SMS PHARMA Directors Report

Dear Shareholders,

The Directors have pleasure in presenting before you the 28th Annual
Report of the Company together with Audited Statement of Accounts for
the year ended 31st March, 2016.

A. FINANCIAL SUMMERY: (INR In lakh)

Standalone

Particulars

2015-16 2014-15
(INR in Lakhs) (INR in Lakhs)

Gross Sales 58,246.88 55,764.66

Net Sales 55,607.10 53,604.12

Other Operating Income 4,712.23 4,324.46

Net Revenue from 60,3|9.33 57,928.58

Operations

Other Income 360.80 1,632.00

EBIDTA 9,280.35 10,258.05

Finance Charges 1,709.81 1,793.09

Depreciation 1,943.30 1,716.61

Profit Before Tax 5,627.24 6,748.35

Taxation 1,463.32 3,223.89

Profit After Tax 4,163.92 3,524.46

Balance brought forward 8,369.01 6,073,30
from previous year

Less : Adjustment of - 24.98
depreciation reserve as
per Schedule II of
Companies Act, 201 3

Balance available for 12,532.93 9,572.78

Appropriations.

Appropriations:

Proposed Dividend 169.30 169.30

Dividend Tax 34.47 34.47

General Reserve 1,000.00 1,000.00

Profit carried to Balance

Sheet

Earnings per share 4.92 4.16

- Basic/Diluted

B. STATE OF Company AFFAIR''''S

B.I) In Financial & Production terms

During the year 2015-16 the Company had achieved production of 2,375
M.T of APIs and their Intermediates in comparison with 2,026 M.T of FY
2014-15 and registered a growth of 17.22% The net sales of the Company
has reached to Rs, 55,607.10 lakhs as against Rs,53,604.12 lakhs
registering a growth of 3.74% and the net revenue from operations have
increased by 4.12%. With this EPS has increased to Rs, 4.92 as against
Rs, 4.16 during the year 2014-15. The management believes that the
profitability margins from the operations are sustainable and it will
continue to strengthen its leadership position.

B.2) Awards and Approval

Your Company had won first "India Pharma Award, 2015" in the following
two categories:

1. INDIA PHARMA BULK DRUG Company OF THE YEAR AWARD.

2. INDIA PHARMA BULK DRUG EXPORT Company OF THE YEAR AWARD.

During the year under review, the facility located at kandivalasa has
completed USFDA Inspection and there were no observations in this
regard. Apart from this our facility at bachupally, also had the USFDA
approval.

B.3) Subsidiaries and Associates:

Your Company is having one associate Company. The said associate
Company viz. "VKT Pharma Private Limited" is under the same management.
Your Company is holding 34.33% equity shares in the said associate
Company and the share of loss for your Company for financial year
2015-16 was Rs, 74,71,033/-. SMS Life sciences India Limited has become
the wholly owned subsidiary of your Company during the Financial Year
2016-17.

The consolidated financial statements had been prepared as per
Accounting Standard (AS) 23 - "Accounting for Investment in Associates
in Consolidated Financial Statements" specified under Section 133 of
Companies Act, 201 3 for considering the financials of Associate
Company. The required form, as per the provisions of the Sec. 129(3)
read with rule 5 of Companies (Accounts) Rules, 2014 viz. AOC-1'''' is
form part of this report as Annexure -'''' I''''

B.4) Change in Nature of Business

There is no change in Nature of Business. A detailed report on the same
viz. ''''Management Analysis and Discussion Report'''' is form part of this
report as Annexure - ''''2''''

B.5) Share Capital

During the year under review the Company had neither issued fresh
equity/sweat equity shares nor any debentures, Employees Stock Option
Scheme or any share based employee benefits. The Company had sub
divided the face value of share of Rs, 10/- each into face value of Rs,
I/- of each with record date of 18th December, 2015. A report on the
same viz. ''''Equity Buildup Report'''' is form part of this report as
Annexure - ''''3''''

C. TRANSFER TO RESERVES:

Your Company has transferred an amount Rs, 1,000 Lakhs (previous year
Rs, 1000 Lakhs) to General Reserve out of the amount available for
appropriations.

D. DIVIDEND:

Your Directors have pleasure in recommending the dividend of Rs, 0.20/-
(i.e. 20%) per equity share of Rs, I/-face value, aggregating toRs,
1,69,30,406/-which shall be paid within 30 days after the conclusion of
the Annual General meeting, subject to the approval of the shareholders
of the Company. The total cash outflow on account of dividend including
dividend distribution tax is Rs, 203.77 lakhs.

E. PROPOSAL FOR DE-MERGER OF SEMI REGULATED UNITS:

The Board has approved the "Draft Scheme of Arrangement for Demerger of
Semi Regulated Units (Unit - I, IV & V) along with other Assets to
transfer the same to SMS Life sciences India Limited (Resulting
Company), with an object to reduce the impact of Semi Regulated Units
on Regulated Units, achieving operational efficiencies, site synergies
and streamlining its current structure. The Draft Scheme of Arrangement
is subject to the Approvals of Stock Exchanges, Securities Board of
India Limited, Reserve

Bank of India and other regulatory authorities and also Hon''''ble High
Court of Judicature at Hyderabad for the State of Telangana and Andhra
Pradesh.

E DIRECTORS'''' RESPONSIBILITY STATEMENT:

Pursuant to the provisions of Section I 34(3)(c) of the Companies Act,
2013 as amended, the Board of Directors confirm that:

1. In preparation of the Financial Statements for the year ended 31st
March, 2016 the applicable accounting standards had been followed along
with proper explanation relating to material departures, if any.

2. They had selected such accounting policies as notified & modified
by ICAI and applied them consistently and made judgments and estimates
that are reasonable and prudent so as to give a true and fair view of
the state of affairs of the Company at the end of the financial year
and of the profit and loss of the Company for that period;

3. They had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of the
Companies Act, 2013 as amended form time to time for safeguarding the
assets of the Company and for preventing and detecting fraud and other
irregularities;

4. The Annual Accounts had been prepared on going concern basis.

5. The Company has developed an effective mechanism for internal
financial controls, it has been followed by the Company consistently;
such internal financial controls are adequate and operating
effectively.

6. They had devised proper systems to ensure compliance with the
provisions of all applicable laws and that such systems were adequate
and operating effectively.

G. LOANS, GUARANTEES AND INVESTMENTS:

Your Company had made investment in its associate Company viz. M/s. VKT
Pharma Private Limited for its business purpose. During the year under
review,


your Company had acquired 5,1 1,400 equity shares of face value of Rs,
10/- each in the said associate at an average price of Rs, 157.21.
Further, your Company had also made an investment in 1000 equity shares
of Sireen Drugs Private Limited of Rs, 10/- each.

The Particulars of loans/advances given are provided in the Standalone
Financial Statements. Please refer (Note no. 16.1) of the Standalone
Financial Statements.

The Company is maintaining the details of investments made during the
year in Statutory Form MBP - 2. The details of loans / advances given
and investments made during the financial year ended on 31st March,
2016 are furnished as Annexure -''''4''''.

H. RELATED PARTY TRANSACTIONS

All contracts/arrangements/transactions entered by the Company during
the financial year 2015-16 with related parties were in the ordinary
course of business and at an arm''''s length basis and are in compliance
with the provisions of the Companies Act and the SEBI (Listing
Obligation & Disclosure Requirement) Regulation, 2015. There are no
materially significant related party transactions made by the Company
with Promoters, Directors and Key Managerial Personnel etc. which may
have potential conflict with the interest of the Company. All related
party transactions are presented to the Audit Committee and to the
Board on quarterly basis.

A statement of all Related Party Transactions is being presented before
the Audit Committee on Quarterly basis specifying the nature, value and
terms and conditions of the transactions. A Policy on Related Party
Transactions approved by the Board on 14th May, 2016 is uploaded on the
Company''''s website at the web link http://www.smspharma.com/investors/
down loads/policy-on-related-party-transactions. pdf. The particulars
of contracts or arrangements entered into by the Company with related
parties referred to in Section 188(1) are kept by the Company in
Statutory Form AOC-2. Further details required to disclose as per
Accounting Standard-18 (as issued & modified by ICAI) form part of the
notes to the financial statements provided in the annual report. The
required form viz. AOC-2'''' is form part of this report as Annexure -''''5''''

I. STATE OF BOARD AFFAIRS

1.1) Board of Directors and Key Managerial Personnel:

Your Company is maintaining an optimum combination of Independent and
Executive directors in the Board, who have vast experience in pharma
and other relevant fields. During the year under review following
changes occurred in the position of Independent directors:

a) Sri A. R Rao resigned from the Board on 9th October, 2015.

b) The Board had appointed Sri Potluri Venkata Subba Rao (PS. Rao) as
an additional Independent Director on Board w.e.f. 7th November, 2015.

c) Sri K.S. Rao having a long association with the Company had demised
on 29th November, 2015 due to illness.

Further, in accordance with the provisions of Section I52(6)(a) of the
Companies Act, 2013 and revised Articles of Association as approved by
the shareholders at their meeting held on 29th September, 2015. All the
Executive Directors are compulsorily liable to retire by rotation.
Accordingly Sri Ramesh Babu Potluri and Sri TWSN Murthy, whole time
directors, are liable to retire by rotation at the forthcoming/ensuing
Annual General Meeting scheduled on 30th September, 2016 and being
eligible, seeks reappointment. A brief profile of directors and
managers seeking re-appointment are given along with the AGM Notice for
the reference of the shareholders.

The board had been appointed Sri Saurav Roy in place of Sri R Prabhakar
Rao on 4th August, 2015 and designated him as Company Secretary of the
Company pursuant to provisions of Section 203 of the Companies Act,
2013. Sri R Prabhakar Rao resigned from the Company w.e.f. 31st July,
2015. Further the Board has affirmed the Compliance of the Code of
Conduct as applicable on the Directors & Senior Management Personnel.

1.2) Independent Directors:

In accordance with the provisions of the Section 149 (7) of the
Companies Act, 201 3, each independent director had confirmed to the
Company that he/ she meets the criteria of Independence laid down in
the Section 149 (6) of the Companies Act, 201 3 and Regulation 25(1) of
SEBI (Listing Obligations and Disclosure Requirements), Regulations,
2015.

All the independent Directors of the Company have given declarations
under sub-section (6) of Section 149 of the Act, and the same had been
considered and taken on record by the Board.

1.3) Annual Evaluation:

Your Company had conducted a separate Meeting of Independent Directors
on 9th February, 2015 in which they had evaluated the performance of
Executive directors and Non- Executive/Nominee Director''''s. Further, in
the Board Meeting held on 14th May, 2016 the Board had evaluated the
performance of Independent Directors and their contribution in the
Board. The evaluation had been made on specified standards.

1.4) Risk Management Policy

In accordance with the provisions of the Regulation 21 of SEBI (Listing
Obligations and Disclosure Requirements), Regulations, 2015 your
Company is not required to form the separate Risk Management Committee
and accordingly Risk Management Policy is also not applicable to the
Company.

The Company has adequate internal control systems and procedures to
mitigate the financial risk (if any), arise in near future. The Risk
Management procedure will be reviewed by the Audit Committee and the
Board of Directors on a Quarterly basis.

1.5) KMP Appointment and Remuneration Policy

During the year under review your Company had adopted a ''''Nomination and
Remuneration Committee Charter'''' in its Board meeting held on 5th
December, 2015. The Nomination and Remuneration Committee abide by the
said Charter for appointing any Key Managerial Persons (KMP). During
the year under review, the Committee had recommended for appointment of
Company Secretary and one Independent Director. The appointment made by
the Company for the position of Independent Director in compliance with
the relevant provisions of Companies Act, 2013, its allied rules and
other applicable norms of the SEBI.

Appointment of any KMP is made by the Nomination and Remuneration
Committee in com menstruation of the requirement of the position and
experience of the candidate. The Committee has not formulated any
formal policy for appointment of KMP it is more as and when basis.

1.6) Composition and Number of Meetings of the Board and Audit
Committee:

During the year under review the Board of directors met seven times.
The dates on which the Board Meetings were held on 30th May 2015, 8th
August 2015, 9th October 2015, 7th November 2015, 5th December 2015,
Nth February 2016, 30th March

2016. A detailed report on the above mentioned along with reporting
required under Sec. 177(8) and 177(10) of the Companies Act, 2013 and
composition of various committees formed part of the report viz.
''''Corporate Governance Report'''' is form part of this report as Annexure -
''''6 ''''

1.7) Extract of Annual Return:

In accordance with the provisions of the Companies Act, 201 3 and Rule
12 of Companies (Management and Administration) Rules, 2014 the extract
of Annual Return is prepared in prescribed form i.e. ''''Form MGT-9''''. The
said form part of this report as Annexure -''''7''''

j. DEPOSITS

Your Company had not accepted/invited any deposits from the public
during the year under review. As such no amount of principal or
interest was outstanding on the date of the Balance Sheet.

K. CORPORATE SOCIAL RESPONSIBILITY

As per the provisions of Section 135 and Schedule- VII of the Companies
Act, 2013, and Companies (Corporate Social Responsibility Policy)
Rules, 2014 your Company had formulated a Corporate Social
Responsibility Policy (CSR Policy). The said policy contains the scope
of CSR Expenditure and provides guidance for way forward for expending
the same. The composition of CSR committee and other details mentioned
under ''''Corporate Governance Report'''' is form part of this report as
Annexure - ''''6''''

As per the provisions of the Section I 35 of the Act, the average net
profits of the Company during the preceding three years stands as Rs,
923.75 lakhs hence the Company is required to spend a sum of Rs, 18.47
lakhs towards CSR Expenditure in FY 2015-16. The details of it are
mentioned under ''''CSR Expenditure'''' in statutory format is form part of
this report as Annexure-''''8''''.

L. PARTICULARS OF EMPLOYEES:

Disclosures pertaining to remuneration and other details as required
under Section 197 (12) of the Companies Act, 2013 read with Rule 5 (I)
of the Companies (Appointment and Remuneration of Managerial Personnel)
Rules, 2014 is mentioned under ''''Employees Remuneration Report'''' is form
part of this report as Annexure - ''''9''''. None of the employees is
receiving salary of more than Rs, 5 Lakh per month.

M. CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION AND FOREIGN EXCHANGE
EARNINGS AND OUTGO:

The information required under Section 134(3)(m) of the Companies Act,
201 3 read with the applicable Rules is form part of this report as
Annexure- '''' 10''''.

N. AUDITORS:

N. I) Statutory Auditors

The shareholders at their 27th Annual General Meeting (AGM) held on
29-09-2015, approved the reappointment of M/s. Rambabu& Co., Chartered
Accountants (ICAI Firm Registration No. 002976S), as Statutory Auditors
of the Company, to hold the office till the conclusion of the 28th
Annual General Meeting. M/s. Rambabu & Co., Chartered Accountants, are
eligible for reappointment and have confirmed their eligibility under
Section 141 of the Companies Act, 2013, read with Rule 4 of the
Companies (Audit and Auditors) Rules, 2014. They have consented to the
said appointment. They have further confirmed that they are not
disqualified to be appointed as statutory auditor.

The Audit Committee of the Board of Directors recommended the
appointment of M/s. Rambabu & Co., Chartered Accountants, as Statutory
Auditors of the Company from the conclusion of 28th Annual General
Meeting till the conclusion of the 29th Annual General Meeting.

N.2) Secretarial Auditor

Pursuant to Section 204 of the Companies Act, 2013, and the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014,
M/s. SWS & Associates Company Secretaries LLP were appointed to conduct
Secretarial Audit of the Company for the Financial Year ended on 31st
March, 2016. Secretarial Audit Report for the financial year 2015-16 is
form part of this report as Annexure-'''' I I''''

N.3) Cost Auditor

Pursuant to Section 148 of the Companies Act, 2013 read with the
Companies (Audit and Auditors) Rules, 2014, and the Companies (Cost
Records & Audit) Amendment Rules, 2014, the Company maintains Cost
Records Your Board has on the recommendations of the Audit Committee,
appointed Sri K.S.N. Sarma having Registration No.- 102145 and
Membership No.-6875 as Cost Auditor of the Company for the financial
year 2016-1 7. The provisions also require the remuneration of the Cost
Auditor to be approved by the shareholders, as mentioned under AGM
Notice under item no. 12. As a matter of record, the Cost Audit Report
for the year 2014-15 was filed with the Central Government within the
prescribed time limit and for the year 2015-16 will be filed within the
stipulated time.

O. INTERNAL FINANCIAL CONTROL SYSTEMS AND THEIR ADEQUACY:

Your Company has laid down set of standards which enables to implement
internal financial control across the organization and ensure that the
same are adequate and operating effectively (I) To provide reasonable
assurance that: transactions are executed in conformity with generally
accepted accounting principles/standards or any other criteria
applicable to such statements, (2) to maintain accountability for
assets; access to assets is permitted only in accordance with
management''''s general or specific authorization and the maintenance of
the records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the Company, (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the assets that could
have a material effect on the Financial Statements.

P. WHISTEL BLOWER POLICY/VIGIL MECHANISM

The Company has established a mechanism trough which all the
stakeholders can report the suspected frauds and genuine grievances to
the appropriate authority. The whistle Blower Policy which has been
approved by the Board of Directors of the Company has been uploaded on
the Company''''s website of the Company
(http://www.smspharma.com/investors/ downloads/whist
le-blower-protection-policy.pdf). During the year under review the
Company has not received any complaint(s) under this policy.

Q. BOARD''''S RESPONSE ON AUDITORS QUALIFICATION, RESERVATION OR

ADVERSE REMARK OR DISCLAIMER MADE:

There are no qualifications, reservations or adverse remarks made by
the Statutory Auditor, Secretarial Auditor and Cost Auditor in their
report.

R. REPORTING ON SEXUAL HARRASEMENT:

The Company has zero tolerance for sexual harassment at workplace and
has adopted a "Policy on Prevention, Prohibition and Redressal of
Sexual Harassment of Women at Workplace" in line with the provisions of
the Sexual Harassment of Women at Workplace (Prevention, Prohibition
and Redressal) Act, 2013 and the Rules there under for prevention and
redressal of complaints of sexual harassment at workplace.

The Company is committed to providing equal opportunities without
regard to their race, caste, sex, religion, colour, nationality,
disability, etc. All women associates (permanent, temporary,
contractual and trainees) as well as any women visiting the Company''''s
office premises or women service providers are covered under this
policy. All employees are treated with dignity with a view to maintain
a work environment free of sexual harassment whether physical, verbal
or psychological.

During the year under review, the Company has not received any
complaints on sexual harassments. No workshops were carried out
against sexual harassment, but awareness programms were carried out at
each manufacturing unit and corporate office for women employees''''
regarding this policy and the said policy is also displayed on the
website of the Company.

S. DETAILS OF SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE REGULATORS
OR COURTS OR TRIBUNALS IMPACTING THE GOING CONCERN STATUS AND Company''''s
OPERATIONS IN FUTURE:

No significant and material orders passed by the regulators or courts
or tribunals impacting the going concern status and Company''''s
operations in future. Further, No material Changes and commitments
which affecting the financial position of the Company.

Acknowledgements:

Your Directors place on record their sincere appreciation for the
significant contribution made by the employees through their
dedication, hard work and commitments. Your Directors gratefully
acknowledge and appreciate the support extended by the Banks, Financial
Institutions, various government authorities, customers and also
shareholders of the Company, for their continued support and confidence
reposed in the Company.

By the order of the Board

Ramesh Babu Potluri

Chairman and Managing Director

(DIN:00I6638I)


Place: Hyderabad

Date: 10-08-2016

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