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Neuland Laboratories Ltd.

BSE: 524558 Sector: Health care
NSE: NEULANDLAB ISIN Code: INE794A01010
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OPEN 713.70
PREVIOUS CLOSE 705.40
VOLUME 2787
52-Week high 1547.50
52-Week low 680.00
P/E 42.75
Mkt Cap.(Rs cr) 625
Buy Price 0.00
Buy Qty 0.00
Sell Price 0.00
Sell Qty 0.00
OPEN 713.70
CLOSE 705.40
VOLUME 2787
52-Week high 1547.50
52-Week low 680.00
P/E 42.75
Mkt Cap.(Rs cr) 625
Buy Price 0.00
Buy Qty 0.00
Sell Price 0.00
Sell Qty 0.00

Neuland Laboratories Ltd. (NEULANDLAB) - Director Report

Company director report

Your Directors have pleasure in presenting the Thirty Third Annual Report of yourCompany along with the audited statement of accounts for the year ended March 31 2017.

Financial Results

(Rs. in lacs)
2016-17 2015-16
Total Revenue/Income 57367.31 51158.92
Profit before Depreciation and Tax 6753.42 5702.28
Less: Depreciation and amortisation charge 1864.66 1574.26
Profit before Tax 4888.76 4128.02
Provision for current tax and deferred tax 1646.20 1486.54
Profit after Tax 3242.56 2641.48
Add: Balance brought forward from the previous year 8012.26 5584.62
Profit available for appropriation 11254.82 8226.10
Appropriation - 213.84
Balance carried forward to Balance Sheet 11254.82 8012.26

For the financial year ended March 31 2017 the total income was

Rs. 57367.31 lacs as compared to Rs.51158.92 lacs in the corresponding period of theprevious year. The EBITDA for the financial year 2016-17 stood at Rs. 8838.56 lacswith a margin of 15.40% compared to EBIDTA of Rs. 4128.02 lacs and margin of 15.91%during the corresponding period of previous year. The Net profit wasRs.3242.56 lacs forthe year under review as compared to Rs. 2641.48 lacs in the corresponding period of theprevious year.

Business Review

During a challenging time for the pharmaceutical industry your Company was able tocontinue to make progress towards establishing itself as a leading API partner of choiceto the pharmaceutical industry. We have seen strengthening of old relationships and newopportunities blossom across geographies such as China and new emerging players. We hadseen an impressive set of numbers in the first half of the year under review and sawcontinued momentum in the second half. We are at a point where we clearly need to expandour manufacturing capacities as we progress on various fronts in terms of the GDS(generic drug substances) and CMS (custom manufacturing solutions) businesses.

The Company is headed in the right direction in terms of the various initiatives beingtaken to further develop the organization to ensure we meet the challenges ahead. We haveseen that with the case of the Process Engineering lab which gives us better traction interms of the CMS business. We have seen further validation of the Company's plans throughthe approval of a New Drug Application (NDA) for a drug where Neuland is the key APIsupplier. Overall the fiscal year under review has been one where we have seen Neulandmake considerable progress on all fronts.

Dividend

Keeping in view the future strategic initiatives of the Company your Directors do notrecommend any dividend for the year ended March 31 2017.

Share Capital

The equity shares of your Company continue to be listed and traded on the BSE Limitedand National Stock Exchange of India Limited. The paid-up equity share capital as on March31 2017 was Rs. 888.43 lacs. During the year under review your Company has allotted1000 equity shares of a face value of Rs.10 each to eligible employee in exercise ofstock options under the ESOS 2008. Your Company has not issued any shares or granted stockoptions or sweat equity during the year.

Outlook

Even as both the branded and generic segments of the pharmaceutical industry are goingthrough substantial changes we strongly believe your Company is in a good position toachieve sustainable long-term growth. Neuland's clear positioning as a pure-play APIplayer will continue to ensure that your Company will be one of the first and last stopsfor customers looking for supply partners. There are clear strengths in terms of thevariety in GDS portfolio as well as the customer profile in the CMS business. Further webelieve that the management of the Company is investing in the right areas to ensure thatNeuland will be a leader in the API industry.

Consolidated Financial Statements

The consolidated financial statements of the Company prepared in accordance withrelevant Accounting Standards (AS) issued by the Institute of Chartered Accountants ofIndia and approved by the Board of Directors of the Company form part of this AnnualReport.

Annual accounts of the subsidiary companies are kept for inspection by any member atthe Registered Office of the Company as well as at the Registered Office of the respectivesubsidiary companies. Any member interested in a copy of the accounts of the subsidiariesmay write to the Company Secretary at the Registered Office of the Company.

The afore-mentioned documents are also available on the website of the Company atwww.neulandlabs.com

A report on the performance and financial position of the subsidiaries set out in theprescribed form AOC-1 in terms of proviso to sub section (3) of Section 129 of theCompanies Act 2013 is provided as Annexure A to the consolidated financial statementsand hence not repeated here.

Subsidiaries

Your Company has two subsidiaries Neuland Laboratories K.K. Japan and NeulandLaboratories Inc. USA working on market development. There are no associate companieswithin the meaning of Section 2(6) of the Companies Act 2013. Further there has been nomaterial change in the nature of business of the subsidiaries.

Holding Company

Your Company is a Subsidiary Company of Neuland Health Sciences Private Limited as perSection 2(87) of the Companies Act 2013.

Documents uploaded on the Website

The following documents are available on the website of the Company(www.neulandlabs.com) in compliance with Companies Act 2013:

• Unpaid dividend details as per Section 124(2)

• Corporate Social Responsibility Policy as per Section 135(4)(a)

• Financial Statements of the Company and Consolidated Financial Statements alongwith relevant documents as per third proviso to section 136(1)

• Separate audited accounts in respect of subsidiaries as per fourth proviso tosection 136(1)

• Details of vigil mechanism for directors and employees to report genuineconcerns as per proviso to section 177(10)

• Policy on Material Subsidiaries

• The terms and conditions of appointment of independent directors as per ScheduleVI to the Act

Research & Development

The Research and Development (R&D) team of our Company continues its ventures toensure that identified products are scaled up at the appropriate time such that there is asteady stream of new products.

During the year under review six (three completed and other three in completion stage)of the existing products were taken up for process improvement involving cycle timereduction recovery and reuse of solvents adoption of green chemistry yield improvementand backward integration of key starting materials.

The increase in the Custom Manufacturing Solutions (CMS) business coupled with customersatisfaction is significantly on account of our team showing utmost importance to thecustomer needs without compromising on the quality and timelines.

There is a great emphasis on QBD (Quality by Design) for robust processes. The team hasbeen working on acquiring new capabilities prominent among them being enzymatic research.The team has initiated work on the same while forging strong collaborative links whichcould play a key role in the future.

Environment Health & Safety

Your Company is committed to excellence in environment health and safety (EHS) andbelieves it is an important pillar of corporate governance. As a responsible corporatecitizen your company continuously strives to serve the society through responsiblymanaging EHS related expectations of internal and external customers. To achieve this weensure that all our activities products and services are carried out consideringappropriate EHS related concerns and addressing the same.

To address the EHS related concerns your Company has formulated an EHS Policy whichis implemented in a continual and systematic manner through ISO 14001:2004 and BS OHSAS18001:2007 management systems. EHS Policy communicates collective intentions to allNeulanders in key areas of EHS compliance environment health safety continualimprovement and community development. All employees of your Company are expected to takepersonal responsibility for meeting the requirement of the EHS management systems andrequired competencies are developed and performances are monitored. EHS policy acts as aguiding principle for identifying analyzing and mitigating any environmental impactsand/or safety and health risks arising from our activities products and services.

On Occupational Health front your Company has a fully functional occupational healthcentre with physician support staff and required infrastructure. The occupational healthteam is spearheading initiatives like exposure assessment work place monitoring healthawareness campaigns and medical surveillance programme aiming to make your Company's workenvironment comfortable safe and healthy for employees. Pre-employment periodical andproduct specific health checkups have been customized for nature of work to strengthen theCompany's medical surveillance program. While developing processes at R&D the Companyadopts ‘Green Chemistry'. Through this method input materials like variouschemicals solvents water energy and process conditions are selected aiming atminimizing environmental impact and eschewing safety & health hazards. Hazard &Operability (HazOp) and Hazard Identification & Risk Assessment (HIRA) studies arecarried out for processes and activities to minimize health and safety risks from suchprocesses and activities. To assess process hazard at developmental stage Process SafetyLaboratory has been set up in R&D center under Technology Transfer Dept. Process isbeing tested at different environmental condition & consider least hazardous processfor operation. Once processes are developed process improvement initiatives are taken upcontinuously to optimize consumption of raw materials solvents water and energy inmanufacturing processes to make them sustainable.

Your Company conducts regular internal audits which surface any potentialnon-compliances for corrective actions to be taken. These audits are conducted withexclusive focus on different areas like Environment Occupational Health and Safety.

Your Company has implemented co-processing of certain hazardous wastes as fuelsubstitutes in authorized cement plants in their kilns to support energy resourceconservation and reduce greenhouse gas emissions. This usage of hazardous wastes helps inconserving energy resources and reducing greenhouse gas emissions. Regular pollutionmonitoring is carried out to ensure compliance with permitted norms.

Information Management Systems

Your Company's information technology platform is a key component in offering customerstransparency accountability and reliability while executing their orders. The systemdesign and architecture is kept updated and customers are encouraged to track the progressin execution of their orders.

In view of mobile handset increasingly becoming standard device of computing firstenterprise mobile application has been developed to track various issues and theirresolution status and more such mobile applications development have been planned.

Most of the current manual business processes have been automated to bringtransparency which helps to improve productivity.

To secure end points (PC laptop mobile etc.) and information flow over e-mail &web e.g. various measures including Data Leak Prevention (DLP) Rights Management Systems(RMS) Mobile Device Management (MDM) and Media Encryption have been implemented toprotect IPR Customer Data and Confidentiality.

All the employees are aware and have been sensitized that all assets of your Companygenerate confidential information and therefore information security is viewed with greatimportance. Your Company appreciates the importance of intellectual property rights andhas put in place procedures to protect strictly intellectual properties. This includescomprehensive user awareness training for Information Security Management System (ISMS)adoption and its adherence followed by internal ISMS audit of all functions.

Your Company successfully completed ISO 27001:2013 surveillance audit of InformationSecurity Management System.

Corporate Governance Report Management Discussion & Analysis and Other InformationRequired under the Companies Act 2013 and SEBI (Listing Obligations and DisclosureRequirements) Regulations 2015

As per SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015Corporate Governance Report with Certificate from a Practicing Company Secretary thereonand Management Discussion and Analysis report are attached and form part of this report.

Directors and Key Managerial Personnel

The changes taken place in the key managerial personnel during the financial year2016-17 and as on the date of this report are as under:

Sl. No. Name Designa- tion Appointment / Cessation Date of appointment / cessation
1 Mr. Anil Kumar Chief Financial Officer Cessation 28-Feb-2017
2 Mr. D.Saharsh Rao* Chief Financial Officer Appointment 17-Aug-2017
3 Mr. D.Saharsh Rao* Chief Financial Officer Cessation 22-Nov-2017
4 Mr. Amit Agarwal Chief Financial Officer Appointment 22-Nov-2017

*Mr. D. Saharsh Rao was appointed as the Chief Financial Officer in addition to hisrole of Joint Managing Director with no change in the terms and conditions of hisappointment.

In accordance with the provisions of Section 152 of the Companies Act 2013 Dr.Christopher M Cimarusti shall retire by rotation and being eligible offers himself forre-appointment. The profile of Dr. Cimarusti is included in the Report on CorporateGovernance and the Notice of the AGM.

Dr. D.R. Rao Chairman & Managing Director Mr. D. Sucheth Rao Vice Chairman &CEO Mr. D. Saharsh Rao Joint Managing Director Mr. Amit Agarwal Chief FinancialOfficer and Ms. Sarada Bhamidipati Company Secretary & Compliance Officer are theKey Managerial Personnel of the Company as on the date of this Report.

Independent Directors' Declaration

All the Independent Directors have given declarations that they meet the criteria ofindependence as laid down under Section 149(6) of the Companies Act 2013 and SEBI(Listing Obligations and Disclosure Requirements) Regulations 2015.

Listing at Stock Exchanges

The equity shares of your Company continue to be listed and traded on the BSE Limitedand National Stock Exchange of India Limited. The annual listing fee for the year 2017-18has been paid to both the Stock Exchanges.

Directors' Responsibility Statement

Pursuant to Section 134(3)(c) of the Companies Act 2013 your Directors confirm thatto the best of their knowledge and belief and according to the information and explanationobtained by them:

a. in the preparation of the annual financial statements for the year ended March 312017 the applicable accounting standards have been followed along with proper explanationrelating to material departures if any;

b. such accounting policies as mentioned in the Notes to the Financial Statements havebeen selected and applied consistently and judgement and estimates have been made that arereasonable and prudent so as to give a true and fair view of the state of affairs of theCompany as at March 31 2017 and of the profit of the Company for the year ended on thatdate;

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 the Company and for preventing and detecting fraud and other irregularities;

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

e. proper internal financial controls were in place and that the financial controlswere adequate and were operating effectively; and

f. systems to ensure compliance with the provisions of all applicable laws were inplace and were adequate and operating effectively.

Board Meetings

During the year under review five Board Meetings and four Audit Committee Meetingswere convened and held the details of which are given in the Corporate Governance Reportwhich forms part of this report. The intervening gap between the Meetings was within theperiod prescribed under the Companies Act 2013.

Board Evaluation

Pursuant to the provisions of the Companies Act 2013 and SEBI (Listing Obligations andDisclosure Requirements) Regulations 2015 the Board has carried out an evaluation of thedirectors as well as the evaluation of the Board and its Committees. The process wascarried out by circulating questionnaires on the Board and Committees functioning oncertain parameters. The performance evaluation of the independent directors was carriedout by the entire Board except the director being evaluated. The performance evaluationof the non-Independent Directors including Executive Directors was carried out by theIndependent Directors.

Independent Directors' Meeting

A separate meeting of the independent directors was convened which reviewed theperformance of the Board the non-independent directors and the Chairman.

Audit Committee

The composition of the Audit Committee and its terms of reference are included in theReport on Corporate Governance annexed.

Nomination and Remuneration Committee

The details of the Nomination and Remuneration Committee are set out in the Report ofCorporate Governance forming part of this Report.

Your Company has a Nomination and Remuneration Policy as required under section 178 ofthe Companies Act 2013 for selection and appointment of Directors Key ManagerialPersonnel Senior Management and their remuneration.

Policy of Directors' Appointment and Remuneration

Your Company's Policy on Directors' appointment and remuneration including criteria fordetermining qualifications positive attributes independence of a director and othermatters provided under section 178(3) of the Act are covered in the Corporate GovernanceReport which forms part of this Report. Further information about elements ofremuneration package of individual directors is provided in the extract of Annual Returnas provided under Section 92(3) of the Act is enclosed at Annexure 2 in the prescribedform MGT-9 and forms part of this Report.

Code of Conduct for Directors and Senior Management

The Directors and members of Senior Management have afirmed compliance with the Code ofConduct for Directors and Senior Management of the Company. A declaration to this effecthas been signed by the Chairman & Managing Director and forms part of the AnnualReport.

Internal Financial Controls

The Company has in place adequate internal financial controls with reference tofinancial statements. During the year under review such controls were tested and noreportable material weakness in the design or operation were observed.

Vigilance Mechanism

Your Company has a Vigilance mechanism to deal with instances of fraud andmismanagement if any. The Whistle Blower Policy enables reporting of unethical behaviouractual or suspected fraud or violation of the Company's code of conduct or ethics policyto the management. The vigil mechanism also ensures strict confidentiality is maintainedand provides adequate safeguards against victimization of employees who avail of themechanism and also provided for direct access to the Chairman of the Audit Committee inexceptional cases.

Prevention of Insider Trading

The Company has adopted (i) Code of Internal Procedures and Conduct for RegulatingMonitoring and Reporting of Trading by Insiders and (ii) Code of Fair Disclosures with aview to serve as a guiding charter for all concerned persons associated with thefunctioning of the Company pursuant to the SEBI (Prohibition of Insider Trading)Regulations 2015. The Company Secretary & Compliance Officer is responsible forimplementation of the Code.

Disclosure as per Sexual Harassment of Women at Workplace (Prevention Prohibition andRedressal) Act 2013

Your Company is committed to ensure that there is no scope for sexual harassment atworkplace and has adopted a policy on prevention prohibition and redressal of sexualharassment at workplace in line with the provisions of Sexual Harassment of Women atWorkplace (Prevention Prohibition and Redressal) Act 2013 and the rules framedthereunder.

The Company has not received any complaints on sexual harassment during the year underreview.

Employee Stock Option Scheme

During the year under review your Company has not granted any stock options. Pursuantto the resolution passed by Annual General meeting on July 20 2007 your Company hasgranted 34500 stock options to its employees under the Employee Stock Options Scheme("ESOS 2008"). Of the 2500 outstanding Stock Options your company has allotted1000 equity shares to the eligible employees under ESOS 2008 and the balance 1500options have lapsed during the financial year ended March 31 2017.

As per the terms of ESOS 2008 the vested stock options must be exercised by theeligible employee within a period of 7 years from the date of vesting of the respectiveemployee stock options. All the granted and vested options have lapsed during November2016 due to lapse of the exercise period under ESOS 2008.

As on March 31 2017 no employee stock options available in the Company and hence nodisclosures are being made under Regulation 14 of the Securities and Exchange Board ofIndia (Share Based Employee Benefits) Regulations 2014 (‘the Regulations').

Statutory Auditors

The financial statements have been audited by Walker Chandiok & Co LLP (ICAI Firm'sRegistration No. 001076N/N500013) Chartered Accountants Statutory Auditors of theCompany.

Pursuant to the provisions of Section 139 of the Act and the rules framed thereunderWalker Chandiok & Co LLP Chartered Accountants were appointed as Statutory Auditorsof the Company from the conclusion of the 30th Annual General Meeting (AGM) of the Companyfor a period of five years i.e. till the conclusion of the 35th AGM to be held in theyear 2019 subject to ratification of their appointment by the members at every AGM.

Cost Auditors

Pursuant to Section 148 of the Companies Act 2013 read with the Companies (CostRecords and Audit) Amendment Rules 2014 subject to the approval of the CentralGovernment if any required the Audit Committee has recommended and the Board ofDirectors had appointed M/s. Nageswara Rao & Co. (Registration No. 000332) CostAccountants being eligible and having sought re-appointment as Cost Auditors of theCompany to carry out the cost audit of the products manufactured by the Company duringthe financial year 2017-18.

Secretarial Audit Report

Your Company has obtained Secretarial Audit Report for the financial year 2016-17 fromthe Company Secretary in practice for compliance with Section 204(1) of the Companies Act2013 Listing Agreement SEBI Regulations on Takeover Insider Trading and Depositories& Participants. The Report of the Secretarial Auditor is annexed to the CorporateGovernance Report and forms part of this report.

Insurance

Your Company has taken necessary steps to mitigate risks and obtained appropriateinsurances and the Board is kept appraised of the risk assessment and minimizationprocedures. The assets of the Company have been adequately covered under insurance. Thepolicy values have been determined taking into consideration the value of the assets ofthe Company.

Material Changes

There have been no material changes and commitments affecting the financial position ofthe Company between the end of the financial year of the Company to which the financialstatements relate and the date of the report. Further it is hereby confirmed that therehas been no change in the nature of business of the Company.

The Board of Directors of the Company at its meeting held on November 4 2016 approvedthe Scheme of Amalgamation and Arrangement of Neuland Health Sciences Private Limited(Holding Company) and Neuland Pharma Research Private Limited (Subsidiary of the HoldingCompany) with the Company ("Scheme of Amalgamation") as per theapplicable provisions of the Companies Act 1956 / 2013 subject to receipt of requisiteapprovals. The Appointed Date as per the terms of the Scheme is April 1 2016. The Schemewas approved by the Members of the Company on May 30 2017. In view of the afore-mentionedScheme of Amalgamation the Company had applied for an extension for holding its AnnualGeneral Meeting to the Registrar of Companies Hyderabad which was approved and extensionof three months was provided to the Company to hold its Annual General Meeting on orbefore December 31 2017.

Extract of Annual Return

The extract of Annual Return required under Section 134(3)(a) of the Companies Act2013 read with Rule 12(1) of the Companies (Management and Administration) Rules 2014 isenclosed as Annexure 2 in Form No.MGT-9 and forms part of this Report.

Transactions with Related Parties

All contracts / arrangements / transactions entered into by the Company during thefinancial year with related parties were in the ordinary course of business and on anarm's length basis under Section 188(1) of the Companies Act 2013. As provided underSection 134(3)(h) of the Act and Rules made thereunder disclosure of particulars ofmaterial transactions with related parties entered into by the Company in the prescribedformat is annexed to this report as Annexure–5. The Company has obtainedshareholders' approval for the transactions with Related Parties wherever requiredpursuant to SEBI (LODR) Regulations 2015. Disclosures on related party transactions areset out in Note No. 29 to the standalone financial statements.

Prior omnibus approval of the Audit Committee is obtained for the transactions whichare of a repetitive nature and a statement giving details of all related partytransactions is placed before the Audit Committee and the Board of Directors for theirapproval on a quarterly basis and deviations if any were ratified.

The Company has Related Party Transaction Policy for purpose of identification andmonitoring of such transactions. The Policy on materiality of related party transactionsand dealing with related party transactions as approved by the Board may be accessed onthe Company's website www.neulandlabs.com.

Internal Control

The information about internal controls is set out in the Management Discussion &Analysis report which is attached and forms part of this Report.

Particulars of Loans Guarantees and Investments

Your Company has not given any loans and guarantees or made any investments underSection 186 of the Act during the year under review.

Deposits from Public

Your Company has not accepted any deposits from the public and as such no amount ofprincipal or interest on deposits from the public was outstanding as on the date of theBalance Sheet.

Significant and Material Orders passed by the Regulators or Courts

There are no significant material orders passed by the Regulators / Courts which wouldimpact the going concern status of the Company and its future operations.

Risk Management

The Board oversees Company's processes for determining risk tolerance and reviewmanagement's action and comparison of overall risk tolerance to established levels. Majorrisks identified by the businesses and functions are systematically addressed throughappropriate actions on a continuous basis. For details please refer to the ManagementDiscussion and Analysis report which forms part of the Board Report.

Corporate Social Responsibility

The Corporate Social Responsibility Committee (CSR Committee) has formulated andrecommended to the Board a Corporate Social Responsibility Policy (CSR Policy) indicatingthe activities to be undertaken by the Company which has been approved by the Board. TheCSR Policy is available on your Company's website www. neulandlabs.com.

Your Company has initiated CSR activities as per the CSR Policy and in compliance withSchedule VII to the Companies Act 2013. The details of the CSR initiatives and activitiesand the amounts spent during the financial year 2016-17 are given in the Annual Report onCSR activities in Annexure 4 to this Report.

Energy Conservation Technology Absorption and Foreign Exchange Earnings and Outgo

The information on conservation of energy technology absorption and foreign exchangeearnings and outgo stipulated under Section 134(3)(m) of the Companies Act 2013 read withRule 8 of the Companies (Accounts) Rules 2014 is annexed herewith as Annexure 1.

Industrial Relations

Your Company's relations with its employees continue to be cordial. Dedicated work bythe workmen supervisors and executives of your Company made it possible to achievesuccess under trying and difficult circumstances.

Particulars of Employees

Disclosures pertaining to remuneration and other details as required under Section197(12) of the Act read with Rule 5(1) of the Companies (Appointment and Remuneration ofManagerial Personnel) Rules 2014 are provided in the Annexure 3 of this Report.

In terms of the provisions of Section 197(12) of the Act read with Rules 5(2) and 5(3)of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014 astatement showing the names and other particulars of the employees drawing remuneration inexcess of the limits set out in the said rules is annexed herewith as Annexure 3.

Acknowledgement

Your Board is appreciative of the passion dedication and commitment demonstrated onthe job by all the employees. The trust reposed in your Company by its esteemed customershelped stabilize growth during the year under review. Your Directors wish to place onrecord their gratitude to the Customers Vendors Government Financial InstitutionsBanks and Shareholders for their continuing support guidance and assistance over theyears.

For and on behalf of the Board
Sd/-
Dr. Davuluri Rama Mohan Rao
Chairman & Managing Director
(DIN: 00107737)
Hyderabad November 22 2017