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Aurobindo Pharma Ltd.

BSE: 524804 Sector: Health care
NSE: AUROPHARMA ISIN Code: INE406A01037
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VOLUME 58508
52-Week high 895.00
52-Week low 582.00
P/E 18.68
Mkt Cap.(Rs cr) 42763.49
Buy Price 730.75
Buy Qty 10.00
Sell Price 0.00
Sell Qty 0.00
OPEN 733.00
CLOSE 724.95
VOLUME 58508
52-Week high 895.00
52-Week low 582.00
P/E 18.68
Mkt Cap.(Rs cr) 42763.49
Buy Price 730.75
Buy Qty 10.00
Sell Price 0.00
Sell Qty 0.00

Aurobindo Pharma Ltd. (AUROPHARMA) - Director Report

Company director report

Dear Members

Your Directors are pleased to present the 29th Annual Report of the Company togetherwith the audited accounts for the financial year ended March 31 2016.

FINANCIAL RESULTS

Standalone financials Rs. Million
2015-16 2014-15
Gross Turnover 93227.6 82448.4
Profit before depreciation interest tax and exceptional items 26323.6 23176.4
Depreciation/amortization 2630.0 2451.5
Finance cost 652.7 565.8
Exchange difference adjusted to borrowing cost 1640.4 755.6
Profit before tax 21400.5 19403.4
Provision for tax/deferred tax 5203.8 4240.0
Net Profit after tax 16196.7 15163.5
Balance brought forward from previous year 41682.3 28278.4
Balance available for appropriation 57879.0 43441.9
Appropriations
Dividend on equity shares: Interim 1461.4 1312.8
Final
Tax on dividend 297.5 250.4
Depreciation adjusted (as per Schedule II) 196.4
Transferred to general reserve
Surplus carried to Balance Sheet 56120.1 41682.3

DIVIDEND

Your Directors have approved a fourth interim dividend of 70% i.e. Rs.0.70 per equityshare and together with the first interim dividend of 50% i.e. Rs.0.50 per equity sharesecond interim dividend of 60% i.e. Rs.0.60 per equity share and third interim dividend of70% i.e.Rs.0.70 per equity share the total dividend for the financial year 2015-16 comesto 250% (Post 1:1 bonus issue) i.e. Rs.2.50 per share on the equity share of Rs.1 against450% i.e. Rs.4.50 per share of Rs.1 paid in the previous year.

BONUS

As Members are aware during the year your Company allotted 291982275 equity sharesof Rs.1 each to the shareholders of the Company as bonus shares in the ratio of 1:1.

PERFORMANCE REVIEW

Your Company had a healthy financial performance during the year contributed by astrong product portfolio of complex products and differentiated technology. There was asignificant growth momentum in all markets with solid overall results. The focus was onexecution of the strategies improving the product mix and gaining presence in themarkets. Your Company shall strive to sustain the performance with the continuation ofapprovals expansion of manufacturing capacities and being in verticals that add value toAurobindo and its stakeholders.

There was a robust growth in revenues operating profit and net profit. Aurobindoachieved a 14.5% increase in standalone revenue in 2015-16 to Rs.93495.0 million. AtRs.26323.6 million the operating profit including forex and other income exceeded thecorresponding previous year by 13.6%.

Profit before tax for the year at standalone level was Rs.21400.5 million a growth of10.3% over 2014-15 while the net profit at Rs.16196.7 million is a growth of 6.8% overRs.15163.5 million reported in 2014-15. The diluted earnings per share is Rs.27.72 ascompared to Rs.25.98 (adjusted for bonus shares issued in July 2015).

The rupee depreciated by 7% during the year which entailed a foreign exchange loss ofRs.1640.4 million to your Company due to restatement of the Company's debt most ofwhich are dollar denominated.

At the consolidated level the revenues increased to Rs.138960.8 million a growth of14.6% over the previous year. EBITDA margin widened to 23.1% as compared to 21.2% in2014-15. EBITDA for the year was Rs.32055.8 million as against Rs.25636.2 million in theprevious year and the diluted earnings per share grew by 25.6% to Rs.33.92 reflectingrobust execution improved product mix enhanced productivity and optimization of costs.The Company saw sustained growth in all markets especially in the US emerging marketsand for its ARV/HIV product portfolio.

US formulation business contributed 55% to the overall formulation revenue during theyear as against 50.5% in the previous year. The revenue generated from the US businessgrew by 27.2% at Rs.61439.9 million in 2015-16 over the previous year sales ofRs.48317.0 million. The sales uptick gained traction with the launch of several new oraland injectable products in the US and the performance of the nutraceuticals business.Aurobindo received 49 final approvals from the US FDA during the financial year whichhelped add to the momentum and market presence.

OTC products in the US continued to gain penetration into several key regional markets.The current portfolio consists of over 75 products and a few more are being developedwhich are expected to be commercialized in 2016-17.

Europe sales were at Rs.31303.7 million in 2015-16 over the previous year sales ofRs.31947 million. The focus during the year was on working towards synergies between theacquired businesses at Western Europe with the Company's existing ground presence inseveral markets. The acquired business witnessed profitability during the yearcontributed by business structures getting streamlined integrated and optimized toimprove information flow decision making and control. The processes were simplified andmade more efficient. These initiatives translate into better customer contact add to costeffectiveness create superior inventory management and drive profitability.

As part of further enhancing the European business with a focus on cost optimizationseveral products earmarked for Europe are being developed at the research centre atHyderabad and a large manufacturing facility is being commissioned dedicated for suppliesat Visakhapatnam.

Shipments from this Unit XV facility would commence in 2016-17.

Formulations sales to the emerging markets such as Brazil Ukraine Mexico and MENA(Middle East and North Africa) as well as South Africa and Canada grew by 21.5% toRs.6914.2 million during the year as compared to Rs.5691.9 million reported in 2014-15.There has been a growth in ARV formulations revenues by 24.5% to Rs.11998.8 millionduring the year predominantly due to participation in certain notable tenders.

Formulations sales across all geographies grew by 16.8% to Rs.111656.6 million asagainst Rs.95586 million in the previous year and constituted 79.5% of the revenues whileactive pharmaceutical ingredients (APIs) made the balance 20.5%.

Revenue from APIs has been Rs.28836.5 million in the year under review which ishigher by 6.6% over 2014-15. The growth has mainly been led by the high valuenon-betalactam APIs despite ramping up volumes to meet the exponential demand forin-house formulation manufacture. Debottlenecking efforts are being undertaken at theexisting facilities to supplement API capacities. Your Company sells API to domestic aswell as the global markets.

As in the past Aurobindo made long-term investments in all key markets with itscustomer relationships strategic partnerships and improved business mix and market share.With a view to ensure sustainable growth the Company continued to augment manufacturingcapacity. This was another year focused on operational excellence compliance standardsquality assurance productivity improvement and highest priority to health and safety.

In order to enhance business intensity employee engagement and performance wastargeted. Aurobindo continued to attract and develop people for the future to ensure goodleadership and organizational efficiency. Determined efforts on enhancing margins raisingprofitability and cash flow generation helped lower the debt and improve the quality ofthe balance sheet.

Overall every initiative and endeavour was designed to shape a successful future forthe Company.

OUTLOOK

Aurobindo's strategy is to develop and bring to market specialty and complex genericproducts including injectables where the active pharmaceutical ingredient is difficult tosource or significant manufacturing or regulatory hurdles exist and are difficult toovercome or where product is in short supply. The focus is on demand led products thathave a sustainable elevated market where the demand is for high value difficult todevelop complex products.

Accordingly your Company has been having a strategy of filing for selectdifferentiated products and as the approvals are received commercialization leads tomarket expansion.

Increasing launch of recently approved injectable products and improved economics ofthe commercialized products are likely to make an impact on the revenues and bottom line.Several of these are niche and high value products which would further improve the productmix in the market.

The anticipated launch of some of the products recently approved by the FDA andincreased volumes of existing products is expected to keep the momentum going over thenext few quarters. Several of the products that were approved by the FDA in recent timesand several others that await approval are considered to be large market opportunities.More important the manufacturing capacities are in place to meet the requirement. TheCompany therefore looks forward to significantly ramp up contributions from the productsover the foreseeable future.

There are several products under development in the oncology and hormonal verticalswhich are likely to be filed over the next 12 to 18 months. Progress is being made atdevelopment stage in microsphere technology especially on formulation feasibility finetuning and scaling up of technology with a view to enter depot injection products. Plansare on-going to file the first product in 2017-18. The objective is to launch fouridentified products which together account for a market size of around USD 3 billion. Asstated earlier the focus is in qualitatively adding to a differentiated product basket.

The Company has developed and made penem filings for three injectable products for theUS market and the fourth product is filed in first quarter of 2016-17. These four penemshave an addressable market of about USD 500 million as per IMS March 2016 data. Aurobindohas selected difficult to develop penem products in keeping with the corporate strategy.While the products have been launched in Brazil and Mexico the impetus will be gainedwhen the launch takes place in US in 2016-17.

At Natrol the business is encouraging. New products are being developed and launchedand in line with the growth momentum the R&D pipeline is being strengthened.

Aurobindo offers solid value proposition to its customers with a breadth of portfolio.The build up in portfolio with complex products makes your Company a partner of choice.The team at Aurobindo has been steadily improving on its timing of supplies especiallyits on-time-in-full (OTIF) record. Investments are being made in further enhancing thesupply chain dynamics to improve reliability of deliveries while optimizing on costs.There is a perceptible change favourably impacting the customers and driving yourCompany's growth.

Aurobindo is driving growth through several verticals. There is a determined foray intooncology and hormonal products enzymes peptides including microspheres oralcontraceptives nasal products steroids OTC offers differentiated technology viz depotinjections inhalers patches and films. In all the newer ventures Aurobindo will buildand leverage on its inherent strengths augmented by a team of generic industry-seasonedprofessionals. Your Company has strong relationships in the market that would help tocreate businesses with a broad unique product portfolio in record time. In essence thenew business models are founded on core competencies.

In financial terms the objective is to strive for higher predictable and calibratedgrowth and improve EBITDA margin and Return on Investment. The target is to stay cashflow positive improve the quality of the balance sheet lower the leverage reduceinterest outgo and expand earnings year-on-year

Your Company has set a vision to build businesses that meaningfully impact theiraddressable markets are respected for customer centric products and services meetindustry benchmarks in productivity of resources are recognized for quality andcompliance standards and in the ultimate analysis create societal wealth for allstakeholders.

RESEARCH & DEVELOPMENT

Aurobindo's new product development initiatives range from conventional oral andinjectable products to more complex and advanced dosages. The focus during the year was toprioritize on the difficult and niche products including oral and sterile peptide drugproducts involving difficult clinical end-point studies. In filing ANDAs such productsinvolved innovative and highly development intensive work. Cost optimization continued tobe a core area that was worked upon for both the US and EU markets.

The nutraceuticals and the OTC teams made significant contributions by launching newproducts. Another notable activity during the financial year was the start of developmentwork on more than 20 products in the oncology and hormone segments both in injectable andsolid dosage forms for which the filings are expected over the next 12 to18 months.Further product development has been initiated in new segments such as dermatologyproducts and nasal drug delivery.

The continuous innovative and skillful work being done by R&D team is seen in thenumber of approvals received over the years with revenue growth and productivity gains.The regulatory product approvals for the ANDAs filed in the past as well as increasedcontribution/ commercialization of the development projects already undertaken willcontinue to demonstrate the intellectual property strengths of your Company.

In order to develop oncology APIs an exclusive laboratory has been created withisolators and appropriate personal safety protection. A few APIs have been identified anddevelopment work is ongoing.

Analytical capabilities were enhanced by acquiring the advanced models of GCMS LCMSand ICPMS in order to comply with the stringent ICH guidelines for control of genotoxicimpurities and toxic metal ions. These would further improve quality of drug substancesand would also facilitate regulatory approvals as impurities as low as less than 1 ppm canbe identified and quantified with these new equipments. Additionally an advanced XRDmachine has been acquired to detect and quantify polymorph contamination at very lowlevels.

Chemical manufacturing processes of four APIs were validated for in-time filing ofNCE-1 ANDAs in the US with Paragraph-IV certification. At the same time six additionalmolecules were identified during the year and process development was undertaken for NCE-1filing in 2016-17.

In terms of the filings to US FDA a total of 398 ANDAs have been filed by Aurobindo ason March 31 2016 out of which 251 ANDA approvals (215 final approvals including 10 forAurolife Pharma LLC and 36 tentative approvals) have been received. The balance 147 ANDAsare under review for approval. During the year Aurobindo filed 22 ANDAs while 49 finalapprovals were received.

Similarly as on March 31 2016 the team has filed over 2700 DMFs including 202 withUS FDA. So far 158 patent applications are pending with various authorities and 18 havebeen granted patents.

ENVIRONMENT HEALTH & SAFETY

Your Company demonstrated consistency in successful implementation of wastewatertreatment recycle/reuse hazardous waste disposal and recycling from environmentalmanagement considerations across all manufacturing locations. Consents from localregulatory agencies have been obtained for four green field drug formulation units.

Environmental infrastructure has been further upgraded in some of the manufacturingfacilities. In some cases the existing systems are further augmented with additionalinfrastructure that would lead to energy saving or cleaner handling of waste streams oremissions. Some of these systems include ATFD systems RO systems paddle/double drumdriers and ESP for boiler. Some of these systems are planned to be replicated in othermanufacturing units where necessary during 2016-17.

On-line ambient air quality monitoring system is set up in one of the API facility andadditional systems of the same are augmented in another API unit. The Company's facilitiesare in compliance with the regulatory requirements in respect of on-line continuousmonitoring systems.

Dedicated STPs are installed in two of the formulations units with MBBR technology; apatented procedure which is functioning satisfactorily. Similar systems are being plannedin some of the API manufacturing units.

Preparation for ISO 14001 accreditation process of one of the API unit is complete andcertification is expected during the year. It is proposed to initiate the process for onemore API unit during 2016-17.

As part of plantation drive about 15000 saplings were planted in 2015-16. In 2016-17it is proposed to plant another 10000 saplings.

On the safety aspect all new chemical processes are reviewed for safety elementsbefore lab validation is done so that necessary changes can be implemented in theprocesses and inherent safety is enhanced. Reaction calorimeter and DSC are installed inthe research centre to generate data on reaction hazards. Powder safety data is alsogenerated at a third party lab and hazards identified at lab stage itself. This data willprovide key inputs for safe design of process and plant in which the process operates.

Hazard and operability (HAZOP) studies initiated in earlier years are continuing and 77processes have been subjected to HAZOP study. Activity based risk assessment is alsoprogressing well and 59 activities have been completed this year.

In order to effectively oversee implementation of actionable items derived frommultiple sources a corrective and preventive action (CAPA) tracking methodology isimplemented where incomplete action items are highlighted to senior management onimmediate basis.

Aurobindo's safety team ensures that all new facilities comply with EHS guidelines andhence all project proposals and layouts are reviewed for EHS and necessary requirementsare in-built from the construction phase itself.

Training is a focus area and a target of 0.5% of all man-hours on safety training wasset at the start of the year. At the end of year 0.52% was achieved. The awareness levelswill be further enhanced with higher targeted training in the coming years.

HUMAN RESOURCE DEVELOPMENT

During the year the aim was to strategize for future leaders of tomorrow; creation ofa talent pool that can be depend upon. Therefore a meaningful multi-layered model wasdesigned and implemented.

25 graduate engineers were inducted into the system at the entry level and wereoriented trained and integrated into the system. This is a year-long effort that willreap its benefits in years to come. Year on year the 25 GETs would be inducted in to thesystem. Much benchmarking and study was conducted to develop a robust recruitment andinduction policy.

At the mid level management the Company tied up with international consultants to workon 24 key competencies required to transform managers to leaders and was implementedwithin the year. A year-long MDP was designed with assessment centers reviews andpresentations made to senior management which had a perceptible impact on the Company'soperations.

The in-house Aurobindo Training and Development Centre (ATDC) recruits trains andhelps absorb talented employees. During the year we have recruited through this routeover 230 employees (M.Pharm M.Sc. B. Pharm & ITI/diploma holders). Adequate care istaken to ensure that the candidates were fully equipped with appropriate skill sets toperform their duties from day one.

Across the organization every employee has been sensitized towards technicalexcellence continuous improvement and to respect the assurance standards in the interestof protecting the process and product quality and patient health.

An advanced management training system 'Nichelon 5 CMS' is implemented at allformulation units global pharmaco-vigilance and at APL Healthcare. As part ofharmonization Nichelon5 CMS has been implemented at Auronext a subsidiary of the Companyduring 2015-16 and also initiated implementation at other subsidiaries such as AurobindoUSA and in the Western Europe operations.

AWARDS

Your Company was honoured in January 2016 the Indian Drug Manufacturers' AssociationIDMA Margi Memorial Best Process Patent Award 2014-15 for three US patents.

The Pharmaceuticals Export Promotion Council of India (Pharmexcil) conferred upon yourCompany a Certificate of Appreciation in recognition of commendable contribution inbulk/APIs category.

The Chief Commissioner of Central Excise Customs and Service Tax Hyderabadfelicitated your Company in February 2016 for outstanding performance during the financialyear 2014-15.

SUBSIDIARIES/JOINT VENTURES

As per the provisions of Section 129 of the Companies Act 2013 read with the Companies(Accounts) Rules 2014 a separate statement containing the salient features of thefinancial statements of the subsidiary companies/associate companies/joint ventures isdetailed in Form AOC-1 and is in Annexure-1 to this Report.

During the year the following are the changes in the subsidiaries of the Company:

Closure of subsidiaries

a. Actavis France (Merged with Arrow Generiques France retrospectively from April 12015);

b. APL IP Company Limited;

c. APL Holdings (Jersey) Limited;

d. Helix Healthcare B.V. has sold entire shareholding of Aurobindo Pharma (Australia)Pty Limited Australia and its subsidiary Aurobindo Pharma NZ Limited New Zealand onApril 10 2015.

Changes in structure/ownership

a. Milpharm Limited was acquired by Agile Pharma B.V. from Helix Healthcare B.V.;

b. Aurobindo Pharma B.V. was merged into Actavis B.V. On the same day Actavis B.V. wasrenamed as Aurobindo Pharma B.V.

Changes in the names of subsidiaries

a. Aurex B.V. was renamed as Pharmacin B.V.;

b. A separate company Pharmacin B.V. was renamed as Aurex B.V.;

c. Actavis Deutschland GmbH & Co. KG was renamed as Puren Pharma GmbH & Co. KG.

The process of liquidation of Aurobindo Pharma (Singapore) Pte Limited a dormantcompany is pending with Registrar of Companies Singapore.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements have been prepared by the Company in accordance withthe requirements of Accounting Standards 21 issued by the Institute of CharteredAccountants of India (ICAI) and as per the provisions of Companies Act 2013. As per theprovisions of Section 136 of the Companies Act 2013 the Company has placed separatelythe audited accounts of its subsidiaries on its website www.aurobindo.com and copy ofaudited financial statements of its subsidiaries will be provided to the Members at theirrequest.

VIGIL MECHANISM

The Board of Directors has adopted the Whistle Blower Policy which is in compliancewith Section 177(10) of the Companies Act 2013 and Regulation 22 of the SEBI (ListingObligations and Disclosure Requirements) Regulations 2015. The Whistle Blower Policy aimsfor conducting the affairs in a fair and transparent manner by adopting highest standardsof professionalism honesty integrity and ethical behavior. All permanent employees andwhole-time directors of the Company are covered under the Whistle Blower Policy.

A mechanism has been established for employees to report concerns about unethicalbehavior actual or suspected fraud or violation of Code of Conduct and Ethics. It alsoprovides for adequate safeguards against the victimization of employees who avail of themechanism and allows direct access to the Chairperson of the audit committee inexceptional cases. The Whistle Blower Policy is available on the Company's websitehttp://www.aurobindo.com/about-us/ corporategovernance.

POLICY ON SEXUAL HARASSMENT

Your Company has constituted an Internal Complaints Committee as per the SexualHarassment of Women at Workplace (Prevention Prohibition and Redressal) Act 2013 and theRules there under. The Company has a policy on prevention & prohibition of sexualharassment at workplace. The policy provides for protection against sexual harassment ofwomen at workplace and for prevention and redressal of such complaints. During the yearno complaints have been received under the policy.

RATING

The Long-term Fitch Rating of your Company has been upgraded to 'IND AA+' from 'IND AA'indicating stable outlook of the Company.

MEETINGS OF THE BOARD

The Board and Committee meetings are pre-scheduled and a tentative calendar of themeetings finalized in consultation with the Directors to facilitate them to plan theirschedule. However in case of special and urgent business needs approval is taken bypassing resolutions through circulation. During the year under review six Board Meetingsand six Audit Committee Meetings were convened and held. The details of the meetingsincluding composition of Audit Committee are provided in the Corporate Governance Report.During the year all the recommendations of the Audit Committee were accepted by theBoard.

DIRECTORS

As per the provisions of the Companies Act 2013 Mr. K. Nithyananda Reddy and Mr. M.Madan Mohan Reddy will retire at the ensuing annual general meeting and being eligibleseek re-appointment. The Board of Directors recommends their re-appointment.

The appointment of Mr. P. Sarath Chandra Reddy as the Whole-time Director of theCompany is being proposed at the ensuing Annual General Meeting. The Board of Directorsrecommonds his appointment.

DETAILS OF DIRECTORS & KEY MANAGERIAL PERSONNEL

The Members of the Company at the 28th Annual General Meeting of the Company held onAugust 27 2015 have re-appointed Mr. N. Govindarajan as Managing Director Mr. K.Nithyananda Reddy as Vice Chairman and Whole-time Director Dr. M. Sivakumaran asWhole-time Director and Mr. M. Madan Mohan Reddy as Whole-time Director for a period ofthree years with effect from June 1 2015. The Members also appointed Dr. (Mrs.) AvnitBimal Singh as an Independent Director of the Company for a period of five years up toMarch 24 2020.

Mr. P. Sarath Chandra Reddy a Non-Executive Director of the Company was appointed as aWhole-time Director of the Company with effect from June 1 2016 subject to the approvalof the Member at the ensuing Annual General Meeting.

Mr. A. Mohan Rami Reddy Vice President (Legal) & Company Secretary is retiringfrom the services of the Company at the close of business hours on May 31 2016. Mr. B.Adi Reddy has been appointed as Company Secretary of the Company with effect from June 12016.

DIRECTORS' RESPONSIBILITY STATEMENT

Pursuant to Section 134(3)(c) of the Companies Act 2013 your Directors confirm that:

a. in the preparation of the annual accounts the applicable accounting standards havebeen followed along with proper explanation relating to material departures if any;

b. appropriate accounting policies have been selected and applied consistently.Judgment and estimates which are reasonable and prudent have been made so as to give atrue and fair view of the state of affairs of your Company as at the end of the financialyear and of the profit of your Company for the year;

c. proper and sufficient care has been taken for the maintenance of adequate accountingrecords in accordance with the provisions of the Companies Act 2013 for safeguarding theassets of your Company and for preventing and detecting fraud and other irregularities;

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

e. proper internal financial controls have been laid down to be followed by yourCompany and such internal financial controls are adequate and are operating effectively;and

f. proper systems to ensure compliance with the provisions of all applicable laws havebeen devised and such systems are adequate and are operating effectively.

DECLARATION FROM INDEPENDENT DIRECTORS

The independent directors have submitted the declaration of independence stating thatthey meet the criteria of independence as provided in sub-section (6) of Section 149 ofthe Companies Act 2013.

BOARD DIVERSITY

The Company recognizes and embraces the importance of a diverse board in its success.The Board has adopted the Board Diversity Policy which sets out the approach to diversityof the Board of Directors. The Board Diversity Policy is available on the Company'swebsite http://www.aurobindo.com/about-us/corporate-governance.

BOARD EVALUATION

SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 mandates thatthe Board shall monitor and review the Board evaluation framework. The Companies Act 2013states that a formal annual evaluation needs to be made by the Board of its ownperformance and that of its committees and individual directors. Schedule IV of theCompanies Act 2013 states that the performance evaluation of independent directors shallbe done by the entire Board of Directors excluding the director being evaluated. Theevaluation of all the Directors and the Board as a whole was conducted based on thecriteria and framework adopted by the Board including performance and working of itscommittees.

POLICY ON DIRECTORS' APPOINTMENT AND REMUNERATION

The policy of the Company on directors' appointment and remuneration includingcriteria for determining qualifications positive attributes independence of a directorand other matters are adopted as per the provisions of the Companies Act 2013. Theremuneration paid to the Directors is as per the terms laid out in the nomination andremuneration policy of the Company. The nomination and remuneration policy as adopted bythe Board is placed on the Company's websitehttp://www.aurobindo.com/about-us/corporate-governance.

TRANSFER TO RESERVE

The Company has not transferred any amount to general reserve out of the profits of theyear.

LOANS GUARANTEES OR INVESTMENTS

Loans guarantees or investments covered under Section 186 of the Companies Act 2013form part of the Notes to the financial statements provided in this Annual Report.

CONTRACTS OR ARRANGEMENTS WITH RELATED PARTIES

The particulars of contracts or arrangements with related parties referred to insub-section (1) of Section 188 of the Companies Act 2013 is prepared in Form No. AOC-2pursuant to clause (h) of sub-section (3) of Section 134 of the Act and Rule 8(2) of theCompanies (Accounts) Rules 2014 and is in Annexure-2 to this Report.

EXTRACT OF ANNUAL RETURN

As required under Section 92(3) of the Companies Act 2013 and Rule 12(1) of theCompanies (Management and Administration) Rules 2014 the extract of Annual Returnprepared in Form MGT-9 is in Annexure-3 to this Report.

CONSERVATION OF ENERGY TECHNOLOGY ABSORPTION FOREIGN EXCHANGE EARNINGS ANDOUTGO

Information with respect to conservation of energy technology absorption foreignexchange earnings and outgo pursuant to Section 134(3)(m) of the Act read with Companies(Accounts) Rules 2014 is in Annexure-4 to this Report.

RISK MANAGEMENT COMMITTEE

Risk Management Committee of the Company consists of three Directors viz. Mr. M.Sitarama Murty Mr. N. Govindarajan and Mr. P. Sarath Chandra Reddy. The Company hasestablished a separate department to monitor the enterprise risk and for its management.

The Committee had formulated a risk management policy for dealing with different kindsof risks which it faces in day-to-day operations of the Company. Risk management policy ofthe Company outlines different kinds of risks and risk mitigating measures to be adoptedby the Board. The Company has adequate internal financial control systems and proceduresto combat the risk. The risk management procedure is reviewed by the Audit Committee andBoard of Directors on regular basis at the time of review of quarterly financial resultsof the Company. A report on the risk and their management is enclosed as a separatesection forming part of this report.

AUDITORS & AUDITORS' REPORT

The statutory auditors' report is annexed to this report. The notes on financialstatements referred to in the Auditors' Report are self-explanatory and do not call forany further comments. There are no specifications reservations adverse remarks ondisclosure by the statutory auditors in their report. They have not reported any incidentof fraud to the Audit Committee of the Company during the year under review.

The Members of the Company at the 27th Annual General Meeting had appointed M/s. S.R.Batliboi & Associates LLP Chartered Accountants as Statutory Auditors of the Companyup to the conclusion of 30th Annual General Meeting of the Company subject to ratificationof the appointment by the members at every Annual General Meeting. The ratification of theappointment of statutory auditors is proposed at the ensuing Annual General Meeting.

COST AUDIT

M/s. Sagar & Associates Cost Accountants were appointed as Cost Auditors of theCompany to conduct cost audit of the Company for the year 2014-15. The Cost Audit Reportof the Company in XBRL format for 2014-15 was filed with the Ministry of Corporate Affairswithin the due date.

INTERNAL AUDITORS

The Board of Directors of the Company has appointed a professional firm of CharteredAccountants to conduct internal audit of the Company for the financial year ended March31 2016.

INTERNAL FINANCIAL CONTROLS

The internal financial controls (IFC) framework at Aurobindo encompasses internalcontrols over financial reporting (ICOFR) as well as operational controls that have beenput in place across all key business processes of the Company. The internal controls aredesigned to facilitate and support the achievement of the Company's business objectivesand such controls do enable the Company to adapt to changing and operating environment tomitigate risks to acceptable levels and to support sound decision making and goodgovernance.

Details in respect of adequacy of internal financial controls with reference to thefinancial statements are briefly iterated below:

a. The Company maintains all its major records in ERP System (Oracle Financials) andthe work flow and approvals are routed accordingly;

b. The Company has appointed internal auditors to examine the internal controls andexamine whether the workflow of the organization is being done through the approvedpolicies of the Company. In every quarter during the approval of financial statementsinternal auditors present the internal audit report and the management comments on theinternal audit observations; and

c. The Board of Directors of the Company has adopted various SOPs and policies such asrelated party transactions policy whistle blower policy policy to determine materialsubsidiaries and such other procedures for ensuring the orderly and efficient conduct ofits business for safeguarding of its assets the prevention and detection of frauds anderrors the accuracy and completeness of the accounting records and the timelypreparation of reliable financial information.

SECRETARIAL AUDIT REPORT

Pursuant to the provisions of Section 204 of the Companies Act 2013 and Rule 9 of theCompanies (Appointment and Remuneration of Managerial Personnel) Rules 2014 the Companyhas appointed Mr. S. Chidambaram Practicing Company Secretary (C.P.No:2286) to undertakethe Secretarial Audit of the Company for the financial year 2015-16. The Secretarial AuditReport issued in form MR-3 is in Annexure-5 to this Report. There are noqualifications reservations or adverse remarks in the Secretarial Audit Report.

CORPORATE SOCIAL RESPONSIBILITY

Your Company believes that there must be a healthy partnership between business and thesociety. Initiatives are therefore taken to execute on the stated CSR policy of 'give backto the society.'

The activities during the year centered on providing educational support healthcaresanitation public safety poverty alleviation and sports. In educational area theactivities included renovation of school buildings construction of class rooms libraryand toilets provision of furniture such as desks payment of salaries at municipalschools and encouraging school children with bags note books scholarship etc.

In healthcare the Company continued to supply safe drinking water to an entirevillage provide pipelines to transport water to overhead tanks underground storages andinstallation of RO plants. Drains were constructed and ambulance donated to a village.

Under the category of public safety Aurobindo also contributed fire engines and paidmonthly salaries of fire safety staff. At the request of the police authorities theCompany installed CCTV cameras on national highway covering areas such as HyderabadPolepally Siddipet and Jedcherla.

From August 2015 the Company provides 300 meals every day for the attendants and staffof a government hospital at Sangareddy. A centralized kitchen is also run for the benefitof the public at an Iskcon centre.

A detailed account of the CSR activities forms part of the annual report on CSR placedon the Company's website at: http://www.aurobindo.com/social-responsibility/csr-activities. Report on Corporate Social Responsibility as perRule 8 of the Companies (Corporate Social Responsibility Policy) Rules 2014 is in Annexure-6to this Report.

STATEMENT OF PARTICULARS OF APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL

The statement of particulars of appointment and remuneration of managerial personnel asper Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules2014 is in Annexure-7 to this Report.

INSURANCE

All properties and insurable interests of the Company including buildings plant andmachinery and stocks have been fully insured.

MATERIAL CHANGES AND COMMITMENTS

There are no material changes and commitments in the business operations of the Companyfrom the financial year ended March 31 2016 to the date of signing of the Director'sReport. There were no significant and material orders passed by the regulators or courtsor tribunals impacting the going concern status and Company's operations in future.

CORPORATE GOVERNANCE

A separate section on Corporate Governance standards followed by your Company asstipulated under Schedule V (C) of the SEBI (Listing Obligations and DisclosureRequirements) Regulations 2015 is enclosed as a separate section forming part of thisreport.

The certificate of the Practicing Company Secretary Mr. S. Chidambaram with regard tocompliance of conditions of corporate governance as stipulated under Schedule V (E) of theSEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 is annexed to theReport on Corporate Governance.

MANAGEMENT DISCUSSION AND ANALYSIS

Management Discussion and Analysis Report for the year under review as stipulated underSEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 is presented in aseparate section forming part of this report.

FIXED DEPOSITS

Your Company has not accepted any fixed deposits from the public within the purview ofChapter V of the Companies Act 2013.

INDUSTRIAL RELATIONS

Industrial relations at all units of the Company have been harmonious and cordial. Theemployees are motivated and have shown initiative in improving the Company's performance.

TRANSFER OF UNPAID AND UNCLAIMED AMOUNT TO IEPF

The dividends which remain unpaid/unclaimed for a period of seven years have beentransferred on due dates by the Company to the Investor Education and Protection Fund(IEPF) established by the Central Government.

SHARE CAPITAL

The paid up share capital of the Company increased by Rs.293187311 during the yeardue to the allotment of 291982275 equity shares of Rs.1 each as Bonus and 1205036equity shares of Rs.1 each on exercise of stock options under the Employee Stock OptionPlan-2006 (ESOP 2006) of the Company. The paid up share capital of the Company as on March31 2016 was 585169586 equity shares of Rs.1 each.

EMPLOYEE STOCK OPTION SCHEME

The Members at the Annual General Meeting of the Company held on September 18 2006approved formulation of Employee Stock Option Scheme-2006 (ESOP 2006) for the eligibleemployees and Directors of the Company and its subsidiaries. Details of the stock optionsas on March 31 2016 is provided on the Company's website:http://www.aurobindo.com/about-us/corporate-governance. The details of the employee stockoptions also form part of the notes to accounts of the financial statements in this AnnualReport.

ACKNOWLEDGEMENTS

Your Directors are grateful to the employees of Aurobindo for building a strongfoundation for the Company and working towards enhancing growth in the future. TheDirectors want to thank the customers business associates banks central and stategovernments and their agencies for their trust encouragement and support. Every day theinvestors have shown their faith in Aurobindo. The Board shall always strive to perform tomeet their expectations.

For and on behalf of the Board
K. Ragunathan
Hyderabad Chairman
May 30 2016 DIN: 00523576

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