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Divis Laboratories Ltd.

BSE: 532488 Sector: Health care
NSE: DIVISLAB ISIN Code: INE361B01024
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VOLUME 16559
52-Week high 1184.00
52-Week low 533.10
P/E 30.76
Mkt Cap.(Rs cr) 28,018
Buy Price 1054.80
Buy Qty 2.00
Sell Price 1055.50
Sell Qty 67.00
OPEN 1068.00
CLOSE 1060.70
VOLUME 16559
52-Week high 1184.00
52-Week low 533.10
P/E 30.76
Mkt Cap.(Rs cr) 28,018
Buy Price 1054.80
Buy Qty 2.00
Sell Price 1055.50
Sell Qty 67.00

Divis Laboratories Ltd. (DIVISLAB) - Director Report

Company director report

Dear Shareholders

Your Directors have pleasure in placing before you the Twenty Seventh Annual Report ofthe Company together with the Audited Accounts for the year ended 31st March 2017.

Financial Results

The Company's financial performance for the year ended 31st March 2017 is summarizedbelow:

Rs. in Lakhs

Particulars

Standalone

Consolidated

2016-17 2015-16 2016-17 2015-16
Revenue 406577.66 374984.94 410626.01 380487.97
Other income 7597.65 9591.58 7489.30 9744.05
Total Revenue 414175.31 384576.52 418115.31 390232.02
Expenditure 262800.58 234936.34 266022.79 238751.22
Profit before depreciation interest and tax (PBDIT) 151374.73 149640.18 152092.52 151480.80
Depreciation 12326.23 11810.20 12333.19 11818.13
Finance Cost 225.62 300.69 225.62 378.28
Profit before Tax (PBT) 138822.88 137529.29 139533.71 139284.39
Provision for Tax:
Current Tax 28522.55 28423.09 28522.55 28423.09
Deferred Tax 4973.34 (1978.13) 4969.35 (1717.15)
Total tax provision 33495.89 26444.96 33491.90 26705.94
Profit after Tax (PAT) 105326.99 111084.33 106041.81 112578.45
Other comprehensive Income (net of tax) (140.02) (301.24) 322.24 (1577.57)
Total comprehensive Income 105186.97 110783.09 106408.61 111000.88
Earnings per Share (EPS) Basic & Diluted (Rs.) 39.68 41.84 39.95 42.41

Indian Accounting Standards (Ind-AS)

The Ministry of Corporate Affairs (MCA) vide its notification dated 16th February2015 notified the Indian Accounting Standards (Ind-AS) applicable to certain classes ofcompanies replacing the previous Indian GAAP prescribed under the Companies Act 2013. Forour company Ind AS is applicable from this financial year with a transition date of 1stApril 2015.

Major areas which had impact on account of transition to Ind AS are:

o Fair value of certain financial instruments like investments loans to subsidiariesdeposits

o Remeasurement of post-employment benefit obligations o Reporting Revenue inclusive ofexcise duty o Deferred tax on GAAP adjustments

o Remeasurement of lease rentals

Reconciliation of the effect of transition from the previous Indian GAAP to Ind AS hasbeen provided in Note No.46 in the notes to accounts in the standalone and Note No.45 tothe consolidated financial statements.

Operations

Standalone

o Revenues for the year increased by 8% to Rs.414175.31 lakhs. o Operating profit(PBDIT) for the year amounted to Rs.151374.73 lakhs as against an operating profit ofRs.149225.94 lakhs last year. o Profit before Tax (PBT) for the year amounted toRs.138822.88 lakhs as against a PBT of Rs.137529.29 lakhs for the last year. o TaxProvision for the current year amounted to Rs.33495.89 lakhs as against a tax provision ofRs.26444.96 lakhs). o Profit after Tax (PAT) before Other Comprehensive Income for theyear amounted to Rs.105326.99 lakhs as against a PAT of Rs.111084.33 lakhs last year.

o Earnings Per Share of Rs.2/- each works out to Rs.39.68 for the year as againstRs.41.84 last year.

o Out of the total revenue 33% came from North America 40% from Europe 12% fromAsia 13% from India and 2% from rest of the World.

Consolidated

Our total revenues on consolidated basis increased to Rs.418115.31 lakhs fromRs.390232.02 lakhs in the previous year reflecting a growth of 7%.

The operating profit before depreciation finance charges and tax (PBDIT) amounted toRs.152092.52 lakhs as against Rs.151480.80 lakhs in the previous year. Profit after Taxbefore Other Comprehensive Income for the year accounted to Rs.106041.81 lakhs as againstRs.112578.45 lakhs in the previous year.

Dividend

Your Directors are pleased to recommend a dividend of Rs.10/- per equity share ofRs.2/- each i.e. 500% for the financial year ended 31st March 2017 subject to approvalof members at the ensuing Annual General Meeting.

The total dividend payout for the current year amounts to Rs.31951.17 lakhs (inclusiveof tax of Rs.5404.32 lakhs) as against Rs.31951.17 lakhs in the previous year. Dividend(including dividend tax) as a percentage of profits is 30% as compared to 29% in theprevious year.

Transfer to Reserves

The company proposes to retain the entire amount of Rs.407694.36 lakhs in the Profitand Loss Account.

Subsidiaries

Our subsidiaries viz. M/s. Divis Laboratories (USA) Inc. in USA and M/s. Divi'sLaboratories Europe AG in Switzerland are engaged in marketing/ distribution ofnutraceutical products and to provide a greater reach to customers within these regions.

During the year the subsidiaries have achieved aggregate turnover of Rs.21677.72 lakhsas against previous year turnover of Rs.18856.54 lakhs reflecting a growth of 14.96% forthe nutraceutical products in North America and Europe.

Subsidiaries have achieved growth in operating profit. Gain on forex currencytranslation for the year accounted to Rs.254.94 lakhs for US subsidiary and Rs.194.79lakhs for Europe subsidiary. With significant efforts having been made in the operationsmarket reach and qualifications from several customers the company is confident ofachieving profitability at the subsidiaries and recovery of the investments/advances madein the next couple of years. There has been no material change in the nature of thebusiness of the subsidiaries.

As per section 129(3) of the Companies Act 2013 read with Companies (Accounts) Rules2014 statement containing the salient features of the financial statement of Company'ssubsidiaries in form AOC-1 is annexed herewith as "Annexure I". Moreoverpursuant to provisions of Section 136(1) of the Companies Act 2013 audited financialstatements of the subsidiary companies are placed on the website of the company at www.divislabs.com.The Consolidated Financial Statements presented by the Company include the financialresults of its subsidiary companies.

Policy for determining Material Subsidiaries is available on the Company's corporatewebsite at: http://www.divislabs.com/inside/pdf/Policv%20Subsidiarv.pdf Presentlythe Company does not have any material subsidiary.

Consolidated Accounts

As stipulated in the listing regulations and Companies Act 2013 the consolidatedfinancial statements have been prepared by the Company in accordance with the relevantaccounting standards. The audited consolidated financial statements together with AuditorsReport thereon form part of the Annual report.

Kakinada Project

Your company proposes to set up a new manufacturing facility at Kakinada in the stateof Andhra Pradesh with an initial investment of Rs.700 crores for augmenting capacities asalso de-risking its operations; and in this regard has approached the Government ofAndhra Pradesh for allotment of suitable land. The Government has allotted 505 acres ofland at Ontimamidi Village (Kona) Thondangi Mandal East Godavari District in the Stateof Andhra Pradesh and gave us advance possession of the land pending proceduralformalities. The company has spent an amount of Rs.3435.22 lakhs during the year towardsthe cost of land and minor civil works at the site. Government has registered land of anextent of 351.72 acres in favour of the company.

While we started the preliminary procedures for securing the land and applications forpermissions for setting up the facility several farmers/earlier owners whose land hasbeen acquired/resumed by the Government have filed writ petitions before the Hon'ble HighCourt of Telangana and Andhra Pradesh contesting such acquisition/resumption or seekingadditional compensation. The company hopes that the Government would resolve the legalissue with the contestants paving the way for registration of the balance land after whichthe company would be able to set up its manufacturing facility.

Deposits

The Company has not accepted any deposits from public covered by provisions of Section73 of the Companies Act 2013.

Loans Guarantees or Investments

During the year the company has not given any loans or guarantees covered under theprovisions of section 186 of the Companies Act 2013. The details of investments made bycompany are given in the notes to the financial statements.

Management Discussion and Analysis

In terms of provisions of Regulation 34(2) of SEBI (Listing Obligations and DisclosureRequirements) Regulations 2015 ("SEBI Listing Regulations") report onManagement Discussion & Analysis for the year under review is provided in a separatesection forming part of this Annual Report.

Internal Financial Controls

Information in respect of internal financial control and their adequacy is included inthe Management Discussion and Analysis which is a part of the Annual report.

FDA Inspection

The Company has received a warning letter from US-FDA for its Unit-II at Visakhapatnamsubsequent to inspection of the facility during Nov- Dec 2016 and issue of an ImportAlert. The US-FDA has also exempted several products from the Import Alert. The warningletter summarized the deviations from current Good Manufacturing Practices (cGMP) foractive pharmaceutical ingredients (APIs) and also that its Investigators documented thatthe company limited and/or refused an FDA inspection.

The company responded to the observations in Form-483 issued by the US-FDA and also tothe warning letter within the stipulated time. The company engaged reputed consultants andsubject matter experts for advising on the deviations observed and have initiated theremediation measures to comply with the cGMP requirements.

Material Changes and Commitments

No other material changes and commitments have occurred after the close of the yeartill the date of this Report which affect the financial position of the company. Furtherthere is no change in the nature of business of the Company.

Risk Management

The Company has an enterprise-wide approach to risk management which lays emphasis onidentifying and managing key operational and strategic risks. Through this approach thecompany strives to identify opportunities that enhance organisational values whilemanaging or mitigating risks that can adversely impact its future performance. The companyhas been addressing various risks impacting the company and the policy of the company onrisk management is provided elsewhere in this annual report in Management Discussion andAnalysis.

The Risk Management Committee constituted by the Company constantly evaluates variousrisks - business customer concentration supplier concentration regulatory compliancesconfidentiality of processes consistency of cGMP practices environment employee health

and safety etc. monitors risk and deploy appropriate control systems aimed atmitigating such risks to the extent possible.

Directors' Responsibility Statement

As required under Section 134 (5) of the Companies Act 2013 Directors of your companyhereby state and confirm that:

a) the applicable accounting standards have been followed in the preparation of theannual accounts;

b) accounting policies selected were applied consistently and the judgements andestimates made are reasonable and prudent so as to give a true and fair view of the stateof affairs of the Company as at the end of the financial year and of the profit of thecompany for the period;

c) proper and sufficient care has been taken for the maintenance of adequate accountingrecords in accordance with the provisions of the Act for safeguarding the assets of theCompany and for preventing and detecting fraud and other irregularities;

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

e) internal financial controls have been laid down and such controls are adequate andoperating effectively;

f) proper systems have been laid down to ensure compliance with the provisions of allapplicable laws and such systems are adequate and operating effectively.

Directors and Key Managerial Personnel

Re-appointment:

As per the provisions of the Companies Act 2013 Mr. Kiran S. Divi Wholetime Directorwill retire by rotation at the ensuing 27th Annual General Meeting and being eligibleoffers himself for re-appointment.

Retirement:

Smt. S. Sridevi has completed her tenure of appointment as Small shareholderIndependent Director on 22nd June 2017 and she is not eligible for re-appointment. YourBoard appreciates the contribution made by her during her tenure as director of thecompany.

Appointment:

Your Board has appointed Mrs. Nilima Motaparti as an Additional Director designated asWhole-time Director at its meeting held on 27th June 2017 on the recommendation of theNomination and Remuneration Committee and the Audit Committee. Mrs. Nilima has beenworking in the management cadre of the company as Chief Controller (Commercial) sinceJuly 2012 as approved by the members at their meeting held on 6th August 2012. The Boardcommends her appointment as Whole-time Director for your approval.

Your Board has appointed Dr. Ramesh B.V. Nimmagadda as an Additional IndependentDirector at its meeting held on 27th June 2017 on the recommendation of the Nominationand Remuneration Committee. The Board commends his appointment as an Independent Directorfor your approval.

Brief profile of the directors proposed for appointment/re-appointment are given in thenotice convening the 27th AGM for reference of the shareholders.

Number of Meetings of Board of Directors

The Board meets at least four times in a year at quarterly intervals and morefrequently if deemed necessary to transact its business. During the financial year theBoard has met four times i.e. on 28th May 2016 12th August 2016 12th November 2016 and4th February 2017.

Delaration By Independent Directors

The company has obtained declaration from all independent directors of the companyunder section 149(7) of the Companies Act 2013 confirming that they meet the criteria ofindependence as provided in Section 149(6) of the Companies Act 2013 and Regulation 25 ofSEBI Listing Regulations.

Audit Committee

Details pertaining to the role objective and composition of the Audit Committee areincluded in the Corporate Governance Report which is part of the Annual Report for theyear.

Board Evaluation

The Board of Directors carried out an annual evaluation of its own performance of thecommittees of the Board and of the individual directors pursuant to the provisions of theCompanies Act 2013 and SEBI Listing Regulations.

Performance evaluation was carried out on the basis of criteria evolved as provided bythe Guidance Note on Board Evaluation issued by Securities and Exchange Board of Indiaseeking inputs from the directors individually and the committees through a structuredquestionnaire which provides a valuable feedback for contribution to the Board improvingboard effectiveness maximising strengths and highlighting areas for further improvementetc.

In a separate meeting of the Independent directors performance of the non-independentdirectors and the Board as a whole was evaluated taking into account the views of thenon-independent directors and the same was discussed in the Board meeting. The performanceevaluation of independent directors shall be done by the entire Board of Directors(excluding the director being evaluated).

Policy on Directors' Appointment and Remuneration

The Policy on appointment and remuneration of Directors Key Managerial Persons andSenior Management including criteria for determining qualifications positive attributesand directors' independence as required under section 178(3) of the Companies Act 2013and Regulation 19 read with Schedule II Part D of SEBI Listing Regulations is annexedherewith as "Annexure II".

Remuneration Details of Directors and KMP

Particulars required to be furnished under Rule 5(1) of the Companies (Appointment andRemuneration of Managerial Personnel) Rules 2014 as amended are given in "Annexure-III"and forms part of this Report.

Related Party Transactions

There are no materially significant related party transactions made by the company withPromoters Key Managerial Personnel or other designated persons which may have potentialconflict with interest of the company at large. As a matter of policy your Companycarries out transactions with related parties on an arms' length basis. Statement of thesetransactions is given at Note No.42 of the notes to Accounts.

Accordingly particulars of contracts or arrangements with related parties referred toin Section 188(1) along with the justification for entering into such contract orarrangement in Form AOC-2 does not form a part of this report.

Vigil Mechanism

The Company has established a vigil mechanism and formulated a Whistle Blower Policy toprovide mechanism for directors and employees of the company to report their concernsabout any unethical behaviour actual or suspected fraud or violation of the company'scode of conduct or ethics policy. The Policy provides that the company investigates suchincidents when reported in an impartial manner and takes appropriate action to ensurethat requisite standards of professional and ethical conduct are always upheld. Thismechanism also provides for adequate safeguards against victimization of director(s) /employee(s) who avail the mechanism and also provide for direct access to the Chairman ofthe Audit Committee in exceptional cases. The Whistle Blower Policy may be accessed on theCompany's website at: http://www.divislabs.com/inside/pdf/Whistle%20blower%20policv.pdf

Particulars Of Employees

Particulars of employees required to be furnished under Rule 5(2) and 5(3) of theCompanies (Appointment and Remuneration of Managerial Personnel) Rules 2014 as amendedare given in "Annexure-IV" and forms part of this Report.

Corporate Social Responsibility

The Board of Directors has constituted Corporate Social Responsibility Committee (CSRCommittee) consisting of members viz. Mr. R. Ranga Rao (Chairman) Dr. Murali K. Divi Mr.N. V Ramana and Mr. Madusudana Rao Divi.

Corporate Social Responsibility Policy (CSR Policy) indicating the activities to beundertaken by the Company was adopted by the Board on the recommendation of the CSRCommittee.

Report on Corporate Social Responsibility as Per Rule 8 of Companies (Corporate SocialResponsibility Policy) Rules 2014 is prepared and the same is enclosed as "Annexure-V"to this Report.

Business Responsibility Report

Pursuant to the SEBI Listing Regulations Business Responsibility Report (BRR)describing the initiatives taken by the Company is enclosed as part of this Report.

Conservation of Energy Technology Absorption and Foreign Exchange Earnings & Outgo

Particulars required under Section 134 (3) (m) of the Companies Act 2013 read withRule 8(3) of the Companies (Accounts) Rules 2014 is given in the "Annexure-VI"to this report.

Audit Reports

o Report of the Statutory Auditors for the year does not contain any qualificationreservation or adverse remark or disclaimer or reporting of any offence or fraud.

o The Secretarial Audit Report does not contain any qualification reservation oradverse remark or disclaimer.

Statutory Auditors

Under Section 139 of the Companies Act 2013 and Rules made there under it ismandatory for the Company to rotate current statutory auditors on completion of maximumterm permitted under the Section.

M/s. PVRK Nageswara Rao & Co Chartered Accountants the statutory auditors of theCompany hold office till the conclusion of this 27th Annual General Meeting of theCompany and pursuant to Section 139(2) and the rules notified in this regard they are noteligible for re-appointment.

Your Board of Directors on the recommendation of the Audit Committee do recommend theappointment of M/s. Price Waterhouse Chartered Accountants LLP (Firm Registration No.012754N/N500016) as the Statutory Auditors of the Company for a term of five consecutiveyears from the conclusion of the 27th Annual General Meeting of the Company scheduled tobe held in the year 2017 till the conclusion of the 32nd Annual General Meeting to be heldin the year 2022 subject to the ratification of their appointment at every AGM.

Secretarial Audit

Pursuant to provisions of section 204 of the Companies Act 2013 and the Companies(Appointment and Remuneration of Managerial Personnel)

Rules 2014 the Board of Directors of the Company has appointed Mr. V. Bhaskara RaoPracticing Company Secretary (PCS Registration No. 4182) as the Secretarial Auditor of theCompany to conduct the Secretarial audit for the financial year 2016-17. The SecretarialAudit report for the financial year 2016-17 is annexed herewith as "Annexure-VII".

Corporate Governance Report

The report on Corporate Governance as per Regulation 34(3) read with Schedule V of theSEBI Listing Regulations is included as a part of this Annual Report. The requisitecertificate from Mr. V. Bhaskara Rao Practicing Company Secretary confirming thecompliance with the conditions of Corporate Governance is attached to the report onCorporate Governance.

Extract of Annual Return

An Extract of Annual Return in Form MGT-9 as per the provisions of Section 92(3) of theCompanies Act 2013 and Rule 12 of Companies (Management and Administration) Rules 2014is enclosed as "Annexure-VIII" to this report.

Other Disclosures

o Information on Unclaimed Dividend and transfer to IEPF is provided in the CorporateGovernance Report. o No company has become or ceased to be its Subsidiary joint ventureor associate company during the year o No significant and material orders were passed bythe regulators or courts or tribunals impacting the going concern status and company'soperations in future.

o No cases were filed pursuant to the Sexual Harassment of Women at Work Place(Prevention Prohibition and Redressal) Act 2013 during the year under review.

o As per Regulation 43A of the SEBI Listing Regulations the Dividend DistributionPolicy is disclosed in the Corporate Governance Report and on the website of the Company.

Acknowledgements

The Board expresses its appreciation for the continued support received from Governmentauthorities Banks customers vendors and investors. The Board also appreciates and valuethe commitment and contribution of its employees at all levels.

For and on behalf of the Board
Dr. Murali K. Divi
Hyderabad Chairman & Managing Director
27th June 2017 (DIN: 00005040)