Dr Reddy's Labs - 2008-2009 -Annual Report

DR. REDDY'S LABORATORIES LIMITED

ANNUAL REPORT 2008-2009

DIRECTOR'S REPORT

Dear Members,

Your Directors are pleased to present the 25th Annual Report for the year
ended 31 March 2009.

FINANCIAL HIGHLIGHTS:

Table 1 gives the financial highlights of the Company for the financial
year 2008-09 as compared to previous financial year on Indian GAAP
standalone basis.

TABLE-1: Financial highlights for the Financial Year ended 31 March:

In Rs. million
2009 2008

Income 42,979 35,850

Gross profit 9,231 7,462

Depreciation 1,936 1,620

Profit before tax 7,295 5,842

Taxation

- Current tax (1,686) (1,089)

Net profit for the year 5,609 4,753

Add: Profit and loss brought forward 16,575 13,036

TOTAL AVAILABLE FOR APPROPRIATION 22,184 17,789

APPROPRIATIONS:

Proposed dividend on equity shares 1,053 631

Tax on proposed dividend 178 107

Dividend of previous year 1 1

Transfer to general reserve 561 475

Balance carried forward 20,391 16,575

DIVIDEND:

Your Directors are pleased to recommend a dividend of Rs. 6.25 per equity
share of Rs. 5/- each (125%) for the financial year 2008-09. The dividend,
if approved at the ensuing Annual General Meeting, will be paid to those
shareholders whose names appear on the register of members of the Company
as on 11 July 2009.

The dividend would be tax-free in the hands of the shareholders.

SHARE CAPITAL:

The paid up Share Capital of your Company increased by Rs. 1.48 million in
the financial year ended 31 March 2009, due to allotment of 296,031 equity
shares on exercise of Stock Options by the eligible employees under Dr.
Reddy's Employees Stock Option Scheme, 2002 and Dr. Reddy's Employees ADR
Stock Option Scheme, 2007.

CORPORATE GOVERNANCE AND ADDITIONAL INFORMATION TO SHAREHOLDERS:

A detailed report on the Corporate Governance system and practices of the
Company are given in a separate section in this annual report. Detailed
information for the shareholders is given in Additional Shareholders'
Information section.

MANAGEMENT DISCUSSION AND ANALYSIS:

A detailed report on the Management Discussion and Analysis is provided as
a separate section in the annual report.

SUBSIDIARY COMPANIES:

The Company has 40 subsidiary companies as on 31 March 2009.

During the year, the Company acquired DowPharma's small molecules business
in UK under Chirotech Technology Limited, BASF Corporation's manufacturing
facility at Shreveport in Louisiana, USA under Dr. Reddy's Laboratories
Louisiana LLC and Jet Generici SRL, a company engaged in the sale of
generic finished dosages in Italy. In addition, Perlecan Pharma Private
Limited, Macred India Private Limited and Dr. Reddy's Laboratories ILAC
Ticaret also became subsidiary of the Company.

The Ministry of Corporate Affairs (MCA) had granted its approval to the
Company for not attaching the financials of subsidiary companies to the
financials of the Company for the financial year 2008-09. The members may
refer to the Statement under Section 212 of the Companies Act, 1956 and
summary information on the financials of subsidiaries, in terms of the said
approval of MCA, appended to the above Statement under Section 212 of the
Companies Act, 1956 in this Annual Report for further information on these
subsidiaries.

The members, if they desire, may write to Company Secretary at Dr. Reddy's
Laboratories Limited, 7-1-27, Ameerpet, Hyderabad - 500016 to obtain a copy
of the financials of the subsidiary companies.

The consolidated financial statements, in terms of Clause 32 of the Listing
Agreement and in terms of Accounting Standards 21 issued by the Institute
of Chartered Accountants of India (ICAI) also form part of this Annual
Report.

FIXED DEPOSITS:

Your Company has not accepted any fixed deposits under Section 58A of the
Companies Act, 1956 and hence no amount of principal or interest was
outstanding as of the Balance Sheet date.

DIRECTORS:

Dr. Omkar Goswami and Mr. Ravi Bhoothalingam retire by rotation at the
ensuing Annual General Meeting scheduled on 22 July 2009 and are eligible
for re-appointment.

The Board of Directors appointed Dr. Bruce L. A. Carter as an additional
director on the Board of Directors of the Company on 21 July 2008. He will
hold this office till the Annual General Meeting of the Company scheduled
on 22 July 2009. Due notice under Section 257 of the Companies Act, 1956
has been received from a member proposing his appointment. It is proposed
to appoint him as a Director of the Company liable to retire by rotation.
The resolution for the same has been included in the notice of the Annual
General Meeting scheduled to be held on 22 July 2009.

The brief profiles of Dr. Omkar Goswami, Mr. Ravi Bhoothalingam and Dr.
Bruce L. A. Carter are given in the Corporate Governance section for the
reference of members.

Prof. Krishna G. Palepu resigned from the Board of Directors of the Company
and ceased to be the Director of the Company with effect from 20 January
2009. The Board placed a record of their deep appreciation of the services
rendered by Prof. Krishna G. Palepu during his tenure of office.

AUDITORS:

The Statutory Auditors of the Company M/s. B S R & Co., Chartered
Accountants, retire at the ensuing Annual General Meeting and have
confirmed their eligibility and willingness to accept office of Auditors,
if reappointed. The Audit Committee and the Board of Directors recommend
reappointment of M/s. B S R & Co. as Statutory Auditors of the Company for
the financial year 2009-10 for shareholder's approval.

COST AUDIT:

Pursuant to Section 233B of the Companies Act, 1956, the Central Government
has prescribed Cost Audit of the Company's Bulk Drugs Division and
Formulations Division.

Subject to the approval of the Central Government, the Board had appointed
M/s. Sagar & Associates as Cost Auditors of the Company for the Financial
Year 2008-09. The Cost Audit is under process and the Company will submit
the Cost Auditors' Report to the Central Government in time.

DIRECTORS RESPONSIBILITY STATEMENT:

In terms of Section 217 (2AA)of the Companies Act, 1956, your Directors
confirm as under:

1. In preparation of annual accounts, the applicable accounting standards
have been followed along with proper explanation relating to material
departures;

2. We have selected such accounting policies and applied them consistently
and made judgments and estimates that 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 2008-09 and of profit of the Company for that period;

3. We have taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of this Act for
safeguarding the assets of the Company and for preventing and detecting
fraud and other irregularities;

4. We have prepared the annual accounts on an on-going concern basis.

EMPLOYEES STOCK OPTION SCHEMES:

Pursuant to the provisions of Guideline 12 of the Securities and Exchange
Board of India (Employees Stock Option Scheme and Employees Stock Purchase
Scheme), Guidelines, 1999, as amended, the details of stock options as on
31 March 2009 under the 'Dr. Reddy's Employees Stock Option Scheme, 2002'
and the 'Dr. Reddy's Employees ADR Stock Option Scheme, 2007' are set out
in the Annexure - 1 to the Directors' Report.

PARTICULARS OF EMPLOYEES:

Pursuant to the provisions of Section 217(2A) of the Companies Act, 1956
read with Companies (Particulars of Employees) Rules, 1975 as amended, the
names and other particulars of employees are set out in the Annexure - 2 to
the Directors' Report.

CONSERVATION OF ENERGY, RESEARCH AND DEVELOPMENTS, TECHNOLOGY ABSORPTION,
FOREIGN EXCHANGE EARNING AND OUTGO:

The particulars as prescribed under Section 217(1) (e) of the Companies
Act, 1956, read with the Companies (Disclosure of Particulars in the Report
of Board of Directors) Rule, 1988 are set out in the Annexure - 3 to the
Directors' Report.

ACKNOWLEDGEMENT:

Your Directors place on record their sincere appreciation for significant
contribution made by the employees through their dedication, hard work and
commitment and the trust reposed on us by the medical fraternity and the
patients.

We also acknowledge the support and wise counsel extended to us by the
analysts, bankers, government agencies, shareholders and investors at
large. We look forward to have the same support in our endeavor to help
people lead healthier lives.

For and on behalf of the Board
of Directors

DR. K ANJI REDDY
CHAIRMAN
Date : 18 May 2009
Place: Hyderabad

ANNEXURE TO THE DIRECTORS' REPORT

ANNEXURE - 1

Pursuant to the provisions of Guideline 12 of the Securities and Exchange
Board of India (Employees Stock Option Scheme and Employees Stock Purchase
Scheme), Guidelines, 1999, as amended, the details of stock options as on
31 March 2009 under the Dr. Reddy's Employees Stock Option Scheme, 2002 and
the Dr. Reddy's Employees ADR Stock Option Scheme, 2007 are as under:


Description Details
Dr. Reddy's Employees Stock Option Scheme, 2002

Options granted 5,351,196

The pricing formula Dr. Reddy's Employees Stock Option Scheme, 2002
provides for the grant of options in two
categories:

Category A: 600,000 stock options out of the total
of 4,590,956 reserved for grant of options having
an exercise price equal to the fair market value
of the underlying equity shares on the date of
grant; and

Category B: 3,990,956 stock options out of the
total of 4,590,956 reserved for grant of options
having an exercise price equal to the parvalue of
the underlying equity shares (i.e., Rs. 5 per
option).

The fair market value of a share on each grant
date falling under Category A above is defined as
the weighted average closing price for 30 days
prior to the grant, in the stock exchange where
there is highest trading volume during that
period.

Options vested 204,119

Options exercised 1,064,455

The total number of 1,064,455
shares arising as a
result of exercise of
option

Options lapsed 3,371,845

Variation of terms of 1. Members of the Company approved the amendment
options in Dr. Reddy's Employees Stock Option Scheme, 2002
at the Annual General Meeting held on 28 July
2004.

The amendment enabled the Company to grant Stock
Options in two categories as discussed below.
Before this amendment Dr. Reddy's Employees Stock
Option Scheme, 2002 provided for grant of options
at fair market value only.

Category A: 1,721,700 stock options out of the
total of 2,295,478 reserved for grant of options
having an exercise price equal to the fair market
value of the underlying equity shares on the date
of grant; and

Category B: 573,778 stock options out of the total
of 2,295,478 reserved for grant of options having
an exercise price equal to the parvalue of the
underlying equity shares (i.e., Rs. 5 per option).

2. Members of the Company approved the amendment
in Dr. Reddy's Employees Stock Option Scheme, 2002
at the Annual General Meeting held on 28 July
2004.

The amendment enabled the Company to grant Stock
Options in two categories as discussed in para 2
above. Before this amendment Dr. Reddy's Employees
Stock Option Scheme, 2002 provided for grant of
options at fair market value only.

3. Members of the Company approved the amendment
in Dr. Reddy's Employees Stock Option Scheme,
2002, at the Annual General Meeting held on 22
July, 2008, to exercise the right to recover from
the relevant employees, the fringe benefit tax, in
respect of options granted to or vested or
exercised by the eligible employees under
provisions of the Income Tax Act, 1961. Further,
pursuant to changes in the work levels in the
organisation structure of the Company, approved
removing the grades and designations prescribed in
the Scheme.

Money realised by Rs. 111,430,782/-
exercise of options

Total number of options 914,896
in force

Employee wise details
as on 31 March 2009 of
options granted to

(i) Senior managerial Name Exercise price No. of
personnel options

Mr. V S Vasudevan Fair Market Value 98,610
Par Value 15,250

Mr. Abhijit Par Value 20,500
Mukherjee

Mr. Jaspal Singh Par Value 20,500
Bajwa

Mr. K B Sankara Rao Par Value 17,780

Mr. Raghu Cidambi Par Value 14,500

Mr. Saumen Par Value 20,500
Chakraborty

Mr. Umang Vohra Par Value 7,850

Mr. Amit Patel Fair Market Value 4,000
Par Value 2,650

Dr. Rajinder Kumar Par Value 13,500

Mr. Prabir Kumar Jha Par Value 10,050

Mr. Cartikeya Reddy Par Value 13,400

Mr. Vilas Dholye Par Value 8,570

(ii) Any other employee Nil
who receives a grant in
any one year of option
amounting to 5% or
more of option granted
during that year.

(iii) Identified Nil
employees who were
granted option, during
any one year, equal to
or exceeding 1 % of
the issued capital
(excluding outstanding
warrants and
conversions) of the
Company at the time
of grant;

Diluted Earnings Per Rs. 33.11
Share (EPS) pursuant
to issue of shares on
exercise of option
calculated in
accordance with
Accounting Standard
(AS) 20 'Earnings Per
Share'

The difference The employee Compensation Cost on account of ESOP
between the employee in the financial year 2008-09 based on Intrinsic
compensation cost Value Method is Rs. 197 million. Had the Company
computer under used the FairValue Method, the ESOP cost in the
Intrinsic Value Method financial year would have been Rs. 203 million,
and the employee which would have a consequential effect on profit.
compensation cost
that shall have been However, there would not have been any significant
recognized if the adverse effect on the Profit and EPS, on using
Company had used the fair value method of accounting,
Fair Value Methods and
its impact on profits
and on EPS of the
Company

Weighted-average Weighted average exercise price of the outstanding
exercise prices and Fair Market Value options as on 31 March 2009 was
weighted-average fair Rs. 417.51.
values of options for
options whose exercise Weighted average exercise price of the outstanding
price either equals or Par Value options as on 31 March 2009 was Rs. 5.
exceeds or is less than The weighted average fair value of the outstanding
the market price of options as on 31 March 2009 was Rs. 329.81.
the stock

Description of the The Company has opted Intrinsic Value Method for
method and significant accounting of Compensation Cost arising out of
assumptions used ESOP. However for disclosures in para 12 above the
during the year to following assumptions have been used:
estimate the fair
values of options:

(i) Risk-free interest 6.84% - 8.04%
rate,

(ii) Expected life, 12 months to 78 months

(iii) Expected 28.21 % to 41.87%
volatility,

(iv) Expected dividends 0.45% - 0.80%
and

(v) The price of the Rs. 469.05 to Rs. 694.95
underlying share in
market at the time of
option grant


Description Details
Dr. Reddy's Employees ADR Stock Option
Scheme, 2002

Options granted 281,218

The pricing formula Dr. Reddy's Employees ADR Stock Option
Scheme, 2007 provides for the grant of options
in two categories:

Category A: 382,695 shall be available for grant
of Stock Options at the fair market value; and

Category B: 1,148,084 Options shall be available
for grant of Stock Options at par value of the
shares i.e. Rs. 5 per option.

The fair market value of a share on each grant
date falling under Category A above is defined
as the closing price of the Company's equity
shares on the trading day immediately preceding
the date of grant, in the stock exchange where
there is highest trading volume during that
period.

Options vested 24,012

Options exercised 72,426

The total number of 1,064,455
shares arising as a
result of exercise of
option

Options lapsed 52,215

Variation of terms -
of options

Money realised by Rs. 362,130/-
exercise of options

Total number of 156,577
options in force

Employee wise details
as on 31 March 2009 of
options granted to

(i) Senior managerial Name Exercise No. of
price options

Mr. Jeff Par Value 14,500
Wasserstein

Mr. Amit Par Value 15,650
Patel

(ii) Any other employee Nil
who receives a grant in
any one year of option
amounting to 5% or
more of option granted
during that year.

(iii) Identified Nil
employees who were
granted option, during
any one year, equal to
or exceeding 1 % of
the issued capital
(excluding outstanding
warrants and
conversions) of the
Company at the time
of grant;

Diluted Earnings Per -
Share (EPS) pursuant
to issue of shares on
exercise of option
calculated in
accordance with
Accounting Standard
(AS) 20 'Earnings
Per Share'

Annexure - 3

FORM A

Form for Disclosure of Particulars with respect to Conservation of Energy:

A. Power and fuel consumption:

1. Electricity:

Purchased 2008-09 2007-08

Unit 139,480,303 118,283,306

Total amount (Rs.) 475,325,793 412,897,055

Rate / unit (Rs.) 3.41 3.49

Own generation - through diesel generator set:

2008-09 2007-08

Unit 9,455,950 5,322,801

Units per ltr. of diesel oil 3.48 3.22

Rate / unit (Rs.) 10.40 10.42

2. Coal (used in boiler):

2008-09 2007-08

Quantity (tonnes) 58,719 50,427

Total Cost (Rs.) 204,165,661 162,387,363

Average rate (Rs.) 3,477 3,220

3. Furnace Oil:

2008-09 2007-08

Quantity (K Lts.) 4,333 2,604

Total Cost (Rs.) 121,043,314 60,099,631

Rate / unit (Rs.) 27,936 23,080

FORM B

Research and development (R & D):

1. Specific areas in which R&D carried out by the Company:

Our research and development activities can be classified into several
categories, which run parallel to the activities in our principal areas of
operations:

* Active pharmaceutical ingredients and intermediaries, where our research
and development activities concentrate on development of chemical processes
for the synthesis of active pharmaceutical ingredients for use in our
generics and formulations segments and for technology transfer to
commercial production for sales in the emerging and developed markets to
third parties.

* Generics, where our research and development activities are directed at
the development of product formulations, process validation, bio-
equivalency testing and other data needed to prepare a growing list of
drugs that are equivalent to numerous brand name products.

Currently, we have integrated product development capabilities in our API
and generics to increase our focus on productivity and product delivery,
with combined technical excellence and process excellence. This is also
supplemented by our technical, intellectual property and legal skills thus
enhancing our new product development process. This helped us leverage our
core technology strengths in chemistry and formulation development with
legal, regulatory and intellectual property management expertise to expand
our product pipeline.

* Critical care and biotechnology, where research and development
activities are directed at the development of oncology and biotechnology
products for the emerging as well as regulated markets.

* Custom pharmaceuticals, where we intend to leverage the strength of our
process chemistry skills to cater to the niche segment of the specialty
chemical industry targeting innovator pharmaceutical companies. The
research and development is directed towards supporting the business to
focus on marketing of process development and manufacturing services to
emerging and established pharmaceutical companies.

* Drug discovery, where we are actively pursuing discovery and development
of NCEs. Our research programs focus on the following therapeutic areas:

- Metabolic disorders
- Cardiovascular disorders
- Pain and inflammation
- Bacterial infections

We are pursuing an integrated research strategy focusing on discovery of
new molecular targets and designing of screening assays to screen for
promising lead molecules. Discovery is followed by selection and
optimization of lead molecules and further clinical development of those
optimized leads.

2. Benefits derived as a result of the R&D:

* Commercial production of the new products.

* Modification of existing manufacturing processes for some of the products
and significant savings in cost of production.

* Modification of existing manufacturing processes to reduce the time cycle

* Indian patents and US patents filings for protection of Intellectual
Property generated during R&D.

3. Future plan of action:

Commercialisation of new products for which the products are under trials
at development stage. Several new products have been identified after a
thorough study of the market and the processes to manufacture these
products will be developed in the R&D lab.

Form C.

Foreign exchange earnings and outgo:

Please refer information given in the notes to the annual accounts of the
Company in Schedule 20 Notes to accounts item No.16 to item No. 17.

4. Expenditure on R & D:
For the year ended 31 March
2009 2008

A Capital (Rs. millions) 365 1,153

B Recurring (Rs. millions) 3,847 3,219

C Total (Rs. millions) 4,212 4,372

Total R & D expenditure as a percentage 10.42% 12.91%
of total turnover

Technology, absorption, adaptation and innovation:

1. Efforts, in brief, made towards technology absorption, adaptation and
innovation:

The Company has a full-fledged R&D Division continuously engaged in
research on new products and on process development of existing products.
The Company has developed indigenous technology in respect of the products
manufactured by it.

As soon as the technology is developed for a product, it is tested in Pilot
Plant and thereafter commercial production is taken up. It is our
philosophy to continuously upgrade the technology.

2. Benefits derived as a result of the above efforts, e.g., product
improvement, cost reduction, product development, import substitution, etc.

Product quality improvement, cost reduction, product development, import
substitution etc. The continuous up gradation and adoption of new
technology has benefited the Company in the form of better production
process, better yields, better quality of the end product and cost
reduction.

3. In case of imported technology }
(imported during the last 5 years }
reckoned from the beginning of the } No imported technology
financial year), following }
information may be furnished: }
}
a) Technology imported }
}
b) Year of import }
}
c) Has technology been fully absorbed }
}
d) If not fully absorbed, areas where }
this has not taken place, reasons there }
for and future plans of action. }

MANAGEMENT DISCUSSION AND ANALYSIS:

Given below are the key events of the Company for the year ended 31 March
2009 (2008-09).

* Launch of sumatriptan (authorized generic):

In line with an earlier settlement of patent litigation, Dr. Reddy's was
able to launch sumatriptan, the authorized generic version of Imitrexr
ahead of others in USA. This has contributed to Rs. 7,188 million or 10% of
Dr. Reddy's total revenues for 2008-09.

Global Generics revenue increased by 51% to Rs. 49,790 million, primarily
on account of the launch of Sumatriptan in North America and strong
performance in Russia and CIS.

* 16 new products launched in the US generics market in 2008-09, including
two over-the-counter (OTC) products. We have filed 138 cumulative
Abbreviated New Drug Applications (ANDAs) up to date. As on 31 March 2009,
there were tentative approval of 9 ANDAs and 59 ANDAs were pending for
approval at the US Food and Drug Authority (USFDA).

* Our PSAI business grew by 13% to Rs. 18,758 million. Revenues from the
emerging markets grew by 20% largely due to launch of clopidogrel in South
Korea and increased sales of naproxen and ciprofloxacin.

* The Company filed 21 Drug Master Files (DMFs) in the US during the year,
taking the total filings to 148. It also filed 5 DMFs in Canada, 19 in
Europe and 10 in the rest of the world.

* Consolidated revenues grew by 39% to Rs. 69,441 million. EBIDTA
increased by 50% to Rs. 14,529 million.

* We made three new acquisitions. These are: DowPharma's Small Molecules
facilities in the United Kingdom, located at Mirfield and Cambridge
(Chirotech); BASF Corporation's manufacturing facility at Shreveport in
Louisiana, USA; and Jet Generici SRL, a company engaged in the sale of
generic finished dosages in Italy. These acquisitions will act as building
blocks for future growth of the Company. Already, some of these are paying
dividends. Operations at Shreveport contributed to Rs. 1,684 million of
revenue in 2008-09; and Chirotech contributed Rs. 1,021 million.

* Betapharm impairment is triggered by adverse market conditions such as
decrease in market prices and an increasing trend of State Healthcare
Insurance Fund companies in Germany to adopt a lowest price tender supply
model. Products awarded to the Company under a big tender from AOK (the
largest German State Health Fund 'SHI') did not include many of the key
products. As a result the Company tested carrying value of betapharm
intangibles for impairment. Therefore, Dr. Reddy's has recorded a non-cash
write-down of intangible assets amounting to Rs. 3,167 million. With the
market having moved to tender-based supplies, the goodwill also had to be
evaluated for impairment. Having done so, we have taken a non-cash
impairment charge of Rs. 10,856 million. In the aggregate, the non-cash
impairment charge amounts to Rs. 14,023 million.

TRENDS IN GLOBAL MARKETS:

Note: Global market share numbers referred to in this and subsequent
sections are based on reports dated Dec 2008 from IMS Health Inc.

According to IMS Health Inc., the global pharmaceutical market is forecast
to cross U.S.$. 1 trillion by 2013, at a compounded annual growth rate
(CAGR) of 6% over the next five years. The forecast also predicts global
pharmaceutical sales to expand to U.S.$. 800 billion in 2009, compared to
U.S.$. 773 billion in 2008 - a projected growth of 2.5% to 3.5% on constant
dollar basis. In 2008, global pharmaceutical sales showed a growth of 5%
over the previous year.

GLOBAL REGIONAL PERFORMANCE:

* The US market is expected to contract in 2009. In the US, market growth
slowed down to 1%-2% (U.S.$. 312 billion) in 2008 versus 4%-5% in 2007.
Growth is forecasted by IMS Health Inc. to decline by 1%-2% in 2009. The
slower growth in 2008 was on account of less-than-expected demand for
recently introduced products, as well as the economic climate - which
appears to be having an impact on doctor visits and pharmaceutical sales.
The other key factors impacting growth are leveling off of growth from
Medicare Part D (program run by US government to subsidize the costs of
prescription drugs for Medicare beneficiaries in the United States), high
level of generic penetration in key therapeutic areas, new products
struggling for traction in the market place and players as well as
regulators increasing scrutiny on value of medicines.

* Other mature markets will also show lower growth. Europe contributed
U.S.$. 247 billion to total pharmaceutical market in 2008 and showed a
growth of 5%-6%. The top five markets (France, Germany, the UK, Italy and
Spain) in Europe together grew at 4%-5% in 2008 - up from the 3%-4% growth
witnessed in 2007. Going forward, these five markets are forecast to grow
at 3%-4% in 2009. While these major countries are seeing increased demand
from an ageing population and rising need for preventive care, growth is
being affected by health technology assessments, the use of contracting by
payers as a means of controlling costs and decentralization as well as
cutbacks of government healthcare budgets. The sharpest fall in growth was
in Japan: the market grew at 1%-2% in 2008, compared to 5%-6% in 2007.

* Emerging markets are the next frontier. Emerging markets, including China
and India, grew by more than 12% in 2008, largely due to their expanding
economies, increased affordability and broader access to healthcare. It is
getting increasingly apparent that emerging markets will grow collectively
at 13% to 16% up to 2013. The seven emerging markets (China, Brazil, India,
South Korea, Mexico, Turkey and Russia) will contribute more than half of
global market growth in 2009 and will contribute 40% to the global market
growth from 2009 to 2013. China, which is currently the sixth-largest
pharmaceutical market, will become the third largest by 2011.

* Global economic slowdown will affect markets in varying degrees. The
extent of the economic impact on each pharmaceutical market is influenced
by the healthcare cost burden borne by patients and the short- and long-
term policy responses that governments implement. While it is clear that
the responses will be varied, it is difficult to exactly predict what these
will be in each of the geographies.

KEY GLOBAL MARKET TRENDS:

* Convergence between generic companies and innovators. Competitive
pressures across the global pharmaceutical market have prompted industry
players to continually modify their strategies in a bid to sustain revenue
growth. While consolidation will continue, there is a growing trend for
innovators to acquire or ally with generic companies as a new means of
gaining entry to emerging markets dominated by branded generics.

* Emerging markets will be the growth drivers. Rapidly growing economies,
increasing population, greater inclination and higher disposable income to
spend on healthcare are driving the growth of pharmaceuticals in emerging
markets. According to IMS, revenues from emerging markets by 2017 are
forecasted between U.S.$. 290 and U.S.$. 320 billion, with a CAGR of 12% to
15%.

* An even more generic world. An additional $24 billion of branded products
- including anti-epileptics, proton pump inhibitors and anti-virals - will
lose their exclusivity in the top eight markets in 2009. This will
contribute to generics sales of more than $78 billion next year, implying a
growth of something between 5% and 7%, which will be similar to what
occurred in 2008. Increased use of generics is being driven by an ageing
population in the mature markets, higher level of generics prescriptions
written in the US, new government contracting initiatives and a distinctly
pro-generics thrust in Europe.

* The rise of specialty products. Pharmaceutical products mainly prescribed
by specialists are forecasted to grow by 8% to 9% in 2009 and are expected
to contribute two-thirds of total market growth. Biologics are expected to
grow at 11% to 12%; oncology products at 15% to 16%; and HIV therapies at
13% to 14%. In contrast, products generally prescribed by primary care
physicians are expected to grow by 2% to 3%, due to the loss of patent
exclusivity for several blockbusters and fewer significant product
launches.

* Increased pressure on cost and pricing. In 2009, growth across the
leading European markets will be affected by payer actions, which include
increased rebating and contracting in Germany, expansion of regional
formularies in Italy, a 5% decrease in branded prices in the UK, a 10%
price reduction on a number of brands in France and expansion of the
reference pricing system in Spain. The impact of Heath Technology Assessors
will be felt in Germany by reimbursement limitations for drugs not
determined to be cost effective. The UK pharmaceutical market may be
affected by any policy change that allows patients to buy additional
treatments not offered by the National Health Service.

* A number of events may occur in 2009 that also could have a long-term
impact on the pharmaceutical market. These include: (i) the uptake of
biosimilars in human growth hormones and erythropoietin in Europe; (ii)
greater adoption of generics in Japan; (iii) use of contracting strategies
across the EU; (iv) deregulation of the pharmacy sector in Europe; and (v)
potential for significant healthcare policy changes in the US.

TRENDS IN INDIA:

NOTE: Information in this section is based on the Indian Pharmaceutical
Overview Report, published by ORG IMS Research Private Ltd. for the year
ended December 2008.

The Indian pharmaceutical market continues to be highly fragmented and
dominated by Indian companies. The Indian retail pharmaceutical market grew
by 9.8% to Rs. 341 billion, with volumes contributing 1.5%, new products
contributing 7.1% and price another 1.2%.

Over the years, higher growth has been driven mainly by increased
expenditure on healthcare, rising disposable income, growing penetration of
health insurance, changing disease profile and regulatory reforms. In
addition, the strong growth registered by the Indian economy over the last
few years has also helped the domestic pharmaceutical market. On an overall
basis, Indian companies outgrew the market at 11.9%, while MNCs registered
a growth of 5.5%.

Acute therapy dominates the market with a value contribution of over 75%.
The chronic segment has registered a healthy growth of 21% versus 11% in
the acute segment. In acute therapy, anti-infectives and gynecology have
grown faster than the industry - with growth of 11% and 13% respectively.
In the chronic therapy segment, the growth leaders have been cardiac and
anti-diabetics - growing at 14% and 17% respectively.

Brand building has been the key growth driver for 2008, with new product
introductions reaching new heights. The top-300 brands account for more
than one-third of the incremental value.

The Indian pharmaceutical market is expected to grow at 11% to 12% per
annum and be valued at U.S.$. 20 billion by 2015. That will make India one
of the world's top 10 pharmaceutical markets. Pharmaceutical companies will
also continue to grow through acquisitions, joint ventures, leveraging low
operational costs and outsourcing.

DR. REDDY'S MARKET PERFORMANCE:

REVENUES:

The Company's consolidated revenues increased by 39% to Rs. 69,441 million
(U.S.$. 1.37 billion) in 2008-09. The major reasons for the revenue growth
were:

* The Company launched sumatriptan, the authorized generic version of
Imitrex(R) tablets in the US. This contributed Rs. 7,188 million or 10% of
Dr. Reddy's total revenues.

Note:

(R) - Registered

* During 2008-09, Company's three new acquisitions (Chirotech, Shreveport
and Jet Generici SRL) together contributed Rs. 2,797 million or 4% of total
revenues.

* Excluding authorized generic product and acquisitions, revenues grew by
19% - from Rs. 50,006 million in 2007-08 to Rs. 59,456 million in 2008-09.
PSAI grew by 7%; and Global Generics by 24%.

The Company's consistent growth trend in revenues can be seen in Chart A,
which plots revenues from 1999-2000 to 2008-09 in US dollars. Dr. Reddy's
revenues have been rising a 25% exponential trend rate of growth - the
trend CAGR - over the last 10 years.

In 2008-09, share of revenue from the international businesses stood at 83%
and India revenues stood at 17%. The revenue composition between
geographies changed considerably primarily due to sale of sumatriptan in
the US. Hence, North America (US and Canada) contributed to 35% of total
revenues in 2008-09, versus 23% last year. Europe accounted for 26% of
total sales in 2008-09, compared to 32% in 2007-08. Russia and other CIS
countries contributed to 11% of total revenues. And India delivered 17% of
total revenues in 2008-09 - down in relative terms from 21% in 2007-08.
Chart B plots the data.

CHART-B: Share of Markets:

Country FY 08-09 FY 07-08

India 17% 21%
North America 35% 23%
Europe 26% 32%
Russia & CIS 11% 11%
Others 11% 13%

Table 1 gives Dr. Reddy's consolidated financial performance by businesses
under IFRS.

PHARMACEUTICAL SERVICES AND ACTIVE INGRE DIENTS (PSAI):

Revenues from PSAI grew by 13% to reach Rs. 18,758 million in 2008-09.
Revenues from outside

Consolidated Business-Wise Performance under IFRS:

IN RS. MILLIONS
A B C D E F

Pharmaceutical Services and 18,758 5,595 30 16,623 5,645 34
Active Ingredients (PSAI)

Global Generics 49,790 30,448 61 32,871 19,567 60

Proprietary Business 294 196 67 191 109 57

Others 599 261 44 321 87 27

Total 69,441 36,500 53 50,006 25,408 51

A = 2008-09 Revenue
B = 2008-09 Gross profits(1)
C = 2008-09 % to Revenue
D = 2007-08 Revenue
E = 2007-08 Gross profits(1)
F = 2007-08 % to Revenue

(1) Does not include selling, research and development costs and exchange
gains and losses.

India accounted for 87% of PSAI's top-line, with international business
increasing by 15% to Rs. 16,375 million. 2008-09 saw the Company posting
significant sales of gemcitabine, naproxen, clopidogrel, montelukast,
rabeprazole sodium, ropinirole hydrochloride, sumatriptan succinate.
However, this growth was partially offset by decrease in sales of
escitalopram oxalate, amlodipine besilate and olanzapine. Revenues from our
newly acquired facility at UK, Chirotech, contributed Rs. 1,021 million.

* Revenue from Europe increased by 9% to Rs. 6,160 million in 2008-09,
primarily on account of increased sale of gemcitabine and sumatriptan -
which is partially offset by fall in the sales of olanzapine and ramipril.

* Revenue from North America grew by 16% to Rs. 3,875 million. This was
mostly on account of increased sales of montelukast, rabeprazole sodium and
naproxen, which was partially offset by fall in sales of ranitidine
hydrochloride and ibuprofen.

* Revenue from the emerging markets increased by 20% to Rs. 6,340 million,
thanks to the launch of clopidogrel in South Korea and higher sales of
naproxen and ciprofloxacin.

Chart C gives the geographical distribution of PSAI revenues for 2008-09.
Geographical distruibution of Revenues:

CHART-C: PSAI:

Country PSAI %

India 2,283 13%
North America 3,875 20%
Europe 6,160 33%
Rest of the World 6,340 34%

GLOBAL GENERICS:

Global Generics has outperformed in 2008-09, with revenues increasing by
51% to Rs. 49,790 million. The launch of sumatriptan in the US contributed
Rs. 7,188 million, or 14% of Global Generics revenues.

India:

Revenues in India grew by 5% to Rs. 8,478 million in 2008-09, driven by
performance of the top 10 brands.

* Omez and Omez DR, the Company's brands of omeprazole, grew by 6% compared
to overall market growth of 7.2%. Dr. Reddy's Omez now accounts for 49% of
the total market. Total revenues from this product have crossed over
Rs.1,000 million during 2008-09.

* Reditux, the Company's brand of rituximab, grew by 29%. It is the only
rituximab's generic version launched globally. Affordability (at less than
half the price prevailing under innovator's monopoly) has led to this high
growth of Reditux.

* Aided by a focused market campaign, revenues from Razo, our brand of
rabeprazole, grew by 19% versus overall market growth of 13%. The brand now
has a market share of around 11.5%.

* Atocor, Dr. Reddy's brand of atorvastatin, grew by 10%. It is currently
ranked fifth with a market share in excess of 6%.

* Mintop, the Company's brand of Minoxidil, grew by 15% and is ranked first
with a market share of over 48%.

The Company's top-10 brands accounted for revenues of Rs. 3,334 million
(39% of India generics revenue). Table 2 gives the data for the top-10
brands in India.

TABLE - 2: Revenues from the Top 10 Brands in India:

IN RS. MILLION
Product 2008-09 2007-08 Growth

Omez 776 763 2%

Omez DR 210 166 27%

Nise 605 626 -3%

Stamlo 422 403 5%

Stamlo Beta 301 305 -1%

Atocor 269 244 10%

Razo 214 180 19%

Reditux 199 154 29%

Mintop 172 150 15%

Enam 166 179 -7%

Others 5,144 4,890 5%

Total 8,478 8,060 5%

International:

Revenue from international markets increased by 67% to Rs. 41,312 million
in 2008-09 - primarily driven by North America, Russia, CIS countries,
Europe and Venezuela, as well as the depreciation of the Indian rupee vis-
a-vis 2007-08.

North America:

North America revenue grew by 152% to Rs. 19,843 million in 2008-09 -
thanks largely to the sales of sumatriptan, the authorized generic version
of Imitrexr. As mentioned earlier, sumatriptan contributed to Rs.7,188
million, or 36% of total North America revenues.

Excluding sumatriptan, the rest of the Company's North American generics
portfolio witnessed significant volume growth - which was partially offset
by pricing pressures. New launches during the year of divalproex sodium
sprinkles, risperidone, levetiracetam, venlafaxine, omeprazole DR and
others contributed Rs. 951 million or 5% of total North America revenues.
During the previous year, Dr. Reddy's had started its own OTC business with
the launch of ranitidine and cetirizine. In 2008-09, naproxen and
famotidine was added to the portfolio. These OTC products generated revenue
worth Rs. 992 million during 2008-09.

Russia and CIS countries:

The Russian pharmaceutical market grew by 16% in calendar year 2008. Dr.
Reddy's revenues in Russia grew by 43% - out-performing market growth in
both value and volume terms. The growth was driven by strong contributions
in the OTC segment as well as prescription sales. Key brands such as Nise,
Omez, Keterol, Ciprolet and Cetrine played a major role. At present, Dr.
Reddy's accounts for a market share of 1.25% in value (Pharmexpert MAT,
March 2009). Table 3 gives the revenues from our top five brands in Russia.

TABLE-3 Revenues from the Top 5 Formulation Brands in Russia:

IN RS. MILLION
Key Product 2008-09 2007-08 Growth

Omez 1,281 849 51%

Nise 1,249 799 56%

Ketorol 1,078 797 35%

Ciprolet 701 549 28%

Cetrine 339 199 70%

Revenue from CIS countries increased by 25%, with major contribution from
Ukraine, Kazakhstan and Uzbekistan. During 2008-09, Dr. Reddy's Russian &
CIS sales stood at U.S.$. 150 million.

Europe:

Revenues from Europe grew by 16% to Rs. 11,886 million. betapharm revenues
increased by 20% to Rs. 9,854 million despite an unfavorable pricing
pressure due to the AOK tender in Germany. Revenues from rest of Europe
remained at more or less the same level: Rs. 2,032 million in 2008-09.

Rest of the World (RoW):

Revenues from RoW increased by 64% to Rs. 1,959 million in 2008-09. This
was largely contributed by Venezuela, as well as South Africa, where sales
grew on account of the launch of clopidogrel and growth of Ciproc and Omez.
Chart D gives the geographical distribution of Global Generics revenues for
2008-09.

CHART-D: Global Generics:

Country Global Generics %

India 8,478 17%
North America 19,843 40%
Europe 11,886 24%
Russia & CIS 7,624 15%
Rest of the World 1,959 4%

REGULATORY ACTIVITY:

A strong product pipeline strengthens the foundation of any pharmaceutical
company. Dr. Reddy's has continued with its commitment to build a robust
generics and API pipeline. In 2008-09, the Company filed 23 ANDAs, of which
20 were in the US and 3 in Canada. Among these were 7 Para IV filings.
These ANDAs address innovator revenues of about U.S.$. 12 billion (IMS MAT,
December 2008). Dr. Reddy's has filed 159 cumulative ANDAs in both US and
Canada as of 31 March 2009.

2008-09 also saw the highest number of approvals for the Company's ANDA
filings: 23 final approvals from the US and 4 from Canada, in addition to 4
tentative approvals from the US. As of 31 March 2009, the Company's US
Generic pipeline comprises 68 ANDAs pending with the USFDA, including 9
tentative approvals.

Regarding APIs, the Company filed 55 DMFs in 2008-09. Of these, 21 were
filed in US, 5 in Canada, 19 in Europe and 10 in other countries. As on 31
March 2009, the Company had cumulative filings of 351 DMFs, with 148 in the
US.

DISCOVERY RESEARCH:

As on 31 March 2009, details of Dr. Reddy's New Chemical Entities (NCEs),
under active developement in pipeline are given in Table 4. The Company
continues to advance these NCEs through a combination of in-house
development, partnerships and co-development initiatives.

TABLE-4: Dr. Reddy's Development Pipeline in Discovery Research:

Compound Therapeutic Area Status Remarks

DRF 2593 Metabolic disorders Phase III In Phase III clinical testing
for Type 2 diabetes partnered
with Rheoscience

SEVERAL Respiratory disorders Phase I Targeted for chronic
COMPOUNDS obstructive pulmonary disease
(COPD) partnered with Argenta

DRL 17822 Metabolic disorders / Phase I Targeted for dyslipidemia and
Cardiovascular atherosclerosis
disorders

INTERNAL INITIATIVES:

As a part of the Company's drive to construct and leverage different
building blocks of sustainable growth, Dr. Reddy's has been engaged in
several internal initiatives, some of which are briefly described below.

THEORY OF CONSTRAINTS:

Dr. Reddy's is implementing the learning from the Theory of Constraints. It
is a holistic, company-wide, across-processes implementation of constraints
management in strategic planning, operations, supply chain/logistics, sales
and marketing, project management, metrics and finance. It also requires
building the culture and environment of providing continuous growth in
value for all stakeholders.

We are building a decisive competitive advantage by focusing on two key
elements:

Providing a partnership' with our customers in the Global Generics
business which will deliver superior inventory turns - namely, better
availability coupled with substantially reduced inventories.

Introducing more generic drugs and APIs to the market at lower risk and
investment - thus increasing the productivity of our R&D resources while
improving the ability to complete R&D projects on time.

We believe that these initiatives will result in synchronization of the
end-to-end supply chain (manufacturing, R&D, distribution). Thus, as our
sales grow, the Company should be able to align its capacity to supply the
market in a more systematic and organized way.

PHARMACOVIGILANCE:

Dr. Reddy's pharmacovigilance initiatives come under the rubric of its
Corporate Medical Services. A Global Pharmacovigilance Centre (GPVC) has
been set up in Hyderabad to coordinate safety surveillance activities all
over the world - and thus compile adverse event data on marketed products
as well as those under clinical development.

The company has highly skilled and qualified personnel across geographies
for conducting the Global Pharmacovigilance activities, which are overseen
by a core committee. The objective of the GPVC is to optimize the
centralized database and globally integrate adverse event reporting, risk
assessment and early detections for risk assessment and mitigation.

HUMAN RESOURCES:

Dr. Reddy's global employee strength crossed 10,000 in 2008-09, of which
over 2,000 were based at international locations. There is a conscious
effort at building diversity in the workforce, which has resulted in the
rise of the percentage of women employees. In FY09, almost 14% of the
recruits were women.

TALENT ACQUISITION:

During the year, 1,461 new employees were hired, including replacements.
The highlights of the hiring program were:

Most of the hiring was in manufacturing, quality, R&D and engineering
services, which contributed to about 75 percent of the overall hiring.

Critical talent was added in the areas of polymorphism, analytical R&D,
quality assurance, generics formulation development, manufacturing, global
oncology and clinical sciences.

We recruited 18 management trainees and laterals from prestigious B-Schools
including IIMs, XLRI & ISB; and about 370 technical trainees which include
a number of IIT graduates.

TALENT MANAGEMENT:

Articulated a talent philosophy as a guiding principle for our leadership
development interventions.

Institutionalized a talent management framework based on the Performance-
Potential Matrix to review breadth and depth of talent, including
downstream interventions.

LEARNING AND LEADERSHIP DEVELOPMENT:

Commissioned Dr. Reddy's Leadership Academy to facilitate leadership
development at all levels to build a culture of continuous learning.

Launched programs focused on the basic principles of Theory of Constraints.

Joined a cross-industry consortium to run a high end Senior Leader's
Program (SLP), for which we nominated senior leaders for the high powered
consortium involving companies that are leaders in their respective fields.

Organized our First Annual Leadership Summit at Boston with a world class
faculty to share ideas on strategy, leadership, culture and change.

Re-cast the 360 degree development feedback process, capturing not only
feedback on values and leadership essentials, but also on each of our eight
articulated leadership competencies: stakeholder orientation, business
acumen and strategic thinking, talent mindset, learning orientation, change
management, innovative thinking, networking and influencing and performance
orientation.

BUILDING AN INCLUSIVE ORGANIZATION:

Participated in job fairs for differently able' candidates, including
Career Fairs by the Ability Foundation.

Participated in Women's Career Fair which was organized in collaboration
with Times of India group on the International Women's Day.

Conducted Phase-II of our Women's Survey in our quest to constantly seek
feedback and endeavor to be the most preferred workplace for women'.

Joined the Forum for Women in Leadership (WILL), which is committed to
bringing together senior women executives from leading companies in India.

HR AWARDS:

Received the Recruiting and Staffing Best in Class Award (RASBIC) 2008-09
for the Best Overall Recruiting & Staffing Organization' and Best
Recruiting Evaluation Techniques'.

Received three Employer Branding awards at the World HRD Congress for Best
HR Strategy in line with Business', Excellence in HR through Technology'
and Best Talent Management'.

Received the Global HR Leadership Award for 2008-09 at the Asia-Pacific HR
Congress.

SAFETY, HEALTH AND ENVIRONMENT (SHE):

As a part of Dr. Reddy's commitment towards the principles of sustainable
development, safety, health and environment continue to be priority areas
for the Company.

Dr. Reddy's has been publishing its Sustainability Report for the last five
years - which gives full account of its activities in safety, health and
environment and goes well beyond the statutory requirements. The
Sustainability Report is prepared according to internationally accepted
guidelines issued by Global Reporting Initiatives, commonly known as GRI
guidelines. GRI is an official collaborating center of the United Nations
Environment Program (UNEP) and works in cooperation with the UN Secretary
General's Global Compact. The Company will continue with this initiative of
publishing the Sustainability Report in the future.

Some of the major activities in the area of safety, health and environment
have been:

A zero liquid discharge plant commissioned in the biologics development
centre, making it the fifth such plant in the Company. The entire effluent
generated is treated and the treated effluent is recycled as cooling tower
make-up or boiler feed water. During the year, significant upgrading was
carried out in the effluent treatment facilities in CTO-5 (chemical tech-op
plant 5) and CTO-6.

State-of-the-art solvent recovery systems have been installed to distill
the spent solvents in our API manufacturing facilities. Most distilled
solvents are reused.

To accurately determine our carbon footprint, green house gas (GHG)
accounting for last three years was done by The Energy Research Institute
(TERI) according to standards developed by the World Research Institute and
the World Business Council for Sustainable Development. The detailed
methodology & calculations handed over to us by TERI will now enable us to
accurately calculate our GHG emissions in the future.

Our efforts to find alternative environmental friendly ways to dispose
organic residue have begun to yield results. Going forward, it is estimated
that almost 40% of our organic residue generation will be disposed off to
the cement industry for use as auxiliary fuel - instead of being
incinerated.

To maintain alertness and awareness on safety at the desired level, monthly
safety campaigns were carried out all across manufacturing sites. As on
date 1,089 trained fire fighters and 663 trained first aid resources are
available at various locations.

Comprehensive energy audits with the help of external consultants like the
Confederation of Indian Industry (CII) and TERI have been conducted.

Several other activities such as occupational health surveillance,
upgrading to high quality instruments and rain water harvesting have also
been carried out.

FINANCIALS:

The financials are given in three sub-sections:

Abridged IFRS accounts for Dr. Reddy's as a consolidated entity.

Abridged Indian GAAP consolidated accounts.

Abridged Indian GAAP stand-alone accounts for Dr. Reddy's, as statutorily
required under India's Companies Act, 1956.

IFRS CONSOLIDATED FINANCIALS:

Table 5 gives the abridged IFRS financial performance of Dr. Reddy's for
2008-09 and 2007-08 on a consolidated basis.

TABLE -5: Abridged consolidated statement of operations, 2008-2009, IFRs:

IN RS. MILLION
2008-09 2007-08
Percent Percent Increase /
Rs. Mn To sales Rs. Mn To sales (Decrease)

Revenues 69,441 100% 50,006 100% 39%

Gross profit 36,500 3% 25,408 51% 44%

Selling, general and
administrative expenses 21,020 30% 16,835 34% 25%

Research and development
expenses 4,037 6% 3,533 7% 14%

Impairment loss on other
Intangible assets 3,167 5% 3,011 6% NC

Impairment loss on
Goodwill 10,856 16% 90 0% NC

Other expenses/(income),
net 254 0% (402) (1%) NC

Operating income/ (loss) (2,834) (4%) 2,341 5% NC

Finance income (482) (1%) (1,601) (3%) (70%)

Finance expense 1,668 2% 1,080 2% 54%

Finance expense/
(income), net 1,186 2% (521) (1%) NC

Share of profit of equity
accounted investees 24 2

Profit/(loss) before
income tax (3,996) (6%) 2,864 6% NC

Income tax benefit/
(expense) (1,172) (2%) 972 2% NC

Profit/(loss) for the
year (5,168) (7%) 3,836 8% NC

NC = Not Comparable.

Revenues:

Revenues increased by 39% to Rs. 69,441 million in 2008-09. The launch of
sumatriptan, the authorized generic version of Imitrexr tablets in the US
has contributed to Rs. 7,188 million or 10% of Dr. Reddy's total revenues.
During the year, the Company's three new acquisitions -small molecules
facilities located in Mirfield and Cambridge (UK), the formulations
facility in Shreveport, Louisiana, USA and Jet Generici SRL in Italy
together contributed Rs. 2,797 million, or 4% percent of total revenues.
Excluding the impact of authorized generics & new acquisitions, our
revenues grew by 19%. Also in 2008-09, the US dollar strengthened by
approximately 14% vis-a-vis the Indian Rupee. With over 50% of the
Company's sales invoiced in dollars, this appreciation in dollar
value had a significant positive impact on our revenues.

Gross Profit:

The Company's gross profits increased by 44% to Rs. 36,500 million. Gross
profit as a percentage of revenue was 53% in 2008-09, versus 51% in 2007-
08. PSAI and Global Generics majorly contributed to the gross margins by
Rs. 5,595 million and Rs. 30,448 million, respectively.

Selling, General and Administrative Expenses:

Selling, General and Administrative (SG&A) expenses increased by 25% to Rs.
21,020 million in 2008-09. This was largely a result of higher manpower
costs - which rose by 19% in 2008-09 due to annual increments and increase
in the headcount arising both out of our three acquisitions as well as
normal additions. There was also a growth in marketing expenses, which
increased by 30% in 2008-09, mostly on account of higher marketing expenses
of proprietary business, growth in shipping costs, higher commission on
sales due to increased revenues, as well as higher advertisement expenses
for campaigns undertaken in Russia, Belarus, Ukraine and Germany.

R&D Expenses:

R&D expenses grew by 14% to Rs. 4,037 million. As a share of total revenue,
R&D expenditure was at 6% in 2008-09, compared to 7% in 2007-08. The rise
in R&D expenses was primarily on account of increase in greater development
activity in the Global Generics and proprietary business segments.

Impairment loss on other Intangible assets and Goodwill:

During 2008-09, the Company recorded impairment loss as per IFRS
requirements on intangible assets and goodwill acquired from betapharm,
Germany.

In the course of the year, having faced adverse conditions in Germany such
as decrease in market prices and an increasing trend of State Healthcare
Insurance Fund companies in Germany to adopt a lowest price tender supply
model. Products awarded to the Company under a big tender from AOK (the
largest German State Health Fund 'SHI') did not include many of the key
products and as a result the Company tested the carrying value of the
betapharm intangibles for impairment. As a result of this, Dr. Reddy's has
recorded a non-cash write-down of intangible assets amounting to Rs. 3,167
million. With the market having moved to tender-based supplies, this
goodwill also had to be evaluated for impairment. Having done so, we have
taken a taken a non-cash impairment charge of Rs. 10,856 million. In the
aggregate, the non-cash impairment charge amounts to Rs. 14,023 million.

Other Expenses / (Income), Net:

In 2008-09, other expense amounted to Rs. 254 million, compared to other
income of Rs. 402 million in 2007-08. This movement was primarily on
account of following:

Expenses of Rs. 916 million on account of liquidated damages paid to Eli
Lilly on patent infringement of olanzapine.

Income of Rs. 150 million on account negative goodwill on acquisition of
Dow's small molecule business and Mirfield plant.

Other income increased by Rs. 512 million, primarily due to increase in
sale of spent chemicals, royalty income and income from mutual fund other
miscellaneous income.

Finance Expenses / (Income), Net:

Finance income/expense includes both net interest income/expense and
foreign exchange income/ expense. Net expense in 2008-09 amounted to Rs.
1,186 million, while in 2007-08, it was income of Rs. 521 million. This
increase was largely due to foreign exchange loss of Rs. 634 million in
2008-09 as against a gain of Rs. 739 million in previous year. Moreover,
interest income reduced due to lower deposit of funds as compared to
previous year.

Income Tax:

Provision for income tax for 2008-09 amounted to Rs. 1,172 million against
benefit of Rs. 972 million in 2007-08. This was due to an overall increase
in taxable profits primarily at India and North America, on account of
higher profits generated from sale of Sumatriptan. The benefit in previous
year was on account of deferred tax benefit due to reduction in tax rates
in Germany and write down of betapharm intangibles.

Net Income:

Dr. Reddy's net loss was Rs. 5,168 million in 2008-09, versus a net profit
at Rs. 3,836 million in 2007-08. Excluding impact of impairment of
intangibles & goodwill from current year as well as previous year, adjusted
net income was Rs. 7,873 million in 2008-09, versus net income Rs. 6,043
million in 2007-08.

Liquidity and Capital Resources:

Table 6 gives the Company's IFRS consolidated cash flow for 2008-09 and
2007-08.

TABLE-6: IFRIS Consolidated Cash Flow IN RS. MILLION
2008-09 2007-08

Opening Cash & Cash Equivalents 6,986 18,062

Cash Flows from:

(a) Operating Activities 4,505 6,528

(b) Investing Activities (3,472) (9,367)

(c) Financing Activities (2,527) (7,865)

Effect of exchange rate changes (114) (372)

Closing Cash & Cash Equivalents 5,378 6,986

The Company's cash flow for 2008-09 is lower primarily due to lower cash
generated from its operating activities. Investing activities includes net
investment in property, plant and equipment of Rs. 4,422 million to meet
the business growth, compared to Rs. 6,208 million in 2007-08. Investment
in mutual funds net of proceeds from sale amounted to Rs. 4,383 million.
Net cash outflow from financing activities in 2008-09 mainly represents the
repayment of Rs. 1,925 million of long term debt and payment of dividends
amounting to Rs. 738 million. These have been partially offset by
additional bank borrowings of Rs. 1,263 million. Table 7 gives the
Company's consolidated working capital.

TABLE-7: Dr. Reddy's Consolidated Working Capital:

IN RS. MILLION
31 March 2009 31 March 2008 Change

Accounts receivable (A) 14,592 6,823 7,769

Inventories (B) 13,226 11,133 2,093

Trade Accounts Payable (C) 5,987 5,427 560

Working Capital (A+B-C) 21,831 12,529 9,302

Other current Assets (D) 11,192 16,032 (4,840)

Total Current Assets (A+B+D) 39,010 33,988 5,022

Short and long term loans and
borrowings, current portion (E) 9,351 6,219 3,132

Other current liabilities (F) 11,215 7,955 3,260

Total Current Liabilities (C+E+F) 26,553 19,601 6,952

The debt-equity position of the Company as on 31 March 2009 and 2008 is
given in Table 8.

TABLE-8: Dr. Reddy's Debt-Equity Position:

IN RS. MILLION
31 March 2009 31 March 2008 Change

Total Stockholders' Equity 42,405 47,350 5,305

Long-term Debt (non-current) 10,132 12,698 (2,566)

Long-term Debt (current) 3,501 1,791 1,710

Bank Borrowings 6,068 4,863 1,205

Total Debt 19,701 19,352 349


Debt-Equity:

Stockholders' equity decreased in 2008-09 due to impairment of intangibles
and goodwill. Long-term debt, including the current and non-current
portions, decreased by Rs. 856 million in 2008-09 due to repayments of loan
taken on account of betapharm acquisition.

The Company's ratio of total debt-to-stockholders' equity increased to 0.46
as on 31 March 2009 from 0.41 on 31 March 2008.

INDIAN GAAP CONSOLIDATED FINANCIALS:

Table 9 gives the break-up of Indian GAAP consolidated financials for 2008-
09 and 2007-08.

TABLE-9: Financials, Indian GAAP Consolidated:

IN RS. MILLION
Particulars 2008-09 2007-08 Increase/
(Decrease)

Gross Sales 68,326 49,700 37%

Less: Excise Duty (422) (558) -24%

Net Sales 67,904 49,142 38%

License fees and Service Income 1,102 776 42%

Other Income 994 2,037 -51%

Total Income 70,000 51,955 35%

Expenditure

Material costs 23,223 17,847 30%

Excise duty 387 287 35%

Research and development expenses 4,093 3,447 19%

Personnel costs 9,920 7,311 36%

Operating and other expenses 18,363 12,620 46%

Total Expenditure 55,986 41,512 35%

EBIDTA 14,014 10,443 34%

Finance charges 972 958 1%

Equity in loss of associates 1 17 -94%

Depreciation & Amortization 4,977 4,019 24%

Impairment of goodwill and intangibles 14,628 0

PBT (6,564) 5,450

Provision for Taxation 2,608 1,077 142%

Minority interest 0 (9) -100%

Net Profit (9,172) 4,381 -309%

Revenues:

Gross sales increased by 37% to Rs. 68,326 million in 2008-09. Gross sales
of PSAI grew by 12% to Rs. 18,235 million; while that of Global Generics
grew by 50% to Rs. 49,802 million.

Material Costs:

Material costs increased to Rs. 23,223 million in 2008-09 from Rs. 17,847
million in 2007-08. As a share of total sale, material costs fell to 34% in
2008-09, from 36% in 2007-08.

Personnel Costs:

Personnel costs increased by 36% to Rs. 9,920 million in 2008-09. This was
on account of annual increments and increase in number of employees and due
to three new acquisitions made during current year. As a share of total
income, personnel costs remained at 15%.

Operating and Other Expenses:

Operating and other expenses rose by 46% to Rs. 18,362 million in 2008-09.
The increase was due to higher legal and professional expenses, conversion
charges, advertisement costs and increase in carriage outwards because of
higher sales volumes, rise in power and fuel and a rise in repairs and
maintenance expenses. As a share of total income, this head of expense
increased from 25% in 2007-08 to 27% in 2008-09.

Depreciation and Amortization:

Depreciation and amortization increased by 24% to Rs. 4,977 million in
2008-09 because of increase in gross block and intangibles. Additional
investments were incurred towards normal capital expenditure as well as new
projects in PSAI and Global Generics. Amortization decreased marginally
from Rs. 2,280 million in 2007-08 to Rs. 2,713 million in 2008-09 due to
amortization of goodwill & intangibles of new acquisitions made during
current year. Also, during the year, non-cash impairment charge for
betapharm amounts to Rs. 14,628 million.

Research and Development Expenses:

R&D expenses increased by 19% to Rs. 4,093 million in 2008-09. As a share
of total income, it reduced from 7% in 2007-08 to 6% in 2008-09 - largely
due the increase in income from sales.

Income Tax:

Provision for income tax (inclusive of fringe benefit tax) for 2008-09
amounted to Rs. 2,608 million against Rs. 1,077 million in 2007-08. This
was due to an overall increase in taxable profits primarily at India and
North America. Increase in taxable profit was primarily on account of
higher profits generated from sale of Sumatriptan.

Finance Charges:

Finance expenses for 2008-09 amounted to Rs. 972 million, compared to
Rs.958 million in 2007-08. This was primarily on account of increase in
working capital funds borrowed during the year.

Profit/ (loss) after Tax:

PAT decreased from Rs.4,381 million in 2007-08 to Rs. (9,172) million in
2008-09 primarily due to impairment of intangibles and goodwill of
betapharm.

INDIAN GAAP STAND-ALONE FINANCIALS:

Table 10 gives the break-up of Indian GAAP stand-alone financials for 2008-
09 and 2007-08.

TABLE-10: Financials, Indian GAAP stand-alone IN RS. MILLION

Particulars 2008-09 2007-08 Increase/
(Decrease)

Gross Sales 40,419 33,865 19%

Less: Excise Duty (422) (558) -24%

Net Sales 39,997 33,307 20%

License fees and Service Income 1,979 632 213%

Other Income 1,003 1,911 -48%

Total Income 42,979 35,850 20%
Expenditure

Material costs 14,699 12,535 17%

Excise duty 387 287 35%

Research and development expenses 3,847 3,219 20%

Personnel costs 4,133 3,686 12%

Operating and other expenses 10,365 8,425 23%

Provision for decline in long term
investment 112 133 -16%

Total Expenditure 33,397 28,287 18%

EBIDTA 9,416 7,564 24%

Finance charges 185 102 81%

Depreciation & Amortization 1,936 1,620 20%

PBT 7,295 5,842 25%

Provision for Taxation 1,686 1,089 55%

Net Profit 5,609 4,753 18%

INTERNAL CONTROLS AND RISK MANAGEMENT:

Dr. Reddy's has a comprehensive system of internal controls with the
objective of safeguarding the Company's assets, ensuring that transactions
are properly authorized and providing significant assurance at reasonable
cost, of the integrity, objectivity and reliability of financial
information. The management of Dr. Reddy's duly considers and takes
appropriate action on recommendations made by the statutory auditors,
internal auditors and the independent Audit Committee of the Board of
Directors. More details on internal controls is given in the chapter on
Corporate Governance.

In a very dynamic business environment, the traditional base business model
is exposed to much volatility, both upwards and downwards. While the
upsides create nonlinear value for the organization, there is a conscious
attempt to protect it against the downsides.

As a step towards this and continuing with the progress achieved during the
earlier years, a basic framework for the Enterprise-wide Risk Management
(ERM) has been developed in collaboration with Ernst and Young. It
comprises three phases:

1. Assess Define the risk classification framework, rating criteria and
develop a risk library.

2. Enhance Conduct workshops for prioritization of these risks; identify
risks that matter as well as their root causes; and document the associated
mitigation plans.

3. Monitor Define the risk management organization structure at the
business level; enable the maintenance of risk management framework on an
ongoing basis; and monitor the progress on mitigation plans. The
significant risks include those related to changing regulations and related
compliance, increasing pricing pressure due to market externalities,
foreign currency fluctuations and uncertainties around innovation efforts.
The Company has a formal risk management structure with defined roles and
responsibilities. The Company's Board of Directors, through its Audit
Committee, approves the overall risk management strategy; regularly
monitors the risk management process; and takes high level decision, when
required, on risk management matters. Business unit heads provide overall
guidance on ERM; ensure compliance with the defined risk framework; up-date
the risk register; and either through the Chief Risk Officer or in business
unit presentations, give quarterly update to the Audit Committee of the
Board. The functional heads - within business units and for shared services
- identify risks; analyze and prioritize these in terms of the probability
of occurrence and their impact; prepare mitigation plans; and regularly
monitor the risks.

THREATS, RISKS AND CONCERNS:

Pharmaceutical industry works in an extremely dynamic environment. Compared
with other industries, the risk and compliance profile span the full
pharmaceutical product life cycle - from invention to testing,
manufacturing and marketing. Given below are some key threats, risks and
concerns.

FDA Compliance (Rising audit burdens, inspections and fines) In the recent
past, the pharmaceutical industry has seen more inspections and warning
letters from USFDA. The list of US and international regulations is longer
and the consequences for even technical non-compliance are getting more
severe. The Company continues to give top priority to compliance and
quality year on year.

Global meltdown The recent global slowdown resulted in lower investments
both in existing business and new drug research. With current global
recession, the world's largest pharmaceutical are reconstructing their
business models and accelerating their timetables for implementing
transformational changes in their organizations. These can be in the nature
of discontinuous risks. Also due to global meltdown, there are increased
credit risks in certain markets across the world.

Drug discovery Dr. Reddy's long term discovery operations will depend, to a
large extent, upon its ability to successfully patent and commercialize its
own discovery molecules and specialty products. There are significant risks
of execution, as the process of development and commercialization of new
molecules is time consuming as well as costly.

Generics The Company's generic business remains challenging due to
increased competition from India and Eastern Europe. The segment has
inherent risks with regard to patent litigation, product liability, pricing
pressure, increasing regulation and compliance related issues. The business
could be negatively affected if innovator pharmaceutical companies are
successful in limiting the use of generics through aggressive legal defense
as well as authorized generics deals, development of combination products
and over-the-counter switching. In view of the number of patent expiries
coming up in the near future, sales of patent expiry drugs in the US as
well as in Europe represent significant opportunity for all generics and
API manufacturers. However, obtaining 180-days exclusivity is getting
increasingly difficult in the US and the generics market is becoming
rapidly commoditized.

Drug pricing In India, the Government of India through its Drugs (Prices
Control) Order, 1995 (DPCO) imposes price controls for specified
pharmaceutical products under certain circumstances. Adverse changes in the
DPCO list or a widening of the span of price control can affect pricing and
hence, Indian revenues.

Foreign exchange fluctuations In 2008-09, the US dollar strengthened by
approximately 14% vis-a-vis the Indian rupee. Due to high volatility in the
global currency markets, the risk on foreign receivables has increased
significantly.

Germany The market has changed to a tender-based model, where it has now a
high volume and low margin play.

Patent With implementation of GATT in 2005, India started recognizing
product patent protection with effect from 1 January 2005. It is expected
that the new product launch opportunities for Indian manufacturers of API
and finished dosages will narrow over the next few years.

OUTLOOK:

Dr. Reddy's looks forward to a robust performance in 2009-10. Our guidance
is that revenue should grow by 10% in 2008-09, with ROCE (%) in mid to
high teens. This growth will be driven by our PSAI and Global Generics
businesses.

In Global Generics segment, the US generic business is expected to deliver
stronger performance with at least one limited competition' product
opportunity expected to come up each year. In Germany, where there has been
rapid transition from branded generics to commodity generics, the Company
is changing the business model and aligning the organization structure to
remain competitive in the emerging scenario. In India, the Company should
see growth in sales due to implementation of replenishment based supply
chain model. In Biologics, the niche segment of India business, we expect
to launch two products in 2009-10. In Russia and CIS countries, the Company
expects growth to continue. In PSAI business, the Company expects to
deliver strong performance because of efficient synergies created between
manufacturing, R&D and intellectual property - catering to both generics
and innovator companies. In custom pharmaceutical services, we are
transiting the business model from contract research service to contract
manufacturing.

We have been steadily building capabilities and resource over the years and
strengthened these further with initiatives at improving productivity and
reducing costs. We expect these initiatives delivering value in 2009-10.

CAUTIONARY STATEMENT:

The management of Dr. Reddy's has prepared and is responsible for the
financial statements that appear in this report. These financial statements
are in conformity with accounting principles generally accepted in India
and in the US and therefore include amounts based on informed judgments and
estimates. The management also accepts responsibility for the preparation
of other financial information that is included in this report.

This write-up includes some forward-looking statements, as defined in the
U.S. Private Securities Litigation Reform Act of 1995. The management has
based these forward-looking statements on its current expectations and
projections about future events. Such statements involve known and unknown
risks, uncertainties and other factors that may cause actual results to
differ materially. These factors include, but are not limited to, changes
in local and global economic conditions, the Company's ability to
successfully implement its strategy, the market's acceptance of and demand
for its products, growth and expansion, technological change and exposure
to market risks. By their nature, these expectations and projections are
only estimates and could be materially different from actual results in the
future.

HUMAN RESOURCES

The quality of the leadership pipeline makes corporations sustainable; to
deliver beyond individual personalities. This year too we continued to
build on our commitment to leadership development, which includes providing
associates with the opportunities and skills to make a difference to the
world.

LEARNING AND LEADERSHIP:

This year we commissioned our Leadership Academy, a state-of-the-art
infrastructure to support our leadership development agenda. We hope this
will be another catalyst for our culture of continuous learning across the
company. The programs offered in the Leadership Academy focus on building
functional, behavioral and leadership competencies. It shall also actively
support organizational transformation interventions that we have initiated.

An organization-wide strategic initiative called 'The Viable Vision' was
rolled out this year, to transform the organization into an ever
flourishing company'. Preparing the hearts and minds of the associates to a
new operating paradigm and enabling culture has been a major change effort
within the organization. Our learning agenda then has been as much about
managing organizational change as about developing leadership.

Through our 'Leader's Talk' series, we have initiated series of talks and
experience sharing sessions by known thought leaders, renowned academics
and acclaimed practitioners. Learning from the experience of others we feel
builds insights that we gain from, individually and collectively.

We also participated in a unique Senior Leader's Program (SLP) wherein
nominated senior leaders from the company underwent a two week modular
leadership development programme with peers from leaders of other
consortium partners. The consortium is a mix of leading organizations from
a group of diversified industries: FMCG, Information technology,
Information technology-enabled services (ITES), automobiles, banking and
others. The SLP offered teaching inputs from best-in-class faculty and
cross industry peer learning - all very much in line with our focus to the
future.

This year we initiated the concept of an Annual Leadership Summit. 40 top
leaders went to a specially designed retreat at Boston. The summit
facilitated by world class faculty, helped develop common perspectives on
key organizational priorities - Strategy, Leadership, Culture and Change.

We firmly believe that leadership development needs incessant feedback and
coaching. We have completely recast our 360 degree feedback process,
benchmarking extensively, making it more comprehensive and covering a much
wider pool of managers. We expect downstream interventions will help us
stay focused on competency-based development and an ever-rising bar of
leadership behavior.

REFINING TALENT MANAGEMENT:

As we evolve, so does our Talent Management thinking. This year, we
institutionalized a 9-Box Performance-Potential framework to assess talent
and identify gaps. We have also now articulated eight leadership
competencies that will be fulcrum of our talent management focus - from
talent acquisition, career progression and leadership development.

TALENT ENHANCEMENT:

We added almost 1,500 new associates to the organization this year, mostly
in Sales, Operations and Product development. We continued to tap into the
campus talent pool, attracting the best from the top universities. This
year we recruited 18 management trainees and laterals from prestigious B-
Schools including IIMs, XLRI & ISB as well about 370 Technical Trainees
which include a sizable number of IIT graduates. At the same time, our
internal job mart threw up opportunities for many to explore other
assignments within the company. Over 22% of positions were filled
internally, a 7% increase over the earlier year.

One of our top priorities has been to add key talent at the leadership
level across several businesses as well as in corporate functions. We have
also injected talent into niche areas of Polymorphism, Analytical R&D,
Development Quality Assurance, Generics Formulation Development,
Manufacturing, Global Oncology and Clinical Sciences.

Lean processes and simplification of our people processes remains a focus
for us. We have leveraged technology significantly to optimize the
recruitment process as well. Our e-recruitment module serves as a platform
for applicant tracking, from application creation to on-boarding.

RECOGNITIONS IN HR:

We continue to be recognized by numerous external agencies for our people
practices. We won the Recruiting and Staffing Best in Class Award (RASBIC)
2008-09 in the Best Overall Recruiting & Staffing Organization of the
year' and Best Recruiting Evaluation Techniques'. We also brought home
three Employer Branding awards at the World HRD Congress. The awards were
for Best HR Strategy in line with Business, Excellence in HR though
Technology and Best Talent Management.

Prabir Jha, our Global Human Resources & Communications Head, was conferred
the HR Leadership Award for 2008-09 at the Asia-Pacific HR Congress and was
featured in the list of '40 most powerful HR Professionals in India', a
list that was released at the Congress. He was also conferred the 'HR
Professional of the Year' Award at the World HRD Congress held at Mumbai.

TRULY INCLUSIVE ORGANIZATION:

Our firm belief in employee diversity and providing fair employment
opportunities for all led to revamping our Employee Referral Scheme-
'Parichay', making referrals of women and differently-abled candidates more
rewarding. Our participation in job fairs for differently-abled candidates,
including career fairs by the Ability Foundation strengthened our Diversity
Program. Our effort to build a truly inclusive organization is also visible
in many women-friendly policies and initiatives that we rolled out this
year. Significant increase in hiring from campuses, where almost one third
of all hires were women proves that we take our commitment to building an
inclusive organization seriously. Our second Women's Survey this year
reflected a very positive feedback. This year we joined the 'Forum for
Women in Leadership' (WILL), which is committed to bringing senior women
executives from leading companies in corporate India together for
leveraging the talent-pool and redefining best-employers for women in
leadership positions.

As we look ahead, we are confident that the strong positive people
philosophy and practices that we have nurtured will continue to support us
to be a preferred destination of talent. We will seek and give the best we
can. And build a still stronger organization reputation.

SAFETY, HEALTH & ENVIRONMENT:

The year 2008-09 was eventful with significant steps taken towards
strengthening various aspects related to SHE. Organization, documentation,
awareness, audits, influencing our business partners, compliance, risk
analysis, training, emergency preparedness, resource conservation & waste
management were all parts of the SH&E strengthening exercise this year.

SAFETY & HEALTH UPDATE:

During the year, 82 safety related incidents were reported from across all
locations of which 9 were lost time accidents. All reported incidents were
thoroughly investigated & corrective actions were implemented. It is
notable that Units II & IV of CTO, Units I, IV and VII of FTO, the
Biologics facility and the Integrated Product Development facility had no
lost time accidents during the year. Compliance was a key focus area which
was driven through Quarterly Compliance Forum meetings with all business
units followed by a review with the Compliance Committee at the Board.
Several compliance issues pertaining to SHE were tabled in these forums.
Action plans were drawn and executed for improving compliance.

Emphasis on improving safety culture and line management ownership of
Safety was on through the year. Steps were taken to monitor SHE performance
through leading indicators than lagging indicators. A specially designed
training session titled 'Safety@Dr. Reddy's' was conducted for site
leadership across our facilities to sensitize employees on the same. Safety
training was disseminated through 661 internal training sessions
(equivalent to 2906 man days of training) conducted by internal faculty.
Specialized Training on 'Risk Analysis' by CIBA Expert Services covered 150
employees.

STRENGTHENING COMMITMENT TO SAFETY:

To inculcate alertness and sustain awareness on safety at the desired
level, monthly safety campaigns were carried out across all manufacturing
sites on themes of Emergency Management, Static electricity, Work permit
system, Construction safety, Laboratory safety etc. 'National Safety Week'
was celebrated across all our manufacturing facilities to strengthen &
intensify safety culture in the workplace. Communicating through skits,
banners, posters, quiz competitions, videos and training programs were very
effective in ensuring message delivery. The World Environment day too was
celebrated across our facilities to create awareness and foster commitment
towards the environment. Tree plantations and poster competitions dotted
the celebration.

To ensure a well administered and uniformly documented SHE system across
all the manufacturing sites and to prescribe safety requirements that have
to be followed, twelve safety guidelines on the areas of Change control,
Risk analysis, Confined space safety, Compressed gas cylinder safety were
made available. Safety information on all the chemicals we handle and on
all finished products that are shipped to our customers is essential for
both compliance and safety. Chemwatch database which lists updated Material
Safety Data Sheets (MSDS) for over 3 million chemicals was put to use.
Through this database, a new initiative of creating 'Batch Chemical Safety'
cards for various products being manufactured in CTOs was initiated. All
key safety related data on handling chemicals is summarized in a simple and
precise manner making it easier for operators to refer and assess the risk.

Emergency Preparedness is critical for the control & mitigation of any
emergency situation. During the year 17 mock drills, 16 Fire drills and 10
First Aid training programs were conducted across the company. As on date
1089 trained fire fighters and 663 trained first aiders are available at
various locations. Occupational Health surveillance was conducted across
all our manufacturing sites. The services of Dr. Rane, a renowned
Occupational Health specialist were used in the CTOs for surveillance.

EFFORTS TO REDUCE CARBON FOOTPRINT:

A Zero Liquid Discharge Plant was commissioned in Biologics development
centre bringing our number of treatment plants to five. The entire effluent
generated is treated and is recycled to be reused as make-up in cooling
towers or as feed water in boilers. The ZLD combines Multiple Effect
Evaporators, Reverse Osmosis Units, Membrane Filtration, Agitated thin-film
drier and Biological treatment. During the year, significant upgrade of the
effluent treatment facilities in CTO-5 and CTO-6 was undertaken.

Site specific state-of-the-art solvent recovery systems (SRS) were
installed to distill spent solvents in the API manufacturing facilities.
The SRS units are automated with advanced systems like PLC (Programmable
Logic Controller) and DCS (Distributed Control systems) for achieving high
performance by minimizing manual intervention and reducing risk through
integrated process safety systems. Most of the distilled solvents are
either reused internally thus ensuring resource conservation as well as
cost reduction.

Our CTOs continued to upgrade & install modern equipment like Peristaltic
Pumps for safe handling of corrosive, flammable & lachrymatic substances;
Dry Screw Vacuum Pumps for handling low boiling solvents to reduce fugitive
emissions and personal exposure.

GOING BEYOND:

SHE support was extended to the Third Party manufacturing facilities which
manufacture key starting material for our CTOs. We conducted 10 Risk
assessments and 1068 man hours of training apart from providing guidance on
various SHE matters.

A comprehensive rain water harvesting study was carried out at the
Bachupally campus. As per the final report of the study, more than 50% of
the water consumption of the entire campus could be harvested and deposited
back into the ground. Persistent efforts to find alternative environmental
friendly methods to dispose organic residue have begun to yield results.
During the year nearly 275 tons of organic residue was sent to a cement
industry for use as an auxiliary fuel. Going forward, it is estimated that
almost 40% of our organic residue generation can be made available to the
cement industry for use as an auxiliary fuel as against incineration.

Comprehensive energy audits were conducted in 12 of our locations by TERI
and 182 energy saving projects with saving potential of 67.32 INR million /
year were identified. Plants are making detailed assessment of the projects
for implementation. A feasibility study was conducted in our Hyderabad
based manufacturing facilities to explore opportunities to use solar
energy. Various interesting opportunities to utilize solar energy like
solar thermal energy in Canteens, AHU water heating, solar power for office
lighting, UPS battery charging, etc are being explored. To accurately
determine our carbon footprint, Green House Gas accounting for last 3 years
was done by TERI as per standard developed by World Research Institute &
World Business Council for Sustainable Development. The detailed
methodology & calculations handed over to us by TERI will now enable us to
accurately estimate and reduce our GHG emissions going forward.

Leadership level positions were created at the business unit level in APIs
and Formulations, while specialist positions in Process Safety &
Industrial Hygiene were created at the corporate level. The SHE Infosite
(an exhaustive information based website placed on employee portal) was
significantly upgraded to improve reporting and tracking of leading
indicators. Dedicated efforts towards resource conservation, strengthening
safety culture, continuous upgrade of physical facilities to deliver better
safety and environmental performance will continue.

NOTE
CTO - Chemical Technical Operations - manufacturing facility for Active
Pharmaceutical Ingredients (APIs)

FTO - Formulations Technical Operations - manufacturing facility for
finished dosages / formulations.

CORPORATE SOCIAL RESPONSIBILITY

DR. R EDDY'S FOUNDATION:

The activities of Dr. Reddy's Foundation (DRF) span two broad areas of
social intervention: Livelihoods & Education.

Livelihoods Create, implement and disseminate sustainable and replicable
livelihood models through partnerships.

Education Provide learning opportunities for those who have never been to
school, or have dropped out of it; while improving quality of education
across schools.

DRF BAGS CORPO RATE CITIZEN' AWARD:

September 2008 presented a milestone moment with the Foundation being
awarded the Economic Times Corporate Citizen of the Year' award in
recognition of its contribution to the public good through commitment to
critical social causes that influence the lives and livelihood of thousands
of needy Indians'.

Accepting the award, Dr. Anji Reddy (Chairman, Dr. Reddy's and DRF) said,
'LABS is an innovation much on the same lines as drug discovery, which is
driven by my core business philosophy of delivering medicines at affordable
prices for people to lead healthier lives. DRF innovates and tries out
novel concepts that are continuously refined and scaled up to cover larger
groups of deprived populations. This is in keeping with our pursuit of
creating CSR models that have measurable results and can be replicated
across the country.'

DRF GETS A NEW CEO:

Mr. Jitendra Kalra assumed charge as Chief Executive Officer of DRF in June
2008. An internationally acclaimed expert and trainer on cluster
development' with wide-ranging experience in the development sector, Kalra
served in the UNIDO and the Indian Civil Services for 19 years before
joining the Foundation.

LIVELIHOODS UPDATE:

LIVELIHOOD ADVANCEMENT BUSINESS SCHOOL (LABS):

A total of 46,473 livelihoods were generated by LABS in 2008-09 under the
following partnerships:

Government Partnership with Livelihoods
Partnerships

Grameen LABS MoRD, Government of India 20072

IKP-Urban (UPADHI) MEPMA, Govt. of AP 6246
LABS

CDMA LABS CDMA, Govt. of AP 992

Maarpu LABS DYS, Govt. of AP 1535

IKP LABS EGMM, Govt. of AP 12586

GVMC LABS GVMC, Govt. of AP 366

MPRLP LABS MPRLP, Govt. of MP 49

Corporation LABS Corporation of Chennai, Tamil Nadu 468

TP LABS Directorate of Town Panchayats, Tamil Nadu 132

SGSY LABS MoRD and NABARD, Uttar Pradesh 1497

SHG LABS WBSRDA, West Bengal 133

Total 44076

Corporate Partnership with Livelihoods
Partnerships

MSDF LABS Michael & Susan Dell Foundation 1370

Asha LABS Tata Teleservices 64

CII-Yi LABS CII-Yi 339

Tata Telecom Training Academy Tata Communications 30

Accenture LABS Accenture 285

Firstsource LABS Firstsource 309

Total 2397

SOCIAL AUDIT REPORT:

DRF published its Social Audit Report for 2007-08 with an objective of
reporting accurately on its achievements, acquiring clarity in
understanding and aligning to its core values, consulting stakeholders on
measures to improve its program quality and preparing for scale up of its
activities. In October 2008, the Social Accounts were discussed and
ratified by a Social Audit Panel comprising John Pearce (Social Audit
Network, UK) and select experts in the development sector.

STRENGTHENING AL UMNI NETWORK:

The year witnessed several alumni meets, which helped in sharing
information on various job avenues and learning opportunities. A website
titled www.labsalumni.org was also launched to serve as an e-platform for
LABS alumni by offering information and programs of relevance.

NEW LABS PARTNERSHIPS FORGED IN THE YEAR:

Michael & Susan Dell Foundation - LABS:

In partnership with Michael & Susan Dell Foundation, DRF has set up over 10
MSDF LABS centers in the National Capital Region of Delhi, to provide
sustainable livelihoods training to 6000 youth from slum pockets who are
being relocated to resettlement areas on the city's outskirts.

Indira Kranthi Patham - Urban (UPADHI) LABS DRF has drawn up an MoU with
Mission for Elimination of Poverty in Municipal Areas (MEPMA, Government of
AP) to impart placement-linked skills training to the State's urban poor
through the IKP-Urban (UPADHI) LABS project.

Asha LABS with Tata Teleservices In India's rapidly expanding services
sector, telecom sales are making quick inroads into the country's deep
rural areas. To cater to the need for a large trained workforce in this
sector DRF has in partnership with Tata Teleservices - launched Asha
LABS', under which two pilot training centers have been set up at Hyderabad
and Indore, with each center training 60 aspirants.

Self Help Groups, West Bengal - LABS To assist rural women Self Help Groups
(SHG) in West Bengal in marketing their products effectively, DRF has
partnered with the state government to impart skills training in
entrepreneurship, rural retailing, packaging, branding, customer
management, life skills, computer fundamentals and basic English. The State
Government mobilizes the beneficiaries for the training program, after
which the SHGs are also assisted in obtaining market linkages.

Indira Kranthi Patham LABS In another MoU with Employment Generation &
Marketing Mission (EGMM, Government of AP), DRF has set up IKP (Indira
Kranthi Patham) LABS centers across the state to provide vocational
training for disadvantaged rural youth. EGMM provides the necessary
infrastructure support for program implementation.

NEW RURAL INITIATIVES:

Two pilot rural initiatives were launched in select villages in Sadashivpet
(AP) and Daund (Maharashtra). DRF facilitated 15 non-farm micro-enterprises
in Sadashivpet, while in Daund it identified several on-farm activities and
arranged skill training as well as bank linkages for potential
beneficiaries. Farmers' clubs have been set up to enable members to address
common problems.

Development funds have been formed for members to avail short-term loans
for new technology adoption and micro-enterprise development. Two rural
LABS centers were set up, with each center training about 60 youth in two
domains.

EXPLORING NEW LIVELIHOOD OPTIONS:

Based on market need analyses, LABS curricula have been updated and
developed in the following domains:

Retailing: Aspects specific to organized retailing, which is rapidly
expanding all over India, opening up a wide array of job opportunities for
youth. The aspirants can become counter / floor sales executives.

Telecom Sales: Caters to the need for a large trained workforce in this
sector, which is making very quick inroads into rural India as well. The
aspirants can become communication advisors, customer relations executives,
etc.

Rural Marketing: Assists SHGs in enhancing their communication skills,
sales techniques, entrepreneurial competencies, customer handling and
computer basics.

Direct Selling: Emphasizes direct selling techniques, negotiation skills
and objection handling methods specific to direct selling; it enables
aspirants to become direct / channel sales executives.

Banking, Financial Services & Insurance: Skills required in marketing
financial services, as well as good product knowledge. The aspirants can
become relationship officers, data entry operators, etc.

Housekeeping: Various functions of corporate housekeeping, organization of
the housekeeping sector, competencies required in housekeeping personnel,
etc. The course equips the aspirants for various positions in the
housekeeping sector.

Security Services: Various types of security situations (emergency / fire /
bomb threat), evacuation, security documentation, etc. The aspirants can
become security / escort / residential guards.

Bengali Cuisine: Developed to train women members of SHG LABS (West Bengal)
in running their own food production enterprises.

Chinese Cuisine: Designed to enable the aspirants to set up their own
eateries, the curriculum includes different types of traditional Chinese
cuisine / sauces, Chinese kitchenware, etc.

Bakery & Confectionery: Elements like bakery ingredients, preparation of
various types of breads / pastries / cookies / cakes, cake frosting /
icing, etc.

The Communicative English module for LABS aspirants has been revised to
become learner-centric. IT modules for non-IT courses have also been
updated. Various capacity building programs were held for staff at all
levels to ensure efficient administration of the LABS program across the
country.

EDUCATION UPDATE:

YUVA YOUTH LEARNING CENTERS:

Community-based adolescent youth learning centers established in various
urban slum areas around Hyderabad help bring dropouts and working children
into the mainstream education system. They prepare eligible students for
the Class X Board exam and help them obtain formal academic certification.
They also provide career counseling and job-related training. DRF also runs
a Residential Yuva Center for girl students besides having served 500
students at five Yuva Centres this year.

TRANSIT EDUCATION CENTERS :

In partnership with various construction companies in Hyderabad and RR
Districts, DRF set up over 100 transit schools for children of migrant
construction workers. A transit school comprises an early childhood
education center' (creche), a bridge course camp and a regular primary
school. Nearly 4000 children have been enrolled so far, with 120 teachers
engaged in teaching them. Children in the group of 9-14 years are mobilized
into Residential Bridge Course' centers.

ALTIUS, THE ADVANCEMENT SCHOOL:

Located in Hyderabad, Altius helps graduates and diploma holders access
various career advancement opportunities by providing them requisite
employability skills. It offers training in Medical Transcription, Call
Center and Accountancy packages, in addition to Communicative English, soft
skills and basic IT skills. Over 200 people have received training at
Altius so far.

PUDAMI NEIGHBOURHOOD SCHOOLS:

A novel initiative of DRF to bring quality education to all children in the
neighborhood, the Pudami schools address the rising demand for English-
medium education from marginalized / lower-income communities. Four schools
have been set up in Hyderabad and RR Districts so far. They have a combined
strength of over 1000 children, drawn from all sections, together forming
one homogenous Pudami' community.

PUDAMI ENGLISH PRIMARIES:

To make quality English-medium education accessible to urban children from
lower income groups, DRF set up 29 Pudami English Primaries in Hyderabad
and RR Districts. They have a combined strength of 3250 children (from
Nursery to Class V) and 152 teachers. The Primaries are assisted by DRF's
in-house Education Resource Center in curriculum design, academic
monitoring mechanism and preparation of training material for the teachers.

KALLAM ANJI REDDY VIDYALAYA (KARV):

The Kallam Anji Reddy Vidyalaya located in Hyderabad has a current strength
of plus 1500 students. The school offers instruction in both English and
Telugu media.

KALLAM ANJI REDDY VOCATIONAL JUNIOR COLLEGE:

Located in Hyderabad, the College presently offers five 2-year vocational
courses at the Intermediate level - Automobile Engineering Technician,
Computer Graphics & Animation, Computer Science & Engineering, Hotel
Operations and Multi-Purpose Health Worker.

ECCE COURSE LAUNCHED:

DRF has launched six-month professional development courses for teachers to
help them enhance their pedagogical practices in Early Childhood Care &
Education (ECCE). DRF now has its own cadre of teachers specifically
trained in child-centered ECCE methods and pre-primary education.

TOUCHING LIVES OF PEOPLE:

DR. REDDY'S FOUND ATION FOR H EAL TH EDUCATION:

Patient rights and well-being are an important concern for us. The desire
to improve patient care and to help create a more responsive integrated
healthcare service prompted us to establish the Dr. Reddy's Foundation for
Health Education (DRFHE).

'Excellence is the unlimited ability to improve the quality of what you
have to offer'. Firmly believing this, DRFHE strives to deliver programs on
Health Education which speak of quality. Programs are well received and
DRFHE has received heartening responses from the participants and from the
company's sales team who have contributed to the significant scale up of
the various programs. The year 2008-09 witnessed an increase of over 8
times compared to the previous year.

EDUCATION INITIATIVES:

Post Graduate Certificate in Healthcare Management:

DRFHE is successfully running its sixth batch of the Post Graduate
Certificate in Health Care Management (PGCHM) at Hyderabad. Thirty students
have enrolled for the academic year 2008-09. A PGCHM-certified Patient
Educator would be a combination of: Physician's Assistant, Patient
Counselor, Health Educator and Physician's Associate.

Certificate Program in Cancer Counseling:

DRFHE had conducted two Certification Programs in Cancer Counseling (CPCC).
Fourteen candidates have been placed as Case Managers under leading
Oncologists across India. This Program enables the participants from
Bioscience background to emerge as knowledgeable, skilled and competent
individuals specialized in cancer counseling.

RATIO ANALYSIS

BASED ON CONSOLIDATED IFRS FINANCIAL:

Ratio Analysis

2009 2008

Performance Ratios:

International revenue / total revenue % 83.5 79.1

Domestic revenue / total revenue % 16.5 20.9

Gross proft / total revenue % 52.6 50.8

- Pharmaceutical Services and Active Ingredients % 29.9 34.0

- Global Generics % 61.1 59.5

Selling, General and Administrative expenses /
total revenue % (Note 1) 28.1 30.5

R&D Expenses / total revenue % 5.8 7.1

Operating proft / total revenue % (4.1) 4.7

Depreciation and amortization / total revenue % (Note 2) 25.7 12.9

Other Operating income,net of expense / total revenue % (0.4) 0.8

Proft before tax / total revenue % (5.8) 5.7

Proft after tax / total revenue % (7.4) 7.7

balance Sheet Ratios:

Fixed Assets turnover ratio 3.7 3.4

Capital expenditure / total revenue % 6.5 12.5

Working Capital Turnover ratio (Note 3) 5.6 6.3

Debt / Equity 0.5 0.4

Debtors turnover (Days) 56.3 52.3

Inventory turnover ratio (Days) 135.0 138.6

Current ratio 1.5 1.7

Cash and equivalents / total assets 6.7 8.7

Investments / total assets 0.9 5.8

Growth Ratios:

Total revenue % 38.9 (23.2)

- Pharmaceutical Services and Active Ingredients% 12.8 (9.8)

- Global Generics % 51.5 (29.1)

International revenue % 46.6 (29.3)

Selling, General and Administrative expenses % 28.0 8.5

R&D Expenses % 14.3 43.5

Share Data:

Book Value (Rs. per Share) 249.6 281.6

Dividend % 125.0 75.0

Dividend per share (Rs.) 6.25 3.75

Basic earnings per share (Rs.) (30.69) 22.89

Diluted earnings per share (Rs.) (30.69) 22.80

NOTES:

(1) Selling, General and Administrative expenses excludes Amortisation
expense

(2) Includes Impairment

(3) Working Capital is calculated as (Accounts Receivables; Inventories &
Other Current Assets) Less (Trade Accounts Payables; Accrued Expenses &
other Current liabilities)