Lupin Limited,(‘the Company’) incorporated in 1983, is an innovation led Transnational Pharmaceutical Company producing, developing and marketing a wide range of branded and generic formulations, biotechnology products and active pharmaceutical ingredients (APIs) globally. The Company has significant presence in the Cardiovascular, Diabetology, Asthama, Pediatrics, Central Nervous System, Gastro-Intestinal, Anti-Infectives and Nonsteroidal Anti Inflammatory Drug therapy segments and is a global leader in the Anti-TB and Cephalosporins segments. The Company along with its subsidiaries has manufacturing locations spread across India, Japan, USA, Mexico and Brazil with trading and other incidental and related activities extending to the global markets.
1B. RECENT ACCOUNTING PRONOUNCEMENTS:
Standards issued but not yet effective:
In March 2017, the Ministry of Corporate Affairs issued the Companies(Indian Accounting Standards) (Amendments) Rules, 2017, notifying amendments to Ind AS 7, ‘Statement of Cash Flows’ and Ind AS 102, ‘Share-based Payment.’ These amendments are in accordance with the recent amendments made by International Accounting Standards Board (IASB) to IAS 7, ‘Statement of Cash Flows’ and IFRS 2 ‘Share-based Payment’ respectively. The amendments are applicable to the Company from April 1, 2017.
Amendment to Ind AS 7:
The amendment to Ind AS 7 requires the entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes, suggesting inclusion of a reconciliation between the opening and closing balances in the balance sheet for liabilities arising from financing activities to meet the disclosure requirement.
The Company is evaluating the requirements of the amendment and the effect on the standalone financial statements is being evaluated.
Amendment to Ind AS 102:
The amendment to Ind AS 102 provides specific guidance to measurement of cash-settled awards, modification of cash-settled awards and awards that include a net settlement feature in respect of withholding taxes. However, this amendment is not applicable to the Company.
a) Capital Reserve
The Capital reserve is created on receipts of government grants for setting up the factories in backward areas for performing research on critical medicines for the betterment of the society and on restructuring of the Capital of the Company under various schemes of Amalgmation.
b) Capital Redemption Reserve
This reserve represents redemption of redeemable cumulative preference shares in earlier years.
c) Securities Premium
Securities premium account comprises of premium on issue of shares. The reserve is utilised in accordance with the specific provision of the Companies Act, 2013.
d) General Reserve
The General reserve is used from time to time to transfer profits from retained earnings for appropriation purposes. As the General reserve is created by a transfer from one component of equity to another and is not an item of other comprehensive income, items included in the General reserve will not be reclassified subsequently to the statement of profit and loss.
e) Amalgamation Reserve
This reserve represents creation of amalgamation reserve pursuant to the scheme of amalgamation between erstwhile Lupin Laboratories Ltd. and the Company.
f) Cash flow hedge reserve
The cash flow hedge reserve represents the cumulative effective portion of gains or losses arising on changes in fair value of designated portion of hedging instruments entered into for Cash flow hedges. The cumulative gain or loss arising on changes in fair value of the designated portion of the hedging instruments that are recognised and accumulated under the heading of cash flow reserve will be reclassfied to statement of profit and loss only when the hedged items affect the profit or loss.
1. NON-CURRENT BORROWINGS
a) Deferred Sales Tax Loan is interest free and payable in 5 equal annual installments after expiry of initial 10 years moratorium period from each such year of deferral period from 1998-99 to 2009-10.
b) Term Loans from CSIR carry interest of 3% p.a. and is payable in 3 annual installments of Rs.30.9 million each alongwith interest.
c) Term Loans from DST carry interest of 3% p.a. and is payable in 2 annual installments of Rs.10.4 million each alongwith interest.
d) The Company has not defaulted on repayment of loans and interest during the year.
2. CURRENT BORROWINGS
a) Secured loans comprise of Cash Credit, Current Loans, Packing Credit, Post Shipment Credit, Bills Discounted and Overseas Import Credit and are secured by hypothecation of inventories and trade receivables, and all other moveable assets, including current assets at godowns, depots, in course of transit or on high seas and a second charge on immovable properties and moveable assets of the Company both present and future. It includes foreign currency loans of Rs.454.0 million (31.03.2016 Rs.1,855.1 million , 01.04.2015 Rs.nil)
b) Unsecured loans comprise of Current Loans, Packing Credit, Post Shipment Credit, Bills Discounted and Overseas Import Credit. It includes Foreign Currency Loan of Rs.3,826.2 million (31.03.2016 Rs.1,523.9 million , 01.04.2015 Rs.nil)
c) Foreign Currency loans carry interest rate at LIBOR plus market driven margins and those in Indian Rupees carry interest rate in the range of 8.25% to 11.70% p.a.
d) The Company has not defaulted on repayment of loans and interest during the year.
a) Estimated amount of contracts remaining to be executed on capital account and not provided for, net of advances, Rs.3655.4 million (31.03.2016 - Rs.3766.7 million, 01.04.2015 - Rs.2399.6 million).
b) Letters of comfort for support in respect of a subsidiary. The Company considers its investments in subsidiary as strategic and long-term in nature. The Company is committed to operationally, technically and financially support the operations of its subsidiary.
c) Other commitments - Non-cancellable operating leases (Refer note 41).
d) Dividends proposed of Rs.7.5 per equity share before the financial statements approved for issue, but not recognised as a liability in the financial statements is Rs.3386.8 million (31.03.2016 - Rs.3379.4 million, 01.04.2015 - Rs.3371.2 million).
Future cash outflows in respect of the above, if any, is determinable only on receipt of judgement / decisions pending with the relevant authorities. The Company does not expect the outcome of the matters stated above to have a material adverse impact on the Company’s financial condition, results of operations or cash flows.
The Company does not envisage any likely reimbursements in respect of the above.
The Company is involved in various legal proceedings, including claims against the Company pertaining to Income tax, Excise, Customs, Sales/VAT tax, product liability related claims, employment claims and other regulatory matters relating to conduct of its business. The Company has reviewed all its pending litigations and proceedings and has adequately provided for where provisions are required and disclosed as contingent liability where applicable, in the financial statements. The Company carries product liability insurance policy with an amount it believes is sufficient for its needs. In respect of other claims, the Company believes, these claims do not constitute material litigation matters and with its meritorious defences, the ultimate disposition of these matters will not have material adverse effect on its financial statements.
4. a) During the year, the Company has made additional Capital Contribution of Rs.10610.4 million (previous year Rs.13142.3 million) in Lupin Atlantis Holdings SA, Switzerland (LAHSA), a wholly owned subsidiary.
During the year, the Company has made Capital Contribution of Rs.nil (previous year Rs.6385.5 million) in Lupin Holdings
B.V., Netherlands (LHBV), a wholly owned subsidiary.
During the year, 100% shareholding of Novel Clinical Research (India) Pvt. Ltd., India (Novel India) has transferred from Novel Laboratories Inc., USA to the Company for Rs.0.1 million. Consequently, Novel India has become a direct subsidiary of the company.
During the previous year, the Company has transferred its 100% shareholding in Lupin (Europe) Limited, UK (LEL) for Rs.20.0 million to LAHSA. Consequently, LEL has become a step-down subsidiary of the Company.
During the previous year, the Company has transferred its 100% shareholding in Lupin Middle East FZ-LLC, UAE (LME) for Rs.32.3 million to LAHSA. Consequently, LME has become a step-down subsidiary of the Company.
b) During the previous year, the Company, through its wholly owned subsidiary Lupin Farmaceutica do Brasil LTDA, Brazil purchased 100% stake in Medquimica Industria Farmaceutica S.A., Brazil (MQ) at a total cost of Rs.2506.4 million.
c) During the year, the Company, through its wholly owned subsidiary Lupin Holdings B.V., Netherlands (LHBV), acquired / subscribed to the equity stake of the following subsidiaries:
i) Additional investment in Generic Health SDN. BHD., Malaysia at a total cost of Rs.1.0 million (previous year Rs.0.6 million).
ii) 0.01% equity stake in Lupin Ukraine LLC, Ukraine at a total cost of Rs.269/-.
iii) Additional investment in Lupin Farmaceutica do Brazil LTDA, Brazil (LFB) at a total cost of Rs.nil (previous year Rs.174.1 million). Effective January 01, 2016, LFB merged with MQ, its wholly owned subsidiary company, resulting into LHBV’s equity stake in MQ equal to 4.56%.
iv) 0.01% equity stake in Lupin Pharma LLC, Russia at a total cost of Rs.nil (previous year Rs.107/-).
d) During the year, the Company, through its wholly owned subsidiary LAHSA acquired / subscribed to the equity stake of the following subsidiaries:
i) Additional investment in Lupin Inc., USA at a total cost of Rs.5319.6 million (previous year Rs.1762.0 million) as additional paid-in capital - securities premium.
ii) Additional investment in Lupin Pharma LLC, Russia at a total cost of Rs.33.7 million as capital contribution (previous year Rs.0.1 million for 99.99% equity stake).
iii) 100% equity stake in Lupin Pharma Canada Ltd., Canada (LPCC) transferred from LHBV for Rs.250.8 million.
iv) Additional investment in Lupin (Europe) Ltd., UK at a total cost of Rs.259.7 million (previous year Rs.nil).
v) 99.99% equity stake in Lupin Ukraine LLC, Ukraine at a total cost of Rs.0.3 million.
vi) 100% equity stake in Lupin Japan & Asia Pacific K. K., Japan at a total cost of Rs.2.9 million.
vii) 100% equity stake in Lupin Latam, Inc., USA at a total cost of Rs.68/-.
viii) 94.91% equity stake in LFB at a total cost of Rs.nil (previous year Rs.3627.4 million). Effective January 01, 2016, LFB merged with MQ, its wholly owned subsidiary company. Subsequently, LAHSA made an additional investment of Rs.268.8 million (previous year Rs.274.1 million) in MQ resulting into LAHSA’s equity stake in MQ equal to 95.44%.
e) During the previous year, Lupin Inc., USA (LINC), a wholly owned subsidiary of LAHSA, acquired / subscribed to the equity stake of the following subsidiaries:
i) 100% equity stake in Gavis Pharmaceuticals, LLC, USA (Gavis) and its wholly owned subsidiary Edison Therapeutics LLC, USA (Edison) at a total cost of Rs.3664.7 million. Effective February 24, 2017, Edison merged into Gavis.
ii) 100% equity stake in Novel Laboratories, Inc., USA (Novel USA) and its wholly owned subsidiary Novel Clinical Research (India) Pvt. Ltd., India at a total cost of Rs.5327.7 million.
iii) 100% equity stake in VGS Holdings, Inc., USA (VGS) at a total cost of Rs.793.2 million. Effective February 24, 2017, VGS merged into Novel USA.
iv) 100% equity stake in Lupin Research Inc., USA at a total cost of Rs.67/-.
v) Lupin Pharmaceuticals, Inc, USA (LPI) has effected a reverse split of the shares in the ratio of 10000:1 and also changed the par value of the shares from USD 1 per share to USD 0.001 per share. This has resulted in reduction of number of shares held by the Company in LPI without changing the proportionate holding of the existing shareholders.
f) During the previous year, the Company’s wholly owned subsidiary LHBV sold 356 shares (0.18% equity stake) of its subsidiary Kyowa Pharmaceutical Industry Co., Limited, Japan to Medipal Holdings Corporation, Japan for a total consideration of Rs.59.4 million.
The above acquisitions / subscriptions / disposals are based on the net asset values, the future projected revenues, operating profits, cash flows and independent valuation reports; as applicable, of the investee companies.
5. Lupin Ltd and LAHSA have agreed to co-develop a bio-similar product.
6. Pre-operative expenses pending capitalisation included in Capital Work-In-Progress (Refer note 2) represent direct attributable expenditure for setting up of plants prior to the date of commencement of commercial production. The same will be capitalised on completion of projects and commencement of commercial operations. The details of pre-operative expenses are:
7. Segment Reporting:
The Company has presented data relating to its segments based on its consolidated financial statements, which are presented in the same Annual Report. Accordingly, in terms of paragraph 4 of the Indian Accounting `Standard (Ind AS 108) “Operating Segments”, no disclosures related to segments are presented in this standalone financial statements.
8. Auditors’ Remuneration:
* Excluding service tax and Swachh Bharat Cess
** Represents fees in respect of audit of subsidiaries for consolidation requirements of the Company in terms of Section 129(3) of the 2013 Act.
*** Includes payment for taxation matters to an affiliated firm of erstwhile auditors covered by a networking arrangement which is registered with the Institute of Chartered Accountants of India.
9. The Company procures equipments, vehicles and office premises under operating lease agreements that are renewable on a periodic basis at the option of both lessor and lessee. The initial tenure of the lease is generally between 12 months to 60 months. The lease rentals recognised in the Statement of Profit and Loss (Refer note 33) for the year are Rs.652.8 million (previous year Rs.478.2 million). The contingent rent recognised in the Statement of Profit and Loss for the year is Rs.nil (previous year Rs.nil). The future minimum lease payments and payment profile of non-cancellable operating leases are as under:
The Company has entered into long-term leasing arrangements for land with government authorities which are in the nature of finance lease. These arrangements do not involve any material recurring payments, hence other disclosures are not given.
10. Share-based payment arrangements:
i) Employee stock options - equity settled
The Company implemented “Lupin Employees Stock Option Plan 2003” (ESOP 2003), “Lupin Employees Stock Option Plan 2005” (ESOP 2005), “Lupin Subsidiary Companies Employees Stock Option Plan 2005” (SESOP 2005), “Lupin Employees Stock Option Plan 2011” (ESOP 2011), “Lupin Subsidiary Companies Employees Stock Option Plan 2011” (SESOP 2011), “Lupin Employees Stock Option Plan 2014” (ESOP 2014) and “Lupin Subsidiary Companies Employees Stock Option Plan 2014” (SESOP 2014) in earlier years, as approved by the Shareholders of the Company and the Nomination and Remuneration Committee of the Board of Directors (the Committee).
The Committee determines which eligible employees will receive options, the number of options to be granted, the vesting period and the exercise period. The options are granted at an exercise price, which is in accordance with the relevant SEBI guidelines in force, at the time of such grants. Each option entitles the holder to exercise the right to apply for and seek allotment of one equity share of Rs.2 each. The options issued under the above schemes vest in a phased manner after completion of the minimum period of one year with an exercise period of ten years from the respective grant dates.
Valuation of stock options
The fair value of stock options granted during the period has been measured using the Black-Scholes option pricing model at the date of the grant. The Black-Scholes option pricing model includes assumptions regarding dividend yields, expected volatility, expected terms and risk free interest rates. They key inputs and assumptions used are as follows:
Share price: The closing price on NSE as on the date of grant has been considered for valuing the options granted.
Exercise Price: Exercise Price is the market price or face value or such other price as determined by the Remuneration and Compensation Committee.
Expected Volatility: The historical volatility of the stock till the date of grant has been considered to calculate the fair value of the options.
Expected Option Life: Expected Life of option is the period for which the Company expects the options to be live. The minimum life of a stock option is the minimum period before which the options cannot be exercised and the maximum life is the period after which the options cannot be exercised.
Expected dividends: Expected dividend yield has been calculated as an average of dividend yields for four years preceding the date of the grant.
Risk free interest rate: The risk free interest rate on the date of grant considered for the calculation is the interest rate applicable for a maturity equal to the expected life of the options based on the zero coupon yield curve for Government Securities.
These assumptions reflect management’s best estimates, but these assumptions involve inherent market uncertainties based on market conditions generally outside of the Company’s control. As a result, if other assumptions had been used in the current period, stock-based compensation expense could have been materially impacted. Further, if management uses different assumptions in future periods, stock based compensation expense could be materially impacted in future years. The estimated fair value of stock options is charged to income on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards.
The weighted average inputs used in computing the fair value of options granted were as follows:
ii) Share appreciation rights - cash-settled
During the years 2011-12 and 2012-13, the Company granted Stock Appreciation Rights (“SARs”) to certain eligible employees in accordance with Lupin Employees Stock Appreciation Rights Scheme 2011 (“LESARs 2011”) approved by the Board of Directors (Board) at their Board Meeting held on September 13, 2011. Under the Scheme, eligible employees are entitled to receive appreciation in value of shares on completion of the vesting period.
The Scheme is administered through the Lupin Employees Benefit Trust (“Trust”) as settled by the Company. The Trust is administered by an independent Trustee. At the end of the vesting period of 3 years, the equity shares will be sold in the market by the Trust and the appreciation on the same (if any) will be distributed to the said employees, subject to vesting conditions.
The Company has been submitting required details with stock exchanges in terms of the circulars issued by SEBI in this regard. SEBI vide its circular no. CIR/CFD/POLICYCELL/3/2014 dated June 27, 2014 had extended the timelines for alignment of the Scheme till the new regulations are notified, continuing the prohibition on acquiring securities from the secondary market.
The new regulation viz: Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 (‘the Regulation’) was notified on October 28, 2014, pursuant to which the existing schemes are to be aligned within one year of the effective date of the Regulation. During the previous year, the Trust had distributed the benefits of SARs to the eligible employees in terms of LESARs 2011 and had not acquired any shares from the secondary market.
As approved by the Board, the Company had, prior to the SEBI circular no. CIR/CFD/DIL/3/2013 dated January 17, 2013 advanced an interest free loan to the Trust during the years 2011-12 and 2012-13 to acquire appropriate number of Equity Shares of the Company from the market on the grant date of SARs and the loan outstanding as at the Balance Sheet date was Rs.nil (31.03.2016 - Rs.nil, 01.04.2015 - Rs.251.3 million) and treasury shares outstanding as at the balance sheet date was Rs.nil (31.03.2016 - Rs.nil, 01.04.2015 - Rs.207.8 million).
11. Post-Employment Benefits:
(i) Defined Contribution Plans:
The Company makes contributions towards provident fund and superannuation fund to a defined contribution retirement benefit plan for qualifying employees. The superannuation fund is administered by the Life Insurance Corporation of India (LIC). Under the plan, the Company is required to contribute a specified percentage of payroll cost to the retirement benefit plan to fund the benefits.
The Company recognised Rs.196.1 million (previous year Rs.179.0 million) for superannuation contribution and Rs.231.9 million (previous year Rs.199.9 million) for provident and pension fund contributions in the Statement of Profit and Loss.
(ii) Defined Benefit Plan:
A) The Company makes annual contributions to the Group Gratuity cum Life Assurance Schemes administered by the LIC, a funded defined benefit plan for qualifying employees. The scheme provides for payment as under:
a) On normal retirement / early retirement / withdrawal / resignation:
As per the provisions of the Payment of Gratuity Act, 1972 with vesting period of 5 years of service.
b) On death in service:
As per the provisions of the Payment of Gratuity Act, 1972 without any vesting period.
In addition to the above mentioned scheme, the Company also pays additional gratuity as an ex-gratia and the said amount is provided as non-funded liability based on actuarial valuation.
The most recent actuarial valuation of plan assets and the present value of the defined benefit obligation for gratuity were carried out as at March 31, 2017. The present value of the defined benefit obligations and the related current service cost and past service cost, were measured using the Projected Unit Credit Method.
Based on the actuarial valuation obtained in this respect, the following table sets out the status of the gratuity plan and the amounts recognised in the Company’s financial statements as at the Balance Sheet date:
The estimates of salary escalation considered in actuarial valuation, take account of inflation, seniority, promotion and other relevant factors, such as supply and demand in the employment market.
Reasonably, possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below:
B) The provident fund plan of the Company, except at two plants, is operated by “Lupin Limited Employees Provident Fund Trust” (“Trust”). Eligible employees receive benefits from the said Provident Fund. Both the employees and the Company make monthly contributions to the Provident Fund Plans equal to a specified percentage of the covered employee’s salary.
The minimum interest rate payable by the Trust to the beneficiaries every year is being notified by the Government of India. The Company has an obligation to make good the shortfall, if any, between the return from the investments of the Trust and the notified interest rate. The Board of Trustees administer the contributions made by the Company to the schemes and also defines the investment strategy.
The Company has an obligation to service the shortfall on account of interest generated by the fund and on maturity of fund investments and hence the same has been classified as Defined Benefit Plan in accordance with Ind AS 19 “Employee Benefits”. As per the Guidance Note from the Actuarial Society of India, the Company has obtained the actuarial valuation of interest rate obligation in respect of Provident Fund as at March 31, 2017 and based on the same, there is no shortfall towards interest rate obligation.
Significant management judgement is required in determining provision for income tax, deferred income tax assets and liabilities and recoverability of deferred income tax assets. The recoverability of deferred income tax assets is based on estimates of taxable income and the period over which deferred income tax assets will be recovered. Any changes in future taxable income would impact the recoverability of deferred tax assets.
As on 31st March 2017, tax liability with respect to the dividends proposed before the financial statements approved for issue, but not recognised as a liability in the financial statements is Rs.689.5 million (31.03.2016 - Rs.688.0 million, 01.04.2015 - Rs.686.3 million).
12. The aggregate amount of revenue expenditure incurred during the year on Research and Development and shown in the respective heads of account is Rs.16116.8 million (previous year Rs.11020.3 million).
13. The aggregate amount of cash expenditure incurred during the year on Corporate Social Responsibility (CSR) is Rs.196.8 million (previous year Rs.205.1 million) and is shown separately under note 33 based on Guidance Note on Accounting for Expenditure on CSR Activities issued by the ICAI.
The amount required to be spent by the Company during the year is Rs.662.5 million. No amount was spent during the year towards construction/acquisition of any asset relating to CSR expenditure.
14. The information regarding Micro Enterprises and Small Enterprises has been determined to the extent such parties have been identified on the basis of information available with the Company.
15. As per best estimate of the management, provision has been made towards probable return of goods from customers, as per Indian Accounting Standard (Ind AS) 37.
16. The details of Specified Bank Notes (SBN) held and transacted during the period from 8th November 2016 to 30th December 2016 is provided in the table below (refer note 10):
17. Financial Instruments:
Financial instruments - Fair values and risk management:
A. Accounting classification and fair values:
Carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy, are presented below. It does not include the fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.
Fair value hierarchy
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices).
Level 3 - Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).
* These are for operation purposes and the Company expects its refund on exit. The Company estimates that the fair value of these investments are not materially different as compared to its cost.
B. Measurement of fair values:
Valuation techniques and significant unobservable inputs:
The following tables show the valuation techniques used in measuring Level 2 and Level 3 fair values, for financial instruments measured at fair value in the statement of financial position, as well as the significant unobservable inputs used:
C. Financial risk management:
The Company has exposure to the following risks arising from financial instruments:
- Credit risk;
- Liquidity risk; and
- Market risk
The Company’s board of directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The board of directors has established the Risk Management Committee, which is responsible for developing and monitoring the Company’s risk management policies. The committee reports to the board of directors on its activities.
The Company’s risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed periodically to reflect changes in market conditions and the Company’s activities. The Company, through its training, standards and procedures, aims to maintain a disciplined and constructive control environment in which all employees understand their roles and obligations.
The audit committee oversees how management monitors compliance with the company’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Company. The audit committee is assisted in its oversight role by internal audit. Internal audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the audit committee.
i. Credit risk:
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from customers and investment securities. Credit risk is managed through credit approvals, establishing credit limits and continuously monitoring the creditworthiness of customers to which the Company grants credit terms in the normal course of business. The Company establishes an allowance for doubtful debts and impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments.
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the customer, including the default risk of the industry and country in which the customer operates, also has an influence on credit risk assessment. Credit risk is managed through credit approvals, establishing credit limits and continuously monitoring the creditworthiness of customers to which the Company grants credit terms in the normal course of business.
As at year end, the carrying amount of the Company’s largest customer (a Subsidiary based in North America) was Rs.29436.2 million (31.03.2016 - Rs.34915.6 million, 01.04.2015 - Rs.16406.9 million)
Expected credit loss assessment
The Company allocates each exposure to a credit risk grade based on a variety of data that is determined to be predictive of the risk of loss (e.g. timeliness of payments, available press information etc.) and applying experienced credit judgement.
Exposures to customers outstanding at the end of each reporting period are reviewed by the Company to determine incurred and expected credit losses. Historical trends of impairment of trade receivables do not reflect any significant credit losses. Given that the macroeconomic indicators affecting customers of the Company have not undergone any substantial change, the Company expects the historical trend of minimal credit losses to continue.
The impairment loss at March 31, 2017 related to several customers that have defaulted on their payments to the Company and are not expected to be able to pay their outstanding balances, mainly due to economic circumstances.
Cash and cash equivalents
As at the year end, the Company held cash and cash equivalents of Rs.1580.1 (31.03.2016 - Rs.184.9 million, 01.04.2015 - Rs.573.0 million). The cash and cash equivalents are held with bank and financial institution counterparties with good credit rating.
Other Bank Balances
Other bank balances are held with bank and financial institution counterparties with good credit rating. Derivatives
The derivatives are entered into with bank and financial institution counterparties with good credit rating. Investment in mutual funds
The Company limits its exposure to credit risk by generally investing in liquid securities and only with counterparties that have a good credit rating. The Company does not expect any losses from non-performance by these counter-parties.
Other financial assets
Other financial assets are neither past due nor impaired.
ii. Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.
The Company has obtained fund and non-fund based working capital lines from various banks. The Company invests its surplus funds in bank fixed deposit and liquid and liquid plus schemes of mutual funds, which carry no/low mark to market risks. The Company monitors funding options available in the debt and capital markets with a view to maintaining financial flexibility.
Exposure to liquidity risk
The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include estimated interest payments and exclude the impact of netting agreements.
iii. Market risk
Market risk is the risk that changes in market prices - such as foreign exchange rates, interest rates and equity prices - will affect the Company’s income or the value of its holdings of financial instruments. Market risk is attributable to all market risk sensitive financial instruments including foreign currency receivables and payables and long term debt. We are exposed to market risk primarily related to foreign exchange rate risk. Thus, our exposure to market risk is a function of revenue generating and operating activities in foreign currency. The objective of market risk management is to avoid excessive exposure in our foreign currency revenues and costs. The Company uses derivative to manage market risk. Generally, the Company seeks to apply hedge accounting to manage volatility in profit or loss.
The Company is exposed to currency risk on account of its operations in other countries. The functional currency of the Company is Indian Rupee. The exchange rate between the Indian rupee and foreign currencies has changed substantially in recent periods and may continue to fluctuate substantially in the future. Consequently, the Company uses both derivative instruments, i.e, foreign exchange forward contracts to mitigate the risk of changes in foreign currency exchange rates in respect of its highly probable forecasted transactions and recognized assets and liabilities.
The company enters into foreign currency forward contracts which are not intended for trading or speculative purposes but for hedge purposes to establish the amount of reporting currency required or available at the settlement date of certain payables/receivables.
The company also enters into derivative contracts in order to hedge and manage its foreign currency exposures towards future export earnings. Such derivatives contracts are entered into by the company for hedging purposes only, and are accordingly classified as cash flow hedge.
In addition to the above, the Company has entered into foreign currency forward contract (buy) aggregating USD 66.0 million (with cross currency INR) (31.03.2016 - Rs.nil, 01.04.2015 - Rs.nil) for purposes other than hedging.
A reasonably possible strengthening (weakening) of the Indian Rupee against US dollars at March 31 would have affected the measurement of financial instruments denominated in US dollars and affected equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases.
Interest rate risk
Interest rate risk can be either fair value interest rate risk or cash flow interest rate risk. Fair value interest rate risk is the risk of changes in fair values of fixed interest bearing financial assets or borrowings because of fluctuations in the interest rates, if such assets/borrowings are measured at fair value through profit or loss. Cash flow interest rate risk is the risk that the future cash flows of floating interest bearing borrowings will fluctuate because of fluctuations in the interest rates.
Fair value sensitivity analysis for fixed-rate instruments
The Company does not account for any fixed-rate borrowings at fair value through profit or loss Therefore, a change in interest rates at the reporting date would not affect profit or loss.
Cash flow sensitivity analysis for variable-rate instruments
A reasonably possible change of 100 basis points in interest rates at the reporting date would have increased (decreased) profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency exchange rates, remain constant.
The risk estimates provided assume a change of 100 basis points interest rate for the interest rate benchmark as applicable to the borrowings summarised above. This calculation also assumes that the change occurs at the balance sheet date and has been calculated based on risk exposures outstanding as at that date. The period end balances are not necessarily representative of the average debt outstanding during the period.
Commodity rate risk
The Company’s operating activities involve purchase and sale of Active Pharmaceutical Ingredients (API), whose prices are exposed to the risk of fluctuation over short periods of time. Commodity price risk exposure is evaluated and managed through procurment and other related operating policies. As of March 31, 2017, March 31, 2016 and April 1, 2015 the Company had not entered into any material derivative contracts to hedge exposure to fluctuations in commodity prices.
18. Capital Management:
The Company’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management monitors the return on capital as well as the level of dividends to ordinary shareholders.
The board of directors seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position.
The Company monitors capital using a ratio of ‘adjusted net debt’ to ‘total equity’. For this purpose, adjusted net debt is defined as total liabilities, comprising interest-bearing loans and borrowings, less cash and cash equivalents, other bank bank balances and current investments.
19. Hedge accounting:
The Company’s risk management policy is to hedge above 15% of its estimated net foreign currency exposure in respect of highly probable forecast sales over the following 12-18 months at any point in time. The Company uses forward exchange contracts to hedge its currency risk. Such contracts are generally designated as cash flow hedges.
The forward exchange forward contracts are denominated in the same currency as the highly probable forecast sales, therefore the hedge ratio is 1:1. Most of these contracts have a maturity of 12-18 months from the reporting date. The Company’s policy is for the critical terms of the forward exchange contracts to align with the hedged item.
The Company determines the existence of an economic relationship between the hedging instrument and hedged item based on the currency, amount and timing of their respective cash flows. The Company assesses whether the derivative designated in each hedging relationship is expected to be and has been effective in offsetting changes in the cash flows of the hedged item using the hypothetical derivative method.
In these hedge relationships, changes in timing of the hedged transactions is the main source of hedge ineffectiveness.
(i) Trade receivables and payables
The Company has certain customers which are also supplying materials. Under the terms of agreement, the amounts payable by the Company are offset against receivables and only net amounts are settled.
The Company enters into derivative contracts for hedging future sales. In general, under such agreements, the amounts owed by each counterparty on a single day in respect of all the transactions outstanding in the same currency are aggregated into a single net amount that is payable by one party to the other.
* During the year, the Company has entered into foreign currency forward contracts (buy) for purposes other than hedging.
20. Related Party Disclosures, as required by Indian Accounting Standard 24 (Ind AS 24) are given below: A. Relationships -
Category I: Subsidiaries:
Lupin Pharmaceuticals, Inc., USA
Kyowa Pharmaceutical Industry Co., Limited, Japan
Lupin Australia Pty Limited, Australia
Lupin Holdings B.V., Netherlands
Pharma Dynamics (Proprietary) Limited, South Africa
Hormosan Pharma GmbH, Germany
Multicare Pharmaceuticals Philippines Inc., Philippines
Lupin Atlantis Holdings SA, Switzerland
Lupin (Europe) Limited, UK
Lupin Pharma Canada Limited, Canada
Lupin Mexico S.A. de C.V., Mexico
Generic Health Pty Limited, Australia
Bellwether Pharma Pty Limited, Australia
Lupin Philippines Inc., Philippines
Lupin Healthcare Limited, India
Generic Health SDN. BHD., Malaysia
Kyowa CritiCare Co., Limited, Japan
Lupin Middle East FZ-LLC, UAE
Lupin GmbH, Switzerland
Lupin Inc., USA
Lupin Farmaceutica do Brasil LTDA, Brazil (upto December 31, 2015)
Medquimica Industria Farmaceutica LTDA, Brazil Nanomi B.V., Netherlands Laboratorios Grin S.A. de C.V., Mexico Lupin Pharma LLC, Russia (from February 11, 2016)
VGS Holdings, Inc., USA (from March 8, 2016 and upto February 24, 2017)
Novel Laboratories, Inc., USA (from March 8, 2016)
Novel Clinical Research (India) Private Limited., India (from March 8, 2016)
Gavis Pharmaceuticals, LLC., USA (from March 8, 2016)
Edison Therapeutics, LLC, USA (from March 8, 2016 and upto February 24, 2017)
Lupin Research Inc., USA (from March 8, 2016)
Lupin Ukraine LLC, Ukraine (w.e.f. July 6, 2016)
Lupin Latam, Inc., USA (w.e.f. December 15, 2016)
Lupin Japan & Asia Pacific K.K., Japan (w.e.f. March 13, 2017)
Category II: Jointly Controlled Entity:
YL Biologics Ltd., Japan
Category III: Key Management Personnel (KMP)
Dr. D. B. Gupta Chairman
Dr. Kamal K. Sharma Vice Chairman
Ms. Vinita Gupta Chief Executive Officer
Mr. Nilesh Gupta Managing Director
Mrs. M. D. Gupta Executive Director
Mr. Ramesh Swaminathan Chief Financial Officer and Executive Director
Mr. R.V. Satam Company Secretary
Dr. Vijay Kelkar
Mr. R. A. Shah
Mr. Richard Zahn
Dr. K. U. Mada
Mr. Dileep C. Choksi
Mr. Jean-Luc Belingard
Category IV: Others (Relatives of KMP and Entities in which the KMP and Relatives of KMP have control or significant influence)
Mrs. Kavita Sabharwal (Daughter of Chairman)
Dr. Anuja Gupta (Daughter of Chairman)
Dr. Richa Gupta (Daughter of Chairman)
Mrs. Pushpa Khandelwal (Sister of Chairman)
Mrs. Shefali Nath Gupta (Wife of Managing Director)
Ms. Veda Nilesh Gupta (Daughter of Managing Director)
BS Merc Private Limited (formerly Bharat Steel Fabrication and Engineering Works)
D. B. Gupta (HUF)
Lupin Human Welfare and Research Foundation Lupin Foundation
Lupin International Pvt. Limited (upto September 21, 2016)
Lupin Investments Pvt. Limited Lupin Holdings Pvt. Limited Matashree Gomati Devi Jana Seva Nidhi Polynova Industries Limited Rahas Investments Pvt. Limited
Synchem Investments Pvt. Limited (upto September 21, 2016)
Visiomed Investments Pvt. Limited Zyma Laboratories Limited Concept Pharmaceuticals Limited Shuban Prints
TeamLease Services Limited
Terms and conditions of transactions with related parties:
The sales to and purchases from related parties are made on terms equivalent to those that prevail in arm’s length transactions. Outstanding balances at the year-end are unsecured and interest free and settlement occurs in cash. For the year ended 31 March 2017, the Group has not recorded any impairment of receivables relating to amounts owed by related parties (31.03.2016 - Rs.nil, 01.04.2015 - Rs.nil). This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.
21. First time adoption of Ind AS:
Transition to Ind AS:
For the purposes of reporting as set out in Note 1B(a), the Company has transitioned basis of accounting from Indian generally accepted accounting principles (“IGAAP”) to Ind AS. The accounting policies set out in note 1B have been applied in preparing the financial statements for the year ended 31 March 2017, the comparative information presented in these financial statements for the year ended 31 March 2016 and in the preparation of an opening Ind AS balance sheet at 1 April 2015 (the “transition date”).
In preparing opening Ind AS balance sheet, the Company has adjusted amounts reported in financial statements prepared in accordance with IGAAP. On transition, the Company did not revise estimates previously made under IGAAP except where required by Ind AS.
C. Reconciliation of Statement of Cash Flows
There were no material differences between the Statement of Cash Flows presented under Ind AS and under IGAAP.
Notes to the reconciliation:
1. Proposed dividend
Under previous GAAP, proposed dividends are recognised as a liability in the period to which they relate, irrespective of when they are declared. Under Ind AS, a proposed dividend is recognised as a liability in the period in which it is declared by the Company (usually when approved by shareholders in a general meeting) or paid.
In the case of the Company, the declaration of dividend has occurred after period end. Therefore, the liability recorded for this dividend and tax thereon, has been derecognised against retained earnings.
2. Revenue Recognition - Measurement of Revenue, Linked arrangements
Under Ind AS, revenue is required to be measured at the fair value of consideration received or receivable. Further, under Ind AS, rebates and cash discounts expected to be offered in subsequent periods are required to be factored in and a corresponding reduction from revenue is considered.
The Company enters into out licensing products for the purpose of selling its products in various markets. Ind AS requires an evaluation of separate standalone value of a deliverable while determining the timing and subsequently measuring revenue. In view of this requirement, revenue in relation to dossier arrangements have been re-allocated and consequent impact on timing of revenue recognition has been considered.
3. Trade and other Receivables
Under previous GAAP, the Company has created provision for impairment of receivables only in respect of specific amount for incurred losses. Under Ind AS, impairment allowance has been determined based on Expected Credit Loss (ECL) model.
4. Stock Appreciation Rights (SARs) Liability
Under previous GAAP, expenses in relation to SARs were measured with reference to intrinsic value and the corresponding sum was reflected as part of the reserves. Under Ind AS, the expense in relation to the SARs are required to be measured at fair value and to be presented as a liability.
Further, under Ind AS, the Company has elected to treat the Trust (set up to administer the SARs) as a branch. Consequently, the equity shares of the Company held by the Trust have been presented as Treasury Stock and reduced from the equity.
5. ESOP Cost
Under previous GAAP, the Company recognised only the intrinsic value for the ESOP plan as an expense. Ind AS requires the fair value of the share options to be determined using an appropriate pricing model recognised over the vesting period. An additional expense of Rs.354.9 million (net of Rs.124.4 million cross charged to subsidiaries) has been recognised in profit or loss for the year ended March 31, 2016.
6. Fair valuation of Mutual Funds Investments
Under previous GAAP, Mutual Funds Investments were carried at cost and only mark to market losses were recognised in Statement of Profit and Loss. Under Ind AS, Mutual Funds Investments are fair valued at the period end and resulting mark to market loss or gain is transferred to Statement of Profit and Loss.
7. Effective portion of Losses on hedging instruments transferred to Cash Flow Hedge
The fair value of forward foreign exchange contracts is recognised under both previous GAAP and Ind AS. Under previous GAAP, effective portion of Losses on hedging instruments is transferred to Cash Flow Hedge Reserve, and was not part of net profit reported under previous GAAP. Under Ind AS, said amount is disclosed as a part of Other Comprehensive Income.
8. Fair valuation of non-current security deposits
Under previous GAAP, security deposits are carried at their book values. Under Ind AS, non-cancellable deposits (other than statutory in nature) are required to be measured at their fair values at inception using an appropriate discounting rate.
9. Reversal of straight lining of lease rent
Lease rentals straight-lined under previous GAAP, to the extent linked to inflation are reversed under Ind AS 17.
22. Excise duty (Refer note 33) includes Rs.165.8 million (previous year Rs.74.2 million) being net impact of the excise duty provision on opening and closing stock.
23. No borrowing cost has been capitalised during the year.
24. The Company has a process whereby periodically all long term contracts (including derivative contracts) are assessed for material foreseeable loss. At the year end, the Company has reviewed and ensured that adequate provision as required under any law/accounting standard for material foreseeable losses on such long term contracts (including derivative contracts) has been made in the books of accounts.