Indian School of Business

FADM 2016
Final Assignment
Analysis of the 2015 Financial Statements of
Dr. Reddys and Novartis
Due: 5pm, May 27, 2016
Download electronic copies of the 2015 annual reports of Dr. Reddys and Novartis from the
LMS system. In the case of Dr. Reddys, these instructions refer to the companys annual
report for the year ending March 31, 2015; the 2015 fiscal year refers to the period from
April 1, 2014 to March 31, 2015. Answer the following questions using these documents.
Limit your responses to eight pages including exhibits. Justify your answers with hard
numbers and show your calculation methods where appropriate.
Note: Dr. Reddys annual report contains three sets of financial statements: stand-alone
Indian GAAP statements (for the parent company), consolidated Indian GAAP statements,
and consolidated IFRS statements. Because most of the questions ask for a comparison
between the two companies and Novartis is strictly using IFRS, use Dr. Reddys IFRS
statements unless otherwise instructed on a particular question.
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.
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.
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.
4. Perform the same analysis for the companies geographic segments. Which company is
more dependent on foreign sales?
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.

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.
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.
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.
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.