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Dr Reddys Laboratories Ltd.

BSE: 500124 Sector: Health care
NSE: DRREDDY ISIN Code: INE089A01023
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OPEN 2440.05
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VOLUME 39195
52-Week high 2687.45
52-Week low 1888.00
P/E 35.57
Mkt Cap.(Rs cr) 40,862
Buy Price 0.00
Buy Qty 0.00
Sell Price 0.00
Sell Qty 0.00
OPEN 2440.05
CLOSE 2447.95
VOLUME 39195
52-Week high 2687.45
52-Week low 1888.00
P/E 35.57
Mkt Cap.(Rs cr) 40,862
Buy Price 0.00
Buy Qty 0.00
Sell Price 0.00
Sell Qty 0.00

Dr Reddys Laboratories Ltd. (DRREDDY) - Director Report

Company director report

Dear Members

Your directors are pleased to present the 34th annual report for the year ended 31March 2018.

FINANCIAL HIGHLIGHTS

Table 1 gives the consolidated and standalone financial highlights of the companybased on Ind AS for FY2018 (i.e. from 1 April 2017 to 31 March 2018) compared to theprevious financial year.

COMPANY AFFAIRS

The company's consolidated total income for the year was Rs 144.36 billionwhich was marginally up by 0.5% over the previous year. In US$ terms this amounted to US$2.22 billion. Profit before taxes (PBT) was Rs 13.5 billion representing a declineof 13% over the previous year. In US$ terms this translated to US$ 207 million. Thecompany's standalone total income for the year was Rs 95.63 billion or a declineof 7% over the previous year. In US$ this amounted to US$ 1.47 billion. PBT was Rs 7billion or a reduction of 55% over the previous year. In US$ terms this translated toUS$ 107 million.

Revenues from Global Generics declined by 1% and stood at Rs 114 billion. Therewas growth across Emerging Markets and India partially offset by decline in North AmericaGenerics.

Revenues from North America declined by 6% to Rs 59.8 billion. This was largelyon account of higher price erosions due to channel consolidation and increased competitionin some of our key molecules such as valganciclovir azacytidine and decitabine. This waspartly offset by revenue contribution of some new products. During the year the companylaunched several new products including gVytorin gDoxil gRenvela gAloxi etc. Thecompany filed 19 abbreviated new drug applications (ANDAs) and one new drug application(NDA) under section 505(b)(2) of the Federal Food Drug and Cosmetic Act (FD&C Act) inthe USA. As of 31 March 2018 there were 110 generic filings awaiting approval with the USFood and Drug Administration or USFDA comprising 107 ANDAs and three NDAs filed undersection 505(b)(2). Of these 107 ANDAs 63 are Para IVs out of which 30 are believed tohave ‘First to File' status.

Revenues from Emerging Markets was Rs 22.7 billion registering a year-on-yeargrowth of 8%. Revenues from India stood at Rs 23.3 billion registering ayear-on-year growth of 1%.

Revenues from PSAI stood at Rs 22 billion registering a year-on-year growth of3%. During the year the company filed 12 drug master files (DMFs) in the US.

DIVIDEND

Your directors are pleased to recommend a dividend of Rs 20/- (400%) for FY2018on every equity share of Rs 5/-. The dividend if approved at the 34th annualgeneral meeting (AGM) will be paid to those shareholders whose names appear on theregister of members of the company as of end of the day on 17 July 2018.

In terms of regulation 43A of the SEBI (Listing Obligations and DisclosureRequirements) Regulations 2015 (Listing Regulations) the company's dividend distributionpolicy is attached as Annexure I to the board's report.

TABLE 1 FINANCIAL HIGHLIGHTS (Rs MILLION)
CONSOLIDATED STANDALONE
FY2018 FY2017 FY2018 FY2017
Total income 144362 143676 95633 103110
Profit before depreciation amortization and tax 24276 25803 14711 22796
Depreciation and amortization 10772 10266 7741 7351
Profit before tax 13504 15537 6970 15445
Tax expense 4380 2965 1301 1604
Profit after tax 9124 12572 5669 13841
Share of profit of equity accounted investees net of tax 344 349 - -
Net profit for the year 9468 12921 5669 13841
Add: surplus at the beginning of the year 90771 82595 89063 79930
Total available for appropriation 100239 95516 94732 93771
Appropriations:
Dividend paid during the year 3316 3312 3316 3312
Tax on dividend paid 676 674 676 674
Credit of dividend distribution tax - (596) - (633)
Transfer to general reserve - 1355 - 1355
Balance carried forward 96247 90771 90740 89063

Note: FY2018 represents fiscal year 2017-18 from 1 April 2017 to 31 March 2018 andanalogously for FY2017 and other such labeled years.

TRANSFER TO RESERVES

The company has not proposed to transfer any amount to the general reserve.

SHARE CAPITAL

The paid-up share capital of your company increased by Rs 0.85 million to Rs 829.56million in FY2018 due to allotment of 169194 equity shares on exercise of stock optionsby eligible employees through the ‘Dr. Reddy's Employees Stock Option Scheme 2002'and ‘Dr. Reddy's Employees ADR Stock Option Scheme 2007'.

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 relatingto deposits.

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.

MATERIAL CHANGES AND COMMITMENTS AFFECTING THE FINANCIAL POSITION OF THE COMPANY

None.

SUBSIDIARIES AND ASSOCIATES

The company had 51 subsidiaries and two joint venture companies as on 31 March 2018.During FY2018 Dr. Reddy's Laboratories Chile SpA. (in Chile) Dr. Reddy's (WUXI)Pharmaceutical Co. Limited (in China) Dr. Reddy's Laboratories Malaysia Sdn. Bhd. (inMalaysia) and Dr. Reddy's Laboratories Taiwan Limited (in Taiwan) have become subsidiarycompanies. DRSS Solar Power Private Limited was closed and ceased to be a joint venturecompany. Section 129(3) of the Companies Act 2013 states that where the company has oneor more subsidiaries it shall in addition to its financial statements prepare aconsolidated financial statement of the company and of all subsidiaries in the same formand manner as that of its own and also attach along with its financial statement aseparate statement containing the salient features of the financial statements of itssubsidiaries.

Hence the consolidated financial statements of the company and all its subsidiariesand joint ventures prepared in accordance with Indian Accounting Standards (Ind AS) 110and 111 as specified in the Companies (Indian Accounting Standards) Rules 2015 form partof the annual report. Moreover a statement containing the salient features of thefinancial statement of the company's subsidiaries and joint ventures in the prescribedForm AOC-1 is attached as Annexure II to the board's report. This statement alsoprovides details of the performance and financial position of each subsidiary and jointventure.

In accordance with section 136 of the Companies Act 2013 the audited financialstatements and related information of the subsidiaries wherever applicable are availablefor inspection during regular business hours at our registered office in Hyderabad India.These are also available on the company's website www.drreddys.com.

PARTICULARS OF LOANS GUARANTEES OR INVESTMENTS

The company makes investments or extends loans/guarantees to its wholly- ownedsubsidiaries for their business purposes. Details of loans guarantees and investmentscovered under section 186 of the Companies Act 2013 along with the purpose for whichsuch loan or guarantee was proposed to be utilized by the recipient form part of thenotes to the financial statements provided in this 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 information forshareholders is provided in the chapter on Additional Shareholders' Information. Acertificate from the statutory auditors of the company confirming compliance with theconditions of corporate governance is attached to the chapter on Corporate Governance.

MANAGEMENT DISCUSSION AND ANALYSIS

A detailed report on the Management Discussion and Analysis in terms of theprovisions of regulation 34 of the Listing Regulations is provided as a separate chapterin the annual report.

BOARD OF DIRECTORS AND KEY MANAGERIAL PERSONNEL

The term of Dr. Ashok S Ganguly as an independent director of the company ended on 28July 2017. The board places on record its appreciation for the services rendered by Dr.Ganguly during his tenure as a member of the board and its committees.

The board of directors on 30 October 2017 appointed Mr. Prasad R Menon as anadditional director of the Company categorized as independent. The Board recommendsappointment of Mr. Menon as an independent director under section 149 of the CompaniesAct 2013 for a term of five years with effect from 30 October 2017 for approval of theshareholders at the forthcoming 34th AGM scheduled on 27 July 2018. In accordance withsection 149(7) of the Companies Act 2013 each independent director has confirmed to thecompany that he or she meets the criteria of independence laid down in section 149(6) ofthe Companies Act 2013 and regulation 16(1)(b) of the Listing Regulations.

The term of Mr. Anupam Puri as an independent director of the company is ending at the34th AGM. The board recommends reappointment of Mr. Puri as an independent director undersection 149 of the Companies Act 2013 for a further term of one year for approval of theshareholders at the forthcoming 34th AGM scheduled on 27 July 2018.

Mr. K Satish Reddy retires by rotation at the forthcoming 34th AGM and being eligibleseeks reappointment.

Brief profiles of Mr. Prasad R Menon Mr. Anupam Puri and Mr. K Satish Reddy are givenin the chapter on Corporate Governance and the Notice convening the 34th AGMfor reference of the shareholders.

BOARD EVALUATION

As per provisions of the Companies Act 2013 and regulation 17(10) of the ListingRegulations an evaluation of the performance of the board its committees and members wasundertaken. For details please see the chapter on Corporate Governance in thisannual report.

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. A potential boardmember is also assessed on the basis of independence criteria defined in section 149(6) ofthe Companies Act 2013 and regulation 16(1)(b) of the Listing Regulations.

In accordance with section 178(3) of the Companies Act 2013 regulation 19(4) of theListing Regulations and on recommendations of the company's nomination governance andcompensation committee the board adopted a remuneration policy for directors keymanagerial personnel (KMPs) senior management and other employees. The policy is attachedin the chapter on Corporate Governance.

NUMBER OF BOARD MEETINGS

The board of directors met five times during the year. In addition an annual boardretreat was held to discuss strategic matters. Details of board meetings are given in thechapter on

Corporate Governance.

AUDIT COMMITTEE

The audit committee of the board of directors consists entirely of independentdirectors. Presently the committee comprises Mr. Sridar Iyengar (chairman) Dr. OmkarGoswami and Mr. Bharat N Doshi. Further details can be seen in the chapter on CorporateGovernance. The board has accepted all recommendations made by the audit committeeduring the year.

BUSINESS RISK MANAGEMENT

The company has a risk management committee of the board consisting entirely ofindependent directors. Details of the committee and its terms of reference are set out inthe chapter on

Corporate Governance.

The audit and risk management committees review key risk elements of the company'sbusiness finance operations and compliance and respective mitigation strategies. Therisk management committee reviews key strategic business compliance and operationalrisks while issues around ethics and fraud internal control over financial reporting(ICOFR) as well as process risks and their mitigation are reviewed by the auditcommittee. The company's finance investment and risk management council (FIRM council) isa management level committee which operates under a charter and focuses on risksassociated with the company's business and investments. The FIRM council periodicallyreviews matters pertaining to risk management compliance ethics and fraud. Additionallythe enterprise-wide risk management (ERM) function helps management and the board toperiodically prioritize review and measure business risks against a pre-determined riskappetite and their suitable response depending on whether such risks are internalstrategic or external.

During FY2018 focus areas of risk management committee included progress on cybersecurity data privacy quality and regulatory geo-political risk compliance patentinfringement risk exposures as well as safety and health.

ADEQUACY OF INTERNAL FINANCIAL CONTROL SYSTEMS

The company has in place adequate internal financial controls with reference to itsfinancial statements. These controls ensure the accuracy and completeness of theaccounting records and the preparation of reliable financial statements.

DIRECTORS' RESPONSIBILITY STATEMENT

In terms of section 134(5) of the Companies Act 2013 (‘the Act') your directorsstate that: 1. applicable accounting standards have been followed in the preparation ofthe annual accounts; 2. accounting policies have been selected and applied consistently.Judgments and estimates made are reasonable and prudent so as to give a true and fairview of the state of affairs of the company at the end of the FY2018 and of the profit ofthe company for that period; 3. proper and sufficient care has been taken to maintainadequate accounting records in accordance with the provisions of the Act for safeguardingthe assets of the company and for preventing and detecting fraud and other irregularities;4. annual accounts have been prepared on a going concern basis; 5. adequate internalfinancial controls for the company to follow have been laid down and these are operatingeffectively; and 6. proper and adequate systems have been devised to ensure compliancewith the provisions of all applicable laws and these systems are operating effectively.

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) of the Companies Act2013 in Form AOC-2 is attached as Annexure III. All such contracts or arrangementsare in the interest of the company. Details of related party disclosures form part of thenotes to the financial statements provided in this annual report.

VIGIL MECHANISM/WHISTLE- BLOWER POLICY

The company has an ombudsperson policy (whistle-blower/vigil mechanism) to reportconcerns. The vigil mechanism consists of a hotline — a dedicated e-mail ID and aphone number. The ombudsperson policy safeguards from victimization of those who use thismechanism. The audit committee chairperson is the chief ombudsperson. The policy alsoprovides access to the chairperson of the audit committee under certain circumstances.Details of the policy are available on the company's website www.drreddys.com/investors/governance/ombudsperson-policy.

STATUTORY AUDITORS

M/s. S R Batliboi & Associates LLP chartered accountants (firm registration No.101049W/E300004) were appointed as statutory auditors of the company at the 32nd AGM heldon 27 July 2016 for a period of five years commencing from the conclusion of 32nd AGMtill the conclusion of the 37th AGM subject to ratification by shareholders every yearas may be applicable. However the Ministry of Corporate Affairs (MCA) vide itsnotification dated 7 May 2018 has omitted the requirement under first proviso to section139 of the Companies Act 2013 and rule 3(7) of the Companies (Audit and Auditors) Rules2014 regarding ratification of appointment of statutory auditors by shareholders at everysubsequent AGM. Consequently M/s. S R Batliboi & Associates LLP charteredaccountants continues to be the statutory auditors of the company till the conclusion of37th AGM as approved by shareholders at 32nd AGM held on 27 July 2016.

SECRETARIAL AUDITOR

Pursuant to section 204 of the Companies Act 2013 and the Companies (Appointment andRemuneration of Managerial Personnel) Rules 2014 Dr. K R Chandratre practicing companysecretary (membership no. FCS 1370 and certificate of practice no. 5144) was appointed toconduct the secretarial audit of the company for FY2018. The secretarial audit report forFY2018 is attached as Annexure IV.

Based on the consent received from Dr. K R Chandratre and on the recommendations ofthe audit committee the board has appointed him as the secretarial auditor of the companyfor FY2019.

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) Rules 2014 as amendedthe company maintains the cost audit records in respect of its pharmaceutical business. Onthe recommendation of the audit committee your board has appointed M/s. Sagar &Associates cost accountants (firm registration no. 000118) as cost auditors of thecompany for the FY2019 at a remuneration of Rs 7 lakhs plus reimbursement ofout-of-pocket expenses at actuals and applicable taxes. The provisions also require thatthe remuneration of the cost auditors be ratified by the shareholders. As a matter ofrecord relevant cost audit reports for FY2017 were filed with the central government on24 August 2017 within the stipulated timeline. The cost audit report for FY2018 will alsobe filed within the timeline.

BOARD'S RESPONSE ON AUDITORS' QUALIFICATIONS RESERVATIONS OR ADVERSE REMARKS ORDISCLAIMERS MADE

There are no qualifications reservations or adverse remarks made by the statutoryauditors in their report or by the practicing company secretary in the secretarial auditreport. During the year there were no instances of frauds reported by auditors undersection 143(12) of the Companies Act2013.

SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE COURTS/REGULATORS/ TRIBUNALS

None

INFORMATION REQUIRED UNDER SEXUAL HARASSMENT OF WOMEN AT WORKPLACE (PREVENTIONPROHIBITION AND REDRESSAL) ACT 2013

The company has an apex complaints committee and an internal complaints committee whichoperate under a defined redressal system for complaints pertaining to sexual harassment ofwomen at the workplace. Details are available in the principle 3 under section 7 of the BusinessResponsibility Report forming a part of this annual report.

CORPORATE SOCIAL RESPONSIBILITY (CSR) INITIATIVES

As per section 135 of the Companies Act 2013 the company has a board-level CSRcommittee consisting of Mr. Bharat N Doshi (chairman) Mr. G V Prasad and Mr. K SatishReddy. The company's CSR policy provides a constructive framework to review and organizeour social outreach programs in health livelihood and education. During the year thecommittee monitored implementation and adherence to the CSR policy. Details of the CSRpolicy and initiatives taken by the company during the year are available on the company'swebsite www.drreddys.com. The report on CSR activities is attached as Annexure V.

BUSINESS RESPONSIBILITY REPORT

A detailed Business Responsibility Report as required under regulation 34 of theListing Regulations is given as a separate section in this annual report.

TRANSFER OF UNPAID AND UNCLAIMED AMOUNTS TO INVESTOR EDUCATION AND PROTECTION FUND(IEPF)

Pursuant to the provisions of the Companies Act 2013 read with IEPF Authority(Accounting Audit Transfer and Refund) Rules 2016 as amended declared dividends whichremained unpaid or unclaimed for a period of seven years have been transferred by thecompany to the IEPF which has been established by the central government. Theabove-referred rules also mandate transfer of shares on which dividend are lying unpaidand unclaimed for a period of seven consecutive years to IEPF. The company has issuedindividual notices to the shareholders whose equity shares are liable to be transferred toIEPF advising them to claim their dividend on or before 5 August 2018.

EMPLOYEES STOCK OPTION SCHEMES

During the year there has been no material change in the ‘Dr. Reddy's EmployeesStock Option Scheme 2002' and the ‘Dr. Reddy's Employees ADR Stock Option Scheme2007' (both collectively referred as ‘the schemes'). The schemes are in compliancewith the SEBI (Share Based Employee Benefits) Regulations 2014. The details are availableon the company's website: www.drreddys.com/pdf/ESOP_details.pdf The details also form partof note 2.24 of the notes to accounts of the standalone financial statements.

PARTICULARS OF EMPLOYEES

Disclosures pertaining to remuneration and other details as required under section197(12) of the Companies Act 2013 read with rule 5(1) of the Companies (Appointment andRemuneration of Managerial Personnel) Rules 2014 are attached as Annexure VI. Interms of section 197(12) of the Companies Act 2013 read with rule 5(2) and 5(3) of theCompanies (Appointment and Remuneration of Managerial Personnel) Rules 2014 a statementshowing the names and other particulars of the employees drawing remuneration in excess oflimits set out in said rules forms part of the annual report.

Considering the first proviso to section 136(1) of the Companies Act 2013 the annualreport excluding the aforesaid information is being sent to the shareholders of thecompany and others entitled thereto. The said information is available for inspection atthe registered office of the company during business hours on working days up to the dateof the forthcoming 34th AGM. Any shareholder interested in obtaining a copy thereof maywrite to the company secretary in this regard.

CONSERVATION OF ENERGY TECHNOLOGY ABSORPTION FOREIGN EXCHANGE 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 Annexure VII.

EXTRACT OF THE ANNUAL RETURN

Details forming part of the extract of the annual return in form MGT-9 are attached as AnnexureVIII.

ACKNOWLEDGMENT

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. The board ofdirectors also acknowledge the support extended by the analysts bankers governmentagencies media customers suppliers shareholders and investors at large. It looksforward to your continued support in the company's endeavor to accelerate access toinnovative and affordable medicines… because

Good Health Can't Wait.

For and on behalf of the board of directors

K Satish Reddy

Chairman

Place : Hyderabad

Date : 22 May 2018