DIRECTORS' REPORT

Dear Shareholders,

Your Directors have pleasure in presenting before you the 27th Annual Report of the Company together with Audited Statement of Accounts for the year ended 31st March, 2015.

Review of Operations

During the period under review the company has posted very good results. During the year 2014-15 the Company has achieved production of 2,026 M.T. of APIs and their Intermediates as against 1,79I M.T. during the corresponding year and registered a growth of 13%. The net sales of the company has reached to Rs.53,604 Lakhs as against Rs. 48,198 Lakhs during the previous year registering growth of The EBITDA stood at Rs. 10,258 Lakhs for the year 2014-15 compared to Rs. 5,869 Lakhs for the year 2013-14, registering a growth of 75%. The profit after Tax for FY 2014-15 stood at Rs. 3,524 Lakhs, compared to Rs. 2,038 Lakhs for FY 2013-14, registering a growth of 73% With this EPS has increased to Rs. 41.63 as against Rs. 23.06 during the year 2013-14.

The Company has improved its economy of scale by increasing utilization of production facility at Kandivalasa and Bachupally units. The management believes that the profitability margins from the operations are sustainable and it will continue to strengthen its leadership position through dedicated research and introduction of new products.

During the year the company has re-enforced its fundamental strength of FDA compliant facilities by successfully completing the US FDA audits at Kandivalasa and Bachupally facilities.

Apart from the above, we are having PMDA (Japan) approval on accreditation basis for all the four facilities. KFDA (Korea) approval was obtained for Bachupally and Kandivalasa facilities. TGA (Australia) and EUGMP (E.U.) approval was obtained for Bachupally facility. COFEPRIS (Mexico) approval was obtained for Kazipally facility.

During the year the company has filed 9 Drug Master Files and total DMFs filed up to 31.03.2015 are 24.

The management believes that the profitability margins from the operations are sustainable and it will continue to strengthen its leadership position through dedicated research and introduction of new products. The company will continue to strengthen its model and build systems that are sustainable as it continues to scale-up.

Transfer to Reserves:

Your Company has transferred an amount Rs. I,000 Lakhs (previous year Rs. 300 Lakhs) to General Reserve out of the amount available for appropriations.

Dividend:

Your Directors are pleased to recommend the dividend of Rs. 2-00 per equity share of Rs. 10/- each  (Previous year Rs. 2/- per Equity Share).

Subsidiaries, Associates and Joint Ventures:

During the year the Company acquired 12,25,900 equity shares of Rs. 10/- each in M/s. VKT Pharma Private Limited. With this the said company has become an associate company. The project of the said associate company is in final stage and at the verge of completion and operations are yet to be commenced. The Company has not having any subsidiaries. Hence, as per the Notification GSR 723 (E) dated 14th October, 2014 issued by the Ministry of Corporate Affairs, the company need not give consolidated accounts for the year 2014-15. The required form, as per the provisions of Companies (Accounts) Rules, 2014 viz. AOC-I is attached as Annexure -A' to the Board report.

Loans, Guarantees and Investments:

During the year under review your Company had made investment in an associate company for its business purposes. The Company has not given any loans or extended any guaranty to other Company's, firms or other parties covered in the register maintained under section 189 of the companies Act,2013.

In compliance with the provisions of section 186 of the Companies Act, 2013 read with Companies (Meetings of Board and its Powers) Rules, 2014, the details of investments made during the year are given in Annexure-'B'.

Board of Directors and Key Managerial Personnel:

As per the provisions of Section 149 and 152 of the Companies Act, 2013, the shareholders at their 26th Annual General Meeting held on 30th September, 2014, had approved the appointment of all the existing independent directors of the Company for tenure of up to five consecutive years. None of the independent directors are liable to retire by rotation.

In accordance with the provisions of the Section 149 (7) of the Companies Act, 2013, 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, 2013 and Clause 49 of the Listing Agreement.

Further in accordance with the provisions of Section 152 of the Companies Act, 2013, the shareholders also approved the terms of appointment of Sri R amesh Babu Potluri and Sri T V V S N Murthy,whole time directors, making them liable to retire by rotation. Accordingly Sri Ramesh Babu Potluri, Managing Director, retires by rotation at the forthcoming Annual General Meeting scheduled on 29th September, 2015 and being eligible, seeks reappointment.

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

Sri N. Rajendra Prasad has been designated as Chief Financial Officer and Sri P. Prabhakar Rao, has been designated as Company Secretary of the Company pursuant to provisions of Section 203 of the Companies Act, 2013.

Mechanism for Evaluation of Board:

As per provisions of the Companies Act, 2013 and Clause 49 of the Listing Agreement, the evaluation of the performance of the Board and the members of the Board was under taken. The contribution and impact of the individual directors and the Board as a whole were reviewed through a peer evaluation on the following parameters:

A) Criteria  for  evaluation   of   Board   of Directors as a whole.

i. The frequency of meetings;

ii. The length of meetings;

iii. The administration of meeting.

iv. The number of committees and their roles.

v. The flow of information to board members and between board members;

vi. The quality and quantity of information; and

vii. The Disclosure of Information to the stakeholders.

B) Criteria for evaluation of the Individual Directors.

i. Ability to contribute and monitor corporate governance practices;

ii. Ability to contribute by introducing best practices to address top management issues.

iii. Participation in long term strategic planning.

iv. Commitment to the fulfillment of director obligations and fiduciary responsibilities;

v. Guiding strategy;

vi. Monitoring management performance and development;

vii. Statutory compliance & Corporate Governance;

viii. Attendance and contribution at Board/ Committee Meetings;

ix. Independence of judgment, conflict resolution and contribution in the enhancement of the Board's overall effectiveness.

x. Time spent by each of the member; and

xi. Core competencies.

A 360 degree feedback-cum-assessment of individual directors, the Board as a whole and its committees was conducted.

Number of Meetings of the Board of Directors:

The Board of directors met five times during the year. The dates on which the Board Meetings were held

are 30th May, 2014, 12th August, 2014, 26th August, 2014, IIth November, 2014 and 6th February, 2015.

Nomination and Remuneration Committee:

The terms of reference for the committee includes:-

1. Identifying persons who are qualified to become Directors, Key Managerial Persons and who may be appointed in Senior Management in accordance with the criteria laid down and recommend to the Board for their appointment and removal;

2. Carry on the evaluation of every director's performance;

3. Formulation of the criteria for determining qualifications, positive attributes and independence of a director;

4. Recommend to the Board a policy relating to the remuneration of the directors, key managerial personnel and other employees;

5. Formulation of criteria for evaluation of independent directors and the Board;

6. Devising a policy on Board diversity; and

7. Any other matter as the Board may decide from time to time.

Nomination and Remuneration policy:

In accordance to Section I78 (3) of the Companies

Act, 2013, Clause 49 (IV) (B) of the Listing

Agreement   and   on   the   recommendations   of

Nomination and Remuneration Committee, the Board adopted the remuneration policy for the Directors, Key Managerial Personnel (KMPs) and Senior Management. The Objectives of the Policy are as under:

1. To lay down criteria and terms and conditions with regard to identifying persons who are qualified to become Directors (Executive and Non-Executive) and persons who may be appointed in Senior Management and Key Managerial positions and to determine their remuneration.

2. To determine remuneration based on the Company's size and financial position and trends and practices on remuneration prevailing in peer companies.

3. To carry out evaluation of the performance of Directors.

4. To provide them reward linked directly to their effort, performance, dedication and achievement relating to the Company's operations.

5. To retain, motivate and promote talent and to ensure long term sustainability of talented managerial persons and create competitive advantage.

Audit Committee:

The Audit Committee of the Board of Directors consists entirely of Independent Directors. Presently the Committee comprises of Sri K.S. Rao, (Chairman), Sri A.P. Rao and Sri P. Sarath Kumar.

The Board has accepted all the recommendations made by the Audit Committee during the year.

Risk Management Policy:

The Audit Committee had formulated a Risk Management Policy for dealing with different kinds of risks which it faces in day to day operations of the Company. Risk Management Policy of the Company outlines different kinds of risk and risk mitigating measures to be adopted by the Board. The Company has adequate internal control systems and procedures to combat the risk. The Risk Management procedure will be reviewed by the Audit Committee and the Board of Directors on a Quarterly basis at the time of review of Quarterly Financial Results of the Company.

Internal Financial Control Systems and Their Adequacy:

Your company has laid down set of statements which enables to implement internal financial control across the organization and ensure that the same are adequate and operating effectively

1. To prove reasonable assurances 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 records accurately with required details and fairly reflect the transactions and dispositions of the assets of the company; and

3. Provide reasonable assurance regarding prevention or timely detection of frauds and errors and unauthorized acquisition, use or disposition of the assets that could have a material effect on the financial statements.

4. The company ensures the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.

5. The company has a comprehensive budget control system to monitor revenue and expenditure against approved budget on an ongoing basis.

Directors' Responsibility Statement:

Pursuant to the provisions of Section 134 (3) (c) of the Companies Act, 2013 as amended, the Board of Directors confirm that in the preparation of the Financial Statements for the year ended 31st March,2015:

1. The applicable accounting standards have been followed in the preparation of the Annual Accounts.

2. Such Accounting policies as notified by ICAI have been selected and applied consistently and judgments and estimates made when required 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 of the company for that period.

3. Proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safe guarding the assets of the Company and for preventing and detecting fraud and other irregularities.

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

5. Proper internal financial controls were in place and were following by the Company and that the financial controls were adequate and operating effectively.

6. Proper systems have been devised to ensure compliance with the provisions of all the applicable laws and these systems are adequate and operating effectively.

The Board, further confirm that, during the year under review, there were no cases filed pursuant to the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.

Related Party Transactions:

All contracts/arrangements/transactions entered by the Company during the financial year 2014-15 with related parties were in the ordinary course of business and on an arm's length basis and are in compliance with the provisions of the Companies Act and the Listing Agreement. There are no materially significant related party transactions made by the company with Promoters, Directors are Key Managerial Personnel etc. which may have potential conflict with the interest of the Company. However, to have more transparency in related parties' transactions the Board is seeking shareholders' approval for the said transactions.

All related party transactions are presented to the Audit Committee and the Board. Omnibus approval is obtained for the transactions which are foreseeable and repetitive in nature. A statement of all related party transactions is presented before the Audit Committee on quarterly basis pacifying the nature, value and terms and conditions of the transactions The Related Party Transactions Policy as approved by the Board is uploaded on the Company's website at the web link http://www. smspharma.com. In accordance with Section 134 (3) (h) of the Companies Act, 2013, and Rule 8 (2) of the Companies (Accounts ) Rules, 2014, the particulars of contracts or arrangements entered into by the Company with related parties referred to in Section 188 (I) in Form AOC-2 is attached as Annexure-'C'

The details of related party disclosures form part of the notes to the financial statements provided in the annual report.

With regard to the observation made by the Secretarial Auditor for the appointment of Sri P. Vamshi Krishna and Sri T. V. Praveen, the related parties for place of profit at a monthly remuneration in aggregate exceeding two and half Lakhs Rupees.

Your Directors wish to place on record that Sri T.V. Praveen and Sri P. Vamsi Krishna were appointed has officer holding a place under the erstwhile Section 314(IB) of the Companies Act, 1956 at a monthly remuneration of Rs. 3.00 lakh and Rs. I.50 lakh per month respectively and a resolution to this effect was passed by the shareholders in the 25th Annual General Meeting held on 30th September, 2013, subject to the approval Central Government. The approval of the Central Government was obtained vide approval letter No.SRNB86666047/3/2013-CL-VII dated 24th January,2014 for the payment of monthly remuneration of two and half Lakhs Rupees to Sri T. V. Praveen.

Section 188 of the Companies Act, 2013 has come into force with effect from 0I-04-2014 and accordingly, Rule 15 (3) (ii) (b) of Companies (Meetings of Board and its Powers) Rules, 2014 prescribes the prior approval of the Company by an Ordinary Resolution for the appointment of a related parties to any office or place of profit in the Company at a monthly remuneration exceeding two and half Lakhs Rupees. Since the said appointments were approved by the shareholders on 30th September, 2013 and no fresh appointments were made under the Section I88 of the Companies Act, 2013 after its implementation. The total remuneration paid to the related parties was put for ratification of the Members once again at the ensuing Annual General Meeting.

Vigil Mechanism:

The Board of Directors has adopted Whistle Blower Policy. The Whistle Blower Policy aims for conducting the affairs in a fair and transparent manner by adopting highest standards of professionalism, honesty, integrity and ethical behavior. All permanent employees of the Company are covered under the Whistle Blower Policy.

A mechanism has been established for employees to report concerns about unethical behavior, actual or suspected fraud or violation of Code of Conduct and Ethics. It also provides for adequate safeguards against the victimization of employees who avail of the mechanism and allows direct access to the Chairman of the Audit Committee in exceptional cases.

Auditors:

Statutory Auditors

The shareholders at their 26th Annual General Meeting (AGM) held on 30-09-2014, approved the reappointment of M/s. Rambabu & Co., Chartered Accountants, as Statutory Auditors of the Company, to hold the office till the conclusion of the 27th 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 & Auditors) Rules, 2014 and Clause 41(I) (h) of the Listing Agreement.

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 27th Annual General Meeting till the conclusion of the 28th Annual General Meeting.

Secretarial Auditor

Pursuant to Section 204 of the Companies Act, 2013, and the Companies (Appointment and Remuneration  of  Managerial  Personnel)  Rules, 2014, Sri C Sudhir Babu, Practicing Company Secretary (C.P. No.7666) was appointed to conduct Secretarial Audit of the Company for the Financial Year ended on 31st March, 2015. Secretarial Audit Report for the financial year 2014-15 is attached as Annexure-'D' to this Report.

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 as Cost Auditor of the Company for the financial year 2015-16. The provisions also require the remuneration of the Cost Auditor to be approved by the shareholders.

The Cost Audit Report for the year 2013-14 was filed with the Central Government within the prescribed time limit and for the year 2014-15 will be filed within the stipulated time.

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 and Cost Auditor in their report. Reply on one qualification made by secretarial auditor already form part of this report under head "Related Party Transactions".

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.

Corporate Social Responsibility:

The company recognizes that business enterprises are economic organs of society and part of society and draw on social resources for their growth. The company has duty towards society and the communities and neighborhoods in whose vicinity the company operates.

The Company has constituted Corporate Social Responsibility Committee consisting of the Board of Directors Sri Ramesh Babu Potluri (Chairman & Managing Director), Sri K.S. Rao, an Independent Director and Sri P. Sarath Kumar an Independent Director as Chairman and as members of the committee respectively. The Board approved the CSR Policy as recommended by the CSR Committee with various CSR initiatives falling within the purview of Schedule VII of the Act.

The company would undertake CSR initiatives in compliance with schedule VII of the Companies Act, 2013 The CSR Policy may be accessed on the company's website: www.smspharma.com

As per the provisions of the Section 135 of the Act, the average net profit of the company during the preceding three years was negative. In computing the Net Profits in accordance with Sec. 198 of the Companies Act, 2013 for the purpose of CSR as specified under section 135; your company had earned a profit of Rs. 41.75 Lakhs in the financial year

2011-12 and Rs. 3,250.82 lakhs in the financial year 2013-14 and incurred a loss of Rs. 7,230.04 Lakhs in the financial year 2012-13 after adjusting the capital gains from sale of an unit. Hence, the average net profit of the company for preceding three financial years stands negative i.e. Rs. (I,279.16). spending provisions of CSR are not applicable for the year under review. However an amount of Rs. I,80,000/-was spent during the year 2014-15 for providing purified drinking water in a village in whose vicinity the company operates.

Transfer of unpaid and unclaimed amounts to IEPF:

Pursuant to the provisions of Section 125 of the Companies Act, 2013, the declared dividends, which remained unpaid or unclaimed for a period of 7 years, have been transferred by the company to the Investor Education and Protection Fund (IEPF) established by the Central Government pursuant to the Section 125 of the said Act.

Employees Stock Option Schemes:

The Company has not implemented any Stock Option Schemes to the Employees.

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 are attached as Annexure-'E'

Conservation of Energy, Research and Development, Technology Absorption, Foreign Exchange Earnings and Outgo:

The information required under Section 134 (3) (m) of the Companies Act, 2013 read with the Rule 2 of the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988 is enclosed as Annexure- 'F' to this Report.

Research and Development (R & D):

The company is committed to building a sound base for sustained growth in API and key starting Materials business through the development of new products, innovative technology, process improvement, cost optimization and strengthening the compliance standards leveraging our collective R&D experience resulting enhancement in value of all stakeholders.

The company's R&D delivers on both fronts of profitability and growth giving us a head start in the competitive industry, developing cost effective process for new genetic APIs, meticulously documenting and testing new and improved processes to manufacture quality drug substances and drug intermediates.

The company continues to make fairly significant investments for generic-related pharmaceutical research and technology. This research supports generic business across all the markets and ensures to have a healthy pipeline for future growth. Strong new product capability is key part of strategy of the R&D.

The Department of Scientific and Industrial Research, Ministry of Science and Technology of Government of India has granted approval to the in house research and development facility of Company under the provisions of the Income Tax Act, 196I.

Fixed Deposits:

Your Company has 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.

Contribution to the ex-chequer:

Your Company has contributed X 4,077.25 Lakhs to the ex-chequer (Previous year X 2,306.28 Lakhs) by way of taxes.

Extract of Annual Return:

The Extract of Annual Return is prepared in Form MGT-9 as per the provisions of the Companies Act, 2013 and Rule 12 of Companies (Management and Administration) Rules, 2014 and the same is enclosed as Annexure-'G' to this Report.

Management's Discussion and Analysis:

Management Discussion and Analysis Report for the year under review, as stipulated under Clause 49 of the listing agreement is presented in a separate section forming part of the Annual Report.

Corporate Governance:

A detailed Report on Corporate Governance practices followed by your company, in terms of clause 49 of the Listing Agreement with Stock

Exchanges, is provided separately in this Annual Report.

Listing of Equity Shares:

The Company's Equity Shares are listed at the following Stock Exchanges:

(i) BSE Limited, Phiroze Jeejeebhoy Towers, Dalal Street, Mumbai-400 001 and

(ii) National Stock Exchange of India Limited, Exchange Plaza, Floor 5, Plot No. C/I, G Block Bandra-Kurla Complex, Bandra (East),Mumbai-400 051.

The Company has paid the Annual Listing Fees to the said Stock Exchanges for the financial year 2014-15.

Material changes and commitments:

There are no Material changes and commitments in the business operations of the Company from the financial year ended 31st March, 2015 to the date of signing of the Directors' Report.

Environment:

The Company has taken initiatives to reduce the pollution. Anti-pollution measures taken by the Company will help to minimize the impact of industrial process on the environment and local are nearby.

Acknowledgements:

Your Directors place on record 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 and also customers, for their continued support and confidence reposed in the Company.

for and on behalf of the Board

Ramesh Babu Potluri

Chairman and Managing Director

DIN:00I6638I

Place : Hyderabad

Date : 08.08.2015