MANAGEMENT DISCUSSION AND ANALYSIS REPORT

In the back drop of the Wholesale Price Index (WPI) falling for the 15th straight month in Dec 2015, the Indian economy was expected to grow by 7.3°/o in 2015. While softening of interest rates was not enormous, the growing stress on banks was a grave concern that forced banks to draw back on credit lines. The lower oil prices largely helped the government to get its fiscal deficit lower. India, as expected, grew better than most of the BRIC countries. The high growth expectations was largely dependent on the ability of private enterprises to take investment steps, than the government pouring in money.

 The profit after tax for the year 2015 against 2014, increased by 23.9°/o, to Rs. 535.6 Mio. The continued devaluation of the Indian Rupee vis-a-vis major currencies thereby increasing input costs, impairment of current assets, were key reasons for the dent in the operating margins. Accordingly, the Profit Before Tax % to revenue rose in year 2015 vis-a-vis 2014 by 25.2°/o points, to Rs. 833.3 Mio.

The Company's turnover, across two main segments, namely Pharmaceuticals and Chemicals, is split in the ratio of 71°/o : 29°/o. Various regulatory controls and pricing legislations continue to challenge both the segments. Tax litigations and international price brssures in the Vitamin E business, had its bearing on the profit margin, high inventory and future sustainability. The Company continues to invest in marketing campaigns to fight severe competition in some of the core products.

The analysis of the two segments is briefly stated below.

 Pharmaceuticals Segment:

The Pharmaceuticals Segment has two Business Divisions, namely BioPharma and Consumer Health. The performance for the two Business Divisions are highlighted below.

BioPharma:

BioPharma business unit accounted for 470/o of the Total Company's turnover, registering a growth of 12°/o over the year 2014. Evion, Livogen, and Polybion were the key growth drivers that continued their contribution to the sales growth. Evion continued to feature in the top contributor brands with a growth of 25°/o, Livogen closed second with 15°/o growth, and Polybion with 4°/o growth. Clobetamil and Betamil have also significantly contributed to the growth, and two new introductions, Ecobion BC and Lipigo have crossed the Rs. 50 Mio mark and Rs 19 Mio mark respectively.

Keeping the needs of patients in focus and working towards improving health outcomes, the division continued its efforts to empower stakeholders and partners (public and private health workers, healthcare practitioners, patients and communities) with medical education, knowledge, skills and educational tools.

Towards this, various awareness programs, scientific meets and collaborations were initiated during the year. These included:

(a) A collaboration with the Indian Academy of Paediatrics (IAP)-India's largest paediatric association with 21,000 paediatricians- to launch the 'Diarrhoea Management Force' (DMF). Under DMF, the Biopharma business worked closely with the IAP to educate about Diarrhoea Management.

(b) Under the 'True Red'- An anaemia awareness initiative, 'True Red Check' Camps were conducted in partnership with healthcare practitioners to drive awareness, detection and treatment of anaemia- estimated to affect more than 50% of women in India.

(c) With Diabetes gaining epidemic proportions in India, Merck undertakes regular programs for improving diabetes awareness, screening and diagnosis. Further, free screening camps were organized for public sector organisations.

 (d) U ft Thyroid: Inspite of 7.2 mio people estimated to be suffering from Thyroid diseases in India; the disease remains largely undiagnosed due to a lack of awareness and accessibility to diagnostic tests. Towards addressing this diagnosis-treatment gap, Merck initiated 'U ft Thyroid', TSH detection camps in 2015.

(e) Merck Biopharma also initiated a Public Private Partnership for 'Hypothyroidism management and education' with the State Government of Madhya Pradesh (MP) in 2015. Under this MOU, Merck conducted a medical education program on clinical diagnosis and management of Hypothyroidism during brgnancy in District Hospitals, Primary ft Secondary health Centres, and ASHA (Accredited Social Health Associates) centres. Further, Merck also supports the state in impact assessment post training.

(f) The division also continued to build on its Multi-Channel Marketing (MCM) strategy, which makes use of new media to maximise the reach of its messages to its vast audiences. Through webinars, websites, social media, and SMS campaigns, the division was able to reach out to medical practitioners both urban and rural areas; especially the younger generation of medical practitioners who are increasingly using the internet and digital media to access medical information.

Consumer Health (CH]:

Consumer Health business field accounted for 24% of the Company's turnover, having main brands like Neurobion , Nasivion, Seven Seas and Electrobion which grew by 6.2% (IMS ORG SSA YTD Dec'15).

The shift of Neurobion Forte in Consumer Health from BioPharma since Jan'14 enabled Consumer Health to enter and dominate the Vitamin B market. Neurobion is the No. 1 selling Vitamin B units brand with highest numbers of brscriptions by earning trust of doctors. Consumer Health has taken Neurobion direct to consumers and to grow 10% (IMS ORG SSA YTD Dec'15). Neurobion Forte Tablets with new research-backed advertising materials (TVC) grew phenomenally @ 18% (IMS ORG SSA YTD Dec'15), indicative of successful consumerization capabilities of Merck CH division. Neurobion Forte achieved the unique 100

Crore brand achievement in August as the first Merck Pharma brand to achieve the status.

In the cough and cold category, Consumer Health has its brsence through 'Nasivion' which is one of the leading brands in the category. Navision is the No. 1 brscribed Nasal decongestant across India and which corroborates with the growth 14% (IMS ORG SSA YTD Dec'15). Nasivion Adult spray the DTC or advertised SKU shown wonderful growth of 28% (IMS ORG SSA YTD Dec'15) behind successful consumerization.

Everyday Health Protection and Children Health categories are being rebrsented by the brand: Seven Seas which grew 25% internally.

The local brand Electrobion has seen growth of 6% internally due to focused approach of sales and marketing support.

Merck CH took the unique Sales ft Distribution restructuring initiative in 2015 strengthening the Rx and the trade field force based on the brscription dependency model which helped the business to grow 10% in 2015.

In India, 30% of the population does not have access to quality healthcare and medicines and depends on the government healthcare system. 87% of the population has to pay for medicine and healthcare out of their own pocket with 30% of India earning less than $1 a day. There is a need to establish quality healthcare with quality products to serve the remote areas. Improving access to health is imperative in India and at Consumer Health we feel that we can have a real impact. So CH continued the self-sustainable model in Uttar Pradesh and Bihar in the semi urban and rural markets under the banner of "Su-Swastha", This program, has earned Merck a Global 6th rank in Global A2H (Access to health) ranking bringing accolades for Global Merck.

India is amongst the largest Asia-Pacific markets and amongst the Top 10 fastest growing markets for global Merck CH. Consumer Health division aims to grow further by growing the core business ft adding required line extensions on key brands by making a foray into participated segments and leveraging the local and global RftD capabilities. Consumer Health business field accounted for 24% of the Company's turnover, having main brands like Neurobion, Nasivion, Seven Seas and Electrobion which grew by 9% (IMS ORG SSA YTD Nov'14).

 Pharma Exports:

With Merck Group brvalent in more than 67 countries worldwide, the ability to export remains rather limited. However, the Company exports to some Asian and African countries, the major being Sri Lanka, Nepal, Lebanon, Kenya, Libya, among others. Pharma exports grew by 62.0% in the year 2015, and contributed 7.0% to total Pharma Segment sales. The major growth came from Sri Lanka region.

Production:

The production requirement of the Pharma segment is catered through the Company's own facility at Goa and various toll manufacturing units. The toll units are under regular supervision of the Company in regard to the manufacturing standards.

The Goa unit is well utilised and goes through self-regulated productivity efficiency programs. This unit is going through an upgradation in Injectable production area to make it compliant to the applicable MSQ guidelines. In order to carry out the upgradation, we needed to shut down the production activities for approximately four months. The activities for the shutdown were started from December 01, 2014 and were completed in March 31, 2015. The upgradation also resulted in increasing the capacity of the department from 180 Million, per annum to 220 Million, per annum. In the Softgelatin area we have intentions to upgrade the facility to meet the MBQ guidelines and the upgradation will start in Dec 2016 and will last approx. 3 months.

In order to reduce the C02 produced, the site of Goa has developed the project of using bio-mass fuel available in the surrounding areas to power a 3 MW cogeneration plant. The project has reduced the C02 generation at Goa site from 13.5 tons/year to 2 tons/year, which rebrsents a reduction of 85% of the C02 emissions per year. Additionally, the power plant is supplying a reliable power supply independent from the national grid which suffers frequent power failures. There has been productivity improvement after elimination of shutdown from the power failures.

Chemicals Segment:

The Chemicals segment sales turnover decreased by 2.0% in year 2015, to achieve Rs. 2,656.5 Million, as against Rs.2,711.8 Million in year 2014. The Chemicals segment comprises two divisions: i.e Pharma Chem Solutions and Performance Materials.

Pharm Chem Solutions:

The Pharma Chem Solutions division, as evident from the name, offers products and solutions for Pharma and BioPharma Industry. Products mainly comprise of Active Pharmaceutical ingredients, High quality excipients and Bio-pharmaceuticals. The division's bulk drug products like Vitamin E, Guaizulene, ThaimineDiSulphide (TDS) are manufactured in Goa.

The Growth in Generic Exports and the need for regulatory compliance has driven the sales of this division above industry growth average, in addition, the Company enjoys the confidence and trust as a partner to the industry through its initiatives to advise the industry on latest regulatory trends. Further the company has set up an application lab near Mumbai in order to assist customers with development of formulations using high technology raw materials manufactured by Merck. The expected surge in the launch of biosimilar molecules for the domestic and international markets will also boost the sales of this division.

In line with the Global fall in prices of Vitamins, the activity of the Vitamin E-business has been negatively impacted and price realisation and margins have been affected. In addition to the price erosion, the tax litigation on Vitamin E animal feed resulted in product price unviable for end customers. Due to the heavy reliance on raw material suppliers, no manufacturing back integration, tax litigations, severe price competition from large international players, cyclical market conditions, need for high working capital, your company has decided for the immediate future, to utilise manufacturing capacity of Vitamin E for only captive demand. However, your Company is exploring various avenues to stem this sales erosion.

Performance Materials:

Performance Materials division is mainly into the business of 'Effect' Pigments for the Automotive, Cosmetics, plastics printing and Security Industry and basket of'Actives' for the Cosmetics Industry in addition to the Functional Pigments. While the Customer centric and consultative sales approach by the team pigments was continued, the strategic focus was value-sales and not volume sales. Automotive Industry performance £t Industrial growth was below average coupled with severe competition from local and Chinese suppliers. In spite of all the odds a sales growth of 6.8% was registered in 2015 over year 2014.

Internal Controls:

The Company is equipped with adequate internal control system to ensure that its assets are protected against loss of unauthorised use and improper handling. The Company is subject to exhaustive budgetary and costing process, as well as monitoring and audit by Merck KGaA, Germany at regular intervals. Additionally, in order to supplement the internal control process, during the year under review the company has engaged the services of an able and reputed firm, Ernst and Young, who are authorised by the Audit Committee to assess the adequacy and compliance of internal control process, statutory requirements, etc. Audit Committee finalises the Areas of Audit and their schedule, discuss the findings of the audit, and direct the Company to set up applicable control measures. A risk based audit approach is also implemented by utilising the periodically documented risk assessment reports. Regular updates of the action taken to iron out audit issues are also tabled before the Audit Committee.

In order to further implement a good corporate governance practices at Merck, Audit Committee periodically discusses with statutory and internal auditors on their views of financial statements, compliance to accounting policies, information flow from the Company to them for conducting their area of work, adequacy and effectiveness of internal control and systems within the company.

Risk Management:

The Company is required to follow an orderly risk management system globally, due to legal regulations. Merck is exposed to various risks, which might threaten its business continuity if not identified and addressed in time. The Company therefore follows a proactive risk management policy, aimed at protecting its employees, assets and the environment, while at the same time ensuring growth and continuity of its business. Regular updates are made available to Executive Board and Independent Directors at the Board Meeting and  in special cases on ad-hoc basis. The company also strives to link each risk with a mitigation step to ensure business continuity.

Merck adheres to global compliance guidelines and complies with local laws. Training programs were rolled-out for employees on Pharma Compliance Guidelines, Global Anti-Corruption Standards, Prevention of Sexual Harassment at Workplace, Whistle Blower Mechanism etc.

Business Related Risks:

The Company's performance is impacted by the changes in market demand that guides the development of the Company's products, and the changed customer behaviour. Other factors that affect the company performance are, economic forces, input material availability, composition of legacy brands sales to turnover, span of products under price control, ability to roll out successful line extensions or product applications, employee talent management, availability of able employees, etc. The Company, in the course of portfolio management, regularly evaluates and, if necessary, refocuses.

Inability of the Company to command sale price rise on account of inflationary effects on the input materials, utilities, rising wage costs and overheads, etc., could erode margins. Given that large proportion of the Company's turnover is under price control by the government regulations on Pharma pricing, majority of the products faced inability to raise sales price, despite cost rise. The Company constantly engages in cost reduction measures and also by launching products with high margins. However, there would be possibility of margin erosion due to inability to raise prices and successful product launches.

The Company's imports from Europe, US and South East Asia are subject to foreign exchange fluctuations, which impact the input prices. The Company's principals offer advice on the hedging of the risks at regular intervals.

legal Risks:

The Company's business is a regulated one and is governed by various statutes of the Government. Changes in the statutes and the compliance of the same is both time consuming and sometimes difficult. While in the case of Pharmaceuticals business, pricing norms  set by the Government and FDA related legislation, are to be adhered to, in the case of Chemicals business, the registration processes of certain imports create lot of hassles, delay and loss of business.

Third Party dependence Risks:

The Company uses third party support in regard to manufacturing and distribution of the goods of its products. These parties have access to the Company's assets and business process. The Company uses internal control and audit measures to safeguard itself against any adverse events. However, business interruptions could happen, in case of untoward events taking place. As well, disagreements on contractual terms and conditions with the service provider can lead to stoppage of outsourced activities and business interruptions.

Information Technology Risks:

The Company uses varied IT systems and processes in order to have efficient data collection, monitoring and reporting. There are software related brcautions like handling of data integrity, access rights, virus firewalls, data protection, social media risk, etc. The Company's guidelines and processes are in place and their adherence is continuously monitored and subject to global audits at regular intervals.

Environment and Safety Risks:

The Company's own manufacturing, as well as toll manufacturing units, along with the distribution facilities, are subject to environmental and safety risks. While the Company is adhering to the local legislation on environment protection, such adherence is supported by Group standards, rules, guidelines and audits at regular intervals by experts, to ensure safety standards are put in place to safeguard people, environment and products.

Human Resource Initiative:

The Company had 1554 employees as on December 2015, as against 1515 employee as in brvious year. The Company has various HR initiatives in place designed to ensure that Merck employees continue to  be productive, efficient, and believe the Company to be a great place to work and build a career. Such initiatives include talent management, succession planning, work life balance, development opportunities, international career opportunities, training and the performance management plan. Interventions are simultaneously being worked on to position Merck as an employer of choice in the talent market.

Induction and assimilation programs are also in place to drive and emphasise the Merck values: Integrity, Transparency, Courage," Responsibility, Respect and Achievement.

The Company has a structured development programme designed to safeguard against attrition, develop leaders and build a talent pipeline. The Human Resource team is structured in having independent dedicated support partners to each of the businesses and major support function in order to realise the optimum productivity. The Company has cordial relations with employees at all levels.

Outlook:

The Company has a well balanced portfolio in Pharmaceuticals and Chemicals and endeavours to growth comparable to the Industry. The Indian pharmaceutical industry is likely to face certain headwinds due to price erosion on account of falling WPI, credit risks of customers and vendors, Government of India's initiative to increase the number of Jan Aushadi outlets; and growing conflict between the Indian Pharma Industry and Multi-National Companies over the Intellectual Property rights. However, with the ambitious economic growth targets for the current fiscal year, higher public spending on healthcare and positive effects from Government of India's 'Make in India' initiative, steps to reduce corruption, increase ease of doing business, aiming to reduce litigations, the Industry and your Company is expected to grow at higher growth rate than the GDP growth rate, thereby it looks forward to excelling the business results and improving shareholder value.

On behalf of the Board of Directors

S. N. Talwar

Chairman

Place : Mumbai,

Date :  February 26, 2016