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Dr Reddys Laboratories Ltd.

BSE: 500124 Sector: Health care
NSE: DRREDDY ISIN Code: INE089A01023
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OPEN 4006.00
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VOLUME 19517
52-Week high 4099.90
52-Week low 2352.00
P/E 22.77
Mkt Cap.(Rs cr) 66,902
Buy Price 4011.00
Buy Qty 4.00
Sell Price 4025.90
Sell Qty 11.00
OPEN 4006.00
CLOSE 3999.50
VOLUME 19517
52-Week high 4099.90
52-Week low 2352.00
P/E 22.77
Mkt Cap.(Rs cr) 66,902
Buy Price 4011.00
Buy Qty 4.00
Sell Price 4025.90
Sell Qty 11.00

Dr Reddys Laboratories Ltd. (DRREDDY) - Director Report

Company director report

Dear Members

Your directors are pleased to present the 35th annual report for theyear ended 31 March 2019.

FINANCIAL HIGHLIGHTS

Table 1 gives the consolidated and standalone financial highlights ofthe company based on Indian Accounting Standards (Ind AS) for FY2019 (i.e. from 1 April2018 to 31 March 2019) compared to the previous financial year.

COMPANY AFFAIRS*

The company's consolidated total income for the year wasर157.86billion which was up by 9% over the previous year. In US$ terms this amounted to US$2.28 billion. Profit before taxes (PBT) wasर22.9 billion representing a growth of 70%over the previous year. In US$ terms this translated to US$ 331 million.

The company's standalone total income for the year wasर108.64billion which was up by 14% over the previous year. In US$ this amounted to US$ 1.57billion. PBT wasर17 billion which was up by 144% over the previous year. In US$ termsthis translated to US$ 246 million.

Revenues from Global Generics up by 8% and stood atर123 billion.There was growth across Emerging Markets and India revenues from North America Genericsremained flat on a year-on-year basis.

Revenues from North America stood atर60 billion and remained flaton a year-on-year basis. This was largely on account of revenue contribution from newproducts launched market share gains for existing products and favorable foreignexchange movement offset by higher price erosions in some of our key pharmaceuticalproducts.

During the year the company launched several new products. Theseincluded gSuboxone gTepadina gGleevec gDiprivan etc. The company filed 20 abbreviatednew drug applications (ANDAs) in the USA. As of 31 March 2019 there were 110 genericfilings awaiting approval with the US Food and Drug Administration (USFDA) comprising 107ANDAs and three NDAs filed under Section 505(b)(2) of the Federal Food Drug and CosmeticAct (FD&C Act) in the USA. Of these 107 ANDAs 60 are Para IVs out of which 34 arebelieved to have ‘First to File' status.

Table 1 Financial Highlights

CONSOLIDATED STANDALONE
FY2019 FY2018 FY2019 FY2018
Total income 157857 144362 108639 95633
Profit before depreciation amortization and tax 34268 24276 24813 14711
Depreciation and amortization 11348 10772 7806 7741
Profit before tax 22920 13504 17007 6970
Tax expense 3858 4380 4234 1301
Profit after tax 19062 9124 12773 5669
Share of profit of equity accounted investees net of tax 438 344 - -
Net profit for the year 19500 9468 12773 5669
Opening balance of retained earnings 96247 90771 90740 89063
Net profit for the year 19500 9468 12773 5669
Other comprehensive income/(loss) 255 - - -
Dividend paid during the year (3320) (3316) (3320) (3316)
Tax on dividend paid (682) (676) (682) (676)
Transfer to general reserve - - - -
Closing balance of retained earnings 112000 96247 99511 90740

* The conversion rate is considered as US$ 1 =र69.16.

Revenues from Emerging Markets wasर28.9 billion registering ayear-on-year growth of 28%. Revenues from India stood atर26.2 billion registering ayear-on-year growth of 12%.

Revenues from PSAI stood atर24.1 billion registering a year-on-yeargrowth of 10%. During the year the company filed nine drug master files (DMFs) in the US.

The above revenues are after excluding ‘other operatingincome'.

DIVIDEND

Your directors are pleased to recommend a dividend ofर20 (400%) forFY2019 on every equity share ofर5/-. The recommended dividend is in line with thedividend distribution policy of the company. The dividend if approved at the 35th 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 16 July 2019.

In terms of Regulation 43A of the SEBI (Listing Obligations andDisclosure Requirements) Regulations 2015 (Listing Regulations) the company'sdividend distribution policy is attached as Annexure I to the board's report.

TRANSFER TO RESERVES

The company has not proposed to transfer any amount to the generalreserve.

SHARE CAPITAL

The paid-up share capital of your company increased byर0.78 milliontoर830.33 million in FY2019 due to allotment of 155041 equity shares on exercise ofstock options by eligible employees through the ‘Dr. Reddy's Employees Stock OptionScheme 2002' and ‘Dr. Reddy's Employees ADR Stock Option Scheme2007'.

FIXED DEPOSITS

The company has not accepted any deposits covered under Chapter V ofthe Companies Act 2013. Accordingly no disclosure or reporting is required in respect ofdetails relating to deposits.

CHANGE IN THE NATURE OF BUSINESS IF ANY

During the year there was no change in the nature of business of thecompany or any of its subsidiaries.

MATERIAL CHANGES AND COMMITMENTS AFFECTING THE FINANCIAL POSITION OFTHE COMPANY

There have been no such changes.

SUBSIDIARIES AND ASSOCIATES

The company had 52 subsidiaries and two joint venture companies as on31 March 2019. During FY2019 Dr. Reddy's Laboratories (Thailand) Limited and Dr. Reddy'sLaboratories Philippines Inc. have become subsidiary companies. Pursuant to sale of allthe issued and outstanding membership interests in the antibiotic manufacturing facilityat Tennessee USA Dr. Reddy's Laboratories Tennessee LLC ceased to be a subsidiaryduring the year.

Section 129(3) of the Companies Act 2013 states that where the companyhas one or 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 and associates.

Hence the consolidated financial statements of the company and all itssubsidiaries and joint ventures prepared in accordance with Ind AS 110 and 111 asspecified in the Companies (Indian Accounting Standards) Rules 2015 form part of theannual report. Moreover a statement containing the salient features of the financialstatements of the company's subsidiaries and joint ventures in the prescribed FormAOC-1 is attached as Annexure II to the board's report. This statement also providesdetails of the performance and financial position of each subsidiary and joint venture.

In accordance with Section 136 of the Companies Act 2013 the auditedfinancial statements and related information of the company and its subsidiaries whereverapplicable are available for inspection during regular business hours at our registeredoffice in Hyderabad India.

These are also available on the company's website HREF=http://www.drreddys.com/>www.drreddys.com .

PARTICULARS OF LOANS GUARANTEES OR INVESTMENTS

The company makes investments or extends loans/guarantees to itswholly-owned subsidiaries for their business purposes. Details of loans guarantees andinvestments covered under Section 186 of the Companies Act 2013 along with the purposefor which such loan or guarantee was proposed to be utilized by the recipient form partof the notes 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 ofthe company is given in a separate chapter of this annual report. Similarly otherinformation for shareholders is provided in the Chapter on Additional Shareholders'Information. A certificate from the statutory auditors of the company confirmingcompliance with the conditions of corporate governance is attached to the Chapter onCorporate Governance.

MANAGEMENT DISCUSSION AND ANALYSIS

A detailed report on the Management Discussion and Analysis in terms ofRegulation 34 of the Listing Regulations is provided as a separate chapter in the annualreport.

BOARD OF DIRECTORS AND KEY MANAGERIAL PERSONNEL

Mr. Hans Peter Hasler resigned from the board on 14 June 2018 asindependent director. The board places on record its appreciation for the servicesrendered by Mr. Hans Peter Hasler during his tenure as a member of the board and itscommittees.

The shareholders of the company approved reappointment of Mr. AnupamPuri as an independent director for second term of one year from 27 July 2018 up to 26July 2019 under Section 149 of the Companies Act 2013 at the 34th AGM held on 27 July2018.

Mr. Leo Puri Ms. Shikha Sharma and Mr. Allan Oberman were appointed asadditional directors of the company categorized as Independent with effect from 25October 2018 31 January 2019 and 26 March 2019 respectively. The board recommendsappointment of Mr. Leo Puri Ms. Shikha Sharma and Mr. Allan Oberman as independentdirectors under Section 149 of the Companies Act 2013 for a term of five years each witheffect from 25 October 2018 31 January 2019 and 26 March 2019 respectively for approvalof the shareholders at the forthcoming 35th AGM scheduled on 30 July 2019.

Further the shareholders of the company approved the continuation ofdirectorship of Dr. Bruce L A Carter aged 75 years under Regulation 17(1A) of the ListingRegulations and also reappointed him as a non-executive independent director of thecompany for a second term of three consecutive years from 31 July 2019 up to 30 July 2022by passing a special resolution through postal ballot.

The terms of Mr. Sridar Iyengar and Ms. Kalpana Morparia independentdirectors end at the forthcoming 35th AGM. The board recommends reappointment of Mr.Iyengar and Ms. Morparia as independent directors under Section 149 of Companies Act2013 for another term of four and five years respectively for approval of theshareholders at the forthcoming 35th AGM scheduled on 30 July 2019.

In accordance with Section 149(7) of the Companies Act 2013 eachindependent director has confirmed to the company that he or she meets the criteria ofindependence laid down in Section 149(6) of the Companies Act 2013 and Regulation16(1)(b) of the Listing Regulations.

Mr. Anupam Puri completes his second term as an independent director.Dr. Omkar Goswami retires from the board of the company as independent director at 35thAGM to be held on 30 July 2019 and does not seek reappointment. The board wishes themwell and places on record its appreciation for their work over the long period of timethat they have served as the directors of the company.

Mr. G V Prasad retires by rotation at the forthcoming 35th AGM andbeing eligible seeks reappointment.

Brief profiles of Mr. Sridar Iyengar Ms. Kalpana Morparia Mr. LeoPuri Ms. Shikha Sharma Mr. Allan Oberman and Mr. G V Prasad are given in the Chapter onCorporate Governance and the Notice convening the 35th AGM for reference of theshareholders.

There is no change in KMP during the year under review.

BOARD EVALUATION

As per provisions of the Companies Act 2013 and Regulation 17(10) ofthe Listing Regulations an evaluation of the performance of the board its committees andmembers was undertaken. For details please see the Chapter on Corporate Governance inthis annual report.

APPOINTMENT OF DIRECTORS AND REMUNERATION POLICY

The assessment and appointment of members to the board is based on acombination of criterion that includes ethics personal and professional stature domainexpertise gender diversity and specific qualifications required for the position.

A potential board member is also assessed on the basis of independencecriteria defined in Section 149(6) of the Companies Act 2013 and Regulation 16(1)(b) ofthe Listing Regulations.

In accordance with Section 178(3) of the Companies Act 2013Regulation 19(4) of the Listing Regulations and on recommendations of the company'snomination governance and compensation committee the board adopted a remuneration policyfor directors KMP senior management and other employees. The policy is attached in theChapter on Corporate Governance.

NUMBER OF BOARD MEETINGS

The board of directors met five times during the year. In addition anannual board retreat was held to discuss strategic matters.

Details of board meetings are given in the Chapter on CorporateGovernance.

AUDIT COMMITTEE

The audit committee of the board of directors consists entirely ofindependent directors. Presently the committee comprises Mr. Sridar Iyengar (chairman)Dr. Omkar Goswami Mr. Bharat N Doshi and Ms. Shikha Sharma. Further details can be seenin the Chapter on Corporate Governance. The board has accepted all recommendations made bythe audit committee during the year.

BUSINESS RISK MANAGEMENT

The company has a risk management committee of the board consistingentirely of independent directors and chaired by Dr. Omkar Goswami. Details of thecommittee and its terms of reference are set out in the Chapter on Corporate Governance.

The audit and risk management committees review key risk elements ofthe company's business finance operations and compliance and respective mitigationstrategies. The risk management committee reviews key strategic business compliance andoperational risks while issues around ethics and fraud internal control over financialreporting (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) is a management level committee which operates under a charter and focuseson risks associated with the company's business. 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 FY2019 focus areas of risk management committee includedprogress on cyber security data privacy quality and regulatory geo-political riskcompliance patent infringement and other operating risk exposures.

ADEQUACY OF INTERNAL FINANCIAL CONTROL SYSTEMS

The company has in place adequate internal financial controls withreference to its financial statements. These controls ensure the accuracy and completenessof the accounting records and the preparation of reliable financial statements.

DIRECTORS' RESPONSIBILITY STATEMENT

In terms of Section 134(5) of the Companies Act 2013 your directorsstate that:

1. applicable accounting standards have been followed in thepreparation of the 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 FY2019 and of the profit ofthe company for that period;

3. proper and sufficient care has been taken to maintain adequateaccounting records in accordance with the provisions of the Act for safeguarding theassets 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 internal financial controls for the company to follow havebeen laid down and these are operating effectively; 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 andRule 8(2) of the Companies (Accounts) Rules 2014 the particulars of contracts orarrangements entered into by the company with related parties referred to in Section188(1) of the Companies Act 2013 in Form AOC-2 is attached as Annexure III. All suchcontracts or arrangements are in the interest of the company. Details of related partydisclosures form part of the notes to the financial statements provided in this annualreport.

VIGIL MECHANISM/WHISTLE- BLOWER/OMBUDSPERSON POLICY

The company has an ombudsperson policy (whistle-blower/vigil mechanism)to report concerns. The vigil mechanism consists of a hotline — namely a dedicatede-mail ID and a phone number. The ombudsperson policy safeguards against retaliation ofthose who use this mechanism. The audit committee chairperson is the chief ombudsperson.The policy also provides access to the chairperson of the audit committee for raisingconcerns. Details of the policy are available on the weblink: www.drreddys.com/investors/governance/ombudsperson-policy.

STATUTORY AUDITORS

M/s. S R Batliboi & Associates LLP

Chartered Accountants (firm registration no. 101049W/E300004) wereappointed as statutory auditors of the company at the 32nd AGM held on 27 July 2016 for aperiod of five years commencing from the conclusion of 32nd AGM till the conclusion of the37th AGM subject to ratification by shareholders every year as may be applicable.However the Ministry of Corporate Affairs (MCA) in its notification dated 7 May 2018 hasomitted the requirement under the first proviso to Section 139 of the Companies Act 2013and Rule 3(7) of the Companies (Audit and Auditors) Rules 2014 regarding ratification ofappointment of statutory auditors by shareholders at every subsequent AGM.

Consequently M/s. S R Batliboi & Associates LLP charteredaccountants continue 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 and Remuneration of Managerial Personnel) Rules 2014 Dr. K R Chandratrepracticing company secretary (membership no. FCS 1370 and certificate of practice no.5144) was appointed to conduct the secretarial audit of the company for FY2019. Thesecretarial audit report for FY2019 is attached as Annexure IV.

Based on the consent received from Dr. K R Chandratre and on therecommendations of the audit committee the board has appointed him as the secretarialauditor of the company for FY2020.

COST AUDITORS

Pursuant to Section 148(1) of the Companies Act 2013 read with therelevant rules made thereunder the company maintains the cost audit records in respect ofits pharmaceutical business.

On the recommendation of the audit committee the board has appointedM/s. Sagar & Associates cost accountants (firm registration no. 000118) as costauditors of the company for the FY2020 at a remuneration ofर7 lakh plus reimbursementof out-of-pocket expenses at actuals and applicable taxes. The provisions also requirethat the remuneration of the cost auditors be ratified by the shareholders. As a matter ofrecord relevant cost audit reports for FY2018 were filed with the Central Government on23 August 2018 within the stipulated timeline. The cost audit report for FY2019 will alsobe filed within the timeline.

SECRETARIAL STANDARDS

In terms of Section 118(10) of the Companies Act 2013 the companycomplies with Secretarial Standards 1 and 2 relating to the ‘Meetings of the Boardof Directors' and ‘General Meetings' respectively as specified by theInstitute of Company Secretaries of India and approved by the Central Government. Thecompany has also voluntarily adopted the recommendatory Secretarial Standard-3 on‘Dividend' and Secretarial Standard-4 on ‘Report of the Board ofDirectors' issued by the Institute of Company Secretaries of India.

BOARD'S RESPONSE ON AUDITORS' QUALIFICATIONS RESERVATIONS ORADVERSE REMARKS OR DISCLAIMERS MADE

There are no qualifications reservations or adverse remarks made bythe statutory auditors in their report or by the practicing company secretary in thesecretarial audit report. During the year there were no instances of frauds reported byauditors under Section 143(12) of the Companies Act 2013.

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

On 25 August 2017 a securities class action lawsuit was filed againstthe company its Chief Executive Officer (CEO) and its Chief Financial Officer (CFO) inthe United States District Court for the District of New Jersey. The company'sCo-Chairman its Chief Operating Officer (COO) of the time (since retired) and Dr.Reddy's Laboratories Inc. were subsequently named as defendants in the case. Theoperative complaint alleges that the company made false or misleading statements oromissions in its public filings in violation of the US federal securities laws; that thecompany's share price dropped and its investors were affected.

On 21 March 2019 the District Court issued its decision (dated 20March 2019) granting in part and denying in part the motion to dismiss. Pursuant to thatdecision the Court dismissed the plaintiff's claims on 17 out of the 22 allegedmisstatements/omissions.

The company believes that all the asserted claims including theremaining five out of 22 are without merit and intends to vigorously defend itselfagainst the allegations. At this point any liability that may arise on account of thisclaim is unascertainable. Accordingly no provision has been made in the consolidatedfinancial statements of the company.

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

The company has an apex complaints committee and an internal complaintscommittee which operate under a defined redressal system for complaints pertaining tosexual harassment of women at the workplace. Details are available in the principle 3 ofthe Business Responsibility Report forming a part of this annual report.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

As per Section 135 of the Companies Act 2013 the company has aboard-level CSR committee consisting of Mr. Bharat N Doshi (chairman) Mr. G V Prasad andMr. K Satish Reddy. The company's CSR policy provides a constructive framework toreview and organize our social outreach programs in health livelihood and education.

During the year the committee monitored implementation and adherenceto the CSR policy. Details of the CSR policy and initiatives taken by the company duringthe year are available on the company's website HREF=http://www.drreddys.com/>www.drreddys.com .The report on CSR activities is attached as Annexure V.

BUSINESS RESPONSIBILITY REPORT

A detailed Business Responsibility Report as required under Regulation34 of the Listing Regulations is given as a separate section in this annual report.

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

Pursuant to the provisions of the Companies Act 2013 read with IEPFAuthority (Accounting Audit Transfer and Refund) Rules 2016 as amended declareddividends which remained unpaid or unclaimed for a period of seven years have beentransferred by the company to the IEPF which has been established by the CentralGovernment.

The above-referred rules also mandate transfer of shares on whichdividend are lying unpaid or unclaimed for a period of seven consecutive years to IEPF.The company has issued individual notices to the shareholders whose equity shares areliable to be transferred to IEPF advising them to claim their dividend on or before 14August 2019. Details of transfer of unpaid and unclaimed amounts to IEPF are given in theChapter on Additional Shareholders' Information.

EMPLOYEES STOCK OPTION SCHEMES

During the year the company has formulated and implemented ‘Dr.Reddy's Employees Stock Option Scheme 2018' and established Dr. Reddy'sEmployees ESOS Trust for its implementation and administration. Both the Scheme andimplementation of the scheme through Trust were approved by the shareholders at the 34thAGM of the company.

There has been no change in the ‘Dr. Reddy's Employees StockOption Scheme 2002' the ‘Dr. Reddy's Employees ADR Stock Option Scheme2007'and Dr. Reddy's Employees Stock Option Scheme 2018' (collectivelyreferred as ‘the schemes').

The schemes are in compliance with the SEBI (Share Based EmployeeBenefits) Regulations 2014.

Details are available on the company's website: HREF=http://www.drreddys.com/media>www.drreddys.com/media /904448/esop_details.pdf

The details also form part of note 2.23 of the notes to accounts of thestandalone financial statements.

PARTICULARS OF EMPLOYEES

Disclosures pertaining to remuneration and other details as requiredunder Section 197(12) of the Companies Act 2013 read with Rule 5(1) of the Companies(Appointment and Remuneration of Managerial Personnel) Rules 2014 are attached asAnnexure VI.

In terms of Section 197(12) of the Companies Act 2013 read with Rule5(2) and 5(3) of the Companies (Appointment and Remuneration of Managerial Personnel)Rules 2014 a statement showing the names and other particulars of the employees drawingremuneration in excess of limits set out in said rules forms part of the annual report.

Considering the first proviso to Section 136(1) of the Companies Act2013 the annual report excluding the aforesaid information is being sent to theshareholders of the company and others entitled thereto. The said information is availablefor inspection at the registered office of the company during business hours on workingdays up to the date of the forthcoming 35th AGM. Any shareholder interested in obtaining acopy thereof may write to the company secretary in this regard.

CONSERVATION OF ENERGY TECHNOLOGY ABSORPTION FOREIGN EXCHANGEEARNINGS AND OUTGO

The particulars as prescribed under Section 134(3)(m) of the CompaniesAct 2013 read with Rule 8(3) of the Companies (Accounts) Rules 2014 are attached asAnnexure VII.

ANNUAL RETURN

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

ACKNOWLEDGMENT

Your directors place on record their sincere appreciation for thesignificant contribution made by its employees through their dedication hard work andcommitment as also for the trust reposed on the company by the medical fraternity andpatients. The board of directors also acknowledge the support extended by the analystsbankers government agencies media customers suppliers shareholders and investors atlarge.

It looks forward to your continued support in the company'sendeavor to accelerate access to innovative and affordable medicines because Good HealthCan't Wait.

For and on behalf of the board of directors

K Satish Reddy

Chairman

Place : Hyderabad Date : 17 May 2019