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Novartis India Ltd.

BSE: 500672 | NSE: NOVARTIND | Series: NA | ISIN: INE234A01025 | SECTOR: Pharmaceuticals

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Annual Report

For Year :
2018 2017 2016 2015 2014 2013 2012 2011 2010

Director’s Report

Directors'' Report

The Directors are pleased to present the Annual Report and the Audited Accounts for the financial year ended March 31, 2018.

Summary of the Financial Results

(Rs, in million)

2017-18

2016-17

Revenue from Operations

5,638.9

6,562.3

Total Income

7357.2

7272.3

Profit before Tax

1,575.2

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

Available for appropriation

The Directors have made the following appropriations:

8,336.2

8,143.7

Dividend

281.4

319.6

Dividend distribution tax

57.3

65.1

Buy-back of equity shares

1,537.4

0

Amount transferred to Capital Redemption Reserve

17.3

0

Carry forward

7,238.4

8,336.2

Dividend

The Board has recommended payment of dividend at Rs, 10 per equity share of Rs, 5 each for the financial year 2017-18. The dividend, if approved by the members at the Annual General Meeting (“AGM”), will result in a cash outflow of Rs, 297.7 million including dividend distribution tax.

Buyback of equity shares

During the year, the Company had bought back 34,50,000 equity shares from all existing shareholders/beneficial owners of equity shares, on a proportionate basis, through the Tender Offer route at a price of Rs, 670 (Rupees six hundred and seventy only) per equity share for an aggregate amount of Rs, 231,15,00,000 (Rupees two hundred and thirty one crore fifteen lakh only).

Management Discussion and Analysis

For the year under review, the business operations of the Company comprise of Pharmaceuticals.

a. Industry structure and developments

India’s economic growth in terms of GDP for Financial Year 2017-18, stood at 6.5 percent compared to 7.1 percent during the previous financial year, primarily due to poor performance of the agriculture and manufacturing sectors. While structural reforms like Goods and Service Tax (GST) were welcomed, the transition to GST encountered challenges of policy, law, and information technology systems affected many sectors.

However, Government’s continued commitment towards economic reforms and a slew of measures to support these like rationalizing GST rates on many common goods

& services, simplifying compliance burdens, solving problems associated with nonperforming assets of the banks, liberalizing foreign direct investment are improving growth prospects for the economy.

India’s healthcare system currently remains grossly inadequate to provide care to a population of 1.3 billion, especially in rural areas. With public spending on healthcare at 1.4 percent of GDP India is among the lowest in the world. Continuing challenges surrounding drug pricing and low health insurance are factors impacting the research based pharmaceutical industry. It is encouraging that the Government has come out with a National 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 9.7 percent* between 2017 and 2022, reaching Rs, 1967.6 billion by 2022. It continues to be a highly fragmented and competitive market with a large number of players spread across therapeutic segments.

b. Performance

Revenue from operations for the year ended March 31, 2018 was at Rs, 5638.9 million representing a decrease of 14.1 percent over the previous year.

Profit before tax for the year from continuing operations was at Rs, 1575.2 million representing an increase of 71.7 percent over the previous year. This is mainly on account of interest income of Rs, 981.3 million received on income tax refund of AY 1995-96 recognized as income in the accounts based on the management estimate of the amount the Company is entitled to receive in accordance with the provisions of the Income-tax Act, 1961.

c. Segment-wise operational performance

The Pharmaceuticals business registered Net Revenue from Operations of Rs, 5638.9 million representing a decrease of 14.1 percent over the previous year. Revenue from operations was impacted by the Goods and Service Tax roll-out and expansion of National List of Essential Medicines (NLEM) which led to increase in the scope of drugs subject to price control. Both these events had an adverse impact on the operating profits of the Pharmaceutical business.

Following brands hold key positions in major therapeutic areas such 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 a significant challenge to the pharmaceutical industry in general. Healthcare insurance in India 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 of the pharmaceutical industry. Any attempt to expand the scope of the DPCO will pose additional challenges.

The Indian Pharma Market (IPM) is dominated by generic medicines and these drugs account for nearly 75% of the pharma industry. Therefore, any mandatory prescription of medicines by their generic name, without referring to the brand name, would necessitate a change in the Company’s promotional strategies and could affect product pricing.

Novartis AG, which is our holding company, owns directly or indirectly several companies in Novartis Group worldwide including various brands and patents. Therefore, any merger, acquisition, divestments or restructuring by Novartis AG or its subsidiaries would have an influence on Company’s operations in India as well.

e. Outlook

While the overall outlook for the economy looks promising, it is also dependent upon many macro-economic factors like increasing crude oil prices, problem of non-performing assets, agriculture distress etc. which could have a dampening effect on GDP growth in future.

However, it is encouraging for the Pharma industry to note that the Government is keen to implement two major healthcare programmes, first the National Health Protection Scheme, which is being projected as the world’s largest healthcare programme and the other is to create approximately 1.5 lakh health and wellness centers across the country, which will bring healthcare closer to home. A large and growing population, low healthcare penetration, Government’s commitment to increase healthcare spend, emerging digital technologies in the healthcare sector, growing preference towards private care, all present a growth opportunity for the pharmaceutical industry.

It is also imperative to note that, while government looks committed towards building the health infrastructure, the health delivery system continues to face severe challenges due to lack of appropriate and enough human resources deployed on the ground. The newly announced schemes will truly be a game changer towards universal health coverage, but, as with previous schemes, the key remains in the successful implementation of these programmes.

The IPM does face headwinds in the form of continuing price controls and mandatory prescription of medicines using their generic names. Despite the on-going efforts at driving productivity and various cost control measures, the severe price cuts continue to impact Company results.

f. Internal control systems and their adequacy

The Company maintains appropriate systems of internal control, including monitoring procedures, to ensure that all assets are safeguarded against loss from unauthorized use or disposition. Company policies, guidelines and procedures provide for adequate checks and balances and are meant to ensure that all transactions are authorized, recorded and reported correctly.

The Head of Internal Audit together with external audit consultants review the effectiveness and efficiency of these systems and procedures to ensure that all assets are protected against loss and that the financial and operational information is accurate and complete in all respects. The Audit Committee approves and reviews audit plans for the year based on internal risk assessment. Audits are conducted on an on-going basis and significant deviations are brought to the notice of the Audit Committee of the Board of Directors following which corrective action is recommended for implementation. All these measures facilitate timely detection of any irregularities and early remedial steps.

During the year, the Company conducted a detailed review of its internal control systems, evaluated the internal financial control systems with the Audit Committee and discussed relevant issues with internal and statutory auditors. Based on the recommendations of the Audit Committee, the Board has stated in its responsibility statement that proper internal financial controls were followed by the Company and that such internal financial controls are adequate and were operating effectively.

g. Vigil Mechanism

The Company has established a Vigil Mechanism that enables the Directors and employees to report genuine concerns. The Vigil Mechanism provides for (a) adequate safeguards against victimization of persons who use the Vigil Mechanism; and (b) direct access to the Chairperson of the Audit Committee of the Board of the Company in appropriate or exceptional cases. Details of the Vigil Mechanism policy are made available on the Company’s website www.novartis.in

h. Personnel

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

Number of employees as on March 31, 2018 was 668.

The information required pursuant to Section 197 of the Companies Act, 2013 (“the Act”) read with Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 in respect of employees of the Company, will be provided upon request. In terms of Section 136 of the Act, the Report and Accounts are being sent to the members and others entitled thereto, excluding the information on employees’ particulars, which is available for inspection by members at the Registered Office of the Company during business hours on working days of the Company up to the date of the ensuing AGM. If any member is interested in obtaining a copy thereof, such member may write to the Company Secretary & Compliance Officer of the Company in this regard.

Corporate Social Responsibility

The Company continues to actively support various initiatives in the areas of health, education, sports and environment. The CSR Policy adopted by the Board of Directors is available on the Company’s website www.novartis.in

Health: India has around 60 percent of the world’s leprosy case load and leprosy continues to be an area of focus for the Company’s CSR work in India. Leprosy Post Exposure 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, 1 project supervisor, 7 doctors, 7 supervisors, 14 auxiliary nurse midwives (ANMs), 70 Accredited Social Health Activists (ASHAs) from general healthcare, who were trained in leprosy as well as in the LPEP project. The health awareness reach covered 350,000 people including school children. 9,553 people were screened for leprosy, with a prophylactic dose for prevention of transmission of leprosy being given to 5,828 eligible persons. 3 new cases of leprosy were detected.

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

Education: The poor in India continue to be heavily impacted by lack of education with children not being sent to school so that they can contribute to the family income or dropping out of school. The mid-day meal program, when run effectively, has helped bring and keep children in school. Recognizing this as an important role in education, the Company made significant investments in this area to provide less privileged children with a nutritious meal. More than 8,000 children in Mumbai, Vrindavan, Lucknow and Bhubaneshwar are beneficiaries under this programme.

Sports: India is yet to make a significant mark in the area of sports, particularly at the Olympic level. Focus by parents continues to be on academics for their children making sports a neglected area. The Company continues to support the medical, nutritional and 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 has contributed in a positive way by supporting the upkeep of two beautiful gardens close to its Mumbai office.

The Company continues to commemorate Community Partnership Week (“CPW”) each year encouraging employees to work on causes close to their heart. A pan India activity that has shown rising numbers is the blood donation drive for children suffering from thalassaemia, a hereditary blood disorder where the body makes an abnormal form of haemoglobin, the protein in red blood cells that carry oxygen. They need to get blood every two weeks. CPW continues to grow in stature with a rising number of associates participating 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 on arm’s length basis and in the ordinary course of business. All Related Party Transactions were placed before the Audit Committee of the Board of Directors for their approval. The Audit Committee has granted omnibus approval for Related Party Transactions as per the provisions and restrictions contained in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. (“Listing Regulations”).

The Company has formulated a policy on materiality of Related Party Transactions and also on dealing with Related Party Transactions. The policy is available on the Company’s website www.novartis.in

Pursuant to Clause (h) of sub-section (3) of Section 134 of the Act and Rule 8(2) of the Companies (Accounts) Rules, 2014, the particulars of contracts/arrangements entered into by the Company with related parties referred to in sub-section (1) of Section 188 of the Act including certain arm’s length transactions under third proviso thereto are required to be disclosed in Form AOC-2. The Form AOC-2 envisages disclosure of material contracts or arrangement or transactions at arm’s length basis.

The details of the material Related Party Transactions in financial year 2017-18, as per the Policy on dealing with Related Parties adopted by the Company are disclosed in Annexure B.

The transactions disclosed in the Annexure relate to material Related Party Transactions with Novartis Pharma AG for purchase, transfer or receipt of products, goods, active pharmaceutical ingredients, materials, services, other obligations as approved by members under erstwhile Clause 49(VII)(E) of the listing agreement at the 67th Annual General Meeting of the Company held on July 23, 2015.

Risk Management

The Company has devised and implemented a mechanism for risk management and has developed a Risk Management Policy. The Policy provides for constitution of a Risk Management Committee. The Committee has created a Risk Register and works towards review and identification of internal and external risks and implementation of risk mitigation steps. The Company provides updates on risk management to the Audit Committee of the Board of Directors of the Company on a regular basis.

Fixed Deposits

The Company has not accepted deposits from the public falling within the ambit of Section 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 the provisions of Section 186 of the Act. The Company has certain unquoted investments in co-operative housing societies for premises owned by the Company. The details of changes in the Loans, Guarantees and Investments covered under the provisions of Section 186 of the Act are given in the notes to the Financial Statements.

Board of Directors

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

Mr. Ranjit Shahani resigned from the Board as Vice Chairman & Managing Director of the 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 31, 2018.

The Board of Directors, based on the recommendation of the Nomination & Remuneration Committee, appointed Mr. Milan Paleja as Vice Chairman & Managing Director of the Company w.e.f. June 1, 2018, subject to the approval of members at this AGM and approval of the Central Government.

Ms. Monaz Noble was appointed as Whole Time Director of the Company w.e.f. June 13, 2016. 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 details for 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, its management and operations and provides an overall industry perspective on issues being faced by the industry, in a proactive manner. Details of various familiarization programmes provided to the Directors of the Company are available on the Company’s website www.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 Annual General Meeting to the conclusion of the 71st Annual General Meeting of the Company.

Secretarial Audit

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

The Secretarial Audit Report is annexed herewith as Annexure C. The Secretarial Audit 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 the Companies (Accounts) Rules, 2014, with respect to conservation of energy, technology absorption 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 have been followed along with proper explanation relating to material departures, if any;

(b) Appropriate accounting policies have been selected and applied consistently and have 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 as at March 31, 2018 and of the profit and loss of the Company for the year ended March 31, 2018;

(c) Proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

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

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

(f) Proper systems are devised to ensure compliance with the provisions of all applicable 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 the provisions on corporate governance specified in the Listing Regulations and Novartis Group corporate governance norms.

A certificate of compliance from Dr. K. R. Chandratre, Practicing Company Secretary and the 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 the requirements of the Sexual Harassment of Women at the Workplace (Prevention, Prohibition and Redressal) Act, 2013. An Internal Committee has been set up to redress complaints received regarding sexual harassment. All persons whether employed as permanent, contractual, temporary, trainees are covered under this policy.

During the year 2017-2018, no complaints were received by the Company related to sexual harassment.

Extract of Annual Return

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

Acknowledgement

The Board appreciates and places on record the contribution made by all stakeholders, particularly employees, shareholders, customers, the medical fraternity and all business partners, during the year under review and acknowledges the support received from the parent Company, Novartis AG.

Cautionary Note

The statements forming part of the Directors’ Report may contain certain forward looking remarks within the meaning of applicable securities laws and regulations. Many factors could cause the actual results, performances or achievements of the Company to be materially different from any future results, performances or achievements that may be expressed or implied by such forward looking statements.

On behalf of the Board of Directors

CHRISTOPHER SNOOK

Chairman

May 10, 2018

Director’s Report