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NOTES TO ACCOUNTS

Cadila Healthcare Ltd.

You can view the entire text of Notes to accounts of the company for the latest year
Market Cap. (₹) 24948.61 Cr. P/BV 2.40 Book Value (₹) 101.45
52 Week High/Low (₹) 369/207 FV/ML 1/1 P/E(X) 13.49
Bookclosure 09/08/2019 EPS (₹) 18.06 Div Yield (%) 1.44
Year End :2019-03 

NOTE: 1-COMPANY OVERVIEW:

Cadila Healthcare Limited [“the Company”], a Company limited by shares, incorporated and domiciled in India, operates as an integrated pharmaceutical company with business encompassing the entire value chain in the research, development, production, marketing and distribution of pharmaceutical products. The product portfolio of the Company includes Active Pharmaceutical Ingredients [API], human formulations and animal health & veterinary. The Company’s shares are listed on the National Stock Exchange of India Limited [NSE] and BSE Limited. The registered office of the Company is located at “Zydus Tower”, Satellite Cross Roads, Sarkhej-Gandhinagar Highway, Ahmedabad - 380015.

These financial statements were authorised for issue in accordance with a resolution passed by the Board of Directors at their meeting held on May 29, 2019.Notes:

1 Buildings include Rs. 0.02 [As at March 31, 2018: Rs. 0.02] Million being the value of unquoted shares held in cooperative societies.

2 Additions of Rs. 333 [Previous Year: Rs. 550] Million in research assets during the year are included in “Additions” under the respective heads of Gross Block of Tangible assets as above.

3 Other adjustments include adjustments on account of exchange rate differences.

4 For details of assets pledged as security refer Note 17.

5 Legal titles of some of the immovable properties acquired pursuant to Scheme of Amalgamation of Liva Healthcare Limited, Zydus Animal Health Limited and Zydus Pharmaceuticals Limited with the Company are in the process of being transferred in the name of the Company.

Notes:

a All the above loans have been given for business purposes.

b All the loans are interest bearing except the loan given to Dialforhealth India Limited. c All the above loans are repayable within a period of 2 years.

[*] International Business Development Reserve was created pursuant to Composite Scheme of Amalgamation approved by the Hon’able High Court of Gujarat and its utilization shall be as provided in the scheme.

[**] General Reserve can be used for the purposes and as per guidelines prescribed in the Companies Act, 2013.

[***] The Company had opted for accounting the exchange rate differences arising on the Long Term Foreign Currency Monetary Items [LTFCMI] in accordance with the notification dated March 31, 2009 and amended on December 29, 2011 under the Companies [Accounting Standards] Amendment Rules, 2009 on Accounting Standard 11 relating to “the effects of changes in foreign exchange rates”. Accordingly, the effects of exchange rate differences arising on translation or settlement of long term foreign currency loans availed for funding acquisition of Property, Plant and Equipment have been adjusted to the cost of respective items of Property, Plant and Equipment. In other cases, such exchange rate difference on the LTFCMI is transferred to “Foreign Currency Monetary Items Translation Difference Account” [FCMITDA]. The option of transferring exchange rate differences to FCMITDA is available on LTFCMI outstanding as on March 31, 2016 only. The FCMITDA is amortised during the tenure of the respective LTFCMI but not beyond March 31, 2020.

[#] The Company has elected to recognise changes in the fair value of certain investments in equity securities in other comprehensive income. These changes are accumulated within the FVOCI reserve within equity. The Company transfers amounts from this reserve to retained earnings when the relevant equity securities are derecognised.

A Securities and Terms of Repayment for Secured Long Term Borrowings: a Foreign Currency Loans:

i ECB of USD 20 Million is secured by hypothecation of a specific brand of the Company. The loan is repayable in three equal yearly installments starting from the end of fourth year from the date of its origination [March 20, 2014] along with accrued interest for the period. The outstanding amount of loan as at March 31, 2019 is Rs. 461 [as at March 31, 2018: Rs. 869] Million.

B Terms of Repayment for Unsecured Long Term Borrowings: a Foreign Currency Loans:

i ECB of USD 30 Million is repayable in three yearly installments starting from January 17, 2020 along with interest for the period. The outstanding amount as at March 31, 2019 is Rs. 2,075 [as at March 31, 2018: Rs. 1,956] Million.

ii ECB of USD 20 Million is repayable in three yearly installments starting from March 1, 2020 along with interest for the period. The outstanding amount as at March 31, 2019 is Rs. 1,384 [as at March 31, 2018: Rs. 1,304] Million.

iii ECB of USD 100 Million is repayable in three yearly installments starting from March 27, 2021 along with interest for the period. The outstanding amount as at March 31, 2019 is Rs. 6,918 [as at March 31, 2018: Rs. 6,520] Million.

iv ECB of USD 30 Million is repayable in three yearly installments starting from April 26, 2020 along with interest for the period. The outstanding amount as at March 31, 2019 is Rs. 2,075 [as at March 31, 2018: Rs. 1,956] Million.

v ECB of USD 20 Million is repayable in three yearly installments starting from September 18, 2020 along with interest for the period. The outstanding amount as at March 31, 2019 is Rs. 1,384 [as at March 31, 2018: Rs. 1,304] Million.

vi ECB of USD 20 Million is repayable in three yearly installments starting from September 7, 2021 along with interest for the period. The outstanding amount as at March 31, 2019 is Rs. 1,384 [as at March 31, 2018: ‘ NIL] Million.

vii ECB of USD 30 Million is repayable in three yearly installments starting from January 23, 2022 along with interest for the period. The outstanding amount as at March 31, 2019 is Rs. 2,075 [as at March 31, 2018: ‘ NIL] Million.

b Rupee Loans:

i Loan from Department of Science and Technology is repayable in ten yearly equal installments starting from November 1, 2012. The outstanding amount as at March 31, 2019 is Rs. 31 [as at March 31, 2018: Rs. 41] Million.

ii Biotechnology Industry Research Assistance Council [BIRAC] has sanctioned a loan of Rs.12 Million. Out of the sanctioned amount, BIRAC has disbursed Rs. 4 Million on December 28, 2015 and Rs. 2 Million on November 1, 2017. The loan is repayable in ten equal half-yearly installments starting from August 25, 2019 along with interest accrued thereon. The outstanding amount as at March 31, 2019 is Rs. 6 [as at March 31, 2018: Rs. 6] Million.

Defined benefit plan and long term employment benefit A General description:

Leave wages [Long term employment benefit]:

The leave encashment scheme is administered through Life Insurance Corporation of India’s Employees’ Group Leave Encashment cum Life Assurance [Cash Accumulation] Scheme. The employees of the company are entitled to leave as per the leave policy of the company. The liability on account of accumulated leave as on last day of the accounting year is recognised [net of the fair value of plan assets as at the balance sheet date] at present value of the defined obligation at the balance sheet date based on the actuarial valuation carried out by an independent actuary using projected unit credit method.

Gratuity [Defined benefit plan]:

The Company has a defined benefit gratuity plan. Every employee who has completed continuous services of five years or more gets a gratuity on death or resignation or retirement at 15 days salary [last drawn salary] for each completed year of service. The scheme is funded with an insurance company in the form of a qualifying insurance policy.

The plans typically expose the Company to actuarial risks such as: investment risk, interest rate risk, longevity risk and salary increment risk.

Investment risk:

The present value of the defined benefit plan liability is calculated using a discount rate which is determined by reference to market yields at the end of the reporting period on government bonds.

Interest risk:

A decrease in the bond interest rate will increase the plan liability; however, this will be partially offset by an increase in the return on the plan’s debt investments.

Longevity risk:

The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability.

Salary risk:

The present value of the defined benefit plan liability is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plan’s liability.

The expected contributions for Defined Benefit Plan for the next financial year will be in line with FY 2018-19.

The average duration of the defined benefit plan obligation at the end of the reporting period is 27.23 years [as at March 31, 2018: 27.5 years]

Sensitivity analysis:

A quantitative sensitivity analysis for significant assumptions is shown below:

B The Net Deferred Tax of Rs. 179 Million for the year has been reversed [Previous Year Rs. 881 Million has been charged] in the Statement of Profit and Loss.

C The Company offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority.

Unabsorbed Depreciation is allowed to be set-off for indefinite period. MAT Credit not recognised as at March 31, 2019 is Rs. 4,871 Million.

[*] represents contingent liabilities taken over by the Company under the Scheme of Arrangement and Amalgamation of Cadila Laboratories Limited and erstwhile Cadila Chemicals Limited, Cadila Antibiotics Limited, Cadila Exports Limited and Cadila Veterinary Private Limited with the Company w.e.f. June 1, 1995.

NOTE: 2-DIVIDENDS PROPOSED TO BE DISTRIBUTED:

The Board of Directors, at its meeting held on May 29, 2019, recommended the final dividend of Rs. 3.50 per equity share of Rs. 1/- each. The recommended dividend is subject to the approval of the shareholders at the ensuing Annual General Meeting.

NOTE: 3-SEGMENT INFORMATION:

Segment Information has been given in the Consolidated Financial Statements of the Company. Hence, as per Ind AS-108 “Operating Segments” issued by the Institute of Chartered Accountants of India, no separate disclosure on segment information is given in these financial statements.

NOTE: 4-DETAILS OF LOANS GIVEN, INVESTMENTS MADE AND GUARANTEE GIVEN COVERED U/S 186(4) OF THE COMPANIES ACT, 2013:

A Details of loans and investments are given under the respective heads.

B Corporate guarantees given by the Company [#]:

NOTE: 5-FINANCIAL INSTRUMENTS:

A Fair values hierarchy:

Financial assets and financial liabilities measured at fair value in the statement of financial position are grouped into three Levels of a fair value hierarchy. The three Levels are defined based on the observability of significant inputs to the measurement, as follows:

Level 1: Quoted prices [unadjusted] in active markets for financial instruments.

Level 2 : The fair value of financial instruments that are not traded in an active market is determined using valuation techniques which maximise the use of observable market data relying as little as possible on entity specific estimates.

Level 3 : If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.

Financial Assets:

The carrying amounts of trade receivables, loans and advances to related parties and other financial assets [other than investment in preference shares], cash and cash equivalents are considered to be the approximately equal to the fair values.

Financial Liabilities:

Fair values of loans from banks, other financial liabilities and trade payables are considered to be approximately equal to the carrying values.

Fair values of investment in preference shares were calculated based on cash flows discounted using the applicable adjusted market interest rates.

D Valuation process and technique used to determine fair value:

Specific valuation techniques used to value financial instruments include: a The use of quoted market prices for similar instruments.

b Fair value of Forward Contract value related to investment in a Joint Venture has been determined considering the estimated exercise price and value of the underlying entity. The valuation has been derived using the Present Value technique under Income Approach. The valuation includes significant unobservable inputs like Weighted Average Cost of Capital [WACC], revenue forecast, etc.

Significant unobservable inputs:

Budgeted Sales growth rate : 8% - 10% per annum Weighted Average Cost of Capital : 15.4% per annum

For recurring fair value measurements using significant unobservable inputs [Level 3], the effect of the measurement on profit or loss or other comprehensive income for the period is provided below:

B Risk Management:

The Company’s activities expose it to market risk, liquidity risk and credit risk. This note explains the sources of risk which the entity is exposed to and how the entity manages the risk and the related impact in the financial statements.

The Company’s risk management is done in close co-ordination with the board of directors and focuses on actively securing the Company’s short, medium and long-term cash flows by minimizing the exposure to volatile financial markets. Long-term financial investments are managed to generate lasting returns. The Company does not actively engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Company is exposed are described below:

a Credit risk:

Credit risk arises from the possibility that counter party may not be able to settle its obligations as agreed. The Company is exposed to credit risk from investment in preference shares measured at amortised cost, loans and advances to related parties, trade receivables, bank deposits and other financial assets. The Company periodically assesses the financial reliability of the counter party taking into account the financial condition, current economic trends, analysis of historical bad debts and ageing of accounts receivable. Individual customer limits are set accordingly.

i Investments at Amortised Cost : They are strategic investments in the normal course of business of the company.

ii Bank deposits : The Company maintains its Cash and cash equivalents and Bank deposits with reputed and highly rated banks. Hence, there is no significant credit risk on such deposits.

iii Loans to related parties : They are given for business purposes. The Company reassesses the recoverability of loans periodically. Interest recoveries from these loans are regular and there is no event of defaults.

iv The counter party to the forward contract value related to the Investment in a Joint Venture is the associate entity of co-venturer of one of Joint Ventures. The contract is governed by a shareholder’s agreement which has the needful representations by the counter party. The Company is exposed to insignificant credit risk in relation to the same.

v Trade Receivable: The Company trades with recognized and credit worthy third parties. It is the Company’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an on-going basis with the result that the Company’s exposure to bad debts is not significant.

vi There are no significant credit risks with related parties of the Company. The Company is exposed to credit risk in the event of non-payment by customers. Credit risk concentration with respect to trade receivables is mitigated by the Company’s large customer base. Adequate expected credit losses are recognized as per the assessments. No single third party customer contributes to more than 10% of outstanding accounts receivable [excluding outstanding from subsidiaries] as at March 31, 2019 and March 31, 2018.

The Company has used expected credit loss [ECL] model for assessing the impairment loss. For the purpose, the Company uses a provision matrix to compute the expected credit loss amount. The provision matrix takes into account external and internal risk factors and historical data of credit losses from various customers.

Other than trade receivables, the Company has no significant class of financial assets that is past due but not impaired.

b Liquidity risk:

a Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the availability of funding through an adequate amount of committed credit facilities to meet obligations when due. Due to the nature of the business, the Company maintains flexibility in funding by maintaining availability under committed facilities.

b Management monitors rolling forecasts of the Company’s liquidity position and cash and cash equivalents on the basis of expected cash flows. The Company takes into account the liquidity of the market in which it operates. In addition, the Company’s liquidity management policy involves projecting cash flows in major currencies and considering the level of liquid assets necessary to meet these, monitoring balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans.

Maturities of financial liabilities:

The tables below analyse the Company’s financial liabilities into relevant maturity groupings based on their contractual maturities for all non-derivative financial liabilities. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.

c Foreign currency risk:

The Company is exposed to foreign exchange risk arising from foreign currency transactions, primarily with respect to the US Dollar and Euro. Foreign exchange risk arises from recognised assets and liabilities denominated in a currency that is not the Company’s functional currency. The Company’s operations in foreign currency creates natural foreign currency hedge. This results in insignificant net open foreign currency exposures considering the volumes and operations of the Company.

Foreign currency risk exposure:

Sensitivity:

The sensitivity of profit or loss and equity to changes in the exchange rates arises mainly from foreign currency denominated financial instruments:

Sensitivity impact on profit after tax includes exposures for which the Company has the policy of capitalising exchange differences to reserves - FCMITDA or eligible items of Property, Plant and Equipment [refer note-2 for detailed policy]. The outstanding amount of such foreign currency loans is Rs. 461 [as at March 31, 2018: Rs. 2,630] Million.

d Interest rate risk:

Liabilities:

The Company’s policy is to minimise interest rate cash flow risk exposures on long-term financing. As at March 31, 2019, the Company is exposed to changes in market interest rates through bank borrowings at variable interest rates. The Company’s investments in Fixed Deposits are at fixed interest rates.

Sensitivity *:

Below is the sensitivity of profit or loss and equity changes in interest rates:

e Price risk:

Exposure:

The Company’s exposure to price risk arises from investments in equity and mutual funds held by the Company and classified in the balance sheet as fair value through OCI and at fair value through profit or loss respectively. To manage its price risk arising from investments in equity securities and mutual funds, the Company diversifies its portfolio. Diversification of the portfolio is done in accordance with the limits set by the Company.

C Hedge:

Disclosure of effects of hedge accounting on financial position:

Hedged item - Changes in fair value of trade receivables attributable to changes in foreign exchange rates

Hedging instrument - Changes in fair value of certain foreign currency borrowings attributable to foreign exchange rates

Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument. The Company enters into hedge relationships where the critical terms of the hedging instrument match exactly with the terms of the hedged item, and so a qualitative assessment of effectiveness is performed. If changes in circumstances affect the terms of the hedged item such that the critical terms no longer match exactly with the critical terms of the hedging instrument, the Company uses the dollar offset method to assess effectiveness. There was no hedge ineffectiveness in any of the periods presented above.

NOTE: 6-CAPITAL MANAGEMENT:

The Company’ s capital management objectives are: a to ensure the Company’s ability to continue as a going concern b to provide an adequate return to shareholders c maintain an optimal capital structure to reduce the cost of capital.

Management assesses the Company’s capital requirements in order to maintain an efficient overall financing structure while avoiding excessive leverage. This takes into account the subordination levels of the Company’s various classes of debt. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets.

Loan covenants:

Under the terms of the major borrowing facilities, the Company is required to comply with the following financial covenants, based on consolidated financial information:

- Gross Debt to Equity must be less than 2:1

This is in line with the Company’s covenants as agreed with external Lenders.

NOTE: 7-ASSETS CLASSIFIED AS HELD FOR SALE:

Pursuant to the Share and Loan Purchase Agreement dated April 17, 2018 [“Closing Date”] amongst the Company, Zydus International Private Limited [“ZIPL”], Ireland, Bremer Pharma GmbH [“Bremer”] and Alivira Animal Health Limited [“Alivira”], Ireland , the Company had sold its 100% equity holding and ZIPL had sold and transferred its outstanding loan together with accrued interest in Bremer to Alivira with effect from April 01, 2018 [“Effective Date”].

In accordance with Ind AS 105 “Non-Current Assets held for Sale and Discontinued Operations” and as required under Schedule III of the Companies Act, 2013, the investment in equity shares of Bremer was classified as “Assets held for sale” and disclosed separately for the year ended March 31, 2018 at the lower of its carrying amount and fair value less cost to sell.

NOTE: 8-INVESTMENT IN BAYER ZYDUS PHARMA PRIVATE LIMITED:

Pursuant to the terms of the Joint Venture Agreement [JVA] between the Company and Bayer [South East Asia] Pte. Limited [“Bayer”] dated, January 28, 2011, the Company had sold 12,500,001 equity shares of Bayer Zydus Pharma Private Limited to Bayer on May 2, 2018.

NOTE: 9:

Figures of previous reporting periods have been regrouped/ reclassified to conform to current period’s classification.

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