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Natco Pharma Ltd.

BSE: 524816 Sector: Health care
NSE: NATCOPHARM ISIN Code: INE987B01026
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OPEN 800.00
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VOLUME 39731
52-Week high 1080.00
52-Week low 495.00
P/E 25.76
Mkt Cap.(Rs cr) 13,943
Buy Price 799.95
Buy Qty 1950.00
Sell Price 0.00
Sell Qty 0.00
OPEN 800.00
CLOSE 804.40
VOLUME 39731
52-Week high 1080.00
52-Week low 495.00
P/E 25.76
Mkt Cap.(Rs cr) 13,943
Buy Price 799.95
Buy Qty 1950.00
Sell Price 0.00
Sell Qty 0.00

Natco Pharma Ltd. (NATCOPHARM) - Director Report

Company director report

Dear Members

Your Directors have pleasure in presenting the Thirty-Third Annual Report along withthe audited financial accounts of your Company for the financial year ended 31 March2016.

Financial Highlights

Rs. in Lakhs

Consolidated Standalone
FY 16 FY 15 FY 16 FY 15
Revenue from operations (Net) 114162 82528 102142 71555
Other Income 1076 1490 1407 1357
Total Revenue 115238 84018 103549 72912
Profit before Exceptional Items and Tax 20662 14935 21947 16954
Less: Exceptional Items - (1513) - (1513)
Profit Before Tax 20662 13422 21947 15441
Less: Tax expense (4967) (3499) (4480) (3252)
Add / (Less):Deferred tax (312) 3104 (21) 3104
Profit after tax and before minority interest 15383 13027 17446 15293
Minority Interest 135 435 - -
Profit for the year 15518 13462 17446 15293
Add: Balance at the beginning of the year 46740 36380 49782 37592
Add / (Less): Pursuant to the scheme of -
Amalgamation (1900) (3597)
Less: Appropriations:
Interim Dividend (including tax on distributed Profits) (2620) (2002) (2620) (2002)
Transfer to General Reserve (1100) (1100) (1100) (1100)
Closing Surplus carried forward 56638 46740 59911 49782

Brief Review of the Financial Year

The Company’s standalone revenue for the year was H 103549 lakhs up 42% from theprevious year. Profit before tax for the year was H 21947 lakhs up 42% over the previousyear. The Company’s consolidated revenue for the year was H 115238 lakhs up 37% fromthe previous year. Profit before tax for the year was H 20662 lakhs up 54% over theprevious year. Revenue from formulations segment was the key driver of growth during thefiscal year constituting over 80% of total net revenue on standalone basis. This growthwas largely driven by domestic formulations segments of hepatitis C & oncology drugsespecially the phenomenal growth of hepatitis C brand drugs of the company during theyear. API constituted just under 16% of total net revenue on standalone basis. As of March31 2016 the Company has 38 ANDA filings of which (i) 16 are approved (including 4tentative approvals); (ii) 21 filings are under review which have been filed incollaboration with global pharmaceutical companies such as Mylan Breckenridge AlvogenActavis and Lupin. As of March 31 2016 the Company filed 33 DMFs with the USFDA acrosstherapeutic segments such as oncology CNS anti-asthmatic anti-depressantanti-migraine anti-osteoporosis and gastrointestinal disorders and are currently workingon several more DMFs to be filed with USFDA in near future.

Dividend

On February 11 2016 the Board of Directors declared an interim dividend of H 1.25(62.50%) per equity share for FY2016 entailing a pay-out of H 2620 lakhs (includingdividend distribution tax). The Interim dividend has been subsequently paid to alleligible shareholders and no further dividends are proposed/recommended by the Board.Accordingly your Directors recommend that this interim dividend be treated as the finaldividend of the Company for FY2016.

Transfer to Reserves

The Company transferred H 1100 lakhs to the general reserve during the currentfinancial year.

Share Capital

The paid-up share capital of your Company increased to H 3483.49 lakhs in FY2016 dueto the qualified institutional placement of 1600000 equity shares of H 10 each fullypaid at a premium of H 2120.55 per equity share.

Fixed Deposits

The Company has not accepted any deposits covered under Chapter V of the Companies Act2013. Accordingly no disclosure or reporting is required in respect of details relating todeposits covered under this Chapter

Change in the nature of Business if any

During the year there was no change in the nature of business of the Company or any ofits subsidiaries.

Subsidiaries

The Company has five (5) international subsidiaries (excluding one (1) step downsubsidiary) as on 31 March 2016.The consolidated financial statements of the Company andall its subsidiaries prepared in accordance with Accounting Standards 21 and 27 asspecified in the Companies (Accounts) Rules 2014 form part of the annual report.Further a statement containing the salient features of the financial statement of oursubsidiaries in the prescribed Form AOC-1 is attached as "Annexure I" to theBoard’s Report. This statement also provides the details of the performance andfinancial position of each subsidiary. In accordance with Section 136 of the CompaniesAct 2013 the audited financial statements and related information of the subsidiarieswhere applicable will be available for inspection during regular business hours at theCompany’s registered office in Hyderabad India. Natco Organics Limited (NOL) whichwas a wholly owned domestic subsidiary had ceased to be the subsidiary of the Companypursuant to the approval of Scheme of Amalgamation of NOL into the Company by theHon’ble High Court of Judicature at Madras vide its orders dated 28.04.2016. ThisScheme of Amalgamation is effective from 01.04.2015. The financials for the year ended31.03.2016 are for the merged entity.

Particulars of Investments Loans & Advances

The Company makes investments loans and advances to its subsidiaries for theirbusiness purpose. Details of loans investments and advances covered under Section 186 ofthe Companies Act 2013 form part of the notes to the financial statements provided inthis annual report.

Corporate Governance and additional Shareholders Information

A detailed report on the corporate governance systems and practices of the Company isgiven in a separate chapter of this annual report. Similarly other detailed informationfor shareholders is provided in the chapter General Shareholders’ Information.

A certificate from the Secretarial Auditors of the Company on the compliance with theconditions of corporate governance is attached to the report.

Management Discussion and Analysis

A detailed report on the Management Discussion and Analysis is provided as a separatechapter in the Annual Report.

Board of Directors

In accordance with the provisions of the Companies Act 2013 Dr. AKS Bhujanga Rao(DIN: 02742637 ) retires from his office by rotation and being eligible offers himself forreappointment at the ensuing Annual General Meeting of the Company.

Board Evaluation

As per provisions of the Companies Act 2013 and the Listing Regulations an evaluationof the performance of the Board and members was undertaken.

The contribution and impact of individual Directors were reviewed through a peerevaluation on parameters such as level of engagement and participation flow ofinformation independence of judgment conflicts resolution and their contribution inenhancing the Board’s overall effectiveness. The feedback obtained from theinterventions was discussed in detail and where required Independent and collectiveaction points for improvement put in place.

Appointment of Directors and Remuneration Policy

The assessment and appointment of members to the Board is based on a combination ofcriterion that includes ethics personal and professional stature domain expertisegender diversity and specific qualification required for the position. New Board membersare also assessed on the basis of independence criteria defined in Section 149(6) of theCompanies Act 2013 and SEBI (Listing Obligations and Disclosure Requirements)Regulations 2015 ("Listing Regulations").

In accordance with Section 178(3) of the Companies Act 2013 and on recommendation ofNomination and Remuneration Committee the Board adopted a remuneration policy forDirectors Key Management Personnel (KMPs) and Senior Management. The policy is attachedas "Annexure VIII".

Declaration by Independent Directors

The Company has received necessary declaration from each Independent Director underSection 149(7) of the Companies Act 2013 that he/she meets criteria of Independence laiddown in Section 149(6) of the Companies Act 2013 and Regulation 16(1)(b) of the ListingRegulations.

Number of Board Meetings

The Board of Directors met six times during the year. Details of Board meetings arelaid out in Corporate Governance report which forms a part of this Annual Report.

Business Risk Management

The Company has a risk management mechanism in place to manage uncertainties throughidentification analysis assessment implementing and monitoring to reduce the impact ofrisks to the business which is discussed in detail in the Management Discussion andAnalysis section.

Internal Financial Control

The Company has laid down certain guidelines processes and structure which enablesimplementation of appropriate internal financial controls across the organisation. Suchinternal financial controls encompass policies and procedures adopted by the Company forensuring the orderly and efficient conduct of business including adherence to itspolicies safeguarding of its assets prevention and detection of frauds and errors theaccuracy and completeness of accounting records and the timely preparation of reliablefinancial information. These include control processes both on manual and IT applicationsincluding the ERP application wherein the transactions are approved and recorded.Appropriate review and control mechanisms are built in place to ensure that such controlsystems are adequate and are operating effectively. Because of the inherent limitations ofinternal financial controls including the possibility of collusion or impropermanagement override of controls material misstatements in financial reporting due toerror or fraud may occur and not be detected. Also evaluation of the internal financialcontrols are subject to the risk that the internal financial control may become inadequatebecause of changes in conditions or that the compliance with the policies or proceduresmay deteriorate. The Company has in all material respects adequate internal financialcontrols over financial reporting and such internal financial controls over financialreporting were operating effectively as at 31 March 2016 as stated in the Guidance Noteon Audit of Internal Controls Over Financial Reporting issued by the Institute ofChartered Accountants of India.

Directors’ Responsibility Statement

In terms of Section 134 (3)(c) of the Companies Act 2013 in relation to financialstatements of the Company for the year ended 31st March 2016 the Board of Directorsstate that: a) the applicable Accounting Standards have been followed in preparation ofthe financial statements and there are no material departures from the said standards; (b)reasonable and prudent accounting policies have been used in preparation of the financialstatements and that they have been consistently applied and that reasonable and prudentjudgments and estimates have been made in respect of items not concluded by the year endso as to give a true and fair view of the state of affairs of the Company as at 31stMarch 2016 and of the profit for the year ended on that date; (c) proper and sufficientcare has been taken for maintenance of adequate accounting records in accordance with theprovisions of the Companies Act 2013 for safeguarding the assets of the Company and forpreventing and detecting fraud and other irregularities; (d) the financial statements havebeen prepared on a going concern basis; (e) proper internal financial controls were inplace and were adequate and operating effectively; proper systems to ensure compliancewith the provisions of applicable laws were in place and were adequate and operatingeffectively.

Related Party Transactions

In accordance with Section 134(3) (h) of the Companies Act 2013 and Rule 8(2) of theCompanies (Accounts) Rules 2014 the particulars of contract or arrangement entered intoby the Company with related parties referred to in Section 188(1) in Form AOC-2 isattached as "Annexure II".

The details of related party disclosures form part of the notes to the financialstatements provided in this Annual Report.

Vigil Mechanism / Whistle Blower Policy

The Company has an Ombudsperson policy (Whistle-Blower/ Vigil mechanism) to reportconcerns. Under this policy provisions have been made to safeguard persons who use thismechanism from victimization. An Audit Committee member is the Chief Ombudsperson. Thepolicy also provides access to the chairperson of the Audit Committee under certaincircumstances. The details of the procedure are also available on the website of theCompany www.natcopharma.com.

Auditors

Statutory Auditors

The shareholders at their 31st Annual General Meeting (AGM) held on September 27 2014approved the re-appointment of M/s. Walker Chandiok & Co LLP Chartered Accountantsas statutory auditors of the Company to hold office from the conclusion of the 31st AGMup to the conclusion of the 36th AGM to be held for the year 2018-2019. In terms of firstproviso of Section 139 (1) of the Companies Act 2013 the appointment of the auditors issubject to ratification by the shareholders at every subsequent AGM. Accordingly theappointment of M/s. Walker Chandiok & Co LLP Chartered Accountants as statutoryauditors of the Company from the conclusion of the 33rd AGM till the conclusion of the34th AGM is put forward to the shareholders in the ensuing AGM for their ratification.

Secretarial Auditor

Pursuant to Section 204 of the Companies Act 2013 and the Companies (Appointment &Remuneration of Managerial Personnel) Rules 2014 CS Bala Chandra Sunku (CP No. 12745) aPracticing Company Secretary conducted the secretarial audit of the Company for FY2016.The secretarial audit report in Form No. MR-3 is attached as "Annexure III".

The Board has re-appointed CS Bala Chandra Sunku as Secretarial Auditor of the Companyfor FY 2017.

Cost Auditors

Pursuant to Section 148 of the Companies Act 2013 read with the Companies (Audit andAuditors) Rules 2014 and the Companies (Cost Records and Audit) Amendment Rules 2014the Company maintains the cost audit records in respect of its pharmaceutical business.The Board has on the recommendation of the Audit Committee appointed M/s. S.S. Zanwar& Associates as cost auditors of the Company for FY2016. The provisions also requirethat the remuneration of the cost auditors be ratified by the shareholders and accordinglythe same is put forward to the shareholders in the ensuing AGM for their ratification. Thecost audit report will be filed with the Central Government within the stipulatedtimeline. As a matter of record relevant cost audit reports for FY2015 were filed withinthe due date.

Significant and Material Orders passed by the Courts/Regulators

During FY2016 there were no significant and/or material orders passed by any Court orRegulator or Tribunal which may impact the going concern status or the Company’soperations in future.

Corporate Social Responsibility Initiatives

The Board formulated a Corporate Social Responsibility (CSR) Policy which is in fullforce and operation and is subject to monitoring by the CSR Committee from time to time.The details about the CSR initiatives taken during the year are discussed in a separatechapter "Our commitment" which forms a part of this Annual Report. The AnnualReport on CSR is attached as "Annexure IV".

Transfer of unpaid and unclaimed amounts to Investor Education and Protection Fund

Pursuant to the provisions of Section 205A(5) of the Companies Act 1956 the declareddividends which remained unpaid or unclaimed for a period of seven years have beentransferred by the Company to the Investor Education and Protection Fund (IEPF)established by the Central Government pursuant to Section 205C of the said Act the detailsof which are available in the website of the Company: Weblink:http://natcopharma.co.in/investors/shareholder-information/ unclaimed-dividend/

Employees Stock Option Scheme

The Company has instituted the NATCO Employee Stock Option Plan ‘NATSOP-2015’("the Scheme") as per the special resolution passed in the Extraordinary GeneralMeeting of the Company held on June 27 2015. The scheme is formulated in accordance withthe Securities Exchange Board of India (Share Based Employee Benefits) Regulations 2014issued by the Securities and Exchange Board of India ("SEBI"). Pursuant to theScheme the Board of the Directors of the Company have granted 750000 options(post-split) to eligible employees on August 12 2015. The terms of the Scheme providethat each option entitles the holder to one equity shares of H2 each (post-split) and thatthe options can be settled only by way of issue of equity shares. The options vest on anannual basis over a period of 5 years from the date of grant and the options are entirelytime-based with no performance conditions.

Particulars of Employees

Disclosures pertaining to remuneration and other details as required under Section197(12) of the Companies Act 2013 read with Rules 5(1) 5(2) & 5(3) of the Companies(Appointment and Remuneration of Managerial Personnel)Rules 2014 are attached as"Annexure V".

Conservation of Energy Research and Development Technology Absorption ForeignExchange Earnings and Outgo

The particulars as prescribed under Section 134(3)(m) of the Companies Act 2013 readwith Rule 8(3) of the Companies (Accounts) Rules 2014 are attached as "AnnexureVI".

Extract of the Annual Return

The details forming part of the extract of the annual return in Form MGT-9 are attachedas "Annexure VII".

Nomination and Remuneration Committee

Your Board of Directors had constituted Nomination and Remuneration Committee as perSection 178 of Companies Act 2013 and Regulation 18 of the Listing Regulations. TheNomination and Remuneration Policy of the Company is attached as "Annexure VIII"

Acknowledgement

Your Directors place on record their sincere appreciation for the significantcontribution made by our employees through their dedication hard work and commitment asalso for the trust reposed on us by the medical fraternity and patients. We alsoacknowledge the support extended to us by the analysts bankers government agenciesmedia customers suppliers shareholders and investors at large. We look forward tocontinued support in our endeavour to help people lead healthier lives.

For and on behalf of the Board of Directors
Place: Hyderabad V. C. Nannapaneni
Date : 09 August 2016 Chairman and Managing Director