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Divis Laboratories Ltd.

BSE: 532488 Sector: Health care
NSE: DIVISLAB ISIN Code: INE361B01024
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OPEN 5090.00
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VOLUME 2940
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P/E 67.77
Mkt Cap.(Rs cr) 136,497
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OPEN 5090.00
CLOSE 5108.60
VOLUME 2940
52-Week high 5269.00
52-Week low 2986.70
P/E 67.77
Mkt Cap.(Rs cr) 136,497
Buy Price 5140.00
Buy Qty 14.00
Sell Price 5142.50
Sell Qty 10.00

Divis Laboratories Ltd. (DIVISLAB) - Director Report

Company director report

To

The Members

Your Directors have pleasure in presenting the Annual Report of Divi's LaboratoriesLimited (the Company or Divi's) along with the audited financial statements for thefinancial year ended March 31 2021. The consolidated performance of the Company and itssubsidiaries has been referred to wherever required.

Financial Results

Financial performance of the Company for the year ended March 31 2021 is summarizedbelow:

(Rs in Lakhs)
Standalone Consolidated
Particulars 2020-21 2019-20 2020-21 2019-20
Revenue 679861 531057 696940 539442
Other Income 6253 18986 6256 18963
Total Revenue 686114 550043 703196 558405
Expenditure before depreciation and interest 397793 349513 410946 357225
Profit before depreciation interest and tax (PBDIT) 288321 200530 292250 201180
Depreciation 25465 18595 25559 18624
Finance Cost 69 606 87 610
Profit before Tax (PBT) 262787 181329 266604 181946
Provision for Tax:
Current Tax 60905 38779 61646 39279
Deferred Tax 6410 5279 6529 5013
Total tax provision 67315 44058 68175 44292
Profit after Tax (PAT) 195472 137271 198429 137654
Other comprehensive Income (net of tax) 16 (521) 40 35
Total Comprehensive Income 195488 136750 198469 137689
Earnings per Share (EPS) Basic & Diluted (Rs) 73.63 51.71 74.75 51.85

Operations

Standalone

The current financial year has reflected the benefit of operations from the capexprograms taken up by the Company during the last two years. The debottlenecking andbackward integration programs taken up during the last two years have also become fullyoperational; and has reduced our dependence on key starting materials besides achievingproductivity and cost efficiency. Validations have been completed for several activepharmaceutical ingredients in both the generic and Custom Synthesis products.

Ever since the outbreak of the Covid-19 pandemic the Company has put in appropriatemeasures and protocols for the health and safety of its employees; besides streamliningthe operations and maintaining the supply chain which enabled the Company to continueuninterrupted supply of active pharmaceutical ingredients to customers globally.

Some of the highlights of the operations for the year are:

• Total Income for the year increased by 25% to Rs 686114 lakhs.

• Operating profit (PBDIT) for the year amounted to Rs 288321 lakhs as againstan operating profit of Rs 200530 lakhs last year.

• Profit before Tax (PBT) for the year has grown by 45% to Rs 262787lakhs as against a PBT of Rs 181329 lakhs for the last year.

• Tax Provision for the current year amounted to Rs 67315 lakhs as against a taxprovision of Rs 44058 lakhs for the last year.

• Profit after Tax (PAT) before other comprehensive income for the year grew by42% to Rs 195472 lakhs as against a PAT of Rs 137271 lakhs last year.

• Earnings Per Share of Rs 2/- each works out to Rs 73.63 for the year as againstRs 51.71 last year.

• Out of the total revenue 24% came from North America 48% from Europe 12% fromAsia 12% from India and 4% from rest of the World.

Consolidated

The Company's total consolidated income increased by 26% to Rs 703196 lakhs from Rs558405 lakhs in the previous year.

The operating profit before depreciation finance charges and tax (PBDIT) amounted toRs 292250 lakhs as against Rs 201180 lakhs in the previous year. Profit after Taxbefore Other Comprehensive Income for the year accounted to Rs 198429 lakhs as againstRs 137654 lakhs in the previous year.

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 revenue of Rs 45631 lakhs as againstRs 32070 lakhs in the previous year reflecting a growth of 42% of revenue at thesubsidiary level.

Subsidiaries have been having consistent profits and have improved networth over theyears. There has been no material change in the nature of the business of thesubsidiaries.

As per Section 129(3) of the Companies Act 2013 (the Act) read with Companies(Accounts) Rules 2014 statement containing the salient features of the financialstatement of Company's subsidiaries in form AOC-1 is annexed herewith as "AnnexureI". Moreover pursuant to provisions of Section 136(1) of the Companies Act2013 audited financial statements of the subsidiary companies are placed on the Company'swebsite and can be accessed at https://www.divislabs.com/Subsidiary-Financials-2021.pdf.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 and can be accessed at: https:// www.divislabs.com/MaterialSubsidiaryPolicy.pdf.Presently the Company does not have any material subsidiary.

Consolidated financial statements

As stipulated in the SEBI (Listing Obligations and Disclosure Requirements)Regulations 2015 ("SEBI Listing Regulations") and the Companies Act 2013 theconsolidated financial statements have been prepared by the Company in accordance with therelevant accounting standards. The audited consolidated financial statements together withAuditors Report thereon form part of the Annual Report.

Capital Expenditure

During the financial year 2020-21 the Company has capitalised assets of Rs 118351lakhs and an amount of Rs 71062 lakhs is carried forward as capital work-in-progress atthe end of the year.

The new brownfield DC SEZ and DCV SEZ Units and the debottnecking / backwardintegration programs taken up by the Company have become fully operational during theyear. Modernisation and upgradation of wastewater treatment plants at the manufacturingsites has been implemented.

During the year we have also taken up another capex program with an estimatedinvestment of Rs 400 crores for fast-tracking a customs synthesis project. A part of theproject has been completed and became operational and the rest of the capex will becompleted during early part of the next financial year.

In respect of the Kakinada site we have received final judgement from High Courtdismissing the claims of the previous landowners. We are waiting for the final go-aheadfrom APIIC to hand over the balance land to us. We plan to implement the Project onreceiving the possession of the balance part of the land.

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.

Dividend

Your Directors are pleased to recommend a dividend of Rs 20/- per equity share of Rs2/- each i.e. 1000% for the financial year ended March 31 2021 subject to approval ofmembers at the ensuing Annual General Meeting.

The total dividend payout for the current year amounts to Rs 53094 lakhs as against Rs51206 lakhs in the previous year. Dividend payout as a percentage of profits is 27% ascompared to 37% in the previous year. As members are aware with effect from April 012020 the Government has abolished the dividend distribution tax and dividend income isnow taxable at the hands of shareholders. Hence payment of dividend to members will besubject to tax deduction at source (TDS) as per statutory requirement.

The dividend recommended is in accordance with the Company's Dividend DistributionPolicy. The Dividend Distribution Policy is available on the Company's website and can beaccessed at https://www.divislabs.com/DividendDistributionPolicy.pdf.

Transfer to Reserves

The Directors have decided to retain the entire total comprehensive income for thecurrent year of Rs 195488 lakhs in the reserves (Retained Earnings).

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 by the Company are given in the notes to the financialstatements.

Related Party Transactions

There are no materially significant related party transactions made by the Company withrelated parties which may have potential conflict of interest with the Company at large.As a matter of policy your Company carries out transactions with related parties on anarms' length basis. Statement of these transactions is given at Note No. 38 of the Notesto financial statements.

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 part of this report.

The Policy on Materiality of Related Party Transactions and on dealing with RelatedParty Transactions as approved by the Board is available on the Company's website and canbe accessed at https://www.divislabs.com/RPT-Policy.pdf.

Internal Financial Controls

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

Risk Management

The Company has an enterprise-wide approach to risk management which lays emphasis onidentifying and managing key operational and strategic risks. The aim is to avoid orminimise risks that pose a threat to Divi's continued existence and to make improvedmanagerial decisions to create value. The Company has been addressing various risksimpacting the Company and the policy and processes of the Company on risk management isprovided in the Management Discussion and Analysis.

The Risk Management Committee constituted by the Company constantly evaluates variousrisks – business customer concentration supplier concentration regulatorycompliances confidentiality of processes consistency of cGMP practices environmentemployee health and safety etc. monitors risk and deploy appropriate control systemsaimed at mitigating such risks to the extent possible.

Further details on the Risk Management activities including the implementation of riskmanagement policy key risks identified and their mitigations are covered in ManagementDiscussion and Analysis section which forms part of the Annual Report.

Management Discussion and Analysis

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

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 read with requirements of Schedule III to theAct have been followed in the preparation of the annual accounts for the year ended March31 2021 and there are no material departures from the same;

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.

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 June 06 2020 August 08 2020 November 07 2020 andFebruary 06 2021.

Directors and Key Managerial Personnel

As per the provisions of the Companies Act 2013 and the Articles of Association of theCompany Dr. Kiran S. Divi and Ms. Nilima Prasad Divi Directors of the Company willretire by rotation at the ensuing Annual General Meeting and being eligible the Directorsoffer themselves for re-appointment. The Board of Directors on recommendation ofCompensation Nomination and Remuneration Committee has recommended their reappointment.

Declaration by Independent Directors

The Company has obtained declaration from all Independent Directors of the Companyunder Section 149(7) of the Companies (the Act) 2013 confirming that they meet thecriteria of independence as provided in Section 149(6) of the Companies Act 2013 andRegulation 25 of SEBI Listing Regulations. There has been no change in the circumstancesaffecting their status as Independent Directors of the Company.

Performance Evaluation

The Board of Directors carried out an annual evaluation of its own performance of theCommittees of the Board and of the individual directors including Independent Directorspursuant to the provisions of the Companies 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 Chairpersonnon-independent directors and the Board as a whole was evaluated taking into account theviews of the non-independent directors and the same was discussed in the Board Meeting.Performance evaluation of Independent Directors is done by the entire Board of Directors(excluding the Directors 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 director's independence as required under Section 178(3) of the Companies Act 2013and Regulation 19 read with Schedule II Part D of SEBI Listing Regulations has beenformulated by the Company:

• To identify persons who are qualified to become directors and who may beappointed in senior management in accordance with the criteria laid down.

• To ensure a transparent board nomination process with the diversity of thoughtexperience knowledge perspective and gender in the Board.

• To determine remuneration based on the Company's size and financial position andtrends and practices on remuneration prevailing in peer companies in the Pharma industrybesides qualifications skills capabilities etc.

• To carry out evaluation of the performance of Directors as well as KeyManagerial and Senior Management Personnel.

• To provide them rewards linked directly to their effort performance dedicationand achievement relating to the Company's operations.

• To retain motivate and promote talent and to ensure long term sustainability oftalented managerial persons and create competitive advantage.

Policy on Nomination and Remuneration of Directors Key / Senior Managerial Personnelmay be accessed on the Company's website at: https://www.divislabs.com/NominationRemunerationPolicy.pdf.

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– II" and forms part of this Report.

The non-executive directors of the Company had no pecuniary relationship ortransactions with the Company other than sitting fees annual remuneration andreimbursement of expenses if any.

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 – III" 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.Madhusudana Rao Divi and Dr. Ramesh B.V. Nimmagadda.

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– IV" 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 –V" to this report.

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.

Audit Committee

The details pertaining to the role objective and composition of the Audit Committeeare included in the Corporate Governance Report which is part of the Annual Report for theyear.

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 behavior actual or suspected fraud or violation of the Company's codeof 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: https://www.divislabs.com/WhistleBlowerPolicy.pdf.

Audit Reports

• Report of the Statutory Auditors on the financial statements for the year doesnot contain any qualification reservation or adverse remark or disclaimer; or reportingof any offence or fraud.

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

Statutory Auditors

At the Annual General Meeting held on September 25 2017 M/s Price WaterhouseChartered Accountants LLP (Firm Registration No. 012754N/ N500016) were appointed asStatutory Auditors of the Company to hold office for five consecutive years till theconclusion of the 32nd Annual General Meeting of the Company in the calendar year 2022subject to ratification by the members at each Annual General Meeting.

In terms of first proviso to Section 139 of the Companies Act 2013 the appointment ofthe auditors shall be placed for ratification at every Annual General Meeting. HoweverCompanies (Amendment) Act 2017 omitted the first proviso to Section 139 of Companies Act2013 that requires ratification of appointment of auditor at every annual general meeting.

Accordingly M/s. Price Waterhouse Chartered Accountants LLP will continue as theStatutory Auditors of the Company till conclusion of 32nd Annual General Meeting of theCompany.

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 Directorsof the Company has appointed Mr. V. Bhaskara Rao Practicing Company Secretary (PCSRegistration No. 4182) as the Secretarial Auditor of the Company to conduct theSecretarial audit for the financial year 2020-21. The Secretarial Audit report for thefinancial year 2020-21 is annexed herewith as "Annexure VI".

Cost Audit

Pursuant to the Section 148 of the Act and Rule 3 of the Companies (Cost Records andAudit) Rules 2014 as amended the Company maintains cost records in its books of account.As per Rule 4 of the said rules the requirement for cost audit is not applicable to acompany which is covered under Rule 3 and whose revenue from exports in foreignexchange exceeds seventy five per cent of its total revenue or which is operating from aspecial economic zone. However the Company has voluntarily opted for audit of costrecords and appointed M/s. E.V.S & Associates Cost Accountants as CostAuditors.

Annual Return

In terms of Section 92(3) of the Companies Act 2013 and Rule 12 of the Companies(Management and Administration) Rules 2014 the Annual Return of the Company as on March31 2021 is available on the Company's website and can be accessed athttps://www.divislabs.com/annual-return/2020-21.pdf

Other Disclosures

• Information on Unclaimed Dividend and transfer to IEPF is provided in theCorporate Governance Report.

• No Company has become or ceased to be its subsidiary joint venture or associateCompany during the year.

• No significant and material orders were passed by the regulators or courts ortribunals impacting the going concern status and Company's operations in future.

• The Company has complied with provisions relating to the constitution ofInternal Complaints Committee under the Sexual Harassment of Women at Workplace(Prevention Prohibition and Redressal) Act 2013 and rules made thereunder and during theyear under review there were no complaints received or pending.

• The information with respect to Compensation Nomination and RemunerationCommittee Stakeholders Relationship Committee Risk management Committee are disclosed inthe Corporate Governance Report forming part of the Annual Report.

• The Company has followed the applicable Secretarial Standards i.e. SS-1 andSS-2 relating to ‘Meetings of the Board of Directors' and ‘General Meetings'respectively.

Acknowledgements

Your Directors take this opportunity to thank the customers shareholders suppliersbankers business associates financial institutions and Central and State Governments fortheir consistent support and encouragement to the Company.

We are sure you will join our Directors in conveying our sincere appreciation toemployees at all levels of the Company and its subsidiaries for their hard workdedication and commitment in particular during this unprecedented year thereby ensuringuninterrupted supply of life saving medicines across the globe.

For and on behalf of the Board
Dr. Ramesh B.V. Nimmagadda Dr. Murali K. Divi
Chairman Managing Director
(DIN: 07854042) (DIN: 00005040)
Date: May 29 2021 Place: Chennai Place: Hyderabad

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