT (CONTINUED) Foreign exchange risk
 
 The Company''s exchange risk arises from its foreign operations, foreign
 currency revenues and expenses, (primarily in U.S. dollars, British
 pounds sterling, Roubles and Euros) and foreign currency borrowings (in
 U.S. dollars, Euros and Roubles). A significant portion of the
 Company''s revenues are in these foreign currencies, while a significant 
 portion of its costs are in Indian rupees. As a result, if the
 value of the Indian rupee appreciates relative to these foreign
 currencies, the Company''s financial performance gets adversely
 impacted. The exchange rate between the Indian rupee and these foreign
 currencies has changed substantially in recent periods and may continue
 to fluctuate substantially in the future. Consequently, the Company
 uses derivative financial instruments, such as foreign exchange
 forward contracts, option contracts and swap contracts, to mitigate the
 risk of changes in foreign currency exchange rates in respect of its
 highly probable forecasted transactions and recognised assets and
 liabilities.
 
 The details in respect of the outstanding derivative contracts are
 given in Note 2.35 above.
 
 In respect of the Company''s derivative contracts, a 10%
 decrease/increase in the respective exchange rates of each of the
 currencies underlying such contracts would have resulted in an
 approximately Rs. 1,511/(424) increase/(decrease) in the Company''s
 hedging reserve and an approximately Rs. 1,193/ (1,588)
 increase/(decrease) in the Company''s net profit as at 31 March 2016.
 
 In respect of the Company''s derivative contracts, a 10%
 decrease/increase in the respective exchange rates of each of the
 currencies underlying such contracts would have resulted in an
 approximately Rs. 1,308/(631) increase/(decrease) in the Company''s
 hedging reserve and an approximately Rs. 1,460/ (1,604)
 increase/(decrease) in the Company''s net profit as at 31 March 2015.
 
 4. FINANCIAL RISK MANAGEMENT (CONTINUED) Interest rate risk
 
 As of 31 March 2016, the Company had foreign currency loans of Rs.
 27,730 carrying a floating interest rate of LIBOR minus 5 to plus 125
 bps whereas as of 31 March 2015, the Company had foreign currency loans
 of Rs. 26,366 carrying a floating interest rate of LIBOR minus 7.5 -
 125 bps. These loans expose the Company to risk of changes in interest
 rates. The Company''s treasury department monitors the interest rate
 movement and manages the interest rate risk based on its policies,
 which include entering into interest rate swaps as considered
 necessary. An increase or decrease of 10% in the floating interest
 rate component applicable to its loans and borrowings would affect the
 Company''s net profit by approximately Rs. 11 and Rs. 4 for the year
 ended 31 March 2016 and 31 March 2015, respectively.
 
 The Company''s investments in fixed deposits with banks and short term
 liquid mutual funds are for short durations, and therefore do not
 expose the Company to significant interest rates risk.
 
 Commodity rate risk
 
 Exposure to market risk with respect to commodity prices primarily
 arises from the Company''s purchases and sales of active pharmaceutical
 ingredients, including the raw material components for such active
 pharmaceutical ingredients. These are commodity products, whose prices
 may fluctuate significantly over short periods of time. The prices of
 the Company''s raw materials generally fluctuate in line with commodity
 cycles, although the prices of raw materials used in the Company''s
 active pharmaceutical ingredients business are generally more volatile.
 Cost of raw materials forms the largest portion of the Company''s
 operating expenses. Commodity price risk exposure is evaluated and
 managed through operating procedures and sourcing policies. The Company
 has historically not entered into any material derivative contracts to
 hedge exposure to fluctuations in commodity prices.
 
 5. EMPLOYEE BENEFIT PLANS
 
 5.1 Gratuity Plan
 
 In accordance with applicable Indian laws, the Company provides for a
 lump sum payment to eligible employees, at retirement or termination of
 employment based on the last drawn salary and years of employment with
 the Company. Effective 1 September 1999, the Company established the
 Dr.  Reddy''s Laboratories Gratuity Fund (the Gratuity Fund).
 Liabilities in respect of the Gratuity Plan are determined by an
 actuarial valuation, based upon which the Company makes contributions
 to the Gratuity Fund. Amounts contributed to the Gratuity Fund are
 primarily invested in Indian government bonds and corporate debt
 securities. A portion of the fund is also invested in Indian equities.
 
 6. EMPLOYEE BENEFIT PLANS (CONTINUED) 
 
 6.1 Other benefits
 
 Provident fund benefits
 
 Certain categories of employees of the Company receive benefits from a
 provident fund, a defined contribution plan. Both the employee and
 employer each make monthly contributions to a government administered
 fund equal to 12% of the covered employee''s qualifying salary. The
 Company has no further obligations under the plan beyond its monthly
 contributions. The Company contributed Rs. 551 and Rs. 471 to the
 provident fund plan during the year ended 31 March 2016 and 2015
 respectively.
 
 Superannuation benefits
 
 Certain categories of employees of the Company participate in
 superannuation, a defined contribution plan administered by the Life
 Insurance Corporation of India. The Company makes annual contributions
 based on a specified percentage of each covered employee''s salary. The
 Company has no further obligations under the plan beyond its annual
 contributions. The Company contributed Rs. 71 and Rs. 68 to the
 superannuation plan during the year ended 31 March 2016 and 2015
 respectively.
 
 Compensated leave of absence
 
 The Company provides for accumulation of compensated absences by
 certain categories of its employees. These employees can carry forward
 a portion of the unutilized compensated absences and utilize it in
 future periods or receive cash in lieu thereof as per Company policy.
 The Company records an obligation for compensated absences in the
 period in which the employee renders the services that increases this
 entitlement. The total liability recorded by the Company towards this
 benefit was Rs. 710 and Rs. 542 as at 31 March 2016 and 2015
 respectively.
 
 Long term incentive plan
 
 Certain senior management employees of the Company participate in a
 long term incentive plan which is aimed at rewarding the individual,
 based on performance of such individual, their business unit/function
 and the Company as a whole, with significantly higher rewards for
 superior performances. The total liability recorded by the Company
 towards this benefit was Rs. 570 as of 31 March 2016 and Rs. 188 as of
 31 March 2015.
 
 7. DIVIDEND REMITTANCE IN FOREIGN CURRENCY
 
 The Company does not make any direct remittances of dividends in
 foreign currencies to American Depository Receipts (ADRs) holders. The
 Company remits the equivalent of the dividends payable to the ADR
 holders in Indian Rupees to the custodian, which is the registered
 shareholder on record for all owners of the Company''s ADRs. The
 custodian purchases the foreign currencies and remits it to the
 depository bank which inturn remits the dividends to the ADR holders.
 
 8. ACQUISITION OF SELECT ESTABLISHED BRAND PORTFOLIO OF UCB
 
 On 1 April 2015, the Company entered into a definitive agreement with
 UCB India Private Limited and other UCB group companies (together
 referred to as UCB) to acquire a select portfolio of products
 business in the territories of India, Nepal, Sri Lanka and Maldives.
 The transaction includes approximately 350 employees engaged in
 operations of the acquired India business. The acquisition is expected
 to strengthen the Company''s presence in the areas of dermatology,
 respiratory and pediatric products.
 
 9. SEGMENT INFORMATION
 
 In accordance with AS-17 Segment Reporting, segment information has
 been given in the consolidated financial statements of Dr. Reddy''s
 Laboratories Limited and therefore no separate disclosure on segment
 information is given in these financial statements.
 
 10. RECEIPT OF WARNING LETTER FROM THE U.S. FDA
 
 The Company received a warning letter dated 5 November 2015 from the
 U.S. FDA relating to cGMP deviations at its API manufacturing
 facilities at Srikakulam, Andhra Pradesh and Miryalaguda, Telangana, as
 well as violations at its oncology formulation manufacturing facility
 at Duvvada, Visakhapatnam, Andhra Pradesh previously raised in Form 483
 observations following inspections of these sites by the U.S. FDA in
 November 2014, January 2015 and February-March 2015, respectively.
 
 The warning letter does not restrict production or shipment of the
 Company''s products from these facilities. However, unless and until the
 Company is able to correct outstanding issues to the U.S. FDA''s
 satisfaction, the U.S. FDA may withhold approval of new products and
 new drug applications of the Company, refuse admission of products
 manufactured at the facilities noted in the warning letter into the
 United States, and/or take additional regulatory or legal action
 against the Company. Any such further action could have a material and
 negative impact on the Company''s ongoing business and operations.
 
 The Company submitted its response to the warning letter on 7 December
 2015. Further, the Company provided updates on the progress of its
 corrective actions to the U.S. FDA in January 2016 and March 2016.
 
 The Company believes that it can resolve the issues raised by the U.S.
 FDA satisfactorily in a timely manner. The Company takes the matters
 identified by U.S. FDA in the warning letter seriously, and will
 continue to work diligently to address the observations identified in
 the warning letter, and is concurrently continuing to develop and
 implement its corrective action plans relating to the warning letter.
 
 11. BUYBACK OF SHARES
 
 The Board of Directors of the Company in their meeting held on 17
 February 2016 approved a proposal to buyback Equity Shares of the
 Company, subject to approval by the shareholders, for an aggregate
 amount not exceeding Rs. 15,694 (referred to as the Maximum Buyback
 Size) and at a price not exceeding Rs. 3,500 per Equity Share
 (referred to Maximum Buyback Price) from all shareholders of the
 Company (including persons who become shareholders by cancelling
 American Depository Shares and receiving underlying Equity Shares, and
 excluding the promoters and promoter group of the Company) under the
 open market route in accordance with the provisions contained in the
 Securities and Exchange Board of India (Buy Back of Securities)
 Regulations, 1998 and the Companies Act, 2013 and rules made
 thereunder. The shares bought back under this plan shall be
 extinguished in accordance with the provisions of the Securities and
 Exchange Board of India (Buy Back of Securities) Regulations, 1998 and
 the Companies Act, 2013 and rules made there under
 
 The Company obtained the approval of the shareholders for the buyback
 process on 1 April 2016 and the buyback process commenced on 18 April
 2016.
 
 As of 12 May 2016, the Company bought back 350,000 equity shares as
 part of the aforementioned buyback process.
 
 12. COMPARATIVE FIGURES
 
 Previous year''s figures have been regrouped / reclassified wherever
 necessary, to conform to current year''s classification.
Source : Dion Global Solutions Limited
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