MANAGEMENT DISCUSSION AND ANALYSIS

a) Industry Structure and Development

The global pharmaceutical market is now estimated to be US $ 1.1 trillion and is expected to grow at a CAGR of about 5% over next few years. A move to value based outcomes in drug research, increased penetration of specialty drugs, greater patient access to medicines and continued rise of emerging markets will be primary drivers behind increase in global medicine spending through 2020.

Thanks to advances in science and technology, the research based pharmaceutical industry is entering an exciting new era in medicine development. The research methods are evolving and the innovative pharmaceutical industry aims to turn fundamental research into innovative treatments that are widely available and accessible to patients.

b) Outlook, Risks and Concerns

The outlook for the pharmaceuticals industry remains positive. The pharma industry growth will be driven mainly by population growth, ageing population and increased healthcare spending in pharmerging countries.

Though in the world pharmaceutical market, India is ranked 3rd in volume terms, it has a negligible 1.4% share by value terms. Branded generics constitute 70% of Indian domestic pharmaceutical market. Indian pharmaceutical market is considered to be highly fragmented and consolidation has become an important feature of this industry. Indian pharma industry is today diversified into various spheres of pharma activities including manufacturing of branded and generics formulations and APIs, Research & Development, clinical research and laboratory testing.

Indian pharmaceuticals exports have significantly increased from US$ 2 billion in 2006 to about US$ 14 billion in 2015. USA with 28% is India's largest pharma export destination followed by European Union. It is estimated that 40% of the generics drugs sold in the USA are manufactured in India. Indian pharmaceuticals manufacturing facilities registered with US FDA at 500 plus is also highest for any country outside USA.

Indian companies are focusing on global generic and API business, R&D activities and contract research and manufacturing alliances. India is also fast emerging as a brferred pharmaceuticals manufacturing location.

Increasing use of pharmaceutical generics in developed markets to reduce healthcare cost will provide attractive growth opportunities to generics manufacturers and thus Indian pharmaceutical industry is poised for an accelerated growth in the coming years.

However, poor public healthcare funding and infrastructure, low per capita consumption of medicines in developing and under developed countries including India, currency fluctuations, regulatory issues, government mandated price controls, inflation and resultant all round increase in input costs are few causes of concern.

During the year under report, there was no change in the nature of Company's business.

c) Financial Performance and Operations Review

During the financial year under report, the Company registered a total income of Rs. 2838.92 crores as against Rs. 3120.40 crores in the brvious year, a degrowth of 9%.

The ongoing US FDA regulatory issues adversely impacted the Company's business. The Company's branded formulations business in the emerging markets also suffered due to significant currency fluctuations.

The Company is in the process of implementing combrhensive remedial measures at all its manufacturing sites to ensure quality and regulatory compliances. These remedial measures included review of all processes and procedures, revamping of training system, recruitment of senior quality personnel as well as automation of quality control laboratories. Your Company is committed in resolving the regulatory challenges faced at the earliest. The Company is also committed to its philosophy of highest quality in manufacturing, operations, systems, integrity and cGMP culture. Your management is confident that implementation of remedial measures will ensure that the Company will regain all its regulatory approvals in due course of time.

During the financial year under report, the Earnings before interest, debrciation and foreign exchange loss amounted to Rs. 347.13 crores as against Rs. 556.27 crores in the brvious financial year. The operations have resulted in a net profit of Rs. 91.45 crores during the financial year under report as against Rs. 256.11 crores in the brvious financial year, a de-growth of 64%. The reduction in the net profit is mainly on account of lower sales due to regulatory issues in North America, lower institutional business and also lower branded formulations business in the emerging markets due to significant currency fluctuations.

d) International Business

The products of the Company are now exported to nearly 120 countries across the globe. During the financial year under report, the international business amounted to Rs. 1428.72 crores as against Rs. 1752.86 crores in the brvious year. Formulation exports of the Company decreased by 26% to Rs. 922.05 crores and exports of APIs and Drug Intermediates decreased by 1% to Rs. 506.67 crores.

Europe

The Company achieved European export sales of Rs. 548.60 crores during the financial year under report as against sales of Rs. 645.02 crores in the brvious year, a de-growth of 15% from this continent.

The Company has developed and submitted 61 generic formulation dossiers for registration in Europe out of which 59 dossiers are registered. The Company has also obtained certificate of suitability (COS) of 44 APIs from European Directorate for Quality Medicines.

Africa

The Company achieved export sales of Rs. 218.92 crores to Africa during the financial year under report as against Rs. 348.99 crores in the brvious year.

The Company exports branded and generic formulations as well as APIs to many African countries. The Company markets branded formulations in countries like Uganda, Ghana, Ivory Coast, Burkina Faso, Sudan, Tanzania, Kenya, Ethiopia and Nigeria through dedicated field force. The Company also supplies generics formulations to South Africa.

The Company is expanding its branded formulations business in this continent through expansion of geographical coverage and increase in the number of branded formulations marketed. The Company is also continuously filing new formulation dossiers for registration in the African countries.

The reduction in sales from this continent is mainly on account of reduced institutional anti-malarial formulations business and lower branded formulations business due to currency fluctuations mainly in the West African markets.

Americas

The Company exports its APIs to USA, Canada, Brazil, Mexico and generic formulations to USA, Canada and branded formulations to Panama, West Indies, Peru and Colombia in this sub-continent.

The Company achieved sales of Rs. 265.26 crores in this continent as against Rs. 304.37 crores in the brvious year. As reported earlier, the US formulations and APIs business was impacted due to US FDA import alert for three of the Company's manufacturing facilities.

The Company has signed agreements with marketing partners for sale / distribution of generic formulations on a profit sharing arrangement in the US market. 42 ANDA applications of generic formulations developed by the Company are filed with US FDA out of which 18 ANDA applications are granted till date. 47 DMFs of the Company are also currently filed with US FDA.

Asia

The Asian business (excluding India) recorded sales of Rs. 203.90 crores as against Rs. 214.34 crores in the brvious year. The Company exports formulations as well as APIs to several Asian countries. In countries like Nepal, Srilanka, Myanmar, Philippines and Vietnam, the Company markets its branded formulations through dedicated field force.

Confederation of Independent States (CIS)

The Company's CIS business recorded sales of Rs. 99.62 crores as against Rs. 153.77 crores in the brvious year. Most of the business is from branded formulation sales in Russia, Ukraine, Kazakhstan and Belarus. The Company's branded formulations are marketed in this continent by its own field force appointed through its non-trading offices.

During the financial year, the Company's business was impacted in the CIS market due to significant currency fluctuations.

Australasia

The Company exports APIs to Australia and formulations to Australia and New Zealand in this sub-continent. The business from this continent was Rs. 92.42 crores during the financial year under report as against Rs. 86.37 crores in the brvious year, a growth of 7%.

The steep debrciation of Australian and New Zealand dollars impacted the business growth of the Company in this market during the financial year under report.

The Company has developed and submitted 67 generic formulation dossiers for registration in this market out of which 57 dossiers are registered.

e) Domestic Formulations Business

The Company's formulations business in India now comprises of 13 marketing divisions focusing on key therapeutic segments.

During the financial year under report, the domestic formulations business recorded a growth of 7% at Rs. 1206.70 crores as against Rs. 1128.73 crores in the brvious year.

The lower growth in the domestic formulations business is mainly on account of reduced anti-malarial formulations business. The Government notification banning marketing of few fixed dose combinations also impacted this business in the month of March, 2016.

f) Active Pharmaceutical Ingredients (APIs) and Intermediates Business

During the financial year under report, the APIs and Intermediates business recorded sales of Rs. 647.33 crores as against Rs. 691.97 crores in the brvious financial year. Nearly 78% of the APIs and Intermediates business is from exports.

The Company exports its APIs across the globe. Most of the international customers of the Company are end user formulations manufacturers including several multinational companies.

Your Company is in the process of commercializing several new APIs for the global market.

g) Intellectual Property Protection

The Company has created intellectual property management group within the Research and Development centers to deal with management and protection of intellectual property. The Company has filed many patent applications till date in India, USA and other countries. These applications relate to novel and innovative manufacturing processes for the manufacture of APIs and pharmaceutical formulations.

h) Manufacturing Facilities

The green field API manufacturing facility of the Company at Village Ranu, Tehsil Padra, District - Vadodara (Gujarat) commenced manufacturing operations during the financial year under report. This manufacturing unit is currently in the process of developing/scaling-up APIs for commercialization.

i) Internal Control Systems and its adequacy

The Company has adequate internal control systems including suitable monitoring procedures commensurate with its size and the nature of the business. The internal control systems provide for all documented policies, guidelines, authorisation and approval procedures. The Company has an internal audit department which carries out audits throughout the year. The statutory auditors while conducting the statutory audit, review and evaluate the internal controls and their observations are discussed with the Audit committee of the Board.

j) Human Resources

The human resource plays a vital role in the growth and success of an organization. The Company has maintained cordial and harmonious relations with employees across various locations.

During the year under review, various training and development workshops were conducted to improve the competency level of employees with an objective to improve the operational performance of individuals. The Company has built a competent team to handle challenging assignments. The Company strives to enhance the technical, work related and general skills of employees through dedicated training programs on a continuous basis.

The Company has 13132 permanent employees as on 31st March, 2016 out of which 6050 employees are engaged in the marketing and distribution activities.

k) Cautionary Statement

Certain statement in the management discussion and analysis may be forward looking within the meaning of applicable securities law and regulations and actual results may differ materially from those exbrssed or implied. Factors that would make differences to Company's operations include competition, price realisation, currency fluctuations, regulatory issues, changes in government policies and regulations, tax regimes, economic development within India and the countries in which the Company conducts business and other incidental factors.