Your Directors are pleased to present the 30th Annual Report of the Company togetherwith the audited accounts for the financial year ended March 31 2017.
| || || |
| ||2016-17 ||2015-16 |
|Revenue from operations (inclusive of excise duty) ||97812.1 ||93227.6 |
|Profit before depreciation interest tax and exceptional items ||25099.0 ||24761.1 |
|Depreciation ||2861.7 ||2630.0 |
|Finance cost ||451.6 ||652.7 |
|Profit before tax ||21785.7 ||21478.4 |
|Provision for tax ||4718.1 ||5211.4 |
|Net profit after tax ||17067.6 ||16267.0 |
|Other comprehensive income/(expense) ||(56.1) ||(14.4) |
|Total comprehensive income for the period ||17011.5 ||16252.6 |
Your Directors have approved a second interim dividend of 125% i.e. Rs.1.25 per equityshare and together with the first interim dividend of 125% i.e. Rs.1.25 per equity sharethe total dividend for the financial year 2016-17 comes to 250% i.e. '2.50 per share onthe equity share of Rs.1 against 250% i.e. Rs.2.50 per share of Rs.1 paid in the previousyear.
Pursuant to Regulation 43A of the SEBI (Listing Obligations and DisclosureRequirements) Regulations 2015 top five hundred listed entities based on marketcapitalization are required to formulate a Dividend Distribution Policy. The Board hasapproved and adopted the Dividend Distribution Policy and the same is available on theCompany's website viz. www.aurobindo.com.
Your Company delivered yet another year of consistent and profitable growth continuedto build a robust pipeline of products stepped up market development significantlyexpanded manufacturing capacities invested to further improve reliability of deliverablesand enhanced the level of execution across the Company. There was a sustained focus onresearch and development employee engagement competency enhancement and relentlesspursuit of excellence in quality.
The team at Aurobindo demonstrated resilience despite several challenges especially indealing with competitive pricing pressures in the market as well as hardening of the rupeein the latter half of the financial year. At the market place the momentum was maintainedby improving the product mix with high value differentiated oral solid and injectableproducts.
Your Company was quick to respond to the challenges of the market environment byexecuting improvements in operations. There was considerable work done to scale upvolumes improve efficiencies optimize costs and fine-tune supply chain and logistics inorder to expand the bottom line. Productivity enhancements and process improvements wereproactively undertaken to benchmark the manufacturing systems with the best in theindustry.
The standalone revenue at Rs.97812.1 million increased by 4.9% in 2016-17. Operatingprofit including forex and other income was higher by 1.4% over the previous year. Profitbefore tax was higher by 1.4% at Rs.21785.7 million over the previous year. Net profitfor the year 2016-17 at Rs.17067.6 million was an increase of 4.9% compared to 2015-16.The diluted earnings per share for 2016-17 is Rs.29.16 as compared to Rs.27.84 in 2015-16.
At the consolidated level your Company delivered solid financial results fuelled bystrong performance in US and European markets. The revenues increased to Rs.150898.6million a growth of 8.1% over the previous year with an EBITDA margin of 22.8%. EBITDAfor the year was Rs.34342.8 million as against Rs.31881.2 million in the previous yearand the diluted earnings per share grew by 13.5% to Rs.39.33.
US formulations business contributed 57% to the overall formulations revenue during theyear as against 55% in the previous year. The revenue generated from the US business grewby 12.3% at Rs.68272.3 million in 2016-17 over the previous year sales of Rs.60785.5million.
Your Company maintained its momentum of growth with the launch of several new oral andinjectable products in the US led by final approvals for 61 products from the US FDAduring the financial year. Aurobindo continues to witness strong pace of approvals from USFDA which helped to maintain growth momentum in sales and improve market presence. Inkeeping with the past track record speed to the market and effectiveness in execution hasremained the hallmark of Aurobindo's performance.
As a result of customer centric approach and relationship oriented marketing yourCompany has become the 6th ranked Rx supplier of prescriptions dispensed (as per IMSNational Prescription Audit April 2017). In the highly competitive US market yourCompany has diversified product basket in oral solids including controlled substances andinjectables.
A few key developments in your Company in 2016-17 as regards product portfolioexpansion were as follows:
Received final approvals for 61 ANDAs as compared to 49 in 2015-16;
Obtained US FDA approval for the Company's first penem ANDA for an injectableproduct;
Filed 31 ANDAs as compared to 22 in 2015-16;
Commenced filing from new facility Unit X. As on March 31 2017 the Companyhas filed 4 ANDAs from the facility;
Started filing for oncology products with US FDA through the Company's jointventure entity Eugia; Filed 2 ANDAs;
Launched 35 products in the US market during the year under review;
Capacity utilization was increased at every production facility to meet thegrowing portfolio.
As on March 31 2017 your Company has cumulatively filed 429 ANDAs out of which 276have final approval and 38 have tentative approval including 10 ANDAs which aretentatively approved under PEPFAR and the balance 115 ANDAs are under review.
Your Company clocked a growth of 4.7% in Europe to reach a revenue of Rs.32771.5million in 2016-17 as against sales of Rs.31304.3 million in the previous year. The focuscontinues to achieve improved synergies between the acquired businesses at Western Europewith the Company's existing product pipeline. In all the addressable markets there wasvolume growth improved market presence as well as enhanced profitability supplemented byincreased manufacturing in India for larger number of products. This exercise oftransferring the manufacturing base to India has streamlined and integrated theoperations optimized costs improved the information flow facilitated decision makingand enabled better supervision and control. All of these initiatives have translated intoincrease in profitability.
In March 2017 formulations manufacturing facility
Unit XV at Parawada in Visakhapatnam was commissioned. The unit is primarily forsupplies to European markets and has been audited & approved by European authorities.In order to meet the growing demand the volumes are being ramped up.
During the year your Company further strengthened its branded products portfolio andleveraged its position as a key player in select European markets through couple ofacquisitions. Arrow Generiques S.A.S. the French subsidiary of Aurobindo acquired therights title and interest in products Calcium and Calcium Vitamin D3 including the useof the Orocal trademark for the France market.
Agile Pharma B.V. The Netherlands the wholly owned step-down subsidiary of yourCompany acquired Generis Farmaceutica S.A. which is engaged in the manufacture and saleof pharmaceutical products in Portugal. The acquisition includes the manufacturingfacility in Amadora Portugal which has a capacity to manufacture 1.2 billiontablets/capsules/sachets annually.
Generis Farmaceutica S.A. is a generic pharmaceutical firm that focuses on both theretail and hospital segments apart from exports. Generis has a wide portfolio of productswith major share in the therapeutic areas of cardiovascular (CVS) Central Nervous System(CNS) anti-infectives and genitourinary system ailments. Generis is the most soldpharmaceutical brand in Portugal and is the 2nd largest generic group in Portugal.
The acquisition establishes Aurobindo as the leading generics group in Portugal.Synergies are expected from Aurobindo's vertical integration and pipeline breadthimprovement in Amadora plant capacity utilization by servicing both local and Europeanmarkets and operational advantages.
The acquisition will catapult your Company to the leadership position in the Portuguesegeneric pharma market.
Sales of formulations to the emerging markets such as Brazil Ukraine Mexico and MENA(Middle East and North Africa) as well as South Africa grew by 17% to Rs.7556.3 millionagainst Rs.6461.0 million reported in 2015-16. This segment remains a key market forAurobindo and renewed efforts are made to position your Company's products as one of thepreferred suppliers in the existing and newer geographies.
ARV formulations business clocked a revenue Rs.11854.1 million and during the year your Company received US FDA approval for a valuable product - considered as a first linefor treatment for HIV - under the PEPFAR program and your Company has also filed an ANDArelated to a triple combination product with the FDA.
Overall formulations business constituted 79.8% of the consolidated revenue whileactive pharmaceutical ingredients (API) accounted for the balance 20.2%. During thefinancial year sale of formulations at Rs.120454.2 million grew by 8.9% across allgeographies in comparison to the previous year.
Revenue from API was Rs.30420.6 million during the year under review a growth of5.5%. This growth in revenue of high value APIs has been achieved after meeting the verylarge in-house demand for manufacture of formulations. In line with anticipated furtherincrease in formulations business the in-house capacity for API has been further raisedeven as your Company has contracted additional newer alternate sources for APIs.
AuroHealth a subsidiary of your Company which manufactures and markets pharma OTCproducts in the US continued to gain penetration in to several key national retailers aswell as select regional accounts. This business gained traction during the year and as atend of March 2017 AuroHealth was shipping to 24 customers with a commercialized basket of56 products.
The dietary supplements business done by Natrol the nutritional supplementary makerthat Aurobindo acquired in 2014 was in line with the expectations even as work continuesto enhance the product pipeline. Natrol continues to be amongst the top 20 branded dietarysupplement companies in the US. Existing products gained market share while newerproducts are being launched. The revenues and bottom line expanded as planned and yourCompany sees further headroom for growth.
The Company's endeavor has been to invest in reliability; ensure patient safety throughhigh-end quality of products and processes; develop alternate API and excipient sources todeliver larger volumes in line with customer expectations on-time-in-full; possess highvalue differentiated portfolio of complex molecules; build state-of-the- artmanufacturing facilities that meet compliance standards; ensure safe working environmentto protect the health of the employees; minimize waste and maximize recycling ofmaterials; reduce the risk in operations; and be a preferred partner to all thestakeholders. In effect strive for execution excellence and be a responsible corporatecitizen.
Aurobindo has made significant progress in all these areas but the team works with thebelief that there is room for improvement. Operational excellence is often reviewedclosely to further improve productivity become cost effective and be reliable in everytransaction.
The market environment is changing rapidly with newer challenges and neweropportunities. Your Company has been conscious to work ahead of time and has invested inseveral technologies and platforms such as biotechnology oncology hormones steroidsbiocatalysts peptides vaccines penems depot injections dermatology inhalers nasalpatches and films to sustain the growth.
Aurobindo is striving to stay ahead of the curve. A large portfolio is being built ofdifferentiated products which would act as a moat against competitive pressures; newmanufacturing facilities are under construction to cater to the growing portfolio; severalof the newer technologies would help enhance margins; process improvements and betterlogistics management are expected to strengthen competitiveness.
Your Company's product portfolio and pipeline for the US market have significantpotential for sustainable volume growth. This is a quality conscious knowledge drivenmarket and your Company is far better positioned with offers in several therapeuticsegments.
Pricing pressures in US markets are expected to stay and there is the risk of theability to maintain current margins. Price sensitivities will test all the players in acrowded market where price tends to sag while volume business gets done.
This threat does not affect Aurobindo significantly because of its large portfolio ofproducts control over raw material sourcing and lower product concentration. The Companyis a dominant player in the active ingredients business and has been able to control itsquality improve on timelines be competitive on its costs and has the ability to deliverat short notice. This is a unique advantage that Aurobindo enjoys over competingmanufacturers across the world.
Competitive pressures and resultant price erosion in US markets has galvanized yourCompany to focus on the organizational strength leverage the full capabilities andcompetencies of the cadre of dedicated and highly experienced professionals. Your Companywill continue to work to protect the revenues and bottom line to turn challenges andopportunities into successes.
Research and development (R&D) activity being undertaken is focused on difficult tomanufacture differentiated products with possible low competitive pressure. Work ison-going in differentiated molecules both for oral and injectable products.
For instance your Company successfully developed and filed 4 penems for the US marketand received approval for one product an injection drug at the end of the financialyear. This product was successfully launched in April 2017. Penems are difficult todevelop products. The development and filing is in-line with the strategy of movingtowards complex/specialty products.
The recent acquisition of 5 biosimilar molecules is in furtherance of the samestrategy. These are complex biosimilars and the plans are to take a lead molecule fromthis transaction for clinical trials in 2017. This is an anti-antiogenesis drug used intreatment of multiple-cancers including metastatic colon or rectal cancer non-squamousand non-small cell lung cancers. Apart from these molecules your Company is working ondevelopment of biosimilars in therapeutic segments such as oncology auto immune disordersand ophthalmology.
In keeping with the need to manufacture a growing product pipeline your Company inaddition to commissioning the formulations manufacturing facility at Unit XV referredearlier has initiated significant improvements in capacities to boost volumes as givenbelow:
Unit X: Your Company is building a US FDA compliant oral manufacturing facilityat Naidupet Andhra Pradesh which will be commissioned in 2017-18. It is presently atproject stage where validation batches are being taken and is being got ready forregulatory inspection;
Unit XVI: Your Company is building another US FDA compliant Betalactumirijectables manufacturing facility at Jedcherla near Hyderabad. It is planned to get thefacility commissioned in 2017-18;
Your Company is in the processes of tripling the capacity at AuroLifemanufacturing facility which will significantly boost volumes for the US market.
In order to sustain future growth and spread the geographical risk Aurobindo has beensteadily expanding its European footprint since 2006 via acquisitions across several keymarkets and building a diversified product basket. Most notably in 2014 the acquisitionof Actavis's commercial operations in seven Western European countries added traction tothe Company's presence in these developed markets. The acquisition of Generis referred toearlier builds upon an already successful growth strategy.
Members will recall Arrow Generiques S.A.S. the French subsidiary of Aurobindoacquired select commercial products in Calcium and Calcium Vitamin D3 including the useof the Orocal trademark. This acquisition enables Arrow Generiques to continue to increaseits branded products portfolio and leverage its position as a key player in the marketwith focus on selling generics in the retail and hospital markets in France. The Companyis well balanced between generics/branded products/biosimilars in the retail and hospitalmarkets. A dedicated Business Unit with sales and marketing team has been set upspecifically to enhance this business.
Arrow Generiques has continued developing the brand awareness among prescribers throughpromotion of mature products and launch of specialties for patients care. The presentarrangement will boost the position of Arrow Generiques and open new opportunities for thefuture.
Aurobindo is committed to the larger cause of bringing affordable HIV drugs to millionsof patients. Today in addition to its existing powerful portfolio of products yourCompany is bringing a one-of-its-kind generic version of a valuable drug as alsodeveloping a fixed dose combination drug to help achieve the UNAIDS 90-90-90 goals and anAIDS-free generation. The UNAIDS 90-90-90 goal is an ambitious treatment target aimed atgoals briefly described below:
By 2020 90% of all people living with HIV will know their HIV status.
By 2020 90% of all people with diagnosed HIV infection will receive sustainedantiretroviral therapy.
By 2020 90% of all people receiving antiretroviral therapy will have viralsuppression.
Your Company is striving to help achieve these goals by proactively meeting the needsby offering products in several countries. The World Health Organization has recommendedAurobindo's first- line therapy against HIV which is expected to see rapid growth indemand now that a cost-effective generic product is made available to the market. YourCompany's products have the potential to improve the lives of millions of patients.
RESEARCH & DEVELOPMENT
As in earlier years your Company's new product development initiatives ranged fromconventional oral and injectable products to more complex and advanced dosages. The focuswas to prioritize on the more complex and niche products including oral and sterilepeptide drug products. Filing ANDAs of such products involved innovative and developmentintensive work.
The oncology dietary supplements and the OTC teams made significant contributions bydeveloping new products. A notable activity during the financial year was the start ofdevelopment work on 58 products in the oncology and 8 products in the hormone segmentsboth in injectable and solid dosage forms. Regulatory filings are expected to happen forall these products within the next 3 years. Out of these 66 products that have beenshortlisted two products were filed in the US in 2016-17 and the plans are to file atleast 15 products in 2017-18. Further product development has been initiated in newsegments such as dermatology and nasal drug delivery.
The continuous innovative and skilful work being done by the R&D team is seen inthe number of approvals received over the years with revenue growth and productivitygains. The regulatory product approvals for the ANDAs filed in the past as well asincreased contribution/ commercialization of the development projects already undertakendemonstrate the intellectual property strengths of your Company.
To take-up development of additional oncology molecules another Chemical ResearchLaboratory has been created with isolators and appropriate personal safety protectionequipment. Process development of six anti-cancer APIs is underway to commerciallyvalidate those in the next financial year.
ENVIRONMENT HEALTH & SAFETY
In keeping with the increasing manufacturing infrastructure and in order tocontinuously upgrade the environmental and safety standards your Company took severalinitiatives all of which were dedicated to ensure renewability of the natural resourcesreduce environmental footprint and ensure all our employees contractors and visitors gohome safely. This is an area of management where prevention and proactive supervision isembedded in the systems and processes.
While several steps have been taken to enhance these standards and raise awarenessacross the organization Team Aurobindo believes that it is an area where there is nofinishing line and shall remain a work-in-progress. A few of the actions taken during theyear are listed below:
In 2015-16 the Company planned additional environmental management infrastructureparticularly in wastewater management. These have been installed in 2016-17 commissionedand are working satisfactorily. This year too environment management across allfacilities attained a steady state and have proved that the systems are consistent withenvironmental regulations and customer expectations.
During the year under review there was a surge in environmental assessments of API andformulations units by experts from reputed multinational customers and your Companydemonstrated its efforts on environmental management to the satisfaction of allstakeholders. This journey moves forward as part of continual improvement of theorganization's efforts.
In 2016-17 the biggest of Aurobindo's API manufacturing units Unit XI got accreditedto ISO 14001 international standard. A rigorous and continuous evaluation of environmentalperformance triggered a new initiative of comprehensive and robust rain water managementacross Aurobindo's manufacturing units. As part of this drive existing storm waterdrainage system/ network stands re-engineered.
As part of setting up of dedicated sewage treatment plants (STP) three sewagetreatment plants were installed; one each in two of the manufacturing units and one in aformulation manufacturing unit. These STPs are in addition to the ones planned andinstalled in 2015-16.
During 2016-17 your Company was successful in obtaining consent for expansion of twoAPI manufacturing units. Regulatory approvals and consents are in place for all the unitswhile the Company has ensured compliance with all applicable environmental regulations.
Your Company engaged the employees and contractors to commit themselves for their ownsafety and those of their colleagues. In order to motivate the contractors a reward andpenalty system for contractors was initiated so as to complete their projects with zerosafety incidents.
As an awareness initiative a month long safety program was organized wherepromotional activities were taken up to increase awareness of prevention of hazards andunsafe actions among the work force. Nitrogen blanketing prevention of staticelectricity volatiles in work place and learning from past incidents were the themes ofthe safety month. The program has inspirational impact on the need for employees to alignwith the best interests of each other.
Training remains a continual effort to create a culture of safety. Formal safetytraining inputs were provided accounting for 0.54% of total manhours of each employee.Shift pep talks are organized in API units to communicate the hazards and precautions thatneed to be taken in the operations planned for each shift.
All new processes and changes to existing processes are reviewed by the safety team andtests are conducted to ensure that safety issues in scale-up are identified and addressed.HAZOP studies have been completed for 58 processes during the year and risk assessmentsare completed for 47 activities.
Over and above the routine up gradations your Company installed earth interlock andmonitoring systems. A new technology fire fighting system with aerosol based extinguisherswas installed to raise the in-house capability.
Aurobindo has aligned its human resources learning and development to the needs of agrowing and fast track organization. Year-on-year as the organization catapults ahead tomeet its newest strategies and challenges the immediate impact is felt on its processestechnology and most importantly its people. The very same people have to now perform witha certain sense of urgency do more with less be assertive yet be compliant and feel theheat of increase in their span of control.
This presupposes skilling the existing manpower to perform at their optimum best. Theshop floor resources are hence encouraged to stay focused on key development areas as theyare the doers and hence are required to maintain the necessary cGMP compliance levels.Shop floor executives are continuously trained and groomed in the area of compliancesupported adequately to raise their competence confidence and anytime readiness.
Key employees at the shop floor undergo classroom training on-the-job training andassessments. 5968 mandays of training was conducted for them in 2016-17.
Customized programs such as Auro Disha Naa Unnati specially designed for the block andarea in-charges covering supervisory and managerial skills with emphasis on projectimplementations was organized. Such projects ranged from process improvements to costefficiencies with the support of their managers. 1560 mandays of training was conductedin 2016-17 for supervisory and managerial resources.
Mid-level managers were put through year-long management development programs to bulletproof them wherein they undergo and participate in 24 important competencies to raise themto be successful leaders. They are required to implement projects on cost improvementscustomer service and process improvements. 120 participants are undergoing a full year oftraining in four batches. Each batch on an average has helped save significant amount ofcost where the savings are objectively accounted for even as the managers are raisingtheir expertise to their next level. Individual's career plan is tailored and aligned withthe organization's strategic growth requirements.
A unique intervention has paved its way into the organization where 30 GeneralExecutive Trainees are being hired from premium colleges and are being groomed to growinto future leaders. A yearlong hand-holding process is organized to help them understandthe complexities of the organization. They are put through classroom training on-the-jobtraining projects robust reviews and minimum of three rotations. Three batches have beenhired into the system.
During the year 27637 employees have been covered in compliance safety andbehavioral training. Several employees underwent multiple need based programs.
Aurobindo Training and Development Centre (ATDC) recruits trains and helps absorbtalented candidates. During the year your Company recruited 257 employees (29 M.Pharmacy 113 M.Sc. 55 B. Pharmacy degrees and 60 ITI/Diploma holders). During trainingthey are prepared both on theoretical and practical aspects to meet the requirements ofquality control quality assurance; regulatory affairs analytical techniques stability/quality compliance safety compliance and good documentation practices.
ITI/Diploma candidates are trained on production and packaging operations. Apart fromimparting technical knowledge ATDC plays a critical role in holistic learning whichincludes internalizing the corporate culture work ethics and behavior attributes towardseffective leadership development and progression and making a difference to theorganization.
For its HR practices your Company received recognition during the year such as:
Certificate of Honor in the category of Excellence in HR by CPhI India & UBMIndia for the initiatives taken for e-learning skill development HR automation talentengagement leadership competencies & its integration with HR sub-systems.
Certificate of Appreciation in the 12th edition of BML Munjal Awards forExcellence in Learning & Development.
Your Company has received an award for Most Consistent IR (Investor Relations) Practicein Large Cap category for 2016-17 conducted by KPMG BSE Bloomberg and IR Society.
Aurobindo Pharma is a winner of the Clarivate Analytics India Innovation Awards 2016.Clarivate
Analytics - formerly the IP & Science division of Thomson Reuters -honors the top50 most innovative companies in India according to patent-related metrics that get to theessence of what it means to be truly innovative.
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 statement of subsidiary companies/associate companies/joint ventures is detailedin Form AOC-1 and is in Annexure-1 to this Report.
During the year the following companies were incorporated as step down subsidiaries ofthe Company:
a. Auro AR LLC;
b. Auro Pharma USA LLC;
c. Aurogen South Africa (Pty) Limited;
d. Auro Vaccine LLC USA;
e. Aurovitas Pharma Polska Poland.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements have been prepared by the Company in accordance withthe Indian Accounting Standards (Ind AS) 110 and 111 as specified in the Companies (IndianAccounting Standards) Rules 2015 and as per the provisions of Companies Act 2013. TheCompany has placed separately the audited accounts of its subsidiaries on its websitewww.aurobindo.com in compliance with the provisions of Section 136 of the Companies Act2013. Audited financial statements of the Company's subsidiaries will be provided to theMembers on request.
The Board of Directors has adopted the Whistle Blower Policy which is in compliancewith Section 177(9) 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 their 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 website:http://www. aurobindo.com/about-us/ corporategovernance.
PREVENTION AND PROHIBITION OF SEXUAL HARASSMENT
Your Company has constituted an internal complaints committee in compliance with theSexual Harassment of Women at Workplace (Prevention Prohibition and Redressal) Act 2013and the Rules there under. The Company has a policy on prevention & prohibition ofsexual harassment at workplace. The policy provides for protection against sexualharassment of women at workplace and for the prevention and redressal of such complaints.During the year no complaints have been received.
India Ratings and Research (Ind-Ra) has revised Aurobindo Rs.s outlook to Positive fromStable and affirmed its long-term rating of the Company at Rs.IND AA+'.
MEETINGS OF THE BOARD
The Board and Committee meetings are prescheduled 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 four Board Meetingsand five 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.
As per the provisions of the Companies Act 2013 Mr. P. Sarath Chandra Reddy and Dr.M. Sivakumaran will retire at the ensuing annual general meeting and being eligible seekreappointment. The Board of Directors recommends their re-appointment.
The appointment of Mr. Rangaswamy Rathakrishnan Iyer as an Independent Director of theCompany for a period of two years upto February 8 2019 is being proposed at the ensuingAnnual General Meeting. The Board of Directors recommends his appointment.
Dr. D. Rajagopala Reddy resigned as Independent Director of the Company with effectfrom February 10 2017. The Board has placed on record its sincere appreciation andgratitude for contributions made by him during his tenure as Independent Director of theCompany.
DETAILS OF DIRECTORS & KEY MANAGERIAL PERSONNEL
The Members of the Company at their 29th Annual General Meeting held on August 24 2016have appointed Mr. P. Sarath Chandra Reddy as Whole-time Director for a period of threeyears with effect from June 1 2016.
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.
Judgement 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.
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.
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.
The evaluation 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 website: http://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 & OUTGO
Information with respect to conservation of energy technology absorption foreignexchange earnings & 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 the following Directors viz.
Mr. M. Sitarama Murty Mr. N. Govindarajan and Mr. P. Sarath Chandra Reddy. Mr. M.Sitarama Murty is the Chairman of the Committee. The Company has established a separatedepartment to monitor the enterprise risk and for its management.
The Committee had formulated a risk management policy for dealing with different kindsof risks which the Company faces in its day-to-day operations. 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.
Pursuant to Section 139 (2) of the Companies Act 2013 read with Companies (Audit andAuditors) Rules 2014 the Company at its 27th Annual General Meeting (AGM) held on August27 2014 had appointed M/s. S.R.Batliboi & Associates LLP Chartered Accountants asStatutory Auditors for a period of 3 years i.e. up to the conclusion of the 30th AGM to beheld in the year 2017. The present term of M/s. S.R.Batliboi & Associates LLPStatutory Auditors would expire at the conclusion of the ensuing AGM.
The Board of Directors of the Company has proposed the appointment of M/s. B S R &Associates LLP Chartered Accountants as the Statutory Auditors of the Company to holdoffice from the conclusion of 30th AGM until the conclusion of the 35th AGM.
The Company has received a letter from M/s. B S R & Associates LLP CharteredAccountants confirming that they are eligible for appointment as Statutory Auditors of theCompany under Section 139 of Companies Act 2013 and meet the criteria for appointment asspecified in Section 141 of the Companies Act 2013.
The internal audit of the Company was conducted by a professional firm of CharteredAccountants up to September 2016. From October 2016 internal audit is being conducted byan in-house team of professionals. The internal audit reports are being reviewed by theAudit Committee of the Company.
Pursuant to Section 148 of the Companies Act 2013 read with the Companies (Audit andAuditors) Rules 2014 and the Companies (Cost Records and Audit) Rules 2014 the Companyis maintaining the cost records as its business is covered under the regulated sector viz.drugs and pharmaceuticals. Audit of the Company's cost records is not applicable since theCompany's revenues from exports in foreign exchange exceed 75% of its total revenues.
INTERNAL FINANCIAL CONTROLS
The internal financial controls (IFC) framework institutionalized in Aurobindo lastyear has been evaluated in-depth for its adequacy and operating effectiveness wherein theCompany has covered financial reporting controls operational controls compliance relatedcontrols and also Information Technology (IT) controls comprising IT general controls(ITGC) and application level controls. The ITGC would include controls over ITenvironment computer operations access to programs and data program development andprogram changes. The application controls would include transaction processing controls inERP Oracle system which supports accurate data input data processing and data outputworkflows reviews and approvals as per the defined authorization levels.
In order to further strengthen the existing IFC framework and to support the growingbusiness the Company has redefined all the process level controls at activity level whichhas brought in more clarity and transparency in day-to-day processing of transactions andin addressing any related risks. All the controls so redefined & identified have beenproperly documented and tested with the help of an independent auditor to ensure theiradequacy and effectiveness.
The internal auditors conducts. Process & control review' on a quarterly basis asper the defined scope and submit the audit findings along with management comments andaction taken reports to Audit Committee for its review.
The IFC framework at Aurobindo ensures the following:
Establishment of policies & procedures assignment of responsibilitydelegation of authority segregation of duties to provide a basis for accountability andcontrols;
Physical existence and ownership of assets at a specified date;
Enabling proactive anti-fraud controls and a risk management framework tomitigate fraud risks to the Company;
Recording of all transactions occurred during a specific period. Accounting ofassets liability and revenue and expense components at appropriate amounts;
Preparation of financial information as per the timelines defined by therelevant authorities.
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 M/s. D.V. Rao & Associates a firm of Company Secretaries in practice toundertake the secretarial audit of the Company for the financial year 2016-17. TheSecretarial Audit Report issued in form MR-3 is in Annexure-5 to this Report.
There are no qualifications reservations or adverse remarks in the Secretarial AuditReport.
CORPORATE SOCIAL RESPONSIBILITY
Your Company is striving to help create a healthy improved life of people in itsneighborhood. Broadly the initiatives are to execute on the stated CSR policy of Rs.giveback to the society' and make an impact on the lives of people.
The activities undertaken in 2016-17 can be summarized under the following heads:
Supporting preventive health care;
Eradicating hunger poverty & malnutrition;
Making available safe drinking water;
Encouraging environment sustainability;
Sustaining ecological balance & conservation of natural resources;
Developing rural sports; and
Setting up old age homes etc
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 SocialResponsibility as per Rule 8 of the Companies (Corporate Social Responsibility Policy)Rules 2014 is in Annexure-6 to 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.
All properties and insurable interests of the Company including building 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 2017 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.
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 theCorporate Governance Report.
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.
Your Company has not accepted any fixed deposits from the public within the purview ofChapter V of the Companies Act 2013.
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.
Section 124 of the Companies Act 2013 read with Investor Education and Protection FundAuthority (Accounting Audit Transfer and Refund) Rules 2016 ('the Rules') mandates thatcompanies shall apart from transfer of dividend that has remained unclaimed for a periodof seven years from the unpaid dividend account to the Investor Education and ProtectionFund (IEPF) also transfer the corresponding shares with respect to the dividend whichhas not been paid or claimed for seven consecutive years or more to IEPF. Accordingly thedividends that remain unclaimed for seven years and also the corresponding shares would betransferred to IEPF account on due dates.
The paid up share capital of the Company increased by Rs.712823 during the year due tothe allotment of 712823 equity shares of Rs.1 each on exercise of stock options under theEmployee Stock Option Plan-2006 (ESOP 2006) of the Company. The paid up share capital ofthe Company as on March 31 2017 was 585882409 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 2017 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.
BUSINESS RESPONSIBILITY REPORT
A detailed Business Responsibility Report in terms of the provisions of Regulation 34of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 is availableas a seperate section in this Annual Report.
Your Directors are grateful to for the invaluable contribution made by the employeesand are encouraged by the support of the customers business associates banks andgovernment agencies. The Directors deeply appreciate their faith in the Company andthankful to them. The Board shall always strive to meet the expectations of all thestakeholders.
| ||For and on behalf of the Board |
| ||K. Ragunathan |
|Hyderabad ||Chairman |
|June 20 2017 ||DIN: 00523576 |
Conservation of energy technology absorption foreign exchange earnings and outgo
(Pursuant to the provisions of Section 134(3)(m) of the Companies Act 2013 read withthe Companies (Accounts) Rules 2014)
A. Conservation of energy
i. Steps taken or impact on conservation of energy:
a. Oil-free refrigerant circulation technology (Reduction in greenhouse gas emissionsand energy saving);
b. Cooling tower fans control with respect to water temperature: Energy saving;
c. Power capacitors installed at various utility panels (end load center). We havecalculated power on basis of ampere with/ without capacitors connected to load;
d. Auto controlling arranged by installed VFD vs. pressure transmitter for RT pumpresulting in power saving;
e. LED street light replacement in place of conventional sodium vapor lamp. LED lampreplacement of CFL lamp;
f. Installation of VFDs for reactors resulted in power saving;
g. Replacement of low efficient pumps with high efficient pumps;
h. Reduction in coal consumption by running power plant - 2 & 3;
i. Reduction in coal consumption due to heat recovery from contaminated condensate;
j. Cost saving through reducing of screw feeder feeding percentage from 52% to 45%reduced the crushed coal consumption also by fine tuning other parameters like: Air boxpressure improvement in condensate recovery;
k. Condensate recovery increase from 41% to 62%;
l. Introduced Max100 oil for -150C 60 TR chilling plant for power saving;
m. Arranged mechanical seal & 10 sq. mts condenser for SRA019 to reduce thedistillation time and reduce the solvent losses;
n. Kaizen initiatives introduced in Units 4 10 15 and 16. It covers apart from otherareas the monitoring of power water and effluent and daily discussion at various levelstakes place. All levels of management are involved in this cultural transformation. Thishas created lot of discipline in employees forjudicious use of energy. Apart fromanalyzing data in daily Kaizen projects for energy improvement in specific areas aretaken up;
o. At Unit 7 high wattage sodium water lamps and CFL lamps are replaced by LED lampsresulting in savings;
p. Lighting Servo transformer put in operation at Unit 12 with reduced voltage 180-200Vfor about 10% reduction in lighting load;
q. Cooling tower fan cut-off integrated with UMS system at Unit 15 resulting insavings;
r. Lower RPM motors replaced with higher RPM motors at Unit 7;
s. Steam and AHU condensate recovery systems improved at Unit 7 for water saving of10800KL/annum;
t. Conventional ammonia chiller replaced at Unit 12 with a screw chiller for saving inpower consumption;
u. Laundry water is reused at Unit 12 saving about 1500KL per annum.
ii. Steps taken by the Company for utilizing alternate sources of energy:
a. Power trading through open access using wind/solar power;
b. Solar power plant at Unit 11;
The Company established a 30MW captive solar power plant at a project cost of Rs.1150million at Varisam Pydibhimavaram Srikakulam District under the APTRANSCO CaptiveScheme. After feasibility studies and with necessary approvals the Company undertook theproject on turnkey basis and has fully commissioned the plant.
c. At Units 7 & 15 daylight system installed in warehouse and service areas to usenatural energy. This resulted in approximately 2 lakh units of power saving per annum;
d. Briquettes are used in Units 7 & 15 instead of coal for boiler operations.
iii. Capital investment on energy conservation equipments:
a. Replacement of old vacuum with new energy efficient vacuum pump & 132 kVsub-station in place of existing 33 kV sub-station at Unit 1;
b. Removing of old 10 numbers of air compressors (more than 15 years) & installedenergy efficient air compressor at Unit 5;
c. Existing VAM are not giving the required performance; Hence changed with latesttechnology VAM having better performance;
d. Existing cooling tower fills replaced by usage of energy efficient timber CT &oil free refrigeration system from M/s. Hi-Freeze at Unit 9;
e. Automatic nitrogen blanketing systems to save excess nitrogen going from vent atalmost all API units;
f. Hot water system installed at Unit 1 for dehumidification instead of electricaldehumidifier for ensuring savings;
g. VFDs installed for AHU/cooling fan/chiller pumps at Units 6 7 & 15 for energyreduction.
B. TECHNOLOGY ABSORPTION
Efforts made towards technology absorption:
Technology absorption is not involved as the process for manufacture of activeingredients/ formulation is being developed in-house by the Company.
Benefits derived like product improvement cost reduction product development orimport substitution:
Cost optimization initiative with respect to less expensive active ingredientsexcipients packaging materials changed over in commercialized products. These will resultin annualized savings worth millions of rupees when approved and implemented.
In case of imported technology (imported during the last three years reckoned fromthe beginning of the financial year): Not Applicable.
Expenditure incurred on Research and Development
| ||2016-17 ||2015-16 |
|Capital ||940.7 ||306.6 |
|Recurring ||4963.3 ||4119.0 |
|Total R&D expenditure ||5904.0 ||4425.6 |
|As a % of total gross turnover ||6.04 ||4.75 |
C. Foreign exchange earnings and outgo
Foreign exchange earned in terms of actual inflows and foreign exchange outgo duringthe year in terms of actual outflows:
| || ||Rs. Million |
| ||2016-17 ||2015-16 |
|Foreign exchange earned || || |
|Exports ||75760.7 ||70926.8 |
|Others ||77.0 ||88.3 |
| ||75837.7 ||71015.1 |
|Foreign exchange outgo || || |
|Exports ||27088.8 ||26193.3 |
|Others ||3135.5 ||2605.1 |
| ||30224.3 ||28798.4 |
| ||for and on behalf of he Board |
| ||K. Ragunathan |
|Hyderabad ||Chairman |
|June 20 2017 ||DIN: 00523576 |