2.13 Provision, Contingent Liabilities and Contingent Assets:
A provision is recognised if as a result of a past event, the Company has a present obligation (legal or constructive) that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are recognised at the best estimate of the expenditure required to settle the present obligation at the balance sheet date. If the effect of time value of money is material, provisions are discounted using a current pretax rate that reflects, when appropriate, the risks specific to the liability.
A contingent liability exists when there is a possible but not probable obligation or a present obligation that may, but probably will not, require an outflow of resources,whose existence will be confirmed by the occurrence or nonoccurrence of one or more uncertain future events beyond the control of the Company, or a present obligation whose amount can not be estimated reliably. Contingent liabilities do not warrant provisions but are disclosed unless the possibility of outflow of resources is remote. Contingent
assets are neither recognised nor disclosed in the financial statements. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
Provisions, contingent liabilities and contingent assets are reviewed at each Balance Sheet date.
2.14 Earnings per share ('EPS'):
Basic EPS is calculated by dividing the profit(or loss) attributable to the owners of the Company by the weighted average number of equity shares outstanding during the period. Diluted EPS is computed using the weighted average number of equity and dilutive equity equivalent shares outstanding during the period except where the results would be anti-dilutive.
2.15 Government Grants:
Government grants and subsidies are recognized when there is reasonable assurance that the Company will comply with the conditions attached to them and the grants / subsidy will be received.
Grants related to depreciable assets are treated as deferred income which is recognised in the Statement of profit and loss on a systematic and rational basis over the useful life of the asset. Such allocation to income is usually made over the periods and in the proportions in which depreciation on related assets is charged. Government Grants of revenue nature is reduced from related expenses in the statement of Profit and Loss in the year of its receipt or when there is a reasonable assurance of it being received.
2.16 Cash and cash equivalents:
Cash and cash equivalents for the purpose of statement of cash flows comprise cash at bank including fixed deposits (having original maturity of less than 3 months), cheques in hand and cash in hand.
2.17 Investments in subsidiaries:
Investments in subsidiaries are carried at cost less accumulated impairment losses, if any. Where an indication of impairment exists, the carrying amount of the investment is assessed and written down immediately to its recoverable amount.
2.18 Exceptional items:
When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items is disclosed separately as Exceptional items.
2.19 Segment reporting:
An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the Company's Chief Operating Decision Maker ("CODM") to make decisions for which discrete financial information is available. The Company operates in one reportable business segment i.e. "Pharmaceuticals".
2.20 Recent accounting pronouncements:
Ministry of Corporate Affairs ("MCA") notifies new standards or amendments to the existing standards under Companies (Indian Accounting Standards) Rules as issued from time to time. For the year ended 31 March 2024, MCA has not notified any new standards or amendments to the existing standards applicable to the Company.
2B Key accounting estimates and judgements
The preparation of financial statements in conformity with the Ind AS requires judgements, estimates and assumptions to be made that affect the reported amounts of assets and liabilities on the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the disclosures relating to contingent liabilities as of the date of the financial statements. Although these estimates are based on the management's best knowledge of current events and actions, uncertainty about these assumptions and estimates could result in outcomes different from the estimates. Difference between actual results and estimates are recognised in the period in which the results are known or materialise. Estimates and underlying assumptions are reviewed on an ongoing basis. Any revision to accounting estimates is recognised prospectively in the current and future periods.
Management considers the accounting estimates and assumptions discussed below to be its critical accounting estimates and, accordingly, provide an explanation of each below. The discussion below should also be read in conjunction with the Company's disclosure of material accounting policies which are provided in Note 2A to the standalone financial statements, 'Material accounting policies'.
i) Judgements:
a. The Company uses significant judgement in assessing the lease term (including anticipated renewals) and the applicable discount rate. The Company determines the lease term as the non-cancellable period of a lease, together with both periods covered by an option to extend the lease if the Company is reasonably certain
to exercise that option; and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option. In assessing whether the Company is reasonably certain to exercise an option to extend a lease, or not to exercise an option to terminate a lease, it considers all relevant facts and circumstances that create an economic incentive for the Company to exercise the option to extend the lease, or not to exercise the option to terminate the lease. The Company revises the lease term if there is a change in the non-cancellable period of a lease.
ii) Estimates:
a. Estimate of current and deferred tax:
The Company's tax charge on ordinary activities is the sum of the total current and deferred tax charges. The calculation of the Company's total tax charge necessarily involves a degree of estimation and judgement in respect of certain items whose tax treatment cannot be finally determined until resolution has been reached with the relevant tax authority or, as appropriate, through a formal legal process. The final resolution of some of these items may give rise to material profits/losses and/or cash flows.
The complexity of the Company's structure makes the degree of estimation and judgement more challenging. The resolution of issues is not always within the control of the Company and it is often dependent on the efficiency of the legal processes in the relevant taxing jurisdictions in which the Company operates. Issues can, and often do, take many years to resolve. Payments in respect of tax liabilities for an accounting period result from payments on account and on the final resolution of open items. As a result there can be substantial differences between the tax charge in the Statement of Profit and Loss and tax payments.
The recognition of deferred tax assets is based upon whether it is more likely than not that sufficient and suitable taxable profits will be available in the future against which the reversal of temporary differences can be deducted. To determine the future taxable profits, reference is made to the latest available profit forecasts. Where the temporary differences are related to losses, relevant tax law is considered to determine the availability of the losses to offset against the future taxable profits.
b. Recognition of MAT credit:
The credit availed under MAT is recognised as an asset only when and to the extent there is convincing evidence that the Company will pay normal income tax during the period for which the MAT credit can be carried forward for set off against the normal tax liability. This requires significant management judgement in determining the expected availment of the credit based on business plans and future cash flows of the Company.
c. Estimation of useful life:
The useful life used to amortise or depreciate intangible assets or property, plant and equipment respectively relates to the expected future performance of the assets acquired and management's judgement of the period over which economic benefit will be derived from the asset based on its technical expertise. The charge in respect of periodic depreciation is derived after determining an estimate of an asset's expected useful life and the expected residual value at the end of its life. Increasing an asset's expected life or its residual value would result in a reduced depreciation charge in the Statement of Profit and Loss.
The useful lives and residual values of Company's assets are determined by management at the time the asset is acquired and reviewed annually for appropriateness. The lives are based on historical experience with similar assets as well as anticipation of future events which may impact their life such as changes in technology.
d. Provisions and contingent liabilities:
The Company exercises judgement in measuring and recognising provisions and the exposures to contingent liabilities related to pending litigation or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgement is necessary in assessing the likelihood that a pending claim will succeed, or a liability will arise, and to quantify the possible range of the financial settlement. Due to inherent uncertainty in this evaluation process, actual losses may be different from the originally estimated provision.
e. Impairment loss in investments carried at cost:
The Company conducts impairment reviews of investments in subsidiaries whenever events
or changes in circumstances indicate that their carrying amounts may not be recoverable or tests for impairment annually. Determining whether an asset is impaired requires an estimation of the recoverable amount, which requires the Company to estimate the value in use which is based on future cash flows and a suitable discount rate in order to calculate the present value.
f. Fair value measurements and valuation processes:
When the fair value of financial assets and financial liabilities recorded in the balance sheet cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the Discounted Cash Flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.
g. Defined Benefit Plans:
The cost of the defined benefit gratuity plan and other post-employment benefits and present value of the gratuity obligation are determined using actuarial valuation. An actuarial valuation involves making various assumptions that may differ from actual development in the future. These include the determination of the discount rate, future salary increases, attrition rate and mortality rates. Due to complexities involved in the valuation and its long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.
h. Liabilities towards anticipated sales return:
In determining the provision for anticipated sales returns, estimates for probable saleable and nonsaleable returns of goods from the customers are made on scientific basis after factoring in the historical data of such returns and its trend.
i. Leases:
The discount rate is generally based on the incremental borrowing rate specific to the lease being evaluated or for a portfolio of leases with similar characteristics.
3.36 Financial instruments - Fair values and risk management
A. Accounting classification and fair values
The Company uses the following hierarchic structure of valuation methods to determine and disclose information about the fair value of financial instruments:
Level 1: Observable prices in active markets for identical assets and liabilities;
Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities;
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities
B. Measurement of fair values
The Management assessed that cash and bank balances, trade receivables, trade payables, cash credit and other financial assets
and liabilities approximate their carrying amounts due to short-term maturities of these instruments.
The following methods and assumptions were used to estimate the fair value :
a) Level 1: The fair value of the quoted investments/units of mutual fund scheme are based on market price/net asset value at the reporting date.
b) Level 2: The fair value of financial instruments that are not traded in an active market (i.e. venture capital funds) is determined using valuation techniques which maximize the use of observable market data and rely as little as possible on company specific estimates.
c) Level 3: The fair value of the remaining financial instrument is determined using discounted cash flow analysis. The discount rates used are based on management estimates.
Risk management framework
The Company's Board of Directors have overall responsibility for the establishment and oversight of the Company's risk management framework. The Board of Directors have established a Risk Management Committee, which is responsible for developing and monitoring the Company's risk management policies. The committee reports regularly 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 the limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company's activities. The Company, through its training and management 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.
. 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. The Company is exposed to credit risk from its operating activites (primarily trade receivables) and from its financing/investing activities, including investments in debt securities, deposits with banks, equity securities, venture capital and mutual fund investments. The Company has no significant concentration of credit risk with any counterparty.
The carrying amount of following financial assets represents the maximum credit exposure:
Trade receivables
Trade receivables are consisting of a large number of customers. The Company's exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the factors that may influence the credit risk of its customer base, including the default risk of the industry and country in which customers operate.
The Company has established a credit policy under which each new customer is analysed individually for creditworthiness before the Company's standard payment and delivery terms and conditions are offered. The Company's review includes external ratings, if they are available, and in some cases bank references. Payment terms with customers vary depending upon the contractual terms of each contract. Sale limits are established for each customer and reviewed quarterly.
Loans to subsidiaries
The Company has an exposure of ?3.5 million as at 31 March 2024 (31 March 2023: ?3.3 million) for loans given to subsidiaries. Such loans are classified as financial asset measured at amortised cost.
The Company did not have any amounts that were past due but not impaired at 31 March 2024 or 31 March 2023. The Company has no collateral in respect of these loans.
Investments, Cash and Cash Equivalents and Bank Deposits
Credit risk on cash and cash equivalents, deposits with banks is generally low as the said deposits have been made with the banks who have been assigned high credit rating by international and domestic credit rating agencies.
Investments of surplus funds are made only with approved financial institutions. Investments primarily include investments in subsidiaries, mutual funds, venture capital funds, investment in equity of other companies /LLP, quoted bonds and non-convertible debentures. These mutual funds and counterparties have low credit risk.
Total non-current and current investments as at 31 March 2024 is ?60,248.5 million (31 March 2023: ?52,600.0 million)
Debt securities
The Company has an exposure of ?208.8 million as at 31 March 2024 (31 March 2023: ?1,973.3 million) for debt securities classified as financial asset measured at amortised cost. All the debt securities have been issued by companies registered in India in Indian Rupees.
There has been no allowance for impairment in respect of such debt securities - financial asset measured at amortised cost till 31 March 2024.
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 majority of the Company's trade receivables are due for maturity within 21 - 60 days from the date of billing to the customer. Further, the general credit terms for trade payables are approximately 45 - 60 days. The difference between the above mentioned credit period provides sufficient headroom to meet the short-term working capital needs for day-to-day operations of the Company. Any short-term surplus cash generated, over and above the amount required for working capital management and other operational requirements, are retained as Cash and Investment in short term and long term deposits with banks. The said investments are made in instruments with appropriate maturities and sufficient liquidity.
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. Company is exposed to market risk primarily related to foreign exchange rate risk, interest rate risk and the market value of its investments. Thus, the exposure to market risk is a function of investing and borrowing activities and 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.
Currency risk
The Company is exposed to currency risk on account of its borrowings, other payables, receivables and loans and advances in foreign currency. The functional currency of the Company is Indian Rupee. The Company has exposure to EUR, GBP, USD, AUD, CNY, CAD, KES, JPY, KES, NPR, AED and CHF. The Company has formulated hedging policy for monitoring its foreign currency exposure.
Exposure to currency risk
The currency profile of financial assets and financial liabilities as at 31 March 2024, 31 March 2023 in there respective currencies are as below (absolute values):
3.37 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 Company monitors capital using a ratio of 'net debt' to 'total equity' For this purpose, adjusted net debt is defined as total liabilities, comprising interest-bearing loans and borrowings and obligations under finance leases, less cash and cash equivalents. Adjusted equity comprises all components of equity.
3.40 Government Grant
The Company is eligible for government grants which are conditional upon construction of new factories in the Sikkim region. One of the grants, received in FY 2014-15 amounted to ? 72.4 million with respect to the Kumrek facility. The factory has been constructed and in operation since August 2007. The second grant is with respect to Samardung facility in Sikkim amounting to ?122.1 million for which the Company has received the claim amount in FY 2018-19. The factory has been constructed and in operation since October, 2012. The third grant is with respect to AHS-3 facility in Sikkim amounting to ? 30.6 million for which the Company has received the claim amount in current year. Further, during the current year, Company has received grant amounting to ? 398.7 million with respect to AHS- 2 facility in Sikkim. These grants, recognized as deferred income, are being amortized over the useful life of the plant and machinery in proportion to the related depreciation expense. The unamortised grant as on 31 March 2024 amounts to ?282.7 million (Previous year: ?81.3 million), the breakup of which is as below:
3.43 Exceptional items
a) On January 12, 2024, the Company disclosed about a Cyber security incident occured in November 2023 that compromised business email IDs of certain employees at one of the Company's subsidiaries which resulted in a fraudulent transfer of ? 513.1 Million. The Company employed independent external agencies to investigate the incident. Based on their report, the Company concluded that the impact of the incident did not extend beyond the above mentioned amounts nor did it occur due to any fraudulent act on part of any of the promoters, directors, key managerial personnel or any member of the senior management or any other employee of the Company or it's subsidiary.
The Company has since strengthened its cybersecurity infrastructure and is in the process of implementing improvements to its cyber and data security systems to safeguard against such risks in the future. The Company is also implementing certain long-term measures to augment its security controls systems across the organization. The Company believes that no legal violations have occurred because of this incident, and all known impacts on its standalone financial statements for the year ended 31 March 2024 on account of this incident have been considered. Further, subsequent to this event, the Company has been able to recover an amount of ? 290.4 Million and the net amount of ? 222.7 million has been shown as 'Exception item' in the Statement of Profit and Loss.
b) The Company has considered indicators of impairment of its cash-generating units (CGUs') for factors like decline in operational performance, changes in the outlook of future profitability, and weaker market conditions, among other potential indicators. In respect of one of the manufacturing units located at Indore, where indicators of impairment were identified, the Company identified the recoverable amount of the CGUs, being the higher of the value in use and fair value less costs of disposal, as compared with the carrying value. The value in use is derived from discounted future cash flows uses several assumptions like long term growth rate, discount rate, potential product obsolescence, new product launches and the weighted average cost of capital. The outcome of this exercise as on 31 March 2024 resulted in the Company recognizing an impairment loss of ? 415.6 Million in the financial statements under 'Exceptional Items'
Earnings available for debt service = Net Profit after taxes Non-cash operating expenses like depreciation and other amortizations Interest other adjustments like loss on sale of Fixed assets etc.
Debt service = Interest & Lease Payments Principal Repayments
Net credit sales consist of gross credit sales minus sales return.
Net credit purchases consist of gross credit purchases minus purchase return
Capital Employed = Tangible Net Worth Total Debt Deferred Tax Liability As per our report of even date attached.
For B S R & Co. LLP For and on behalf of the Board of Directors of Alkem Laboratories Limited
Chartered Accountants CIN: L00305MH1973PLC174201
Firm's Registration No. 101248W/W-100022
Sreeja Marar B.N. Singh Sandeep Singh M.K. Singh
Partner Executive Chairman Managing Director Executive Director
Membership No. 111410 DIN. 00760310 DIN. 01277984 DIN. 00881412
Mumbai, India San Francisco, USA Mumbai, India
Dr. Vikas Gupta Nitin Agrawal Manish Narang
Chief Executive Officer President - Finance & President - Legal &
Mumbai, India Chief Financial Officer Company Secretary
Mumbai, India Mumbai, India Mumbai, India
29 May 2024 29 May 2024
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