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You can view the entire text of Notes to accounts of the company for the latest year

BSE: 541540ISIN: INE624Z01016INDUSTRY: Pharmaceuticals

BSE   ` 372.45   Open: 385.95   Today's Range 370.15
389.10
-9.75 ( -2.62 %) Prev Close: 382.20 52 Week Range 287.00
507.20
Year End :2018-03 

NOTE NO. 1 BACKGROUND

Solara Active Pharma Sciences Limited, formerly known as SSL Pharma Sciences Limited, (hereinafter referred as “the Company”) is a public limited Company incorporated on February 23, 2017 under the provisions of Companies Act, 2013 with the object of, inter alia, undertaking the business of manufacturing, production, processing, formulating, sale, import, export, merchandising, distributing, trading of and dealing in active pharmaceutical ingredients. The Company has its registered address at 201, Devavrata, Sector 17, Vashi, Navi Mumbai 400 703. Also, refer note 35 on Composite Scheme of Arrangement.

The standalone Ind AS financial statements were approved by the Board of Directors and authorised for issue on May 19, 2018.

Since the Company was incorporated only in February 2017 and that the Company is preparing these financial information for the first time, these financial statements cover the period from inception until March 31, 2018. These financial statements comprise the Standalone Balance sheet of the Company as at March 31, 2018, Standalone Statement of Profit and Loss (including Other Comprehensive Income) and Standalone Cash flow statement for the period February 23, 2017 to March 31, 2018, Standalone statement of changes in equity as at March 31, 2018, and significant accounting policies and other explanatory information (together the “Standalone Ind AS Financial Statements).

(i) Fair value of Investment properties:

The Company obtains independent valuations for its investment properties once in three years. Accordingly, the fair value of the Company’s investment properties as at March 31, 2018 has been arrived at Rs.71.13 Million on the basis of a valuation carried out by independent valuers not related to the Company. The said valuers are registered with the authority which governs the valuers in India and have appropriate qualifications and relevant experience in the valuation of properties in the relevant locations. The inputs used are as follows:

a) Monthly market rent, taking into account the differences in location, and individual factors, such as frontage and size, between the comparables and the property; and

b) Capitalisation rate, taking into account the capitalisation of rental income potential, nature of the property, and prevailing market condition.

The Company has identified Human API business acquired from Sequent as a Cash Generating Units (CGU) and the goodwill has been allocated to this CGU for the purpose of impairment testing. This goodwill is tested for impairment at least on an annual basis or more frequently when there is an indication for impairment. As of March 31, 2018, the Directors of the Company have assessed the goodwill for impairment by determining the “value in use” of the CGU. The “value in use” of the CGU is determined as an aggregate of present value of cash flow projections covering a five year period and the terminal value. The terminal value of cash generating unit is arrived at by extrapolating cash flows of latest forecasted year to perpetuity using a constant long term growth rate of 3% p.a. The cash flows are discounted using a pre tax discount rate of 16.82%.

The growth rates of the cash generating unit have been considered based on the market conditions prevalent.

The management believes that the projections used by the management for determining the “Value in use” of cash generating unit are based on past experience of the business acquired and external sources of information and any reasonable possible change in the key assumptions on which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash generating unit.

The Company uses a provision matrix to determine impairment loss on portfolio of its trade receivable. The provision matrix is based on its historically observed default rates over the expected life of the trade receivable and is adjusted for forward-looking estimates. At every reporting date, the historical observed default rates are updated and changes in forward-looking estimates are analysed.

(ii) Detail of the rights, preferences and restrictions attaching to each class of shares outstanding equity shares of Rs.10/- each:

The Company has only one class of equity shares, having a par value of Rs.10/-. The holder of equity shares is entitled to one vote per share. The Company declares and pays dividends in Indian rupees. In the event of liquidation of the Company, the holders of the equity shares will be entitled to receive any of the remaining assets of the Company, after distribution to all preferential amounts. The distribution will be in proportion to number of equity shares held by the shareholders.

Details of security and terms of repayment for current borrowings:

Working capital loans from banks are secured by first pari passu charge over current assets of the Company and second pari passu charge on movable and immovable fixed assets of the Company.

In relation to the acquisition of the Human API business acquired from Sequent pursuant to the Scheme referred in Note 35, the Company is in the process of quantifying the tax losses that would be available to it for carry forward and setoff in the subsequent periods. As this amount would be determined based on the tax returns filed by the respective companies in November 2018, no deferred tax asset has been recognised in these financial statements on such losses that may be available to the Company. Necessary adjustment will be made in the subsequent period, upon determination of such losses.

Dues to micro and small enterprises have been admitted to the extent such parties have been identified on the basis of information collected by the management. This has been relied upon by the auditors.

The Company is not subject to tax under normal provisions of the Income Tax Act, 1961, for the current period ended March 31, 2018. However, it is liable for Minimum Alternate Tax on its book profits taxable at 21.34%. Accordingly, the Company has made provision towards MAT amounting to Rs.4.17 Million on a book profit of Rs.19.50 Million.

Refer Note 20 for significant components of deferred tax assets and liabilities.

In addition, the Company has also incurred capital expenditure in such facilities of Rs.222.98 Million which has been capitalised under respective heads in the financial statements.

The amount quantified as research and development expenditure (both capital and revenue) is as certified by the management of the Company and relied upon by the auditors.

NOTE NO. 2 COMPOSITE SCHEME OF ARRANGEMENT BETWEEN THE COMPANY, STRIDES SHASUN LIMITED AND SEQUENT SCIENTIFIC LIMITED:

In accordance with the terms of the Composite Scheme of Arrangement (the ‘Scheme’) between the Company, Strides Shasun Limited (“Strides”) and Sequent Scientific Limited (“Sequent”), as approved by the National Company Law Tribunal, the Commodity API business of Strides and the Human API business of Sequent were demerged from respective Companies and transferred into the Company with the appointed date of October I, 2017 (“the appointed date”) for a consideration of equity shares to be issued by the Company to the equity shareholders of Strides and Sequent in the proportion of agreed share entitlement ratio. The effective date of the Scheme is March 31, 2018, the date on which all the requirements under the Companies Act, 2013, to give effect to the Scheme, were completed. Accordingly, the effect has been given in these Standalone Ind AS financial statements from the appointed date of the Scheme - October 1, 2017.

Pursuant to the Scheme, the Company allotted 24,674,267 equity shares to the shareholders of Strides and Sequent in the ratio of 1 equity share of Rs.10/- each of the Company for every 6 shares of Rs.10/- each held by the shareholders of Strides, and 1 equity share of Rs.10/- each of the Company for every 25 shares of Rs.2/each held by the shareholders of Sequent, on April

II, 2018, the effect of which has been given in these financial statements as on the appointed date of the Scheme. Further, in accordance with the terms of the Scheme, the authorised share capital of the Company is increased to Rs.300 Million represented by 30 Million equity shares of Rs.10 each.

As per the requirements of the Scheme, transfer of the above businesses into the Company have been accounted in accordance with the Ind AS notified under Section 133 of the Act, as on the appointed date of the Scheme as under:

a) Transfer of API business of Strides

(I) The Company has recorded the assets and liabilities of the API Business of Strides at their respective book values appearing in the books of Strides as on the appointed date.

(II) The face value of equity shares issued by the Company to the shareholders of Strides has been recorded to the credit of share capital account of the Company. The premium on issue of these equity shares has been recorded, to the credit of securities premium account, to the extent of difference between (i) the book value of the net assets (i.e. book value of assets and liabilities) recorded pursuant to (I) above and (ii) the face value of such shares allotted.

(III) Shares held by Strides in the Company prior to this Scheme has been cancelled and transferred to Capital reserve.

Principal Activity of API business of Strides:

The commodity API business of Strides being demerged into the Company is primarily focused in the therapeutic area of pain management. The commodity API business is carried out through two manufacturing facilities, located at Cuddalore and Pondicherry, which are transferred to the Company, pursuant to the Scheme.

b) Transfer of Human API business of Sequent

(I) Assets and liabilities of the Human API Business of Sequent have been recorded to reflect at their fair values as on the appointed date. The difference between the fair value of equity shares issued to the shareholders of Sequent and the net assets (i.e. fair value of assets and liabilities recorded as mentioned above), is recorded as goodwill.

(II) The face value of equity shares issued by the Company to the shareholders of Sequent has been recorded to the credit of share capital account of the Company. The premium on issue of these equity shares has been recorded to the credit of securities premium account, to the extent of difference between (i) the fair value of such shares so issued and (ii) the face value of such shares allotted.

Details of the fair value of assets and liabilities of the Human API business recorded by the Company as at

October 1, 2017 are as below:

* As on the date of finalisation of these Standalone Ind AS financial statements, the initial accounting for the above business combination has not been finalised in respect of deferred tax asset on brought forward losses from this acquisition as explained in note 20. Any consequential changes due to finalisation of initial accounting will be recognised in the subsequent period upon such finalisation.

Principal Activity of Human API business of Sequent:

The Human API business of Sequent comprises of a portfolio of niche APIs, carried out through three manufacturing facilities, located in Mangalore, (Karnataka), Mysore (Karnataka) and Mahad (Maharashtra) which are transferred to the Company, pursuant to the Scheme.

Upon the Scheme coming into effect, the investments in following entities, held by the respective businesses above, have also been transferred to the Company:

NOTE NO. 3 BUSINESS ACQUISITION:

The company entered into an agreement to acquire a R&D business at Bengaluru from Sovizen Life Sciences Private Limited and the transaction was completed on February 1, 2018.

Assets and liabilities of the R&D business have been recorded to reflect at their fair values as on the transaction closure date (i.e. February 1, 2018). The difference between the consideration paid and the fair value of the net assets acquired (i.e. fair value of assets and liabilities recorded as mentioned above) is recorded as goodwill.

Principal Activity of the R&D business acquired:

The R&D business at Bengaluru is a state-of-art new facility engaged in the development of generic API and is also engaged in the business of providing product development solutions to its clients.

NOTE NO. 4 EMPLOYEE BENEFITS PLANS

Defined contribution plan

The Company makes contributions to provident fund and employee state insurance schemes which are defined contribution plans, for qualifying employees. Under the schemes, the company is required to contribute a specified percentage of the payroll cost to fund the benefits. The company recognised Rs.38.82 Million for provident fund contributions, Rs.2.33 Million for employee state insurance scheme contributions in the Statement of Profit and Loss. The contributions payable to these plans by the Company are at rates specified in the rules of the schemes.

Defined benefit plan

The Company operates a gratuity plan, a defined employee benefit scheme covering qualifying employees. The benefit vests upon completion of five years of continuous service and once vested it is payable to employees on retirement or on termination of employment. In case of death while in service, the gratuity is payable irrespective of vesting.

Composition of the plan assets

The fund is managed by LIC and SBI, the fund manager. The details of composition of plan assets managed by the fund manager is not available with the company. However, the said funds are subject to Market risk (such as interest risk, investment risk, etc.).

The said benefit plan is exposed to actuarial risks such as longevity risk and salary risk.

The current service cost and the net interest expense for the year are included in the ‘Employee benefits expense’ line item in the standalone statement of profit and loss. The remeasurernent of the net defined benefit liability is included in other comprehensive income.

Significant actuarial assumptions for the determination of the defined obligation are discount rate and expected salary increase. The sensitivity analysis below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant.

If the discount rate increases/(decrease) by 1%, the defined benefit obligation would be Rs.313.59 Million (Rs.349.70 Million) as at March 31, 2018

If the expected salary growth increases/(decrease) by 1%, the defined benefit obligation would be Rs.348.71 Million (Rs.314.02 Million) as at March 31, 2018

The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.

Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation liability recognised in the balance sheet.

NOTE NO. 5 OPERATING LEASES

The Company’s significant operating lease arrangements are mainly in respect of its residential and office premises. The cancellable arrangements can be terminated by either party after giving due notice. The lease rent expense recognized during the period amounts to Rs.18.61 Million. The schedule for future minimum lease payments in respect of non-cancellable operating leases is set out below:

NOTE NO. 6 RELATED PARTY INFORMATION

Holding Company

Strides Shasun Limited (Upto September 30, 2017)

Wholly owned subsidiary:

Shasun USA Inc., USA

Other Subsidiaries:

Sequent Pemems Private Limited Chemsynth Laboratories Private Limited

Enterprises owned or significantly influenced by KMP or person holding significant interest in the Company:

Strides Shasun Limited, India (From October 01, 2017)

Devendra Estates LLP, India Devicam LLP

Alivira Animal Health Limited, India Sequent Scientific Limited, India Sterling Pharma Solutions Limited, UK Tenshi Life Sciences Private Limited

Aurore Life Sciences Private Limited

Tenshi Kaizen Private Limited (formerly Higher Pharmatech Private Limited)

Olene Life Sciences Private Limited

GMS Tenshi Holdings Pte Limited

Stelis Biopharma Private Limited

Sovizen Life Sciences Private Limited

Tenshi Active Pharma Sciences Limited

Styrax Pharma Private Limited

Tenshi Life Care Private Limited

Triphase Pharmaceuticals Private Limited

Oncobiologics Inc.

Naari Pharma Private Limited Sequent Research Limited, India Chayadeep Properties Private Limited, India Tenshi Kaizen Inc., USA Tenshi Kaizen USA Inc., USA

NOTE NO. 7 SEGMENT REPORTING

The Company’s operations has only one reportable segment viz Active Pharmaceutical Ingredient (API). Accordingly no separate disclosure of segment information has been made.

8.1 Fair value of financial assets and financial liabilities that are not measured at fair value (but fair value disclosures are required)

Except as detailed in the following table, the Company considers that the carrying amounts of financial assets and financial liabilities recognised in the financial statements at amortized cost will reasonably approximate their fair values.

Financial risk management objectives

The Company’s activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The Company’s primary focus is to foresee the unpredictability of financial markets and seek to minimize potential adverse effects on its financial performance. The primary market risk to the Company is foreign exchange risk. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below:

8.2 Foreign currency risk management

The Company is exposed to foreign exchange risk due to:

- debt availed in foreign currency

- exposure arising from transactions relating to purchases, revenues, expenses, etc., to be settled (within and outside the group) in currencies other than the functional currency of the respective entities

The details of Unhedged foreign currency exposure are as follows:

Foreign currency sensitivity analysis

Financial instruments affected by changes in foreign exchange rates include External Commercial Borrowings (ECBs) and Working capital loans. The Company considers US Dollar and the Euro to be principal currencies which require monitoring and risk mitigation. The Company is exposed to volatility in other currencies including the Great Britain Pounds (GBP) and the Japanese Yen (JPY). The impact on account of 5% appreciation / depreciation in the exchange rate of the above foreign currencies against INR is given below:

The impact on profit has been arrived at by applying the effects of appreciation / deprecation effects of currency on the net position (Assets in foreign currency - Liabilities in foreign currency) in the respective currencies.

The exchange rate considered for the sensitivity analysis is the exchange rate prevalent as at each period end.

The sensitivity analysis might not be representative of inherent foreign exchange risk due to the fact that the foreign exposure at the end of the reporting period might not reflect the exposure during the period.

8.3 Interest rate risk management

Interest rate risk arises from borrowings. Debt issued at variable rates exposes the company to cash flow risk. Debt issued at fixed rate exposes the company to fair value risk.

Interest rate sensitivity analysis

Financial instruments affected by interest rate changes include Secured Long term loans from banks, Secured Long term loans from others and Secured Short term loans from banks. The impact of a 1% change in interest rates on the profit of an annual period will be Rs.33.78 Million assuming the loans at each year end remain constant during the respective years. This computation does not involve a revaluation of the fair value of loans as a consequence of changes in interest rates. The computation also assumes that an increase in interest rates on floating rate liabilities will not necessarily involve an increase in interest rates on floating rate financial assets.

8.4 Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. Credit Risk to the company primarily arises from trade receivables. Credit risk also arises from cash and cash equivalents, financial instruments and deposits with banks and financial institutions and other financial assets.

The Company has adopted a policy of only dealing with creditworthy counterparties as a means of mitigating the risk of financial loss from defaults. The Company has an internal mechanism of determining the credit rating of the customers and setting credit limits. Credit exposure is controlled by counterparty limits that are reviewed and approved by the risk management committee annually. Ongoing credit evaluation is performed on the financial condition of accounts receivable.

The credit risk arising from receivables is subject to currency risk in that the receivables are predominantly denominated in USD, EUR and GBP and any appreciation in the INR will affect the credit risk. Further, the Company is not significantly exposed to geographical distribution risk as the counterparties operate across various countries across the Globe.

The credit risk on financial instruments like forward exchange contracts is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.

8.5 Liquidity risk management

Ultimate responsibility for liquidity risk management rests with the board of directors, which has established an appropriate liquidity risk management framework for the management of the Company’s short-term, medium-term and long-term funding and liquidity management requirements. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual short term and long term cash flows, and by matching the maturity profiles of financial assets and liabilities.

8.1.1 Liquidity analysis for Non-Derivative Liabilities

The following table details the Company’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to pay. The table include both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rate curves at the end of the reporting period. The contractual maturity is based on the earliest date on which the Company may be required to pay.

NOTE NO. 9 CAPITAL MANAGEMENT

The Company manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Company consists of net debt (borrowings as detailed in notes 18 and 23 offset by cash and bank balances) and total equity.

The Company reviews the capital structure on a semi-annual basis to ensure that it is in compliance with the required covenants. The Company has a target gearing ratio of 1:1 determined as the proportion of net debt to total equity. The gearing ratio at March 31, 2018 is 0.76.

The Company is not subject to any externally imposed capital requirements.

Gearing ratio

The gearing ratio at end of the reporting period was as follows.