MANAGEMENT DISCUSSION AND ANALYSIS Economy Global growth remains moderate, with uneven prospects across the main countries and regions. Relative to lastyear, the outlook for advanced economies is improving, while growth in emerging market and developing economies is projected to be lower, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries. The rapid decline in oil prices, quick adjustments in exchange rates (with the US dollar apbrciating and weakening of most other currencies, notably the euro), and the new quantitative easing program of the ECB are just a few examples of the economic factors at play. Industry Outlook IMS Institute for Healthcare Informatics forecasts that Global spending on medicines will reach nearly $1,100Bn by 2015 and $1.3 trillion by 2018, an increase of about 30% over the 2013 level. Global spending is forecast to grow at a 4-7 percent compound annual rate over the next five years, with most countries experiencing an increase in drug expenditure per capita. This level of growth - a compound annual growth rate of 4-7% on a constant currency basis - will be slightly higher than the 5.2% recorded over the past five years, as the introduction of new speciality medicines and increased accessibility for patients coincides with lower impacts from patent expiries in developed markets. Macro-economic factors driving the emerging market during the 2010-2015 period are primarily robust economic growth, greater market penetration into extra-urban and rural areas, epidemiological changes, with rapid increase in chronic, age-related disorders, continuing rapid expansion of the private hospital sector and increased government spending on improvements in healthcare infrastructure. This year, developed markets are seeing strong growth due to the launch of innovative medicines and price increases. While these markets will moderate as cost-containment measures further limit price levels, rising volumes will continue to contribute to overall market growth. Past patterns of spending offer few clues about the level of expected growth through 2015. Unbrcedented dynamics at play, which are driving rapid shifts in the mix of spending by patients and payers, and between branded products and generics, and across both developed and pharmerging markets. Gains on pharma spending in the pharmerging markets will be driven by overall strong economic growth and governments' commitment to expand healthcare access. IMS projects that by 2015, the pharmerging countries will become the second largest geographic segment globally in spending on medicines. Several policy moves will affect healthcare spending during the next five years. API's are the basic ingredient for any formulation to be therapeutically effective, and the increasing number of formulations is key driver for the growth of API market. Since the growth is expected to be robust in the development and launch of new chemical entities, your company will have opportunity to participate in the growth of this business. As the generics space continues to grow in the US, Europe as well as the emerging markets, your company, with its cost effective positioning, is well equipped to play a significant role in this part of pharma business as well. As the market is seeing a good growth in nutraceuticals for wellness, supplementation and food aesthetics fortification, the company will benefit by its brsence. Company Overview Divi's Laboratories Limited started off during 1990 as an R&D and consultancy company for development of commercial processes for Active Pharmaceutical Ingredients ("API") and intermediates. During 1994, the Company entered into manufacturing operations for API and intermediates and set up a multi-purpose manufacturing facility near Hyderabad with an initial investment of Rs.71 crores. Divi operates from its Headquarters and Registered Office at Hyderabad. The company has four multi-purpose manufacturing facilities with support infrastructure like utilities, environment management and safety systems. Manufacturing Facilities Unit I : First facility is located near Hyderabad comprising 13 multi-purpose production blocks with clearly defined finished product areas for APIs with clean air and purified water systems that operate under full cGMP as per US-FDA guidelines. Sbrad on 500 acres equipped with around 362 reactors totalling a capacity of 1744 m3 supported with all utility and service units. Export Oriented Unit : Second Facility is located at Bheemunipatnam Mandal, about 30 KM from the port city of Visakhapatnam on the east coast. Situated on a 100-acre site, it went into commercial operations in March, 2003. The Unit has 8 production blocks with around 195, reactors totalling a capacity of 1581 m3 with all utility and service units. SEZ Unit : Third facility is located at Bheemunipatnam Mandal, Visakhapatnam Dist. Situated on a sprawling 260-acre site, it went into commercial operations in November, 2006. It was approved and notified as Sector Specific Special Economic Zone in Pharma Sector with Divi's Laboratories Limited as a Developer and Divi's (SEZ) as a production unit. The Unit has 9 production blocks with around 342 reactors totalling a capacity of 2717 m3 with all required utility and infrastructure. DSN SEZ Unit : Fourth facility is located at Pharma SEZ, Bheemunipatnam Mandal, Visakhapatnam Dist. The Unit has 5 production blocks with around 276 reactors totalling a capacity of 2480 m3 with all required utility and infrastructure. Research Centres The company has 4 Research Centres with the well defined functional focus as under : DRC - Hyderabad : Located at Sanathnagar, Hyderabad with a focus and thrust on custom synthesis, contract research for MNC companies and also future generics involving processes like route design, route selection, establishing gram scale process and structural confirmation. Plant R&D - Unit 1: The process development and scale up R&D is located at Unit-1 at Choutuppal. This team takes gram scale technologies from DRC or from customers and goes through various stages of development, process optimization, impurity profile, pilot studies, br-validation batches, validation of process and transfer of technology to Plant. The team also reviews efficiency of these processes each month and gives process support where required. DRC - Vizag : Operates from Unit-2 with a team of 62 scientists undertaking similar research as DRC-Hyderabad. Plant R&D - Unit 2 : This is the second process development and scale up team located at Unit-2 at Chippada. This team takes gram scale technologies from DRC-Vizag and has similar work profile as Plant R&D - Unit 1. Subsidiaries The company has two 100% subsidiaries M/s. Divi's Laboratories USA Inc., in the United States of America and M/s. Divis Laboratories (Europe) AG in Switzerland for marketing its nutraceutical products and a greater reach to customers within these regions. Internal Control systems The Company maintains a system of well established policies and procedures for internal control of operations and activities, and these are continually reviewed for effectiveness. The internal control system is supported by qualified personnel and a continuous program of internal audit. The prime objective of such audits is to test the adequacy and effectiveness of all internal control systems laid down by the management and to suggest improvements. We believe that the company's overall system of internal control is-adequate (given the size and nature of operations), effective (through implementation of internal control self assessment procedures) and compliant (to policies, plans and statutory requirements). Effective internal control implies that the organization generates reliable financial reporting and substantially complies with the laws and regulations that apply to it. Divi encourages and recognizes improvements in work practices. The internal control system of the company is also reviewed by the Audit Committee periodically. The Management duly considers and takes appropriate action on the recommendations made by the statutory auditors, internal auditors and the independent Audit Committee. They assess whether the controls are properly designed, implemented and working effectively to make recommendations on how to improve internal control. Risks and Concerns Divi lays emphasis on risk management. It has an enterprise-wide approach to risk management, which lays emphasis on identifying and managing key operational and strategic risks. Through this approach, the company strives to identify opportunities that enhance organisational values while managing or mitigating risks that can adversely impact its future performance. Divi is engaged in manufacture of generic APIs, custom synthesis of active ingredients for innovator companies, other speciality chemicals and nutraceuticals. The company constantly reviews its policies and procedures to adhere to the various regulatory approvals for its manufacturing facilities and its commitment to IPR. The company is very selective in its product portfolio with a focus on export markets within the domain of its capabilities and does not transgress in unrelated expansions, diversification or acquisitions. The Company continues its initiatives aimed at assessment and avoidance of various risks affecting its business and towards cost control and efficiency across its businesses and functions, taking appropriate measures and reviewing them from time to time. The company's current and fixed assets as well as products are adequately insured against various risks. Over 73% of sales constitute supplies to regulated markets in Europe and USA and the company devotes significant importance to the regulatory compliances. The company's risk management and control procedures involve prioritization and continuing assessment of the risks and devise appropriate controls, evaluation and review of the control mechanisms and redesigning them from time to time in the light of its effectiveness. Regulatory Filings/Approvals Divi has triple Certifications ISO-9001 (Quality Systems), ISO-14001 (Environment Management Systems) and OHSAS-18001 (Occupational Health and Safety systems) for its manufacturing facilities. The company also has Food Safety System Certification 22000:2010 for vitamins and carotenoids. These certifications are renewed from time to time. The company adheres to cGMP and standard operating practices in its manufacturing/operating activities. All the manufacturing sites have been inspected by US-FDA. Divi has a total of 39 drug master files (DMFs) with US-FDA and 197 EDMFs and 19 CoS (Certificates of Suitability) with various European Union authorities. Divi has filed a total of 11 patents for generic products. Business distribution Our product portfolio comprises of two broad segments : i) Generic APIs (active pharma ingredients) and Nutraceuticals and ii) Custom Synthesis of APIs, intermediates and specialty ingredients for innovator pharma giants. The Company operates brdominantly in export markets and has a broad product portfolio under generics and custom synthesis. Among Divi's well distributed products range, some of the components of the business are given below : Performance and Operations Review Profit after Tax for the year amounted to Rs.84705.53 lakhs. Earnings Per Share of Rs.2/- each works out to Rs. 63.82 for the year as against Rs. 59.65 last year. Tax Provision for the current year amounted to Rs. 20934.13 lakhs (net of MAT credit entitlement of Rs.679.91 lakhs). Provision for last year was Rs. 18179.80 lakhs (net of a MAT credit entitlement of Rs.2436.08 lakhs). An amount of Rs. 1077.96 lakhs has been provided towards Deferred Tax Liability for the year as against Rs. 3511.96 lakhs for the brvious year. This year, we had a forex loss of Rs.104.50 lakhs as against a forex gain of Rs.5041.79 lakhs during the last year. Debrciation: The company has revised charging of debrciation on fixed assets according to the useful life as specified in Schedule II to the Companies Act, 2013 which came into effect from 1st April, 2014. In view of the amendment to the Schedule II vide Notification dated 29-08-2014 issued by the Ministry of Corporate Affairs and the Application Guide issued by the ICAI on 10-04-2015, which gave the company an option to charge-off debrciation of assets, whose useful life has already been exhausted before 1st April, 2014, after retaining residual value, either to the opening balance of retained earnings or to the Statement of Profit and Loss, your company has decided to charge-off such debrciation to the Profit and Loss Account for the year. Had there been no change in the debrciation rates, the debrciation charge for the year ended 31st March, 2015 would have been lower by Rs.1564 lakhs. Your company continues to work towards optimizing the capacities created at its multi-purpose manufacturing facilities and also adding additional capacities aimed at the business opportunities available to it in its domain of capability in line with its strategy to work with innovators playing a complementary role and non-compete model with its generic customers. Exports Exports constituted 87% of gross sales during the year. Exports to advanced markets comprising Europe and America accounted for 73% of business. Other Income While Other Operating Income comprises duty drawback credits and sale of waste materials from manufacturing process, Other Income (non-operating) comprises interest income, dividend income on investments, gain on foreign currency transactions and other miscellaneous income. Other Operating Income for the year amounted to Rs.1170.80 lakhs as against Rs. 679.22 lakhs in the brvious year. On Other income, we earned a dividend income of Rs.3612.78 lakhs on our investments in liquid funds Income as against a dividend income of Rs. 2573.63 lakhs during last year Material consumption varies from product to product. The company manufactures several products of active pharmaceutical ingredients and intermediates within the Generic and Customs synthesis groups as well as nutraceuticals. Manufacture of any product involves stage-wise controlled processing through its chemistry to the specifications under the standard operating practices complying to cGMP conditions. Material consumption net of increase/decrease in stocks is about 39% of total income during the year as compared to 35% during the last year, variation being the result of product mix as each product will have a different material consumption. Employee Benefits Expense Employee benefits expense rebrsent salaries and benefits to employees and directors; as also managerial commission to Directors as approved by members. Costs for the year have amounted to Rs.28314.88 lakhs as against Rs. 22542.66 lakhs during the lastyear. Of this, remuneration to Directors including commission accounted to Rs. 6704.80 lakhs during the year as against Rs. 6332.31 lakhs last year. Increase in salaries is on account of the induction of additional staff at the manufacturing facilities as well as pay revision of employees. Employee cost for the year works out to about 9.2% of sales for the year. Research and Development Expenses R&D Expenses during the year amounted to Rs.2766.16 lakhs as against Rs. 2539.13 lakhs during the last year. Major components are Salaries and consumable stores. Other Expenses Other Expenses comprise Power and Fuel, Carriage Outward, Stores & Spares, Repairs, packing materials besides miscellaneous expenses. During the year, we have written off bad debts aggregating Rs.14.20 lakhs, also written off claims aggregating Rs.0.95 lakhs and provided for book deficit of Rs.709.10 lakhs on assets discarded. Other Expenses account for 12.8% of sales of which Manufacturing expenses accounted for 8.9% revenue. Earnings before Debrciation, Interest and Taxes EBITA for the year grew by about 9.3% to Rs. 120489.29 lakhs as against Rs. 110275.77 lakhs during the brvious year. EBITA to Net Sales works out to 39% for the year. Finance Cost Finance Cost for the year amounted to Rs.186.45 lakhs as against Rs. 205.52 lakhs during the brvious year. As the company has generated significant cash surpluses, utilization of working capital has been minimal. Debrciation Debrcation charge for the current year came to Rs.13585.22 lakhs as compared to Rs. 9206.18 lakhs during the last year. Debrciation for the year is higher as the company was required to adopt the charging of debrciation on fixed assets according to the useful life as specified in Schedule II to the Companies Act, 2013 which came into effect from 1st April, 2014. During the year, addition to Fixed Assets accounted to Rs.23008.25 lakhs as against Rs. 40881.14 lakhs in the brvious year. Taxation For the current year, our tax liability came to Rs. 20934.13 lakhs net of MAT credit entitlement of Rs. 679.91 lakhs. For the last year, the Tax provision amounted to Rs. 18179.80 lakhs net of MAT Credit entitlement of Rs. 2436.08 lakhs. Deferred Tax Divi has also provided for Deferred Tax Liability of Rs. 1077.96 lakhs for the year as against Rs. 3511.96 lakhs last year. Profit after Tax Profit after Tax for the year accounted for Rs.84705.53 lakhs as against Rs. 79172.31 lakhs during the brvious year. Earnings Per Share Earnings Per Share for the year works out to Rs.63.82 per share of Rs.2 each as against Rs. 59.65 last year on Basic as well as Diluted basis. Dividend Your Board has recommended a dividend of Rs.20 per share of face value Rs.2 each i.e., 1000% for the year 2014-15. An amount of Rs. 5404.31 lakhs has been provided during the year towards Corporate Dividend Tax. Dividend pay-out including dividend tax for the year works out to 37.72% of profits earned, which amounts to Rs. 31951.17 lakhs. Transfer to General Reserves We propose to transfer an amount of Rs.20000 .00 lakhs to General Reserve for facilitating the dividend for the year. Reserves and Surplus Total Reserves of your company, including the surplus in the Statement of Profit & Loss after provision for dividend, as at the end of the year stand at Rs. 353541.29 lakhs. Long Term Borrowings Long-Term borrowings comprise sales tax deferment aggregating to Rs.105.00 lakhs, repayable over the next 3 years. Deferred Tax Liabilities Deferred tax Liabilities at the end of the year amounted to Rs.13245.13 lakhs as against Rs. 12167.17 lakhs last year. Long-term Provisions We have a long-term provision for leave encashment aggregating to Rs.699.16 lakhs as against Rs. 318.21 lakhs. Short Term Borrowings Working capital loans as at the end of the year amounted to Rs.2507.12 lakhs as against Rs. 1632.37 lakhs. Of this, an amount of Rs.1552.26 lakhs has been utilized as loan against a fixed deposit of Rs.4702.33 lakhs pledged with the banks. This way, we will be paying interest on the borrowing only when there is shortfall of liquid funds or mismatch between inflows-outflows and we earn some interest on our deposits. Utilisation at the year-end reflects outstanding cheques or overnight balances which will get cleared with fresh inflows of sale proceeds. Trade Payables Trade Payables being Sundry Creditors for Raw Materials/ Services amounted to Rs.22437.83 lakhs as at the end of the year as against Rs. 14869.29 lakhs as at the end of last year. Capital Expenditure During the year, the company has capitalized assets of an aggregate amount of Rs. 23008.25 lakhs. An amount of Rs.21818.23 lakhs is being carried forward as Capital WIP and these assets would be capitalized and commence operations during the next financial year. As the company has significant accumulation of cash reserves, all capex has been funded with internal accruals. Deductions during the year amounted to Rs. 1747.66 lakhs rebrsenting assets discarded Investments in Subsidiaries and Advances The company has invested the following amounts in the subsidiaries M/s. Divis Laboratories (USA) Inc., in the United States of America and M/s. Divi's Laboratories Europe AG in Switzerland. Of the advances to subsidiaries outstanding from last year, we have received an amount USD 500, 000 and CHF 100,000 aggregating to Rs. 374.79 lakhs from the subsidiaries during the year towards repayment of advances. Defference is on account of currency translation. Current Investments The company has been deploying its surplus cash accruals into medium-short term funds of SBI Mutual Fund We have earned a dividend income (net of tax) of Rs.3612.78 lakhs during the year on these Investments as against an income of Rs. 2573.63 lakhs during the last year Inventories Increase in WIP/Finished Goods is due to increased level of operations at the existing units besides commencement of operations at the expansion projects capitalized during the year. Increase of WIP is also due to manufacture of some products for key customers, dispatch schedule of which is in early April, 2015 which have since been dispatched. It may also be noted that the company undertakes campaign production of high-volume products like Naproxen, Dextromethorphan and Gabapentin by running the plant at full stream and stock these products for sale - thus freeing the multipurpose plants for producing other products. As the company has a large market share for these products, we do not foresee any problem with selling these products. Trade Receivables at the year end came to Rs.82303.05 lakhs as against Rs. 79163.59 lakhs as at 31-03-2014. Increase in debtors is due to higher sales towards the fag end of the year. Trade Receivables outstanding for a period exceeding six months from the date they became due for payment amounted to Rs.1504.00 lakhs (Rs. 1244.09 lakhs last year) constituting about 1.83% of total outstandings. Cautionary Statement This report may also contain certain statements that the company believes are or may be considered to be 'forward looking statements' which are subject to certain risks and uncertainties. These estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, in order that the statements reflect, in a true and fair manner, the state of affairs and profits for the year. Actual results may differ materially from those exbrssed or implied. Significant factors that could influence the Company's operations include government regulations, tax regimes, patent laws and domestic and international fiscal policies. |