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Novartis India Ltd.

BSE: 500672 Sector: Health care
NSE: NOVARTIND ISIN Code: INE234A01025
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NSE 05:30 | 01 Jan Novartis India Ltd
OPEN 792.00
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VOLUME 55170
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52-Week low 580.00
P/E 28.07
Mkt Cap.(Rs cr) 1,967
Buy Price 796.00
Buy Qty 210.00
Sell Price 796.95
Sell Qty 8.00
OPEN 792.00
CLOSE 781.30
VOLUME 55170
52-Week high 813.00
52-Week low 580.00
P/E 28.07
Mkt Cap.(Rs cr) 1,967
Buy Price 796.00
Buy Qty 210.00
Sell Price 796.95
Sell Qty 8.00

Novartis India Ltd. (NOVARTIND) - Director Report

Company director report

Your Directors are pleased to present the Annual Report and the Audited Accounts forthe financial year ended March 31 2018.

Summary of the Financial Results

(Rs. in million)

2017-18 2016-17
Revenue from Operations 5638.9 6562.3
Total Income 7357.2 7272.3
Profit before Tax 1575.2 917.3
Profit for the year 783.6 572.2
Other Comprehensive Income for the year 12.0 5.0
Balance brought forward from previous year 8336.2 8143.7
Available for appropriation
The Directors have made the following appropriations:
Dividend 281.4 319.6
Dividend distribution tax 57.3 65.1
Buy-back of equity shares 1537.4 0
Amount transferred to Capital Redemption Reserve 17.3 0
Carry forward 7238.4 8336.2

Dividend

The Board has recommended payment of dividend at Rs. 10 per equity share of Rs. 5 eachfor the financial year 2017-18. The dividend if approved by the members at the AnnualGeneral Meeting ("AGM") will result in a cash outflow of Rs. 297.7 millionincluding dividend distribution tax.

Buyback of equity shares

During the year the Company had bought back 3450000 equity shares from all existingshareholders/beneficial owners of equity shares on a proportionate basis through theTender Offer route at a price of Rs. 670 (Rupees six hundred and seventy only) per equityshare for an aggregate amount of Rs. 2311500000 (Rupees two hundred and thirty onecrore fifteen lakh only).

Management Discussion and Analysis

Fortheyearunderreviewthebusinessoperationsof theCompanycompriseof Pharmaceuticals.

a. Industry structure and developments

India's economic growth in terms of GDP for Financial Year 2017-18 stood at 6.5percent compared to 7.1 percent during the previous financial year primarily due to poorperformance of the agriculture and manufacturing sectors. While structural reforms likeGoods and Service Tax (GST) were welcomed the transition to GST encountered challenges ofpolicy law and information technology systems affected many sectors. HoweverGovernment's continued commitment towards economic reforms and a slew of measuresto support these like rationalizing GST rates on many common goods & servicessimplifying compliance burdens solving problems associated with non-performing assets ofthe banks liberalizing foreign direct investment are improving growth prospects for theeconomy.

India's healthcare system currently remains grossly inadequate to provide care to apopulation of 1.3 billion especially in rural areas. With public spending on healthcareat 1.4 percent of GDP India is among the lowest in the world. Continuing challengessurrounding drug pricing and low health insurance are factors impacting the research basedpharmaceutical industry. It is encouraging that the Government has come out with aNational Health Policy 2017 which proposes to increase public health expenditure to 2.5%of the GDP in a time bound manner.

The Indian Pharma Market ("IPM") is valued at Rs. 1184.86 billion (AIOCD MAT

FEB 2018) and forecasted to grow at a Compounded Annual Growth Rate (CAGR) of 9.7percent* between 2017 and 2022 reaching Rs. 1967.6 billion by 2022. It continues to be ahighly fragmented and competitive market with a large number of players spread acrosstherapeutic segments.

b. Performance

Revenue from operations for the year ended March 31 2018 was at Rs. 5638.9 millionrepresenting a decrease of 14.1 percent over the previous year. Profit before tax for theyear from continuing operations was at Rs. 1575.2 million representing an increase of 71.7percent over the previous year. This is mainly on account of interest income of Rs. 981.3million received on income tax refund of AY 1995-96 recognized as income in the accountsbased on the management estimate of the amount the Company is entitled to receive inaccordance with the provisions of the Income-tax Act 1961.

c. Segment-wise operational performance

The Pharmaceuticals business registered Net Revenue from Operations of Rs. 5638.9million representing a decrease of 14.1 percent over the previous year. Revenue fromoperations was impacted by the Goods and Service Tax roll-out and expansion of NationalList of Essential Medicines (NLEM) which led to increase in the scope of drugs subject toprice control. Both these events had an adverse impact on the operating profits of thePharmaceutical business. Following brands hold key positions in major therapeutic areassuch as:

Therapeutic Area Product
Central Nervous System Tegrital
Pain & Inflammation Voveran
Transplantation/Immunology Sandimmun Neoral

d. Risks

India is a self-pay market which coupled with widespread low affordability poses asignificant challenge to the pharmaceutical industry in general. Healthcare insurance inIndia has still not penetrated in a way so as to make a positive impact on affordability.Control of prices of certain drugs under the DPCO continues to affect the profitability ofthe pharmaceutical industry. Any attempt to expand the scope of the DPCO will poseadditional challenges. The Indian Pharma Market (IPM) is dominated by generic medicinesand these drugs account for nearly 75% of the pharma industry. Therefore any mandatoryprescription of medicines by their generic name without referring to the brand namewould necessitate a change in the Company's promotional strategies and could affectproduct pricing. Novartis AG which is our holding company owns directly or indirectlyseveral companies in Novartis Group worldwide including various brands and patents.Therefore any merger acquisition divestments or restructuring by Novartis AG or itssubsidiaries would have an influence on Company's operations in India as well.

* source: IQVIA™ MARKET PROGNOSIS 2018-2022 Asia/Australia – India. PublishedMarch 2018 e. Outlook

While the overall outlook for the economy looks promising it is also dependent uponmany macro-economic factors like increasing crude oil prices problem of non-performingassets agriculture distress etc. which could have a dampening effect on GDP growth infuture.

However it is encouraging for the Pharma industry to note that the Government is keento implement two major healthcare programmes first the National Health Protection Schemewhich is being projected as the world's largest healthcare programme and the other is tocreate approximately 1.5 lakh health and wellness centers across the country which willbring healthcare closer to home. A large and growing population low healthcarepenetration Government's commitment to increase healthcare spend emerging digitaltechnologies in the healthcare sector growing preference towards private care allpresent a growth opportunity for the pharmaceutical industry.

It is also imperative to note that while government looks committed towards buildingthe health infrastructure the health delivery system continues to face severe challengesdue to lack of appropriate and enough human resources deployed on the ground. The newlyannounced schemes will truly be a game changer towards universal health coverage but aswith previous schemes the key remains in the successful implementation of theseprogrammes.

The IPM does face headwinds in the form of continuing price controls and mandatoryprescription of medicines using their generic names. Despite the ongoing efforts atdriving productivity and various cost control measures the severe price cuts continue toimpact Company results.

f. Internal control systems and their adequacy

The Company maintains appropriate systems of internal control including monitoringprocedures to ensure that all assets are safeguarded against loss from unauthorized useor disposition. Company policies guidelines and procedures provide for adequate checksand balances and are meant to ensure that all transactions are authorized recorded andreported correctly. The Head of Internal Audit together with external audit consultantsreview the effectiveness and efficiency of these systems and procedures to ensure that allassets are protected against loss and that the financial and operational information isaccurate and complete in all respects. The Audit Committee approves and reviews auditplans for the year based on internal risk assessment. Audits are conducted on an ongoingbasis and significant deviations are brought to the notice of the Audit Committee of theBoard of Directors following which corrective action is recommended for implementation.All these measures facilitate timely detection of any irregularities and early remedialsteps.

During the year the Company conducted a detailed review of its internal controlsystems evaluated the internal financial control systems with the Audit Committee anddiscussed relevant issues with internal and statutory auditors. Based on therecommendations of the Audit Committee the Board has stated in its responsibilitystatement that proper internal financial controls were followed by the Company and thatsuch internal financial controls are adequate and were operating effectively.

g. Vigil Mechanism

The Company has established a Vigil Mechanism that enables the Directors and employeesto report genuine concerns. The Vigil Mechanism provides for (a) adequate safeguardsagainst victimization of persons who use the Vigil Mechanism; and (b) direct access to theChairperson of the Audit Committee of the Board of the Company in appropriate orexceptional cases. Details of the Vigil Mechanism policy are made available on theCompany's website www.novartis.in

h. Personnel

The Industrial Relations scenario continued to be cordial. The Company regards itsemployees as a great asset and accords high priority to training and development ofemployees.

Number of employees as on March 31 2018 was 668.

The information required pursuant to Section 197 of the Companies Act 2013 ("theAct") read with Rule 5 of the Companies (Appointment and Remuneration of ManagerialPersonnel) Rules 2014 in respect of employees of the Company will be provided uponrequest. In terms of Section 136 of the Act the Report and Accounts are being sent to themembers and others entitled thereto excluding the information on employees' particularswhich is available for inspection by members at the Registered Office of the Companyduring business hours on working days of the Company up to the date of the ensuing AGM. Ifany member is interested in obtaining a copy thereof such member may write to the CompanySecretary & Compliance Officer of the Company in this regard.

Corporate Social Responsibility

The Company continues to actively support various initiatives in the areas of healtheducation sports and environment. The CSR Policy adopted by the Board of Directors isavailable on the Company's website www.novartis.in

Health: India has around 60 percent of the world's leprosy case load and leprosycontinues to be an area of focus for the Company's CSR work in India. Leprosy PostExposure Prophylaxis Project (LPEP) was launched in the union territory of Dadra& Nagar Haveli in March 2015 and continued during the financial year under review.During the year 2017-18 refresher training was conducted for 4 research assistants 1project supervisor 7 doctors 7 supervisors 14 auxiliary nurse midwives (ANMs) 70Accredited Social Health Activists (ASHAs) from general healthcare who weretrained in leprosy as well as in the LPEP project. The health awareness reach covered350000 people including school children. 9553 people were screened for leprosywith a prophylactic dose for prevention of transmission of leprosy being given to 5828eligible persons. 3 new cases of leprosy were detected.

The Company is a strong player in the oncology segment and furthered its commitment tochildren suffering from cancer by funding preventive healthcare and sanitation at variouschild care centers in Maharashtra.

Education: The poor in India continue to be heavily impacted by lack of educationwith children not being sent to school so that they can contribute to the family income ordropping out of school. The mid-day meal program when run effectively has helped bringand keep children in school. Recognizing this as an important role in education theCompany made significant investments in this area to provide less privileged children witha nutritious meal. More than 8000 children in Mumbai Vrindavan Lucknow and Bhubaneshwarare beneficiaries under this programme.

Sports: India is yet to make a significant mark in the area of sports particularlyat the Olympic level. Focus by parents continues to be on academics for their childrenmaking sports a neglected area. The Company continues to support the medical nutritionaland training needs of promising Indian athletes who will participate in future Olympics.

Environment: The city of Mumbai is starved of open green spaces and the Company hascontributed in a positive way by supporting the upkeep of two beautiful gardens close toits Mumbai office.

The Company continues to commemorate Community Partnership Week ("CPW") eachyear encouraging employees to work on causes close to their heart. A pan India activitythat has shown rising numbers is the blood donation drive for children suffering fromthalassaemia a hereditary blood disorder where the body makes an abnormal form ofhaemoglobin the protein in red blood cells that carry oxygen. They need to get bloodevery two weeks. CPW continues to grow in stature with a rising number of associatesparticipating in a broad range of activities covering the less fortunate.

The Annual Report on Corporate Social Responsibility Activities is annexed herewith as

Annexure A.

Related Party Transactions

All Related Party Transactions that were entered into during the financial year were onarm's length basis and in the ordinary course of business. All Related Party Transactionswere placed before the Audit Committee of the Board of Directors for their approval. TheAudit Committee has granted omnibus approval for Related Party Transactions as per theprovisions and restrictions contained in the SEBI (Listing Obligations and DisclosureRequirements) Regulations 2015. ("Listing Regulations"). The Company hasformulated a policy on materiality of Related Party Transactions and also on dealing withRelated Party Transactions. The policy is available on the Company's websitewww.novartis.in Pursuant to Clause (h) of sub-section (3) of Section 134 of the Act andRule 8(2) of the Companies (Accounts) Rules 2014 the particulars ofcontracts/arrangements entered into by the Company with related parties referred to insub-section (1) of Section 188 of the Act including certain arm's length transactionsunder third proviso thereto are required to be disclosed in Form AOC–2. The FormAOC–2 envisages disclosure of material contracts or arrangement or transactions atarm's length basis.

The details of the material Related Party Transactions in financial year 2017-18 asper the Policy on dealing with Related Parties adopted by the Company are disclosed in AnnexureB. The transactions disclosed in the Annexure relate to material Related PartyTransactions with Novartis Pharma AG for purchase transfer or receipt of products goodsactive pharmaceutical ingredients materials services other obligations as approved bymembers under erstwhile Clause 49(VII)(E) of the listing agreement at the 67thAnnual General Meeting of the Company held on July 23 2015.

Risk Management

The Company has devised and implemented a mechanism for risk management and hasdeveloped a Risk Management Policy. The Policy provides for constitution of a RiskManagement Committee. The Committee has created a Risk Register and works towards reviewand identification of internal and external risks and implementation of risk mitigationsteps. The Company provides updates on risk management to the Audit Committee of the Boardof Directors of the Company on a regular basis.

Fixed Deposits

The Company has not accepted deposits from the public falling within the ambit ofSection 73 of the Companies Act 2013 and the rules framed thereunder.

Particulars of Loans Guarantees or Investments

As on March 31 2018 there were no outstanding loans or guarantees covered under theprovisions of Section 186 of the Act. The Company has certain unquoted investments in co-operativehousing societies for premises owned by the Company. The details of changes in the LoansGuarantees and Investments covered under the provisions of Section 186 of the Act aregiven in the notes to the Financial Statements.

Board of Directors

The Company has received declarations from all Independent Directors that they meetthe criteria of independence as laid down under Section 149(6) of the Act and the ListingRegulations.

Mr. Ranjit Shahani resigned from the Board as Vice Chairman & Managing Director ofthe Company w.e.f. February 28 2018. Mr. Jawed Zia who was appointed as Vice Chairman& Managing Director effective March 1 2018 resigned from office effective May 312018. The Board of Directors based on the recommendation of the Nomination &Remuneration Committee appointed Mr. Milan Paleja as Vice Chairman & ManagingDirector of the Company w.e.f. June 1 2018 subject to the approval of members at thisAGM and approval of the Central Government.

Ms. Monaz Noble was appointed as Whole Time Director of the Company w.e.f. June 132016. Ms. Noble retires at this AGM and being eligible offers herself for re-appointment.

Necessary resolutions for the appointment/re-appointment of Directors together with detailsfor appointment/re-appointment have been included in the Notice convening the ensuing AGM.

Familiarization programme for Independent Directors

The Company keeps its Directors informed of the activities of the Company itsmanagement and operations and provides an overall industry perspective on issues beingfaced by the industry in a proactive manner. Details of various familiarizationprogrammes provided to the Directors of the Company are available on the Company's websitewww.novartis.in

Auditors

The Board has recommended the re-appointment of M/s. Deloitte Haskins & Sells LLP(Firm Registration No. 117366W/W-100018) from the conclusion of the 70th AnnualGeneral Meeting to the conclusion of the 71st Annual General Meeting of theCompany.

Secretarial Audit

Pursuant to the provisions of Section 204 of the Act and the Companies (Appointment andRemuneration of Managerial Personnel) Rules 2014 the Board has appointed Mr. K. G. Saraffrom Saraf & Associates Practicing Company Secretary for conducting secretarial auditof the Company for the financial year 2017-18.

The Secretarial Audit Report is annexed herewith as Annexure C. The SecretarialAudit report does not contain any qualification reservation or adverse remark.

Energy Technology Absorption and Foreign Exchange

Information required under Section 134(3)(m) of the Act read with Rule 8(3) of theCompanies (Accounts) Rules 2014 with respect to conservation of energy technologyabsorption and foreign exchange earnings/outgo is included in Annexure D.

Directors' Responsibility Statement

Pursuant to Section 134 of the Act the Directors state that:

(a) In the preparation of the annual accounts the applicable accounting standards havebeen followed along with proper explanation relating to material departures if any; (b)Appropriate accounting policies have been selected and applied consistently and have madejudgments and estimates that are reasonable and prudent so as to give a true and fairview of the state of affairs of the Company as at March 31 2018 and of the profit andloss of the Company for the year ended March 31 2018;

(c) Proper and sufficient care has been taken for the maintenance of adequateaccounting records in accordance with the provisions of the Companies Act 2013 forsafeguarding the assets of the Company and for preventing and detecting fraud and otherirregularities;

(d) The annual accounts have been prepared on a going concern basis;

(e) Proper internal financial controls were followed by the Company and such internalfinancial controls are adequate and were operating effectively;

(f) Proper systems are devised to ensure compliance with the provisions of allapplicable laws and that such systems are adequate and operating effectively.

Corporate Governance

The Company is committed to good corporate governance and is in compliance with theprovisions on corporate governance specified in the Listing Regulations and Novartis Groupcorporate governance norms.

A certificate of compliance from Dr. K. R. Chandratre Practicing Company Secretary andthe report on Corporate Governance form part of this Directors' Report.

Prevention of Sexual Harassment Policy

The Company has in place a Prevention of Sexual Harassment policy in line with therequirements of the Sexual Harassment of Women at the Workplace (Prevention Prohibitionand Redressal) Act 2013. An Internal Committee has been set up to redress complaintsreceived regarding sexual harassment. All persons whether employed as permanentcontractual temporary trainees are covered under this policy.

During the year 2017-2018 no complaints were received by the Company related to sexualharassment.

Extract of Annual Return

The details forming part of the extract of the Annual Return in form MGT 9 are placedon the website of the Company at www.novartis.in

Acknowledgement

The Board appreciates and places on record the contribution made by all stakeholdersparticularly employees shareholders customers the medical fraternity and all businesspartners during the year under review and acknowledges the support received from theparent Company Novartis AG.

Cautionary Note

The statements forming part of the Directors' Report may contain certain forwardlooking remarks within the meaning of applicable securities laws and regulations. Manyfactors could cause the actual results performances or achievements of the Company to bematerially different from any future results performances or achievements that may beexpressed or implied by such forward looking statements.

On behalf of the Board of Directors
CHRISTOPHER SNOOK
Chairman
May 10 2018

Annexure B to the Directors' Report

FORM AOC–2

(Pursuant to Clause (h) of sub-section (3) of Section 134 of the Act and Rule 8(2) ofthe Companies (Accounts) Rules 2014.

Form for disclosure of particulars of contracts/arrangements entered into by theCompany with related parties referred to in sub-section (1) of Section 188 of the Actincluding certain arm's length transactions under third proviso thereto.

1. Details of contracts or arrangements or transactions not at arm's length basisduring the financial year ended March 31 2018 None

2. Details of material contracts or arrangement or transactions at arm's length basisduring the financial year ended March 31 2018 (Refer Note 1)

Sr. No. Particulars Details
(a) Name(s) of the related party & nature of relationship Novartis Pharma AG Basel Switzerland Fellow subsidiary
(b) Nature of contracts/ arrangements/transaction Contract(s) for purchase transfer or receipt of products goods active pharmaceutical ingredients materials services other obligations.
Under the erstwhile Clause 49(VII)(E) of the Listing Agreement the members approved such transactions up to a value of Rs. 3000 million in each financial year at the 67th Annual General Meeting of the Company held on July 23 2015.
(c) Duration of the contracts/ arrangements/transaction Ongoing
(d) Salient terms of the contracts or arrangements or transaction including the value if any The transactions under the contract are in the ordinary course of business and at arm's length. The total value of the transactions in the financial year was Rs. 1032.9 million.
(e) Date of approval by the Board The Board approved these transactions at its meeting held on May 23 2017.
(f) Amount paid as advances if any None

Note 1: Pursuant to Clause (h) of sub-section (3) of Section 134 of the Act and Rule8(2) of the Companies (Accounts) Rules 2014 the particulars of contracts/arrangementsentered into by the Company with related parties referred to in sub-section (1) of Section188 of the Act including certain arm's length transactions under third proviso thereto arerequired to be disclosed in Form AOC–2. The Form AOC–2 envisages disclosure ofmaterial contracts or arrangement or transactions at arm's length basis. The above detailsare as per the Policy on dealing with related party transactions adopted by the Company.

On behalf of the Board of Directors
CHRISTOPHER SNOOK
Chairman
May 10 2018

Annexure D to the Directors' Report

Conservation of energy technology absorption and foreign exchange earnings/outgo

Particulars required by the Section 134(3)(m) of the Companies Act 2013 ("theAct") read with Rule 8(3) of the Companies (Accounts) Rules 2014 and forming part ofthe Directors' Report for the year ended March 31 2018.

A. CONSERVATION OF ENERGY

Measures taken additional investments and impact on reduction of energy consumptionDisclosure of particulars with respect to Conservation of Energy

2017-18 2016-17
a) Power & Fuel Consumption Not applicable Not applicable
b) Consumption – per unit of production Not applicable Not applicable

The Company does not have manufacturing unit in India.

B. TECHNOLOGY ABSORPTION

Disclosure of particulars with respect to Technology Absorption

1. Efforts in brief made towards technology absorption adaptation andinnovation:

Novartis AG Switzerland continues to provide basic technology and technical know-howfor introduction of new products and formulation development. These are adapted wherevernecessary to local conditions.

2. Benefits derived as a result of the above efforts:

New product development productivity and quality improvements enhanced safety andenvironmental protection measures.

3. Technology Imported:

Novartis AG Switzerland has provided technical know-how and technology as and whenrequired relating to products quality marketing and so on. This on-going processinvolves visits by employees of both companies to each other's office sites fordiscussions and training.

4. Expenditure on R&D: NIL

C. FOREIGN EXCHANGE EARNINGS AND OUTGO

The foreign exchange earned in terms of actual inflows during the year was Rs. 60.6million and the foreign exchange outgo during the year was Rs. 3630.2 million in terms ofactual outflows.