Your directors are pleased to present the 36th annual report for the year ended 31March 2020.
Table 1 gives the consolidated and standalone financial highlights of the company basedon Indian Accounting Standards (Ind AS) for FY2020 (i.e. from 1 April 2019 to 31 March2020) compared to the previous financial year.
The company's consolidated total income for the year was Rs.181.38 billion which wasup by 15% over the previous year. In US$ terms this amounted to US$ 2.41 billion. Profitbefore taxes (PBT) was Rs.18.86 billion representing a decline of 19% over the previousyear. In US$ terms this translated to US$ 250 million.
The company's standalone total income for the year was Rs.125.94 billion which was upby 16% over the previous year. In US$ this amounted to US$ 1.67 billion. PBT was Rs.27.76billion which was up by 63% over the previous year. In US$ terms this translated to US$368 million.
Revenues from Global Generics were up by 12% and stood at Rs.138.1 billion. There wasgrowth across North America Generics Emerging Markets and India with a strong growth inEurope.
Revenues from North America stood at Rs.64.7 billion registering a year-on-year growthof 8%. This was largely on account of revenue contribution from new products launchedincrease in volumes for some of our base products and favourable foreign exchangemovement partly offset by high price erosions in some of our products.
During the year the company filed eight abbreviated new drug applications (ANDAs) inthe USA. As of 31 March 2020 there were 99 generic filings awaiting approval with the USFood and Drug Administration (USFDA) comprising 97 ANDAs and two NDAs filed under Section505(b)(2). Of the 97 ANDAs 54 are Para IV applications and we believe 30 of these haveFirst to File' status.
Revenues from Emerging Markets were Rs.32.8 billion registering a year-on-year growthof 14%. Revenues from India stood at Rs.28.9 billion registering a year-on-year growth of11%. Revenues from Europe were Rs.11.7 billion registering a year-on-year growth of 49%.
Revenues from PSAI stood at Rs.25.7 billion registering a year-on-year growth of 7%.During the year the company filed 10 drug master files (DMFs) in the US.
SCHEME OF AMALGAMATION
During the year the board of directors approved the scheme of amalgamation of Dr.Reddy's Holdings Limited with the company ("the scheme") subject to the receiptof necessary approvals from statutory authorities members creditors and Hon'ble NationalCompany Law Tribunal (NCLT) Hyderabad. The company has received no-observation letters on11 October 2019 from the BSE Limited and National Stock Exchange of India Limited on thebasis of no comments received from Securities and Exchange Board of India (SEBI). Themembers and unsecured creditors of the company at the Hon'ble NCLT convened meetings heldon 2 January 2020 approved the said scheme with requisite majority. The petition forapproval of the said scheme has been filed with the Hon'ble NCLT Hyderabad Bench on 9January 2020. The final hearing on the petition is pending.
Your directors are pleased to recommend a dividend of Rs.25 (500%) for FY2020 on everyequity share of Rs.5/-. The recommended dividend is in line with the dividend distributionpolicy of the company. The dividend if approved at the 36th annual general meeting (AGM)will be paid to those members whose names appear on the register of members of the companyas of end of the day on 14 July 2020.
|TABLE 1 FINANCIAL HIGHLIGHTS || || || ||(Rs. MILLION) |
| || |
| ||FY2020 ||FY2019 ||FY2020 ||FY2019 |
|Total income ||181376 ||157857 ||125936 ||108639 |
|Profit before depreciation amortization impairment and tax ||46694 ||34384 ||35650 ||24813 |
|Depreciation and amortization ||11631 ||11348 ||7892 ||7806 |
|Impairment of non-current assets ||16767 ||116 ||- ||- |
|Profit before tax and before share of equity accounted investees ||18296 ||22920 ||27758 ||17007 |
|Share of profit of equity accounted investees net of tax ||561 ||438 ||- ||- |
|Profit before tax ||18857 ||23358 ||27758 ||17007 |
|Tax expense ||(1403) ||3858 ||(1619) ||4234 |
|Net profit for the year ||20260 ||19500 ||29377 ||12773 |
|Opening balance of retained earnings ||112000 ||96247 ||99511 ||90740 |
|Net profit for the year ||20260 ||19500 ||29377 ||12773 |
|Other comprehensive income/(loss) ||5 ||255 ||5 ||- |
|Dividend paid during the year ||(3314) ||(3320) ||(3314) ||(3320) |
|Tax on dividend paid ||(602) ||(682) ||(600) ||(682) |
|Transfer to general reserve ||- ||- ||- ||- |
|Closing balance of retained earnings ||128349 ||112000 ||124979 ||99511 |
The conversion rate is considered as US$ 1 = 7539
Note: FY2020 represents fiscal year 2019-20 from 1 April 2019 to 31 March 2020 andanalogously for FY2019 and other such labelled years.
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.
TRANSFER TO RESERVES
The company has not proposed to transfer any amount to the general reserve.
The paid-up share capital of your company increased by Rs.0.53 million to Rs.830.86million in FY2020 due to allotment of 106134 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'.
The company has not accepted any deposits covered under Chapter V of the Companies Act2013. Accordingly there is no disclosure or reporting required in respect of detailsrelating to 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
There have been no such changes.
SUBSIDIARIES AND ASSOCIATES
The company had 50 subsidiaries and two joint venture companies as on 31 March 2020.During FY2020 Aurigene Pharmaceutical Services Limited was incorporated as a step-downsubsidiary company. Dr. Reddy's Singapore Pte. Limited and Reddy Antilles N.V. were closedand ceased to be wholly-owned subsidiaries. Dr. Reddy's Laboratories International SAceased to be a step-down subsidiary of the company consequent to its merger with Dr.Reddy's Laboratories SA.
Section 129(3) of the Companies Act 2013 states that where the company has one or moresubsidiaries or associate companies it shall in addition to its financial statementsprepare a consolidated financial statement of the company and of all subsidiaries in thesame form and manner as that of its own and also attach along with its financialstatement a separate statement containing the salient features of the financialstatements of its subsidiaries and associates.
Hence the consolidated financial statements of the company and all its subsidiariesand joint ventures prepared in accordance with Ind AS 110 and 111 as specified in theCompanies (Indian Accounting Standards) Rules 2015 form part of the annual report.Moreover a statement containing the salient features of the financial statements of thecompany's subsidiaries and joint ventures in the prescribed Form AOC-1 is attached asAnnexure II to the board's report.
This statement also provides details of the performance and financial position of eachsubsidiary and joint venture.
In accordance with Section 136 of the Companies Act 2013 the audited financialstatements and related information of the company and its subsidiaries whereverapplicable are available on the company's website: www.drreddys.com.
These are also available for inspection during regular business hours at our registeredoffice in Hyderabad India.
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 Regulation 34of SEBI's Listing Regulations is provided as a separate chapter in the annual report.
BOARD OF DIRECTORS AND KEY MANAGERIAL PERSONNEL
During FY2020 the members of the company approved reappointment of Mr. Sridar Iyengar(DIN: 00278512) and Ms. Kalpana Morparia (DIN: 00046081) independent directors effective31 July 2019 for a second term of four and five years respectively under Section 149 ofthe Companies Act 2013. Mr. Anupam Puri and Dr. Omkar Goswami ceased to be independentdirectors of the company with effect from 26 July 2019 and 30 July 2019 respectively oncompletion of their terms.
Mr. Prasad R Menon independent director aged 74 years was appointed as anon-executive independent director for a term of five years with effect from 30 October2017. As per Regulation 17(1A) of the Listing Regulations effective 1 April 2019 thecompany shall appoint a person or continue the directorship of any person as anon-executive director who has attained seventy five years of age only on approval of itsmembers by way of a special resolution. Mr. Menon will be attaining the age of seventyfive years during his present term of five years ending on 29 October 2022. The boardrecommends continuation of directorship of Mr. Menon as an independent director pursuantto Regulation 17(1A) of the Listing Regulations.
The board of directors appointed Mr. Erez Israeli as chief executive officer of thecompany and accordingly re-designated Mr. G V Prasad as co-chairman and managing directorof the company with effect from 1 August 2019.
Further the term of appointment of Mr. G V Prasad ends on 29 January 2021. The boardof directors at its meeting held on 20 May 2020 have reappointed Mr. G V Prasad aswhole-time director designated as co-chairman and managing director of the company (orsuch other designation as the board may deem fit) for a further period of five years witheffect from 30 January 2021 (including terms and conditions of the appointment) subjectto approval of the members at the forthcoming 36th AGM scheduled on 30 July 2020.
Mr. K Satish Reddy retires by rotation at the forthcoming 36th AGM and being eligibleseeks reappointment.
In accordance with Section 149(7) of the Companies Act 2013 each independent directorhas confirmed to the company that he or she meets the criteria of independence laid downin Section 149(6) of the Companies Act 2013 is in compliance with Rule 6(3) of theCompanies (Appointment and Qualifications of Directors) Rules 2014 and Regulation16(1)(b) of the Listing Regulations.
Further they have affirmed compliance to the code of conduct for independent directorsas prescribed in Schedule IV of the Companies Act 2013.
Brief profiles of Mr. Prasad R Menon
Mr. G V Prasad and Mr. K Satish Reddy are given in the chapter on Corporate Governanceand the Notice convening the 36th AGM for reference of the members.
There has been no other change in any other key managerial personnel during the yearunder review.
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 this annualreport.
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 qualifications required for the position.
A potential board member is also assessed on the basis of independence criteria definedin Section 149(6) of the Companies Act 2013 and Regulation 16(1)(b) of the ListingRegulations.
In accordance with Section 178(3) of the Companies Act 2013 Regulation 19(4) of theListing Regulations and on recommendation of the company's nomination governance andcompensation committee the board adopted a remuneration policy for directors KMP seniormanagement and other employees. The policy is attached in the Chapter on CorporateGovernance.
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 and the boardretreat are given in the chapter on Corporate Governance.
The audit committee of the board of directors consists entirely of independentdirectors. Presently the committee comprises Mr. Sridar Iyengar (chairman)
Mr. Leo Puri Mr. Bharat N Doshi and Ms. Shikha Sharma. Further details can be seen inthe 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 consisting entirely ofindependent directors and chaired by Ms. Shikha Sharma. Details of the committee and itsterms of reference are set out in the 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) andCompliance Council are management level committees which operate under a charter and focuson risks associated with the company's business and compliance. The FIRM council and theCompliance council periodically review matters pertaining to risk management complianceand ethics respectively. Additionally the enterprise wide risk management (ERM) functionhelps management and the board to periodically prioritize review and measure businessrisks against a pre-determined risk appetite and their suitable response depending onwhether such risks are internal strategic or external.
During FY2020 focus areas of risk management committee included review andbenchmarking of the ERM framework progress on cyber security data privacy quality andregulatory compliance climate change risks and other operating risk exposures.
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 your directors state that:
1. applicable accounting standards have been followed in the preparation of the annualaccounts;
2. accounting policies have been selected and applied consistently. Judgments andestimates made are reasonable and prudent so as to give a true and fair view of the stateof affairs of the company at the end of the FY2020 and of the profit of the company forthat period;
3. proper and sufficient care has been taken to maintain adequate accounting records inaccordance with the provisions of the Act for safeguarding the assets of the company andfor 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 have been laid downand these are operating effectively; and
6. proper and adequate systems have been devised to ensure compliance with theprovisions 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 the contracts or arrangements enteredinto by the company with related parties referred to in Section 188(1) of the CompaniesAct 2013 in Form AOC-2 is attached as Annexure III to the board's report. All contractsand arrangements
with related parties were in the interest of the company. Details of related partydisclosures form part of the notes to the financial statements provided in the annualreport.
VIGIL MECHANISM/WHISTLE- BLOWER/OMBUDSPERSON POLICY
The company has an ombudsperson policy (whistle-blower/vigil mechanism) to reportconcerns. The vigil mechanism consists of a hotline comprising a dedicated e-mail ID anda phone number. The ombudsperson policy also safeguards against retaliation of those whouse this mechanism.
The audit committee chairperson is the chief ombudsperson. The policy also provides forraising concerns directly to the chief ombudsperson. Details of the policy are availableon the company's website: www.drreddys.com/investors/ governance/ombudsperson-policy
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 members every year as maybe applicable. However the Ministry of Corporate Affairs (MCA) vide its notificationdated 7 May 2018 has omitted the requirement under the first proviso to Section 139 of theCompanies Act 2013 and Rule 3(7) of the Companies (Audit and Auditors) Rules 2014regarding ratification of appointment of statutory auditors by members at every subsequentAGM.
Consequently M/s. S.R. Batliboi &
Associates LLP chartered accountants continue to be the statutory auditors of thecompany till the conclusion of 37th AGM as approved by members at 32nd AGM held on 27July 2016.
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 FY2020. The secretarial audit report forFY2020 is attached as Annexure IV to the boards reports.
Based on the consent received from Mr. Makarand Joshi partner of M/s Makarand M Joshi& Co (MMJC) practising company secretaries Mumbai India (membership no. FCS 5533and certificate of practice no. 3662) and on the recommendation of the audit committeethe board has approved appointment of Mr. Makarand Joshi as the secretarial auditor of thecompany for FY2021.
Pursuant to Section 148(1) of the Companies Act 2013 read with the relevant Rules madethereunder the company maintains the cost records in respect of its 'pharmaceuticals'business.
On the recommendation of the audit committee the board has appointed M/s. Sagar &Associates cost accountants (firm registration no. 000118) as cost auditors of thecompany for the FY2021 at a remuneration of Rs.7 lakh plus reimbursement of out-of-pocketexpenses at actuals and applicable taxes. The provisions also require that theremuneration of the cost auditors be ratified by the members.
As a matter of record relevant cost audit reports for FY2019 were filed with theCentral Government on 26 August 2019 within the stipulated timeline. The cost auditreport for FY2020 will also be filed within the timeline.
In terms of Section 118(10) of the Companies Act 2013 the company complies withSecretarial Standards-1 and 2 relating to the Meetings of the Board of Directors'and General Meetings' respectively as specified by the Institute of CompanySecretaries of India and approved by the Central Government. The company has alsovoluntarily adopted the recommendatory Secretarial Standard-3 on Dividend' andSecretarial Standard-4 on Report of the Board of Directors' issued by the Instituteof Company Secretaries of India.
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 Act 2013.
SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE COURTS/ REGULATORS/TRIBUNALS
On August 25 2017 a securities class action lawsuit was filed against the companyits then chief executive officer (CEO) and its chief financial officer (CFO) in the UnitedStates District Court for the District of New Jersey. The company's co-chairman its chiefoperating officer (COO) of that time (since retired) and Dr. Reddy's Laboratories Inc.were subsequently named as defendants in the case. The operative complaint alleges thatthe company made false or misleading statements or omissions in its public filings inviolation of the US federal securities laws; that the company's share price dropped andits investors were affected.
On March 21 2019 the District Court issued its decision (dated March 20 2019)granting in part and denying in part the motion to dismiss. Pursuant to that decision theCourt dismissed the plaintiff's claims on 17 out of the 22 allegedmisstatements/omissions.
On May 15 2020
Dr. Reddy's Laboratories Limited
Dr. Reddy's Laboratories Inc. and certain of the company's current or formerdirectors and officers (collectively the "Defendants") have entered into aStipulation and Agreement of Settlement (the "Stipulation") with Lead Plaintiffi.e. the Public Employees' Retirement System of Mississippi in the putative securitiesclass action filed against the Defendants in the United States District Court for theDistrict of New Jersey. As consideration for the settlement of the class action thecompany has agreed to pay US$
9 million. The settlement is subject to the approval of the court and may be terminatedprior to court's approval pursuant to the grounds for termination set forth in theStipulation. Subject to the terms of the Stipulation in exchange for the settlementconsideration Lead Plaintiff and members of the settlement class who do not opt-out ofthis settlement would release among other things the claims that were asserted or thatthey could have asserted in this class action. In entering into the settlement theDefendants do not
admit and explicitly deny any liability or wrongdoing of any kind. Subject to theterms of the Stipulation the settlement resolves the remainder of the litigation.
As the company is adequately insured with respect to the aforesaid liability thesettlement did not have any impact on the company's consolidated income statement for theyear ended March 312020.
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 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 the committee monitored implementation and adherence to the CSRpolicy. Details of the CSR policy and initiatives taken by the company during the year areavailable on the company's website: www.drreddys.com. The report on CSR activities isattached as Annexure V to the board's report.
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 andinterest on debentures which remained unpaid or unclaimed for a period of seven years havebeen transferred by the company to the IEPF which has been established by the CentralGovernment.
The above-referred rules also mandate transfer of shares on which dividend are lyingunpaid and unclaimed for a period of seven consecutive years to IEPF.
The company has issued individual notices to the members whose equity shares are liableto be transferred to IEPF advising them to claim their dividend on or before 18 August2020. Details of transfer of unpaid and unclaimed amounts to IEPF are given in the chapteron Additional Shareholders Information.
EMPLOYEES STOCK OPTION SCHEMES
During the year there has been no material change in the Dr. Reddy's EmployeesStock Option Scheme 2002' the Dr. Reddy's Employees ADR Stock Option Scheme2007'and Dr. Reddy's Employees Stock Option Scheme 2018' (collectively referred asthe schemes').
The schemes are in compliance with the SEBI (Share Based Employee Benefits)Regulations 2014.
Details are available on the company's website: https://www.drreddys.com/media/879298/esop-stock-incentive-note. pdf. The details also form part of note 2.24 ofthe 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 to theboard's report
In terms of Section 197(12) of the Companies Act 2013 read with Rule 5(2) and 5(3) ofthe Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014 astatement showing the names and other particulars of the employees drawing remuneration inexcess of limits 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 members of the companyand others entitled thereto. The said information is available for inspection at theregistered office of the company during business hours on working days up to the date ofthe forthcoming 36th AGM by members through electronic mode. Any members interested inobtaining a copy thereof may write 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 to theboard's report.
Details forming part of the extract of the annual return in form MGT-9 are attached asAnnexure VIII to the board's report.
Your directors place on record their sincere appreciation for the significantcontribution made by its employees through their dedication hard work and commitment asalso for the trust reposed in the company by the medical fraternity and patients. Theboard of directors also acknowledge the support extended by the analysts bankersgovernment agencies media customers suppliers members and investors at large.
It looks forward to your continued support in the company's endeavour to accelerateaccess to innovative and affordable medicines because Good Health Can't Wait.
For and on behalf of the board of directors
K Satish Reddy
Place : Hyderabad
Date : 20 May 2020.