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DIRECTOR'S REPORT

Aurobindo Pharma LtdIndustry : Pharmaceuticals - Indian - Bulk Drugs & Formln
BSE Code:524804
ISIN Demat:INE406A01037
Book Value(Rs):160.5349145
NSE Symbol:AUROPHARMA
Div & Yield %:0.53
Market Cap (Rs Cr.):35261.33
P/E(TTM):17.99
EPS(TTM):33.45
Face Value(Rs):1
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Dear Members,

Your Directors are pleased to present the 30th Annual Report of the Company together with the audited accounts for the financial year ended March 31, 2017.

FINANCIAL HIGHLIGHTS

Standalone financials

Rs. Million

2016-17 2015-16
Revenue from operations (inclusive of excise duty) 97,812.1 93,227.6
Profit before depreciation, interest, tax and exceptional items 25,099.0 24,761.1
Depreciation 2,861.7 2,630.0
Finance cost 451.6 652.7
Profit before tax 21,785.7 21,478.4
Provision for tax 4,718.1 5,211.4
Net profit after tax 17,067.6 16,267.0
Other comprehensive income/(expense) (56.1) (14.4)
Total comprehensive income for the period 17,011.5 16,252.6

DIVIDEND

Your Directors have approved a second interim dividend of 125% i.e. Rs.1.25 per equity share and together with the first interim dividend of 125% i.e. Rs.1.25 per equity share, the total dividend for the financial year 2016-17 comes to 250% i.e. '2.50 per share on the equity share of Rs.1 against 250% i.e. Rs.2.50 per share of Rs.1 paid in the previous year.

Pursuant to Regulation 43A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, top five hundred listed entities based on market capitalization are required to formulate a Dividend Distribution Policy. The Board has approved and adopted the Dividend Distribution Policy and the same is available on the Company's website viz. www.aurobindo.com.

PERFORMANCE REVIEW

Your Company delivered yet another year of consistent and profitable growth, continued to build a robust pipeline of products, stepped up market development, significantly expanded manufacturing capacities, invested to further improve reliability of deliverables and enhanced the level of execution across the Company. There was a sustained focus on research and development, employee engagement, competency enhancement and relentless pursuit of excellence in quality.

The team at Aurobindo demonstrated resilience despite several challenges, especially in dealing with competitive pricing pressures in the market as well as hardening of the rupee in the latter half of the financial year. At the market place, the momentum was maintained by improving the product mix with high value, differentiated oral solid and injectable products.

Your Company was quick to respond to the challenges of the market environment by executing improvements in operations. There was considerable work done to scale up volumes, improve efficiencies, optimize costs and fine-tune supply chain and logistics in order to expand the bottom line. Productivity enhancements and process improvements were proactively undertaken to benchmark the manufacturing systems with the best in the industry.

The standalone revenue at Rs.97,812.1 million increased by 4.9% in 2016-17. Operating profit including forex and other income was higher by 1.4% over the previous year. Profit before tax was higher by 1.4% at Rs.21,785.7 million over the previous year. Net profit for the year 2016-17 at Rs.17,067.6 million was an increase of 4.9% compared to 2015-16. The diluted earnings per share for 2016-17 is Rs.29.16 as compared to Rs.27.84 in 2015-16.

At the consolidated level, your Company delivered solid financial results fuelled by strong performance in US and European markets. The revenues increased to Rs.150,898.6 million, a growth of 8.1% over the previous year with an EBITDA margin of 22.8%. EBITDA for the year was Rs.34,342.8 million as against Rs.31,881.2 million in the previous year and the diluted earnings per share grew by 13.5% to Rs.39.33.

US formulations business contributed 57% to the overall formulations revenue during the year, as against 55% in the previous year. The revenue generated from the US business grew by 12.3% at Rs.68,272.3 million in 2016-17 over the previous year sales of Rs.60,785.5 million.

Your Company maintained its momentum of growth with the launch of several new oral and injectable products in the US, led by final approvals for 61 products from the US FDA during the financial year. Aurobindo continues to witness strong pace of approvals from US FDA, which helped to maintain growth momentum in sales and improve market presence. In keeping with the past track record, speed to the market and effectiveness in execution has remained the hallmark of Aurobindo's performance.

As a result of customer centric approach and relationship oriented marketing, your Company has become the 6th ranked Rx supplier of prescriptions dispensed (as per IMS National Prescription Audit, April 2017). In the highly competitive US market, your Company has diversified product basket in oral solids including controlled substances and injectables.

A few key developments in your Company in 2016-17 as regards product portfolio expansion were as follows:

• Received final approvals for 61 ANDAs as compared to 49, in 2015-16;

• Obtained US FDA approval for the Company's first penem ANDA for an injectable product;

• Filed 31 ANDAs as compared to 22, in 2015-16;

• Commenced filing from new facility, Unit X. As on March 31, 2017, the Company has filed 4 ANDAs from the facility;

• Started filing for oncology products with US FDA through the Company's joint venture entity, Eugia; Filed 2 ANDAs;

• Launched 35 products in the US market during the year under review;

• Capacity utilization was increased at every production facility to meet the growing portfolio.

As on March 31, 2017, your Company has cumulatively filed 429 ANDAs, out of which 276 have final approval and 38 have tentative approval, including 10 ANDAs which are tentatively approved under PEPFAR and the balance 115 ANDAs are under review.

Your Company clocked a growth of 4.7% in Europe to reach a revenue of Rs.32,771.5 million in 2016-17 as against sales of Rs.31,304.3 million in the previous year. The focus continues to achieve improved synergies between the acquired businesses at Western Europe with the Company's existing product pipeline. In all the addressable markets, there was volume growth, improved market presence as well as enhanced profitability, supplemented by increased manufacturing in India for larger number of products. This exercise of transferring the manufacturing base to India has streamlined and integrated the operations, optimized costs, improved the information flow, facilitated decision making and enabled better supervision and control. All of these initiatives have translated into increase in profitability.

In March 2017, formulations manufacturing facility

Unit XV at Parawada in Visakhapatnam was commissioned. The unit is primarily for supplies to European markets, and has been audited & approved by European authorities. In order to meet the growing demand, the volumes are being ramped up.

During the year, your Company further strengthened its branded products portfolio and leveraged its position as a key player in select European markets through couple of acquisitions. Arrow Generiques S.A.S., the French subsidiary of Aurobindo acquired the rights, title and interest in products Calcium and Calcium Vitamin D3, including the use of the Orocal trademark for the France market.

Agile Pharma B.V., The Netherlands, the wholly owned step-down subsidiary of your Company acquired Generis Farmaceutica S.A., which is engaged in the manufacture and sale of pharmaceutical products in Portugal. The acquisition includes the manufacturing facility in Amadora, Portugal, which has a capacity to manufacture 1.2 billion tablets/capsules/sachets annually.

Generis Farmaceutica S.A. is a generic pharmaceutical firm that focuses on both the retail and hospital segments apart from exports. Generis has a wide portfolio of products with major share in the therapeutic areas of cardiovascular (CVS), Central Nervous System (CNS), anti-infectives and genitourinary system ailments. Generis is the most sold pharmaceutical brand in Portugal, and is the 2nd largest generic group in Portugal.

The acquisition establishes Aurobindo as the leading generics group in Portugal. Synergies are expected from Aurobindo's vertical integration and pipeline breadth, improvement in Amadora plant capacity utilization by servicing both local and European markets, and operational advantages.

The acquisition will catapult your Company to the leadership position in the Portuguese generic pharma market.

Sales of formulations to the emerging markets such as Brazil, Ukraine, Mexico and MENA (Middle East and North Africa) as well as South Africa grew by 17% to Rs.7,556.3 million against Rs.6,461.0 million reported in 2015-16. This segment remains a key market for Aurobindo and renewed efforts are made to position your Company's products as one of the preferred suppliers in the existing and newer geographies.

ARV formulations business clocked a revenue Rs.11,854.1 million and during the year , your Company received US FDA approval for a valuable product - considered as a first line for treatment for HIV - under the PEPFAR program, and your Company has also filed an ANDA related to a triple combination product with the FDA.

Overall, formulations business constituted 79.8% of the consolidated revenue, while active pharmaceutical ingredients (API) accounted for the balance 20.2%. During the financial year, sale of formulations at Rs.120,454.2 million grew by 8.9% across all geographies in comparison to the previous year.

Revenue from API was Rs.30,420.6 million during the year under review, a growth of 5.5%. This growth in revenue of high value APIs has been achieved after meeting the very large in-house demand for manufacture of formulations. In line with anticipated further increase in formulations business, the in-house capacity for API has been further raised, even as your Company has contracted additional, newer, alternate sources for APIs.

AuroHealth, a subsidiary of your Company, which manufactures and markets pharma OTC products in the US, continued to gain penetration in to several key national retailers as well as select regional accounts. This business gained traction during the year and as at end of March 2017, AuroHealth was shipping to 24 customers with a commercialized basket of 56 products.

The dietary supplements business done by Natrol, the nutritional supplementary maker that Aurobindo acquired in 2014, was in line with the expectations, even as work continues to enhance the product pipeline. Natrol continues to be amongst the top 20 branded dietary supplement companies in the US. Existing products gained market share, while newer products are being launched. The revenues and bottom line expanded as planned and your Company sees further headroom for growth.

OUTLOOK

The Company's endeavor has been to invest in reliability; ensure patient safety through high-end quality of products and processes; develop alternate API and excipient sources to deliver larger volumes, in line with customer expectations on-time-in-full; possess high value, differentiated portfolio of complex molecules; build state-of-the- art manufacturing facilities that meet compliance standards; ensure safe working environment to protect the health of the employees; minimize waste and maximize recycling of materials; reduce the risk in operations; and be a preferred partner to all the stakeholders. In effect, strive for execution excellence and be a responsible corporate citizen.

Aurobindo has made significant progress in all these areas, but the team works with the belief that there is room for improvement. Operational excellence is often reviewed closely to further improve productivity, become cost effective and be reliable in every transaction.

The market environment is changing rapidly, with newer challenges and newer opportunities. Your Company has been conscious to work ahead of time and has invested in several technologies and platforms such as biotechnology, oncology, hormones, steroids, biocatalysts, peptides, vaccines, penems, depot injections, dermatology, inhalers, nasal, patches and films to sustain the growth.

Aurobindo is striving to stay ahead of the curve. A large portfolio is being built of differentiated products which would act as a moat against competitive pressures; new manufacturing facilities are under construction to cater to the growing portfolio; several of the newer technologies would help enhance margins; process improvements and better logistics management are expected to strengthen competitiveness.

Your Company's product portfolio and pipeline for the US market have significant potential for sustainable volume growth. This is a quality conscious, knowledge driven market and your Company is far better positioned with offers in several therapeutic segments.

Pricing pressures in US markets are expected to stay and there is the risk of the ability to maintain current margins. Price sensitivities will test all the players in a crowded market where price tends to sag while volume business gets done.

This threat does not affect Aurobindo significantly, because of its large portfolio of products, control over raw material sourcing and lower product concentration. The Company is a dominant player in the active ingredients business and has been able to control its quality, improve on timelines, be competitive on its costs and has the ability to deliver at short notice. This is a unique advantage that Aurobindo enjoys over competing manufacturers across the world.

Competitive pressures and resultant price erosion in US markets has galvanized your Company to focus on the organizational strength, leverage the full capabilities and competencies of the cadre of dedicated and highly experienced professionals. Your Company will continue to work to protect the revenues and bottom line, to turn challenges and opportunities into successes.

Research and development (R&D) activity being undertaken is focused on difficult to manufacture, differentiated products, with possible low competitive pressure. Work is on-going in differentiated molecules, both for oral and injectable products.

For instance, your Company successfully developed and filed 4 penems for the US market and received approval for one product, an injection drug, at the end of the financial year. This product was successfully launched in April 2017. Penems are difficult to develop products. The development and filing is in-line with the strategy of moving towards complex/specialty products.

The recent acquisition of 5 biosimilar molecules is in furtherance of the same strategy. These are complex biosimilars, and the plans are to take a lead molecule from this transaction for clinical trials in 2017. This is an anti-antiogenesis drug used in treatment of multiple-cancers including metastatic colon or rectal cancer, non-squamous and non-small cell lung cancers. Apart from these molecules, your Company is working on development of biosimilars in therapeutic segments such as oncology, auto immune disorders and ophthalmology.

In keeping with the need to manufacture a growing product pipeline, your Company, in addition to commissioning the formulations manufacturing facility at Unit XV referred earlier, has initiated significant improvements in capacities to boost volumes, as given below:

• Unit X: Your Company is building a US FDA compliant oral manufacturing facility at Naidupet, Andhra Pradesh, which will be commissioned in 2017-18. It is presently at project stage, where validation batches are being taken and is being got ready for regulatory inspection;

• Unit XVI: Your Company is building another US FDA compliant Betalactum irijectables manufacturing facility at Jedcherla, near Hyderabad. It is planned to get the facility commissioned in 2017-18;

• Your Company is in the processes of tripling the capacity at AuroLife manufacturing facility, which will significantly boost volumes for the US market.

In order to sustain future growth and spread the geographical risk, Aurobindo has been steadily expanding its European footprint since 2006, via acquisitions across several key markets and building a diversified product basket. Most notably, in 2014 the acquisition of Actavis's commercial operations in seven Western European countries added traction to the Company's presence in these developed markets. The acquisition of Generis, referred to earlier, builds upon an already successful growth strategy.

Members will recall, Arrow Generiques S.A.S., the French subsidiary of Aurobindo acquired select commercial products in Calcium and Calcium Vitamin D3, including the use of the Orocal trademark. This acquisition enables Arrow Generiques to continue to increase its branded products portfolio and leverage its position as a key player in the market, with focus on selling generics in the retail and hospital markets in France. The Company is well balanced between generics/branded products/biosimilars in the retail and hospital markets. A dedicated Business Unit with sales and marketing team has been set up specifically to enhance this business.

Arrow Generiques has continued developing the brand awareness among prescribers through promotion of mature products and launch of specialties for patients care. The present arrangement will boost the position of Arrow Generiques and open new opportunities for the future.

Aurobindo is committed to the larger cause of bringing affordable HIV drugs to millions of patients. Today, in addition to its existing powerful portfolio of products, your Company is bringing a one-of-its-kind generic version of a valuable drug, as also developing a fixed dose combination drug, to help achieve the UNAIDS 90-90-90 goals and an AIDS-free generation. The UNAIDS 90-90-90 goal is an ambitious treatment target aimed at goals briefly described below:

• By 2020, 90% of all people living with HIV will know their HIV status.

• By 2020, 90% of all people with diagnosed HIV infection will receive sustained antiretroviral therapy.

• By 2020, 90% of all people receiving antiretroviral therapy will have viral suppression.

Your Company is striving to help achieve these goals by proactively meeting the needs by offering products in several countries. The World Health Organization has recommended Aurobindo's first- line therapy against HIV which is expected to see rapid growth in demand now that a cost-effective generic product is made available to the market. Your Company's products have the potential to improve the lives of millions of patients.

RESEARCH & DEVELOPMENT

As in earlier years, your Company's new product development initiatives ranged from conventional oral and injectable products to more complex and advanced dosages. The focus was to prioritize on the more complex and niche products including oral and sterile, peptide drug products. Filing ANDAs of such products involved innovative and development intensive work.

The oncology, dietary supplements and the OTC teams made significant contributions by developing new products. A notable activity during the financial year was the start of development work on 58 products in the oncology and 8 products in the hormone segments, both in injectable and solid dosage forms. Regulatory filings are expected to happen for all these products within the next 3 years. Out of these 66 products that have been shortlisted, two products were filed in the US in 2016-17 and the plans are to file, at least 15 products in 2017-18. Further, product development has been initiated in new segments such as dermatology and nasal drug delivery.

The continuous innovative and skilful work being done by the R&D team is seen in the number of approvals received over the years with revenue growth and productivity gains. The regulatory product approvals for the ANDAs filed in the past as well as increased contribution/ commercialization of the development projects already undertaken, demonstrate the intellectual property strengths of your Company.

To take-up development of additional oncology molecules, another Chemical Research Laboratory has been created with isolators and appropriate personal safety protection equipment. Process development of six anti-cancer APIs is underway to commercially validate those in the next financial year.

ENVIRONMENT, HEALTH & SAFETY

In keeping with the increasing manufacturing infrastructure and in order to continuously upgrade the environmental and safety standards, your Company took several initiatives, all of which were dedicated to ensure renewability of the natural resources, reduce environmental footprint, and ensure all our employees, contractors and visitors go home safely. This is an area of management where prevention and proactive supervision is embedded in the systems and processes.

While several steps have been taken to enhance these standards and raise awareness across the organization, Team Aurobindo believes that it is an area where there is no finishing line and shall remain a work-in-progress. A few of the actions taken during the year are listed below:

Environment

In 2015-16, the Company planned additional environmental management infrastructure, particularly in wastewater management. These have been installed in 2016-17, commissioned and are working satisfactorily. This year too, environment management across all facilities attained a steady state and have proved that the systems are consistent with environmental regulations and customer expectations.

During the year under review, there was a surge in environmental assessments of API and formulations units by experts from reputed multinational customers and your Company demonstrated its efforts on environmental management to the satisfaction of all stakeholders. This journey moves forward as part of continual improvement of the organization's efforts.

In 2016-17, the biggest of Aurobindo's API manufacturing units, Unit XI, got accredited to ISO 14001 international standard. A rigorous and continuous evaluation of environmental performance triggered a new initiative of comprehensive and robust rain water management across Aurobindo's manufacturing units. As part of this drive, existing storm water drainage system/ network stands re-engineered.

As part of setting up of dedicated sewage treatment plants (STP), three sewage treatment plants were installed; one each in two of the manufacturing units and one in a formulation manufacturing unit. These STPs are in addition to the ones planned and installed in 2015-16.

During 2016-17, your Company was successful in obtaining consent for expansion of two API manufacturing units. Regulatory approvals and consents are in place for all the units while the Company has ensured compliance with all applicable environmental regulations.

Safety

Your Company engaged the employees and contractors to commit themselves for their own safety and those of their colleagues. In order to motivate the contractors, a reward and penalty system for contractors was initiated so as to complete their projects with zero safety incidents.

As an awareness initiative, a month long safety program was organized, where promotional activities were taken up to increase awareness of prevention of hazards, and unsafe actions among the work force. Nitrogen blanketing, prevention of static electricity, volatiles in work place and learning from past incidents were the themes of the safety month. The program has inspirational impact on the need for employees to align with the best interests of each other.

Training remains a continual effort to create a culture of safety. Formal safety training inputs were provided, accounting for 0.54% of total manhours of each employee. Shift pep talks are organized in API units to communicate the hazards and precautions that need to be taken in the operations planned for each shift.

All new processes and changes to existing processes are reviewed by the safety team and tests are conducted to ensure that safety issues in scale-up are identified and addressed. HAZOP studies have been completed for 58 processes during the year and risk assessments are completed for 47 activities.

Over and above the routine up gradations, your Company installed earth interlock and monitoring systems. A new technology fire fighting system with aerosol based extinguishers was installed to raise the in-house capability.

HUMAN RESOURCES

Aurobindo has aligned its human resources learning and development to the needs of a growing and fast track organization. Year-on-year as the organization catapults ahead to meet its newest strategies and challenges, the immediate impact is felt on its processes, technology and most importantly its people. The very same people have to now perform with a certain sense of urgency, do more with less, be assertive yet be compliant and feel the heat of increase in their span of control.

This presupposes skilling the existing manpower to perform at their optimum best. The shop floor resources are hence encouraged to stay focused on key development areas as they are the doers, and hence are required to maintain the necessary cGMP compliance levels. Shop floor executives are continuously trained and groomed in the area of compliance, supported adequately to raise their competence, confidence and anytime readiness.

Key employees at the shop floor undergo classroom training, on-the-job training and assessments. 5,968 mandays of training was conducted for them in 2016-17.

Customized programs such as Auro Disha, Naa Unnati specially designed for the block and area in-charges covering supervisory and managerial skills with emphasis on project implementations was organized. Such projects ranged from process improvements to cost efficiencies with the support of their managers. 1,560 mandays of training was conducted in 2016-17 for supervisory and managerial resources.

Mid-level managers were put through year-long management development programs to bullet proof them wherein they undergo and participate in 24 important competencies to raise them to be successful leaders. They are required to implement projects on cost improvements, customer service and process improvements. 120 participants are undergoing a full year of training in four batches. Each batch on an average has helped save significant amount of cost, where the savings are objectively accounted for, even as the managers are raising their expertise to their next level. Individual's career plan is tailored and aligned with the organization's strategic growth requirements.

A unique intervention has paved its way into the organization where 30 General Executive Trainees are being hired from premium colleges and are being groomed to grow into future leaders. A yearlong hand-holding process is organized to help them understand the complexities of the organization. They are put through classroom training, on-the-job training, projects, robust reviews and minimum of three rotations. Three batches have been hired into the system.

During the year, 27,637 employees have been covered in compliance, safety and behavioral training. Several employees underwent multiple, need based programs.

Aurobindo Training and Development Centre (ATDC) recruits, trains and helps absorb talented candidates. During the year, your Company recruited 257 employees (29 M. Pharmacy, 113 M.Sc., 55 B. Pharmacy degrees and 60 ITI/Diploma holders). During training, they are prepared both on theoretical and practical aspects to meet the requirements of quality control, quality assurance; regulatory affairs, analytical techniques, stability/ quality compliance, safety compliance and good documentation practices.

ITI/Diploma candidates are trained on production and packaging operations. Apart from imparting technical knowledge, ATDC plays a critical role in holistic learning which includes internalizing the corporate culture, work ethics and behavior attributes towards effective leadership development and progression and making a difference to the organization.

AWARDS

For its HR practices, your Company received recognition during the year, such as:

• Certificate of Honor in the category of Excellence in HR by CPhI India & UBM India for the initiatives taken for e-learning, skill development, HR automation, talent engagement, leadership competencies & its integration with HR sub-systems.

• Certificate of Appreciation in the 12th edition of BML Munjal Awards for Excellence in Learning & Development.

Your Company has received an award for Most Consistent IR (Investor Relations) Practice in Large Cap category for 2016-17 conducted by KPMG, BSE, Bloomberg and IR Society.

Aurobindo Pharma is a winner of the Clarivate Analytics India Innovation Awards 2016. Clarivate

Analytics - formerly the IP & Science division of Thomson Reuters -honors the top 50 most innovative companies in India according to patent-related metrics that get to the essence of what it means to be truly innovative.

SUBSIDIARIES/JOINT VENTURES

As per the provisions of Section 129 of the Companies Act, 2013 read with the Companies (Accounts) Rules 2014, a separate statement containing the salient features of the financial statement of subsidiary companies/associate companies/joint ventures is detailed in Form AOC-1 and is in Annexure-1 to this Report.

During the year, the following companies were incorporated as step down subsidiaries of the Company:

a. Auro AR LLC;

b. Auro Pharma USA LLC;

c. Aurogen South Africa (Pty) Limited;

d. Auro Vaccine LLC, USA;

e. Aurovitas Pharma Polska, Poland.

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements have been prepared by the Company in accordance with the Indian Accounting Standards (Ind AS) 110 and 111 as specified in the Companies (Indian Accounting Standards) Rules, 2015 and as per the provisions of Companies Act, 2013. The Company has placed separately, the audited accounts of its subsidiaries on its website www.aurobindo.com, in compliance with the provisions of Section 136 of the Companies Act, 2013. Audited financial statements of the Company's subsidiaries will be provided to the Members, on request.

VIGIL MECHANISM

The Board of Directors has adopted the Whistle Blower Policy which is in compliance with Section 177(9) of the Companies Act, 2013 and Regulation 22 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The Whistle Blower Policy aims for conducting the affairs in a fair and transparent manner by adopting highest standards of professionalism, honesty, integrity and ethical behavior. All permanent employees and whole-time directors of the Company are covered under the Whistle Blower Policy.

A mechanism has been established for employees to report their concerns about unethical behavior, actual or suspected fraud or violation of Code of Conduct and Ethics. It also provides for adequate safeguards against the victimization of employees who avail of the mechanism and allows direct access to the Chairperson of the audit committee in exceptional cases. The Whistle Blower Policy is available on the Company's website: http://www. aurobindo.com/about-us/ corporategovernance.

PREVENTION AND PROHIBITION OF SEXUAL HARASSMENT

Your Company has constituted an internal complaints committee in compliance with the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 and the Rules there under. The Company has a policy on prevention & prohibition of sexual harassment at workplace. The policy provides for protection against sexual harassment of women at workplace and for the prevention and redressal of such complaints. During the year, no complaints have been received.

RATING

India Ratings and Research (Ind-Ra) has revised Aurobindo Rs.s outlook to Positive from Stable and affirmed its long-term rating of the Company at Rs.IND AA+'.

MEETINGS OF THE BOARD

The Board and Committee meetings are prescheduled and a tentative calendar of the meetings finalized in consultation with the Directors to facilitate them to plan their schedule. However, in case of special and urgent business needs, approval is taken by passing resolutions through circulation. During the year under review, four Board Meetings and five Audit Committee Meetings were convened and held. The details of the meetings including composition of Audit Committee are provided in the Corporate Governance Report. During the year, all the recommendations of the Audit Committee were accepted by the Board.

DIRECTORS

As per the provisions of the Companies Act, 2013, Mr. P. Sarath Chandra Reddy and Dr. M. Sivakumaran will retire at the ensuing annual general meeting and being eligible, seek reappointment. The Board of Directors recommends their re-appointment.

The appointment of Mr. Rangaswamy Rathakrishnan Iyer as an Independent Director of the Company for a period of two years upto February 8, 2019 is being proposed at the ensuing Annual General Meeting. The Board of Directors recommends his appointment.

Dr. D. Rajagopala Reddy resigned as Independent Director of the Company with effect from February 10, 2017. The Board has placed on record its sincere appreciation and gratitude for contributions made by him during his tenure as Independent Director of the Company.

DETAILS OF DIRECTORS & KEY MANAGERIAL PERSONNEL

The Members of the Company at their 29th Annual General Meeting held on August 24, 2016 have appointed Mr. P. Sarath Chandra Reddy as Whole-time Director for a period of three years with effect from June 1, 2016.

DIRECTORS' RESPONSIBILITY STATEMENT

Pursuant to Section 134(3)(c) of the Companies Act, 2013 your Directors confirm that:

a. in the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures, if any;

b. appropriate accounting policies have been selected and applied consistently.

Judgement and estimates which are reasonable and prudent have been made so as to give a true and fair view of the state of affairs of your Company as at the end of the financial year and of the profit of your Company for the year;

c. proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of your Company and for preventing and detecting fraud and other irregularities;

d. the annual accounts have been prepared on a going concern basis;

e. proper internal financial controls have been laid down to be followed by your Company and such internal financial controls are adequate and are operating effectively; and

f. proper systems to ensure compliance with the provisions of all applicable laws have been devised, and such systems are adequate and are operating effectively.

DECLARATION FROM INDEPENDENT DIRECTORS

The Independent Directors have submitted the declaration of independence stating that they meet the criteria of independence as provided in sub-section (6) of Section 149 of the Companies Act, 2013.

BOARD DIVERSITY

The Company recognizes and embraces the importance of a diverse board in its success. The Board has adopted the Board Diversity Policy which sets out the approach to diversity of the Board of Directors. The Board Diversity Policy is available on the Company's website: http:// www.aurobindo.com/about-us/corporate- governance.

BOARD EVALUATION

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 mandates that the Board shall monitor and review the Board evaluation framework. The Companies Act, 2013 states that a formal annual evaluation needs to be made by the Board of its own performance and that of its committees and individual directors. Schedule IV of the Companies Act, 2013 states that the performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated.

The evaluation of all the Directors and the Board as a whole was conducted based on the criteria and framework adopted by the Board including performance and working of its Committees.

POLICY ON DIRECTORS' APPOINTMENT AND REMUNERATION

The policy of the Company on directors' appointment and remuneration, including criteria for determining qualifications, positive attributes, independence of a director and other matters are adopted as per the provisions of the Companies Act, 2013. The remuneration paid to the Directors is as per the terms laid out in the nomination and remuneration policy of the Company. The nomination and remuneration policy as adopted by the Board is placed on the Company's website: http://www.aurobindo.com/about-us/corporate- governance.

TRANSFER TO RESERVE

The Company has not transferred any amount to general reserve out of the profits of the year.

LOANS, GUARANTEES OR INVESTMENTS

Loans, guarantees or investments covered under Section 186 of the Companies Act, 2013 form part of the Notes to the financial statements provided in this Annual Report.

CONTRACTS OR ARRANGEMENTS WITH RELATED PARTIES

The particulars of contracts or arrangements with related parties referred to in sub-section (1) of Section 188 of the Companies Act, 2013 is prepared in Form No. AOC-2 pursuant to clause (h) of sub-section (3) of Section 134 of the Act and Rule 8(2) of the Companies (Accounts) Rules, 2014 and is in Annexure-2 to this Report.

EXTRACT OF ANNUAL RETURN

As required under Section 92(3) of the Companies Act, 2013 and Rule 12(1) of the Companies (Management and Administration) Rules, 2014, the extract of Annual Return prepared in Form MGT-9 is in Annexure-3 to this Report.

CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS & OUTGO

Information with respect to conservation of energy, technology absorption, foreign exchange earnings & outgo pursuant to Section 134(3)(m) of the Act read with Companies (Accounts) Rules, 2014 is in Annexure-4 to this Report.

RISK MANAGEMENT COMMITTEE

Risk Management Committee of the Company consists of the following Directors viz.

Mr. M. Sitarama Murty, Mr. N. Govindarajan and Mr. P. Sarath Chandra Reddy. Mr. M. Sitarama Murty is the Chairman of the Committee. The Company has established a separate department to monitor the enterprise risk and for its management.

The Committee had formulated a risk management policy for dealing with different kinds of risks which the Company faces in its day-to-day operations. Risk management policy of the Company outlines different kinds of risks and risk mitigating measures to be adopted by the Board. The Company has adequate internal financial control systems and procedures to combat the risk. The risk management procedure is reviewed by the Audit Committee and Board of Directors on regular basis at the time of review of quarterly financial results of the Company. A report on the risk and their management is enclosed as a separate section forming part of this report.

AUDITORS & AUDITORS' REPORT

The statutory auditors' report is annexed to this report. The notes on financial statements referred to in the Auditors' Report are self-explanatory and do not call for any further comments. There are no specifications, reservations, adverse remarks on disclosure by the statutory auditors in their report. They have not reported any incident of fraud to the Audit Committee of the Company during the year, under review.

Pursuant to Section 139 (2) of the Companies Act, 2013, read with Companies (Audit and Auditors) Rules, 2014, the Company at its 27th Annual General Meeting (AGM) held on August 27, 2014, had appointed M/s. S.R.Batliboi & Associates LLP, Chartered Accountants as Statutory Auditors for a period of 3 years i.e. up to the conclusion of the 30th AGM to be held in the year 2017. The present term of M/s. S.R.Batliboi & Associates LLP, Statutory Auditors, would expire at the conclusion of the ensuing AGM.

The Board of Directors of the Company has proposed the appointment of M/s. B S R & Associates LLP, Chartered Accountants as the Statutory Auditors of the Company to hold office from the conclusion of 30th AGM until the conclusion of the 35th AGM.

The Company has received a letter from M/s. B S R & Associates LLP, Chartered Accountants confirming that they are eligible for appointment as Statutory Auditors of the Company under Section 139 of Companies Act, 2013 and meet the criteria for appointment as specified in Section 141 of the Companies Act, 2013.

INTERNAL AUDITORS

The internal audit of the Company was conducted by a professional firm of Chartered Accountants up to September 2016. From October 2016, internal audit is being conducted by an in-house team of professionals. The internal audit reports are being reviewed by the Audit Committee of the Company.

COST AUDIT

Pursuant to Section 148 of the Companies Act, 2013 read with the Companies (Audit and Auditors) Rules, 2014 and the Companies (Cost Records and Audit) Rules, 2014, the Company is maintaining the cost records as its business is covered under the regulated sector viz. drugs and pharmaceuticals. Audit of the Company's cost records is not applicable since the Company's revenues from exports, in foreign exchange, exceed 75% of its total revenues.

INTERNAL FINANCIAL CONTROLS

The internal financial controls (IFC) framework institutionalized in Aurobindo last year has been evaluated in-depth for its adequacy and operating effectiveness, wherein the Company has covered financial reporting controls, operational controls, compliance related controls and also Information Technology (IT) controls, comprising IT general controls (ITGC) and application level controls. The ITGC would include controls over IT environment, computer operations, access to programs and data, program development and program changes. The application controls would include transaction processing controls in ERP Oracle system which supports accurate data input, data processing and data output, workflows, reviews and approvals as per the defined authorization levels.

In order to further strengthen the existing IFC framework and to support the growing business, the Company has redefined all the process level controls at activity level which has brought in more clarity and transparency in day-to-day processing of transactions and in addressing any related risks. All the controls so redefined & identified have been properly documented and tested with the help of an independent auditor to ensure their adequacy and effectiveness.

The internal auditors conducts. Process & control review' on a quarterly basis as per the defined scope and submit the audit findings along with management comments and action taken reports to Audit Committee for its review.

The IFC framework at Aurobindo ensures the following:

• Establishment of policies & procedures, assignment of responsibility, delegation of authority, segregation of duties to provide a basis for accountability and controls;

• Physical existence and ownership of assets at a specified date;

• Enabling proactive anti-fraud controls and a risk management framework to mitigate fraud risks to the Company;

• Recording of all transactions occurred during a specific period. Accounting of assets, liability, and revenue and expense components at appropriate amounts;

• Preparation of financial information as per the timelines defined by the relevant authorities.

SECRETARIAL AUDIT REPORT

Pursuant to the provisions of Section 204 of the Companies Act, 2013 and Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the Company has appointed M/s. D.V. Rao & Associates, a firm of Company Secretaries in practice to undertake the secretarial audit of the Company for the financial year 2016-17. The Secretarial Audit Report issued in form MR-3 is in Annexure-5 to this Report.

There are no qualifications, reservations or adverse remarks in the Secretarial Audit Report.

CORPORATE SOCIAL RESPONSIBILITY

Your Company is striving to help create a healthy, improved life of people in its neighborhood. Broadly, the initiatives are to execute on the stated CSR policy of Rs.give back to the society' and make an impact on the lives of people.

The activities undertaken in 2016-17 can be summarized under the following heads:

• Promoting education;

• Supporting preventive health care;

• Eradicating hunger, poverty & malnutrition;

• Making available safe drinking water;

• Encouraging environment sustainability;

• Sustaining ecological balance & conservation of natural resources;

• Developing rural sports; and

• Setting up old age homes, etc

A detailed account of the CSR activities forms part of the annual report on CSR placed on the Company's website at: http://www.aurobindo.com/social-responsibility/csr-activities. Report on Corporate Social Responsibility as per Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 is in Annexure-6 to this Report.

STATEMENT OF PARTICULARS OF APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL

The statement of particulars of appointment and remuneration of managerial personnel as per Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is in Annexure-7 to this Report.

INSURANCE

All properties and insurable interests of the Company including building, plant and machinery and stocks have been fully insured.

MATERIAL CHANGES AND COMMITMENTS

There are no material changes and commitments in the business operations of the Company from the financial year ended March 31, 2017 to the date of signing of the Director's Report. There were no significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and Company's operations in future.

CORPORATE GOVERNANCE

A separate section on Corporate Governance standards followed by your Company, as stipulated under Schedule V (C) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 is enclosed as a separate section forming part of this report.

The certificate of the Practicing Company Secretary Mr. S. Chidambaram with regard to compliance of conditions of corporate governance as stipulated under Schedule V(E) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 is annexed to the Corporate Governance Report.

MANAGEMENT DISCUSSION AND ANALYSIS

Management Discussion and Analysis Report for the year under review as stipulated under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 is presented in a separate section forming part of this report.

FIXED DEPOSITS

Your Company has not accepted any fixed deposits from the public within the purview of Chapter V of the Companies Act, 2013.

INDUSTRIAL RELATIONS

Industrial relations at all units of the Company have been harmonious and cordial. The employees are motivated and have shown initiative in improving the Company's performance.

TRANSFER OF UNPAID AND UNCLAIMED AMOUNT TO IEPF

The dividends which remain unpaid/unclaimed for a period of seven years, have been transferred on due dates by the Company to the Investor Education and Protection Fund (IEPF) established by the Central Government.

Section 124 of the Companies Act, 2013 read with Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016 ('the Rules') mandates that companies shall apart from transfer of dividend that has remained unclaimed for a period of seven years from the unpaid dividend account to the Investor Education and Protection Fund (IEPF), also transfer the corresponding shares with respect to the dividend, which has not been paid or claimed for seven consecutive years or more to IEPF. Accordingly, the dividends that remain unclaimed for seven years and also the corresponding shares would be transferred to IEPF account on due dates.

SHARE CAPITAL

The paid up share capital of the Company increased by Rs.712,823 during the year due to the allotment of 712,823 equity shares of Rs.1 each on exercise of stock options under the Employee Stock Option Plan-2006 (ESOP 2006) of the Company. The paid up share capital of the Company as on March 31, 2017 was 585,882,409 equity shares of Rs.1 each.

EMPLOYEE STOCK OPTION SCHEME

The Members at the Annual General Meeting of the Company held on September 18, 2006 approved formulation of Employee Stock Option Scheme- 2006 (ESOP 2006) for the eligible employees and Directors of the Company and its subsidiaries. Details of the stock options as on March 31, 2017 is provided on the Company's website: http://www.aurobindo.com/about-us/corporate- governance. The details of the employee stock options also form part of the notes to accounts of the financial statements in this Annual Report.

BUSINESS RESPONSIBILITY REPORT

A detailed Business Responsibility Report in terms of the provisions of Regulation 34 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 is available as a seperate section in this Annual Report.

ACKNOWLEDGEMENTS

Your Directors are grateful to for the invaluable contribution made by the employees and are encouraged by the support of the customers, business associates, banks and government agencies. The Directors deeply appreciate their faith in the Company and thankful to them. The Board shall always strive to meet the expectations of all the stakeholders.

For and on behalf of the Board
K. Ragunathan
Hyderabad Chairman
June 20, 2017 DIN: 00523576

Annexure-4

Conservation of energy, technology absorption, foreign exchange earnings and outgo

(Pursuant to the provisions of Section 134(3)(m) of the Companies Act, 2013 read with the Companies (Accounts) Rules, 2014)

A. Conservation of energy

i. Steps taken or impact on conservation of energy:

a. Oil-free refrigerant circulation technology (Reduction in greenhouse gas emissions and energy saving);

b. Cooling tower fans control with respect to water temperature: Energy saving;

c. Power capacitors installed at various utility panels (end load center). We have calculated power on basis of ampere with/ without capacitors connected to load;

d. Auto controlling arranged by installed VFD vs. pressure transmitter for RT pump resulting in power saving;

e. LED street light replacement in place of conventional sodium vapor lamp. LED lamp replacement of CFL lamp;

f. Installation of VFDs for reactors, resulted in power saving;

g. Replacement of low efficient pumps with high efficient pumps;

h. Reduction in coal consumption by running power plant - 2 & 3;

i. Reduction in coal consumption due to heat recovery from contaminated condensate;

j. Cost saving through reducing of screw feeder feeding percentage from 52% to 45%, reduced the crushed coal consumption also by fine tuning other parameters like: Air box pressure, improvement in condensate recovery;

k. Condensate recovery increase from 41% to 62%;

l. Introduced Max100 oil for -150C, 60 TR chilling plant for power saving;

m. Arranged mechanical seal & 10 sq. mts condenser for SRA019 to reduce the distillation time and reduce the solvent losses;

n. Kaizen initiatives introduced in Units 4, 10, 15 and 16. It covers apart from other areas, the monitoring of power, water and effluent and daily discussion at various levels takes place. All levels of management are involved in this cultural transformation. This has created lot of discipline in employees forjudicious use of energy. Apart from analyzing data in daily Kaizen, projects for energy improvement in specific areas are taken up;

o. At Unit 7, high wattage sodium water lamps and CFL lamps are replaced by LED lamps resulting in savings;

p. Lighting Servo transformer put in operation at Unit 12 with reduced voltage 180-200V for about 10% reduction in lighting load;

q. Cooling tower fan cut-off integrated with UMS system at Unit 15 resulting in savings;

r. Lower RPM motors replaced with higher RPM motors at Unit 7;

s. Steam and AHU condensate recovery systems improved at Unit 7 for water saving of 10,800KL/annum;

t. Conventional ammonia chiller replaced at Unit 12 with a screw chiller for saving in power consumption;

u. Laundry water is reused at Unit 12 saving about 1,500KL per annum.

ii. Steps taken by the Company for utilizing alternate sources of energy:

a. Power trading through open access using wind/solar power;

b. Solar power plant at Unit 11;

The Company established a 30MW captive solar power plant at a project cost of Rs.1,150 million at Varisam, Pydibhimavaram, Srikakulam District under the APTRANSCO Captive Scheme. After feasibility studies and with necessary approvals, the Company undertook the project on turnkey basis and has fully commissioned the plant.

c. At Units 7 & 15, daylight system installed in warehouse and service areas to use natural energy. This resulted in approximately 2 lakh units of power saving per annum;

d. Briquettes are used in Units 7 & 15 instead of coal for boiler operations.

iii. Capital investment on energy conservation equipments:

a. Replacement of old vacuum with new energy efficient vacuum pump & 132 kV sub-station in place of existing 33 kV sub-station at Unit 1;

b. Removing of old 10 numbers of air compressors (more than 15 years) & installed energy efficient air compressor at Unit 5;

c. Existing VAM are not giving the required performance; Hence, changed with latest technology VAM having better performance;

d. Existing cooling tower fills replaced by usage of energy efficient timber CT & oil free refrigeration system from M/s. Hi-Freeze at Unit 9;

e. Automatic nitrogen blanketing systems to save excess nitrogen going from vent at almost all API units;

f. Hot water system installed at Unit 1 for dehumidification instead of electrical dehumidifier for ensuring savings;

g. VFDs installed for AHU/cooling fan/chiller pumps at Units 6, 7 & 15 for energy reduction.

B. TECHNOLOGY ABSORPTION

Efforts made towards technology absorption:

Technology absorption is not involved as the process for manufacture of active ingredients/ formulation is being developed in-house by the Company.

Benefits derived like product improvement, cost reduction, product development or import substitution:

Cost optimization initiative with respect to less expensive active ingredients, excipients, packaging materials changed over in commercialized products. These will result in annualized savings worth millions of rupees when approved and implemented.

In case of imported technology (imported during the last three years reckoned from the beginning of the financial year): Not Applicable.

Expenditure incurred on Research and Development

2016-17 2015-16
Capital 940.7 306.6
Recurring 4,963.3 4,119.0
Total R&D expenditure 5,904.0 4,425.6
As a % of total gross turnover 6.04 4.75

C. Foreign exchange earnings and outgo

Foreign exchange earned in terms of actual inflows and foreign exchange outgo during the year in terms of actual outflows:

Rs. Million
2016-17 2015-16
Foreign exchange earned
Exports 75,760.7 70,926.8
Others 77.0 88.3
75,837.7 71,015.1
Foreign exchange outgo
Exports 27,088.8 26,193.3
Others 3,135.5 2,605.1
30,224.3 28,798.4

 

for and on behalf of he Board
K. Ragunathan
Hyderabad Chairman
June 20, 2017 DIN: 00523576

   

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