ASSIGNMENT SUBMISSION FORM

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Course Name: FADM

Assignment Title: Group Assignment 1

Submitted by: L7
(Student name or group name)

Group Member Name

PG ID

SATYA TANDON

61710925

SUSHAIN TREHAN

61710365

MOULI MALAKAR

61710943

NEHA PALIWAL

61710560

SUYASH KUMAR

61710102

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ISB Honour Code

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I will not fabricate or plagiarise any information with regard to the curriculum.
I will not seek, receive or obtain an unfair advantage over other students.
I will not be a party to any violation of the ISB Honour Code.
I will personally uphold and abide, in theory and practice, the values, purpose and rules of the ISB
Honour Code.
I will report all violations of the ISB Honour Code by members of the ISB community.
I will respect the rights and property of all in the ISB community.
I will abide by all the rules and regulations that are prescribed by ISB.

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1. Compare Dr. Reddys and Novartis using ROE, and pre-tax ROA for fiscal 2015.
Decompose ROA into profit margin and asset turnover. Report which company performs
better on each of these metrics. For simplicity, use the financing cost figure reported on the
face of the income statement as your measure of interest expense in computing EBIT.

a. ROE comparison
ROE = Net Income/ Avg Shareholder Equity
Dr. Reddys: FY 15 Net Income = Rs. 22,179 MM
Avg. Shareholders Equity = (111302+90801)/2

= Rs. 101,051.5 MM

FY 15 ROE = 22179/101051.5 = 21.9%

Novartis: FY 15 Net Income = $ 17,794M
Avg. Shareholders Equity = (77122+70844)/2

= $73,983 MM

FY 15 ROE = 17794/73983 = 24%

b. Pre-tax ROA comparison kumamni

Pre-Tax ROA = EBIT/ Avg. Total Assets
Dr. Reddys: EBIT = Profit before tax + Finance expense (income)
= 28,163+1,092 (Pg 223)

= Rs. 29,255 MM

Avg. Total Assets = (194,762 + 170,223)/2

= Rs 182,492.5M

FY 15 Pre-Tax ROA = 29255/182492.5 = 16%

Novartis
EBIT = Net income + Interest expense + Tax expense = $ 17,794 + 1,106 + 655 MM = $ 19,555 MM
(We have not considered the $454 m in our analysis)
Avg. Total Assets = (131,556 + 125,387)/2

$ 128,471.5M

FY 15 Pre-Tax ROA = 19,555/128471.5 = 15.2%

We can see from this calculation that Novartis ROE is higher than Dr. Reddys (24% vs 22%) whereas Dr.
Reddys ROA is higher than Novartis (16% vs 15.2%)

Pre-Tax ROA = EBIT / Average Assets = (EBIT/ Sales) x (Sales / Average Assets) or EBIT Margin x
Sales Turnover
i.

Net income & Sales turnover margin

Dr. Reddys:
FY 15 EBIT Margin = EBIT Margin / Sales
= 29255 / 148189 = 19.7%
FY 15 Sales Turnover

= Sales / Avg. Total Assets

= 148189 / 182492.5 = 0.81

FY15 ROA = EBIT Margin x Sales Turnover

= 19.7% x 0.81 = 16%
Novartis:
FY 15 EBIT Margin = EBIT Margin / Sales
= 19,555 / 49414 = 39.5%
FY 15 Sales Turnover

= Sales / Avg. Total Assets

= 49414 / 128471.5

= 0.384

FY15 ROA = Net Income Margin x Sales Turnover

= 39.5% x 0.384

= 15.2%

c. Summary

FY15 ROA for Dr. Reddys is higher than for Novartis. This is on account of much higher Sales
turnover in spite of lower EBIT Margin for Dr. Reddys as compared to Novartis.

2. Evaluate the adequacy of operating cash flow to fund each companys capital expenditure
in fiscal 2015? Was operating cash flow adequate to fund net capital expenditure? Was it
adequate to fund all of the companys investments? Was operating cash flow adequate to
fund capital expenditure plus dividends payments and share repurchases? For the purpose
of this question, define capital expenditure to include the purchase of both tangible and
intangible fixed assets, but not the purchase of subsidiaries.
Dr Reddys: For FY15, Net Cash from Operations was Rs. 25,235 MM, which was adequate for
companys capital expenditure of Rs. 15,315 MM.
Net Capital Expenditure was Rs. 15,315 172 MM (proceeds from sale of fixed assets) or Rs. 15,143
MM, still less than operating cash flow, which were adequate to fund net capital expenditure.
Companys cash used in investing activities was Rs. 22,647 MM, which was lower than the cash from
operations, which were adequate to fund all of the companys investments.
Capital expenditure plus dividends payments and share repurchases were Rs. 15,315+3,587+0 or Rs.
18,902, which was lower than the cash from operations, which were adequate to fund capital expenditure
plus dividends payments and share repurchases.
Novartis: For FY15, Cash flow from operating activities was $11,897 MM, which was adequate for
companys capital expenditure of $2,367+1,138 MM or $3,505.
Net Capital Expenditure was $3,505-237-621 MM (proceeds from sale of PP&E and intangibles) or
$2,647 MM, still less than operating cash flow, which were adequate to fund net capital expenditure.
Companys cash used in investing activities was $10,784 MM, which was lower than the cash from
operations, which were adequate to fund all of the companys investments.
Capital expenditure plus dividends payments and share repurchases were $3,505+6,643+6,071 or
$16,219, which was higher than the cash from operations, which were not adequate to fund capital
expenditure plus dividends payments and share repurchases.

3. Use segment information to identify each companys largest, fastest growing, and slowest
growing operating segments in terms of external sales revenue. Define growth as the simple
percentage change in external sales between fiscal 2014 and fiscal 2015. For Dr. Reddys, you must
rely on the Indian GAAP segment information that is provided in Footnote 2.31 of the consolidated
statements. For Novartis, it is based on IFRS and provided in Footnote 3.
Dr. Reddys: Companys largest segment is Global Generics, which had Rs. 122,063 MM of external
sales in FY 15. The slowest growing segment is Proprietary Products, which had a growth of -43% and
the fastest growing segment is Global Generics, with a growth of 15%.
Dr. Reddy's Segments
Rs. in MM
External sales (Gross)

PSAI
2014
2015 % change
23,580 24,779
5.1%

Global Generics
2014
2015 % change
106,356 122,063
14.8%

Proprietary Products
2014 2015 % change
1,779 1,013
-43.1%

Novartis: Companys largest segment is Pharmaceuticals, which had $30,445 MM of external sales in
FY 15. The slowest growing segment is Alcon, which had a growth of -9.4% and the fastest growing
segments are Pharmaceuticals and Sandoz, each with a growth of -4.2%.
4

Novartis Segments
$ in MM
Net sales to third parties from
continuing operations

Pharmaceuticals
2014
2015 % change
31,791

30,445

-4.2%

2014
10,827

Alcon
2015 % change

2014

Sandoz
2015 % change

9,812

9,562

9,157

-9.4%

-4.2%

4. Perform the same analysis for the companies geographic segments. Which company is
more dependent on foreign sales?
Dr. Reddys: Companys largest geographic segment is North America, which had Rs. 70,743 MM of
revenue in FY 15. The slowest growing geographic segment is Russia and other CIS countries, which had
a growth of -10.6% and the fastest growing geographic segment is Others, with a growth of 35.9%.

Dr. Reddy's Geographic Segments

Rs. in MM
India
North America
Russia and other CIS countries
Europe
Others
Total

Sales
2014
2015 % change
18,182
19,772
8.7%
61,362
70,743
15.3%
19,819
17,713
-10.6%
16,287
17,800
9.3%
16,065
21,827
35.9%
131,715 147,855
12.3%

Novartis: Companys largest geographic segment is others, which had $20,590 MM of revenue in FY 15.
The slowest growing geographic segment is Japan, which had a growth of -16.3% and the fastest growing
geographic segment is Switzerland, with a growth of 17.6%.

Novartis' Geographic Segments

$ in MM
Switzerland
United States
United Kingdom
Germany
France
Japan
Other
Total

2014
658
17,337
1,379
3,742
2,638
3,781
22,645
52,180

Sales
2015 % change
774
17.6%
18,079
4.3%
1,277
-7.4%
3,262
-12.8%
2,269
-14.0%
3,163
-16.3%
20,590
-9.1%
49,414
-5.3%

5. When Dr. Reddys discusses its primary competitors, Novartis Sandoz unit is generally
prominently featured in these discussions. In one or two sentences explain why Sandoz is
the part of Novartis that is most likely to be in direct competition with Dr. Reddys.

Dr. Reddys Generic business contributes 82% to its total revenue, indicating that it is a Generics player.
Since Sandoz is in the business of Generics, Dr. Reddys considers it as a primary competitor.

6. Which company had a higher gross margin percentage in fiscal 2015, Novartis or Dr.
Reddys? To achieve an apples-to-apples comparison, use Dr. Reddys IFRS income
statement in answering this question. Perform the same comparison for Sandoz and Dr.
Reddys. Do the relationships make sense to you based on your understanding of the
companies respective business models? Limit your answer to a couple of sentences. For
the purposes of this problem, define the gross margin percentage as:
Sales ( Revenue* Cost of Goods Sold)
Sales Revenue*
*For Novartis, use sales to third parties, excluding other revenues. In the case of Dr.
Reddys, use the revenue figure provided on the face of the IFRS income statement.
Dr. Reddy
-

Gross Margin = (Sales revenue - Cost of sales)/Sales Revenue

= (148189 - 62786)/148189 = 57.6%

Novartis
-

Gross Margin = (Sales revenue - Cost of sales)/Sales Revenue

= (49414-17404)/49414 = 64.7%

Novartis had a higher Gross Margin than Dr. Reddys in FY 2015

Sandoz
-

Gross Margin = (Sales revenue - Cost of sales)/Sales Revenue

= (9157-5325)/9157 = 41.8%

Dr. Reddys had a higher Gross Margin than Sandoz in FY 2015

Novartis is expected to have the highest Gross Margin among the companies considered because it mainly
sells patented prescription medicines (Pharmaceutical segment is 62% of sales for FY 15) that are
expected to yield high margins.
6

Dr. Reddys has a higher margin that Sandoz on account of higher % revenue coming from the US / North
America, which is more lucrative market as compared to other markets. For Sandoz, US revenue
contribution is 10% and for Dr. Reddys, the US revenue contribution is 48% .

7. Operating margin is similar performance metric that also reflects SG&A expenses. It is
defined as Operating Income/Total Revenue. Compare the operating margins of Dr.
Reddys with those of Novartis (the consolidated group) and Sandoz for fiscal 2015.

Dr. Reddys
-

Operating Income Margin = (Gross profit - SGA expenses)/Sales Revenue

= (85403-42585)/148189
= 28.89% = 29%

Novartis (Group)
-

Operating Margin = (Gross profit SGA expenses)/Sales Revenue

= (49414-17404-11772-2475)/49414
= 35.9% = 36%

Sandoz
-

Operating Margin = (Gross profit SGA expenses)/Sales Revenue

= (9157-5325-1585-346)/ 9157
= 20.7% = 21%

Novartis has the highest operating margin, followed by Dr. Reddys and Sandoz at the lowest
operating margin

8. Novartis presents a version of this operating margin labeled Core Return on Net Sales in its Key Performance Indicators chart on page 6. Core Operating Income and Core
Return on Net Sales are Novartis primary non-GAAP performance metrics as discussed
beginning on page 165. What was the single biggest factor causing a discrepancy
between IFRS operating margin and core operating margin in 2015? Limit your answer to
one sentence. You dont need to explain why the factor exists.
Amortization of intangible assets of $3,709 MM was the single biggest factor causing a discrepancy
between IFRS operating margin and core operating margin in 2015.

9. Which of Novartis operating segments showed the biggest discrepancy between IFRS
and core operating performance in 2015? Develop a one or two sentence explanation for
why the largest discrepancy in operating performance would be traceable to this particular
segment.
Alcon segment showed the biggest discrepancy between IFRS and core operating performance in 2015,
with $2,269, (285% of the IFRS Operating income from continuing operations; highest amongst other
segments) of adjustment on account of Amortization of intangible assets (259% of the IFRS Operating
income from continuing operations), impairment charges and other exceptional items.
Alcon was purchased by Novartis, which added intangibles to its assets. These acquired intangibles are
being amortized, which is leading to the high discrepancy in operating performance.