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SENSEX NIFTY India | Notes to Account > Pharmaceuticals > Notes to Account from Divis Laboratories - BSE: 532488, NSE: DIVISLAB

Divis Laboratories

BSE: 532488|NSE: DIVISLAB|ISIN: INE361B01024|SECTOR: Pharmaceuticals
Nov 18, 16:00
-12.5 (-0.72%)
VOLUME 13,449
Nov 18, 15:59
-11.75 (-0.67%)
VOLUME 546,681
Mar 17
Notes to Accounts Year End : Mar '19

1. Background:

1.1 (Divi’s), (the ‘company’) is a company limited by shares, incorporated and domiciled in India. The company is engaged in the manufacture of Active Pharmaceutical ingredients (API’s), Intermediates and Nutraceutical ingredients with predominance in exports. In addition to generic business, the company, through its Custom synthesis business, supports innovator pharma companies for their patented products business right from gram scale requirements for clinical trials to launch as well as late life cycle management. The Company is a public limited company and the Company’s equity shares are listed on the BSE Limited and National Stock Exchange of India Limited (NSE) in India.

1.2 The Financial statements are approved for issue by the Company’s Board of Directors on May 25, 2019.

Amounts recognised in profit or loss

Write-down of inventories to net realisable value and provision for slow moving amounted to RS.4,437 (March 31, 2018 - RS.4,575) as at the year end. An amount of RS.138 was credited to profit or loss (March 31, 2018- RS.2,662 was charged to profit or loss) and included in ‘Changes in value of inventories of Finished goods and work in progress ‘ and ‘Cost of raw materials consumed’ in statement of profit or loss.

Terms and rights attached to equity shares

- The Company has only one class of equity shares having par value of INR 2 per share. The Company declares and pays dividends in Indian rupees. In the event of liquidation of the company, the holders of equity shares will be entitled to receive remaining assets of the company, after distribution of all preferential amounts. The distribution will be in proportion to the number of equity shares held by the shareholders. Every holder of equity shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote.

- Aggregate number of Bonus shares issued during the period of five years immediately preceding the reporting date:

On September 28, 2015, the Company issued 13,27,34,290 equity shares of RS.2 each as fully paid bonus shares by capitalization of securities premium reserve.

Nature and purpose of reserves:

Securities premium reserve:

Securities premium reserve is used to record the premium on issue of shares. The reserve is utilised in accordance with the provisions of the Act. General Reserve:

General Reserves represent amounts transferred from Retained Earnings in earlier years under the provisions of the erstwhile Companies Act, 1956. Special Economic Zone Re-investment reserve:

Under the SEZ scheme, the unit which begins production of Goods/ services on or after April 1, 2005 will be eligible for deductions of 100% of profits or gains derived from export of Goods/ services for the first five years, 50% of such profits or gains for a further period of five years and 50% of such profits or gains for the balance period of five years subject to creation of Special Economic Zone Re-investment reserve out of profit of eligible SEZ Units and utilisation of such reserve by the company for acquiring new plant and machinery for the purpose of its business as per the provisions of the Income Tax Act, 1961. (Refer Note 41)

(i) Compensated Absences obligations:

The Compensated Absences covers the group’s liability for earned leave which is classified as other long-term benefits.

(ii) Post-employment obligations- Gratuity

The Company provides gratuity for employees in India as per the Payment of Gratuity Act, 1972. Employees who are in continuous service for a period of 5 years are eligible for gratuity. The amount of gratuity payable on retirement/termination is the employees’ last drawn basic salary per month computed proportionately for 15 days’ salary multiplied for the number of years of service. The gratuity plan is a funded plan and the Company makes contributions to recognised funds in India through an approved trust administered by Life Insurance Corporation of India.

The amounts recognised in the balance sheet and the movements in the net defined benefit obligation over the year are as follows:

The above sensitivity analysis are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions, the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as and when calculating the defined benefit liability recognised in the balance sheet. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the prior period.

(iv) Defined benefit liability and employer contributions

The Company has established a trust to purchase insurance policy to provide for payment of gratuity to the employees. Every year, the insurance company carries out a funding valuation based on the latest employee data provided by the Company, Any deficit in the assets arising as a result of such valuation is funded by the Company, The company considers that the contribution rate set at the last valuation date is sufficient to eliminate the deficit over the agreed period and that regular contributions, which are based on service costs will not increase significantly.

The Company makes contributions to Defined benefit plans for qualifying employees. These Plans are administered through approved Trust, which operate in accordance with the Trust Deed, Rules and applicable Statutes. The concerned Trust is managed by Trustees who provide strategic guidance with regard to the management of investments and liabilities and also periodic review of its performance. The trust in turn contributes to a scheme administered by the Life Insurance corporation of India to discharge gratuity liability to the employees. The trust has not changed the processes used to manage its risks from previous periods. A large portion of assets consists of government and corporate bonds, although invested in equities, cash and mutual funds. The plan asset mix is in compliance with the requirements of the respective local regulations.

(v) Risk exposure

Through its defined benefit plans, the company is exposed to a number of risks, the most significant of which are detailed below:

Interest Rate Risk: The plan exposes the Company to the risk of fall in interest rates. A fall in interest rates will result in an increase in the ultimate cost of providing the above benefit and will thus result in an increase in the value of the liability.

Liquidity Risk: . This is the risk that the company is not able to meet the short term gratuity pay-out. This may arise due to non-availability of enough cash / cash equivalent to meet the liabilities or holdings illiquid assets not being sold in time.

Salary Escalation Risk: The present value of the defined benefit plans calculated with the assumption of salary increase rate of plan participants in future. Deviation in the rate of increase of salary in future for plan participants from the rate of increase in salary used to determine the present value obligation will have a bearing on the plan’s liability.

Demographic Risk: The Company has used certain mortality and attrition assumptions in valuation of the liability. The Company is exposed to the risk of actual experience turning out to be worse compared to the assumption.

Regulatory Risk: Gratuity benefit is paid in accordance with the requirements of the Payment of Gratuity Act, 1972 (as amended from time to time). There is a risk of change in regulations requiring higher gratuity payouts (eg. Increase in the maximum limit on gratuity,)

Asset Liability Mismatching or Market Risk: The duration of the liability is longer compared to duration of assets, exposing the Company to market risk for volatilities/fall in interest rate.

Investment Risk: The probability and likelihood of occurrence of losses relative to the expected return on any particular investment.

Asset Volatility: The plan liabilities are calculated using a discount rate set with reference to bond yields; if plan assets under-perform this yield, this will create a deficit. Most of the plan asset investments are in fixed income securities with high grades and in government securities. A portion of the fund is invested in equity securities and in alternative investments which have low correlation with equity securities. The equity securities are expected to earn a return in excess of the discount rate and contribute to the plan deficit. The company has a risk management strategy where the aggregate amount of risk exposure on a portfolio level is maintained at a fixed range. Any deviations from the range are corrected by rebalancing the portfolio. The company intends to maintain the investment mix in the continuing years.

Changes in bond yields: A decrease in bond yields will increase plan liabilities, although this will be partially off-set by an increase in the value of the plan’s bond holdings.

(vi) Defined Contribution plans

Employer’s Contribution to Provident Fund: Contributions are made to provident fund in India for employees at the rate of 12% of basic salary as per regulations. The contributions are made to registered provident fund administered by the government. The obligation of the company is limited to the amount contributed and it has no further contractual nor any constructive obligation. The expense recognised during the period towards defined contribution plan is RS.1,159 (March 31, 2018- RS.1,032) also refer Note.40(b)

Employer’s Contribution to State Insurance Scheme: Contributions are made to State Insurance Scheme for employees at the rate of 4.75%. The Contributions are made to Employee State Insurance Corporation (ESI) to the respective State Governments of the Company’s location. This Corporation is administered by the Government and the obligation of the company is limited to the amount contributed and it has no further contractual nor any constructive obligation. The expense recognised during the period towards defined contribution plan is RS.287 (March 31, 2018-RS.242)

Secured borrowings and assets pledged as security

Secured by pari-passu first charge on inventories, receivables and other current assets of the company and pari-passu second charge on movable property, plant and equipment of the company, both present and future. The carrying amounts of financial and non-financial assets pledged as security for current and non- current borrowings are disclosed in Note 20(a)

Note 2(a): Assets pledged as security

The carrying amounts of Company’s assets pledged as security for working capital loans from banks:

Note 3: Income tax expense

This note provides an analysis of the Company’s income tax expense, showing the amounts that are recognised directly in equity and how the tax expense is affected by non-assessable and non-deductible items. It also explains significant estimates made in relation to the Company’s tax positions.

(a) Income tax expense

Entire deferred tax for the year ended March 31, 2019 and March 31, 2018 relates to origination and reversal of temporary differences.

(b) Significant estimates (tax calculation note)

In calculating the tax expense for the current period, the company has treated certain expenditures as deductible and non-deductible based on prior year completed assessments for tax purposes. The Company benefits from the tax holiday available for units set up under the Special Economic Zone Act, 2005. These tax holidays are available for a period of fifteen years from the date of commencement of operations. Under the SEZ scheme, the unit which begins production of Goods/services on or after April 1, 2005 will be eligible for deductions of 100% of profits or gains derived from export of Goods/services for the first five years, 50% of such profits or gains for a further period of five years and 50% of such profits or gains for the balance period of five years subject to creation of Special Economic Zone Re-investment out of profit of eligible SEZ Units and utilisation of such reserve by the company for acquiring new plant and machinery for the purpose of its business as per the provisions of the Income Tax Act, 1961.

(c ) Reconciliation of tax expense and the accounting profit multiplied by India’s tax rate:

The applicable Indian corporate statutory tax rate for the year ended March 31, 2019 and March 31, 2018 is 34.944% and 34.608%, respectively. The increase in the corporate statutory tax rate to 34.944% is consequent to changes made in the Finance Act, 2018.

Note 4: Fair Value Hierarchy

Fair value of the financial instruments is classified in various fair value hierarchies based on the following three levels:

Level 1: Quoted prices (unadjusted) in active market for identical assets or liabilities.

Level 2: Inputs other than quoted price are included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). The fair value of financial instruments that are not traded in an active market is determined using valuation techniques which maximize the use of observable market data and rely as little as possible on entity-specific estimates. If significant inputs required to fair value an instrument are observable, the instrument is included in Level 2.

Level 3: Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs). If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. This is the case with listed instruments where market is not liquid and for unlisted instruments.

Valuation technique used to determine fair value:

Specific Valuation techniques used to value financial instruments include:

- the use of quoted market prices or dealer quotes for similar instruments.

- the fair value of remaining financial instruments is determined using discounted cash flow analysis.

Valuation Process:

The Finance and Accounts department of the Company performs the valuation of financial assets and liabilities required for financial reporting purposes, and report to the Board of Directors. The Level 3 inputs for investment in equity shares are derived using the discounted cash flow analysis.

Note 5: Financial Risk Management

The Company’s activities expose it to market risk, price risk, liquidity risk and credit risk. The Company emphasizes on risk management and has an enterprise wide approach to risk management. The Company’s risk management and control procedures involve prioritization and continuing assessment of these risks and devise appropriate controls, evaluating and reviewing the control mechanism.

(A) Credit Risk:

Credit risk management

I. Credit risk on cash and cash equivalents and investments is limited as the Company generally invests in deposits and mutual funds with nationalised banks, thereby minimising its risk.

II. Credit risk on security deposits, investments, loans given to a subsidiary and trade receivables are evaluated as follows:

Credit risk is the risk of financial loss to the Company if a customer to a financial instrument fails to meet its contractual obligations and arises primarily from trade receivables, treasury operations etc. Credit risk of the Company is managed at the Company level. In the area of treasury operations, the Company is presently exposed to risk relating to investment in mutual funds. The Company regularly monitors such investments and all the investments in mutual funds are held with State Bank of India which is a nationalised bank, thereby minimises the risk.

The credit risk related to trade receivables is influenced mainly by the individual characteristics of each customer. The credit risk is managed by the company by establishing credit limits and continuously monitoring the credit worthiness of the customer. The Company also provides for expected credit losses based on the past experience where it believes that there is high probability of default. In general, all trade receivables greater than 180 days are reviewed and provided for by analysing individual receivables.

(B) Market Risk:

The Company has substantial exposure to foreign currency risk due to the significant exports. Sales to other countries and purchases from overseas suppliers are exposed to risk associated with fluctuation in the currencies of those countries vis-a-vis the functional currency i.e. Indian rupee. The Company manages currency fluctuations by having a better geographic balance in revenue mix and ensures a foreign currency match between liabilities and earnings. The Company believes that the best hedge against foreign exchange risk is to have a good business mix. The Company is very cautious towards hedging as it has a cost as well as its own risks. The Company continually reassesses the cost structure impact of the currency volatility and engages with customers addressing such risks.

(ii) Cash Flow and fair value interest rate risk:

Interest rate exposure: The Company does not have long term borrowings and interest rate risk is towards short term working capital borrowings and fixed deposits. Below is the sensitivity analysis. The analysis presents the cash flow due to the increase/decrease in the interest rates with all other variables held constant.

(c) Price Risk:

The Company is exposed to risk from investments in mutual funds. The company has invested in quoted debt mutual funds with State Bank of India. The Company is very cautious in their investment decisions and takes a conservative approach of investing in nationalised banks with minimal risk. The table below summarises the impact of increase/(decrease) in the Net Asset Value(NAV) of these investments

The analysis is based on the assumption that the NAV has (increased)/decreased by 1% with all other variables held constant.

(d) Liquidity Risk:

Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding to meet obligations when due and to close out market positions. Company’s treasury maintains flexibility in funding by maintaining availability under deposits in banks, adequate limits in the current accounts etc.

Note 6: Capital Management

(a) The Company’s financial strategy aims to provide adequate capital for its growth plans for sustained stakeholder value. The company’s objective is to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders. And depending on the financial market scenario, nature of the funding requirements and cost of such funding, the Company decides the optimum capital structure. The Company aims at maintaining a strong capital base so as to maintain adequate supply of funds towards future growth plans as a going concern.

(b) Dividends:

Dividend paid on Equity shares:

Note 7: Segment Information Description of segments and principal activities

The Chairman and Managing Director has been identified as being the Chief Operating Decision Maker(CODM). Operating segments are defined as components of an enterprise for which discrete financial information is available. This is evaluated regularly by the CODM, in deciding how to allocate resources and assessing the Company’s performance. The company is engaged in the manufacture of Active Pharmaceutical Ingredients (API’s), Intermediates and Nutraceutical Ingredients and operates in a single operating segment.

The reportable segments have been provided in the Consolidated Financial Statements of the Company and therefore no separate disclosure on segment information is given in these standalone financial statements.

Note 8: Leases

The Company has operating lease for office premise, which is renewable on a periodical basis and cancellable at its option. Rental expenses for operating lease recognised in Statement of Profit and Loss for the year is RS.775 (Previous Year is RS.741)

Note: (a) It is not practicable for the company to estimate the timings of cash flows, if any, in respect of the above pending resolution of the respective proceedings.

Note: (b) Provident Fund

The Company is in the process of evaluating the impact of the recent Supreme Court Judgment in case of “Vivekananda Vidyamandir And Others Vs The Regional Provident Fund Commissioner (II) West Bengal” and the related circular (Circular No. C-I/1(33)2019/Vivekananda Vidya Mandir/284) dated March 20, 2019 issued by the Employees’ Provident Fund Organisation in relation to non-exclusion of certain allowances from the definition of “basic wages” of the relevant employees for the purposes of determining contribution to provident fund under the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952. In the assessment of the management which is supported by legal advice, the aforesaid matter is not likely to have a significant impact and accordingly, no provision has been made in these Financial Statements.

Note 9: Payables to Micro, Small & Medium Enterprises

There are no dues to Micro, Small and Medium Enterprises as at year end. The identification of Micro, Small and Medium Enterprises as defined under the provisions of “Micro, Small and Medium Enterprises development Act, 2006” is based on management knowledge of their status.

Note 10: Changes in Accounting Policies :

The Company applied Ind AS 115 for the first time using the modified retrospective method of adoption with the date of initial application of April 01,2018. Under this method any cumulative effect of initially applying Ind AS 115 can be shown as an adjustment to the opening balance of retained earnings as at April 01, 2018. The effect on adoption of Ind AS 115 was insignificant and hence, no adjustments were made to opening balance of retained earnings.

Note 11: Events occurring after the reporting period:

Refer Note 36 for the final dividend recommended by the Board which is subject to the approval of shareholders at the ensuing Annual General Meeting.

Note 12: Previous year figures have been regrouped /reclassified to conform to current year classification.

The accompanying notes are an integral part of the financial statements

Source : Dion Global Solutions Limited
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