Indian Health Care Industry[1]

7/31/2019 Indian Health Care Industry[1]

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1

January 2011

QUARTERLY PERFORMANCEANALYSIS OF COMPANIES

(October December 2010)

INDIAN HEALTH CARE INDUSTRY

Cygnus Business Consulting & Research Pvt. Ltd.Plot No: 8-3-948/949, 1st Floor, Solitaire Plaza,

Behind Image Hospital, Ameerpet, Hyderabad - 500 073.

Tel: +91-40-23430202-05, Fax: +91-40-23430201, E-mail: [email protected]

Website:www.cygnusindia.com

Disclaimer: All information contained in this report has been obtained from sources believed to be accurate by CygnusBusiness Consulting & Research Pvt. Ltd. (Cygnus). While reasonable care has been taken in its preparation, Cygnus makesno representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Theinformation contained herein may be changed without notice. All information should be considered solely as statements of

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QPAC-Indian Health Care Industry- October - December 2010

Cygnus Business Consulting & Research Pvt. Ltd., 2011 2

EXECUTIVE SUMMARY.........................................................................................................3

INDUSTRY ANALYSIS ............................................................................................................4

OUTLOOK FOR THE SECTOR.............................................................................................7

INTER-FIRM COMPARISON..................................................................................................8

COMPANY ANALYSIS ..........................................................................................................10

1. Apollo Hospitals ...............................................................................................................10

2. IndraPrastha Hospitals ......................................................................................................10

3. Kovai Medicals..................................................................................................................11

4. Fortis Health Care .............................................................................................................11

SOURCES & METHODS FOR COMPANY PROJECTIONS...............................................12

CONTENTS



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EXECUTIVE SUMMARY

India is very well placed to tap the growing potential of the healthcare sector. It has the relevant skill-setswith adequate human resources to become the preferred healthcare player in emerging countries across

the globe. The healthcare industry in India has come a long way from the days when those who couldafford it had to travel abroad to get highly specialized services such as cardiac surgery, while others had todo without it. The patients from neighboring countries in Asia are coming to India to receive specializedmedical treatment. Not only is India meeting international standards, but at prices that compare veryfavorably with developed countries. A vibrant and dynamic healthcare sector is imperative for the newhuman resource intensive world.

Quality healthcare is vital for the growth of any nation. The key objectives of an effective healthcaresystem would be to enhance average life expectancy and to improve quality of life and productivity. Therecent Union Budget too has been favorable to the healthcare sector. There has been reduction ofcustoms tariffs on life saving medical equipment, reduction of excise on certain critical drugs andabolition of duty on drugs and materials imported for clinical trials. Permissible depreciation rates for

medical equipment under the Income Tax Law have been increased to enhance cash flows of thecorporate hospitals in the private sector. Lower interest on lending for private sector hospitals exceeding100 beds will improve access to low cost funding for hospitals.

The government has also come up with various insurance schemes, which could help the sector and thisis aided by the formation of various institutes, which have given the country the best of the doctors. Thegrowth in the sector would be driven by healthcare facilities, private and public sector, medical diagnosticand path labs and the medical insurance sector.

As per the Cygnus estimates, the financial performance in the industry was estimated to be positivegrowth from 5% to 35% across the industry when compared the OND 09 Vs OND 10 in its net sales.

Apollo hospitals was estimated to register Rs. 6491.75m (35%) for OND 10 quarter followed by kovai

medicals with Rs. 368.89m (10%). Fortis health care was estimated to register its growth by 5%.Operational performance also in positive trend across the industry. Fortis healtha care was estimated toregister highest OPM and NPM followed by Kovai medicals. Indraprastha Medicals was registred lowestOPM and NPM values

During the period Oct 1st 2010 to Dec 31, 2010 the BSE sensex has moved from 20445.04 points to20509.09 points (64.05 points increase with 0.31% growth). In the same period the Health care Index(BSE HC) has moved from 6107.59 points to 6734.19 points (626.6 points increase and 10.25% growth).

The companies in the industry are also in positive trend in market. The market capitalization has beenregistered with Rs64321.057m during the same period.

In the cost structure scenario, raw material cost has been reduced from OND 09 to OND 10 from

43.91% to Rs29.44% and other expenses are increased from 23.58-39.24% during the period. Staff costhas been registered as third major expenditure in the industry. At Kovai Medical raw material cost hasbeen increased from 16.95-17.43%.

Most of the corporate hospitals are acquiring international standards for patients treatment. In comingyears the industry is receiving major share of business from the international patients since the treatmentcost is very much less when compare with the developed countries.



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Source: BSE India; Cygnus Research;

Net Profit and NPM

450

500

550

JAS 09 (A) JAS 10 (E)

Rsm

5.0

6.0

7.0

8.0

%

Net Profit (LHS)

NPM (RHS)

Net Sales and Growth

6000

6500

7000

7500

JAS 09 (A) JAS 10 (E)

Rsm

15

17

19

%

Net Sales (LHS)

Growth (RHS)

EBIDTA and OPM

1000

1100

JAS 09 (A) JAS 10 (E)

Rsm

15.0

16.0

17.0

%EBIDTA (LHS)

OPM (RHS)

INDUSTRY ANALYSIS

Indian Healthcare IndustryHealthcare industry varies greatly in terms of size, staffing

patterns, and organizational structures. It is one of themajor contributors to the Indian GDP which consists ofthe following segments: Hospitals, Nursing and residentialcare facilities, offices of physicians, offices of dentists,Home healthcare services, offices of other healthpractitioners, Ambulatory healthcare services.

For the period ending OND10, the Indian health careindustrys revenue is expected at Rs8554.00m with arobust growth of 27% as compared to the same periodlast year. The increase in revenue is primarily due toincrease in occupancy and revenue per bed day and higher

number of SAPs (Simplified Acute Physiology Score).With average household consumption expected toincrease by more than 9% per annum, the annualhealthcare expenditure is projected to grow at 11% andalso the number of insured is likely to jump from 200-220m.The industry is expected to continue withthe same trend as there is no big impact of theglobal slowdown that had impacted the revenue ofcompanies throughout the world.

Note: The aggregate calculation consists of thefollowing companies- Apollo Hospitals Enterprise Ltd,Indraprastha Medical Corpn. Ltd, Kovai Medical Centre &

Hospital Ltd, and Fortis Health care.

Industry Aggregate (Rs in million)

Particulars OND10 (E)

Net Sales 8554.00Change 27%

EBITDA 1173.16Change 10%

Depreciation 240.96Other Income 240.61Interest 137.21PBT 1035.59

Tax 280.23Effective Tax Rate 27.1%Reported PAT 755.36

Change 13.80%Industry Market cap (Rs ;bn) 120.67

Source: BSE India; Cygnus Research



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Some of the key factors like continuous investments in research and development have resulted inincreased productivity and better quality of drugs, medicines, medical instruments, hospital equipment,and other medical supplies used in medical industry. Increased costs in the medical treatment in the

developed nations have driven patients to migrate to Asian countries. Rise in ailments among the ageingpopulation especially in developed nations has led to the increase in demand of variety of drugs ormedicines.

Cost StructureFor the quarter endedOND10, raw material cost is the major cost driver for the Indian healthcareindustry. Other cost such as staff, other expenditure and purchase of traded goods comes after Rawmaterial cost. Depreciation and Tax are expected to be constant during the quarter. However, financialcharges for the company is expected to decline considering companies have paid back the existence debtduring the quarter ended OND10.

Healthcare spending in India accounts for over 5% of the country's GDP. Out of which, the publicspending in percentage is around 1% of GDP. The presence of public healthcare is not only weak butalso under-utilised and inefficient. Meanwhile, private sector is quite dominant in the healthcare sector.

Around 80% of total spending on healthcare in India comes from the private sector. Inadequate publicinvestment in health infrastructure has given an opportunity to private hospitals to capture a larger shareof the market. In addition the demand for hospital services has been increasing due to the rise in lifestylerelated diseases. Healthcare Management needs to create services that consumers need but cannot yetimagine. Table given below gives a comparison of important health indicators of India and the UnitedStates which clearly shows that good medical facility still remains beyond reach for most of the middleclass.

Against a world average of 4 beds per 1,000 people, India has just 0.7. Around 80% of total spending onhealthcare in India comes from the private sector. In addition, the demand for hospital services has been

increasing due to the rise in lifestyle related diseases. India has some of the best hospitals and treatment

Indicators USA INDIA

No. of physicians per 10,000 population 26.00 6.00No. of nursing and midwifery personnel per 10,000 population 94.00 13.00No. of dentistry personnel per 10,000 population 16.00 1.00Infant mortality rate (both sexes) per 1000 live births 6.00 54.00

Total expenditure on Health as % of GDP 0.15 0.04No. of hospital beds per 10,000 people 31.00 7.00Source: World Health Statistics, 2009

Cost Structure (as % of Sales)

-0.10

0.20

0.50

0.80

Raw

material

Staffcost

Traded

Goods

Other

expenditure

Depreciation

Interest

Tax

OND 09(A)

OND 10(E)

Source: BSE India; Cygnus Research;



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centres in the world with the best facilities. India has established world class expertise in practices such ascardiac care, cosmetic surgery, joint replacements and dentistry. The Indian Government is trying topromote the concept of medical tourism which will not only serve as revenue earning but also make Indiaas a "global health destination. The cost of some medical procedures conducted in India and the US

gives an idea as to how procedures conducted in India are cheap and affordable compared to otheradvanced countries of the world.

Even if one includes the airfare costs of a patient plus a companion and five star accommodation costs in

India, the cost of getting treated in India is still significantly lower. Hospitals such as Apollo, Escorts,Hinduja, Max Healthcare, Manipal Hospital and Fortis Heart Institute are already becoming premierdestinations for foreign patients from Bangladesh, Mauritius, Egypt and other middle-eastern countries.

Additionally, Indian hospitals are beginning to offer combined and complete packages that includemedical treatment, health recuperation, relaxation, recreation and some amount of tourism within India.Hence, many foreign patients who are now coming to India for treatment are beginning to spend 2-3

weeks at various tourist destinations, after their medical treatment.

Key areas of opportunity in Healthcare

Health Insurance - A growing business: The Indian health insurance market has emerged as a newand lucrative growth avenue for both the existing players as well as the new entrants.The healthinsurance market represents one the fastest growing and second largest non-life insurance segment in the

country. The Indian health insurance market has posted record growth in the last two fiscals.The healthinsurance premium is expected to grow at a CAGR of over 25% for the period spanning from 2009-10 to2013-14.

Human resources and medical education:About 72% doctors are based in tier- cities even then, theprivate sector finds difficulty in bridging the deficit of manpower. As stated above, there is a shortage of1.5 million skilled professionals including doctors and nurses and administrators. Governments haveliberalised the utilisation of AYUSH practitioners through a GR into mainstream medical care provisionspecially in tier 2/3 cities, to bridge their gaps, however the much awaited entry of private players inmedical education will bridge the gap further. With recent opening of numerous hospital managementcolleges, the gap to provide able administrators would surely be bridged and more such institutes will beseen flourishing in the times to come.

Medical equipment: Contributing to almost 40% costs in a tertiary setup, the medical equipmentthough cutting edge at the time of purchase poses the threat of inevitable obsolescence within five toseven years of setup. This problem is compounded by the fact the most of such equipment is importedand very few local reputed manufacturers exist. This will lead to apportioning to higher treatment costsand will further lead to lesser competitive edges and low utilisation rates resulting in undesired operatingmargins.

Government Initiative: The Government has increased allocation towards healthcare and RashtriyaSwasthya Bima Yojana (RSBY). Companies with strong presence in the domestic market are likely to bethe gainers. The Government has increased the weighted deduction on R&D expenditure from150-200%. It is likely to benefit all pharma companies that are involved in R&D activities. The cost ofmedical equipments has been reduced by curtailing their customs duty and countervailing duty and

Procedure Cost in USA (US$) Cost in India (US$)

Smile Designing 8,000 1,100Dental Implants 3,500 900Root Canal Treatment 1,000 110

Tooth Whitening 800 125Tooth Cleaning 300 90Source: www.medicaltourism-india.com



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exempting them from special additional duty. This is beneficial for companies active in the domestichealthcare sector.

OUTLOOK FOR THE SECTOR

Indian healthcare industry is growing at over 18% making it the fastest growing in the world and highestgrowing sectors in India by various Government and non-Government organisations. India's health careindustry will reach staggering US$190 billion. Healthcare sector is set to change drastically in India in thenear future. Many corporate organizations have unfolded their plans to build state-of-art thirty to fiftyhospitals each including Super speciality hospitals in metros and second tier cities. Some of them haveplans to expand in Middle East and South Asian Countries.The Indian Healthcare industry is undergoinga phenomenal expansion and India is now looked upon as the leading country in the promotion ofmedical tourism, with an annual growth rate estimated at 30%. It has grown from 15% in 2000 to 30% inlast five years.The government has taken commitment for provision of Health for All right fromperipheral to rural and urban slums through National & Rural Health Mission, which will entail very largehuman resource capital in health sector.The healthcare industry's size is currently estimated at US$20billion and can increase to US$60 billion by 2010.

The rate of growth of the health care industry in India is moving ahead neck to neck with thepharmaceutical industry and the software industry of the country. Much has been done in the health caresector for bringing about improvement. Approximately 12% of the scope offered by the health careindustry in India has been tapped. The health care industry in India is reckoned to be the engine of theeconomy in the years to come. Health care industry in India is worth US$17 billion and is anticipated togrow by 13% every year. The health care sector encompasses health care instruments, health care in theretail market, hospitals enrolled to the hospital networks. The demand for healthcare services in India hasgrown from US$4.8 billion in 1991 to US$22.8 billion in 2001-02, indicating a compounded annualgrowth rate of 16%. The healthcare industry accounted for 5.2% of Indias in 2002 and this figure couldreach US$47 billion or 6.2-7.5% of GDP by 2012. On one hand, the Indian middle class, with itsincreasing purchasing power, is more willing than ever before to pay more for quality healthcare. The

supply of healthcare services has grown steadily, as the private sector becomes more involved in owningand running hospitals.The recent trends also show how the hospitals have become quality conscious.Reputed hospitals like Wadia and Masina in central and south Mumbai and others across the country havehired a reputed healthcare consultancy firm to do a quality gap analysis and help them streamlineoperations and management and suggest ways to bring about better sustainability.



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INTER-FIRM COMPARISON

Operational Performance

Revenue: Apollo HospitalsEnterprise Ltd to post highestsales

As per Cygnus estimates, for thequarter ended OND10, ApolloHospitals Enterprise Ltd. willregister highest sales of Rs6491.75mas against Rs4808.70m of the sameperiod last year. The companys continuous investments in research and development has resulted inincreased productivity and better quality of drugs, medicines, medical instruments, hospital equipment,and other medical supplies. Unique product and service offering across the value chain and diversifiedmarket and customer base would have added to the revenues of the company. The companys operating

metrics position is healthy with good indication of revenue for the whole year. The company is keen toventure in emerging fields of technology.

For the quarter OND10, other companies like Indraprastha, Fortis and Kovai Medical are expected to dowell in the quarter-ended OND10 as compared to the same period last year. Indraprastha is estimated toregister sales of Rs11.5177m an increase of 7% compared to OND 09. The medical industry is highlyfragmented, comprising of various ancillary sectors namely medical equipment and supplies,pharmaceutical, healthcare services, biotechnology, and alternative medicine sectors. With the inventionof latest technological developments, the healthcare industry is catching up with the other leadingindustries of the world. Other companies in the industries are also expected to increase as there is a focusby various overseas companies to open clinics in new areas of business.

Financial Performance in OND10As per Cygnus estimates, in Diagnostics sector, Kovai Medicals estimated OPM of 66.58% and in case ofNPM also the company is expected to do well at 32.18%. EBITDA is expected an increase of 9% onquarterly basis. For this year, the companys major focus is to consolidate its operations by improvingefficiencies, reducing cost and strengthen product development and better schemes and plan capabilities.

Cost Structure OND 09 Vs OND 10 (Percentage of net sales)For Healthcare industry, Raw Material expenditure is the major driver of the cost structure. Being aservice intensive industry, staff and administration expenses are the second major cost drivers followed bydepreciation expenses. Tax for the companies altogether is estimated to be less than the industry averagedue to Government policies. Interest cost for most of the companies is estimated to decrease marginally

which is proportional to the net sales and based on the ongoing reduction of revenue. Other expenditurehas increased due to growth in revenue. Hence, the companies are making efforts to have control onother expenses. Depreciation charges for some of the companies are expected to increase marginally asthey re-estimated the value of assets and the accruing more assets to expand infrastructure.

Operational Performance Sales Vs Growth (Rs in million)

OND 09 (A) OND 10 (E) Growth %Apollo 4808.70 6491.75 35.00Indraprastha 1076.42 1151.77 7.00Kovai Medicals 335.35 368.89 10.00Fortis Healthcare 515.80 541.59 5.00

Source: BSE India; Cygnus Research

Note:(A) Actuals; (E) Estimated

Financial Performance OND 09 (A) Vs OND10 (E)

Apollo Indraprashta Kovai Medicals Fortis Healthcare

OND 09 OND10 OND09 OND 10 OND 09 OND10 OND09 OND10

Net sales 4808.70 6491.75 1076.42 1151.77 335.35 368.89 515.80 541.59

OPM 16.16 12.98 16.05 17.59 61.55 66.58 54.20 61.53

NPM 9.13 7.80 6.71 7.80 28.47 32.18 124.00 126.97Source: BSE India; Cygnus Research



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Service Sector

Diagnostics Sector

Cost Structure (Percentage of Net Sales) - OND 09 Vs OND 10

Company Apollo Indraprastha Industry

Year 2009 2010 2009 2010 2009 2010Stock in trade 0.00 0.00 0.00 0.00 -0.07 0.06Raw material 0.00 22.99 27.30 24.11 7.27 22.96Staff cost 15.49 12.39 19.09 19.05 16.41 13.97

Traded Goods 0.00 0.00 0.00 0.00 0.84 0.64Other expenditure 68.35 51.64 37.56 39.25 59.73 48.65Depreciation 2.93 2.28 4.95 4.80 3.46 2.82Interest 1.76 1.33 0.94 0.97 1.97 1.60

Tax 4.55 3.37 3.45 4.02 3.99 3.28Source: BSE; Cygnus Research

Cost Structure (Percentage of Net Sales) - OND 09 Vs OND 10

Company Kovai Medicals Fortis Health Care Industry

Year 2009 2010 2009 2010 2009 2010Stock in trade -1.37 1.39 0.00 0.00 -0.07 0.06Raw material 16.74 13.24 27.03 26.77 7.27 22.96Staff cost 12.91 14.92 21.66 21.45 16.41 13.97

Traded Goods 16.93 14.95 0.00 0.00 0.84 0.64Other expenditure 36.43 37.45 40.81 40.42 59.73 48.65Depreciation 3.56 2.67 5.18 5.13 3.46 2.82Interest 3.17 3.21 5.23 5.13 1.97 1.60

Tax 3.74 4.10 0.00 0.00 3.99 3.28Source: BSE; Cygnus Research



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COMPANY ANALYSIS

1. Apollo Hospitals

2. IndraPrastha Hospitals

(Rs in million)

Quarter Full Year Ended

ItemOND 09

(A)OND 10

(E)JFM 11

(P)

GrowthRate %Y o Y

March09 (A)

March10 (E)

GrowthRate %

Net Sales 4808.70 6491.75 6519.15 35% 14579.80 18257.80 25%

EBITDA 777.10 842.45 629.56 8% 2201.20 2812.60 28%

Depreciation 141.00 148.05 151.31 5% 439.20 543.10 24%

Interest 84.70 86.39 87.24 2% 223.10 377.50 69%

Other Income 106.50 117.15 61.05 10% 223.70 329.70 47%

PBT 657.90 725.16 452.07 10% 1762.60 2221.70 26%

TAX 218.80 218.80 141.10 0% 541.70 702.00 30%PAT 439.10 506.36 310.97 15% 1220.90 1519.70 24%

OPM 16% 13% 10% 15% 15%

NPM 9% 8% 5% 8% 8%

Tax Rate 33% 30% 31% 31% 32%

Source: Cygnus ResearchNote: A: Actuals; E: Estimated; P: Projected

(Rs in million)


ItemOND 09

(A)OND 10

(E)JFM 11

(P)

GrowthRate %Y o Y

March09 (A)

March10 (E)

GrowthRate %

Net Sales 1076.42 1151.77 1192.15 7% 4058.83 4364.80 8%

EBITDA 172.75 202.60 219.95 17% 616.68 696.97 13%

Depreciation 53.26 55.28 57.22 4% 186.68 192.90 3%

Interest 10.09 11.17 11.56 11% 57.48 38.54 -33%

Other Income 0.00 0.00 0.00 0% 0.00 0.00 0%

PBT 109.40 136.14 151.16 24% 372.52 465.53 25%

TAX 37.19 46.29 51.40 24% 133.66 154.93 16%PAT 72.21 89.85 99.77 24% 238.86 310.60 30%

OPM 16% 18% 18% 15% 16%

NPM 7% 8% 8% 6% 7%

Tax Rate 34% 34% 34% 36% 33%

Source: Cygnus Research

Note: A: Actuals; E: Estimated; P: Projected



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3. Kovai Medicals

4. Fortis Health Care

(Rs in million)


ItemOND 09

(A)OND 10

(E)JFM 11

(P)

GrowthRate %Y o Y

March09 (A)

March10 (E)

GrowthRate %

Net Sales 335.35 368.89 398.26 10% 1113.27 1304.10 17%

EBITDA 61.55 66.58 70.69 8% 191.80 252.32 32%

Depreciation 11.94 9.85 12.86 -18% 39.15 46.88 20%

Interest 10.62 11.84 9.20 11% 44.34 48.37 9%

Other Income 2.02 2.43 6.75 20% 2.03 15.25 651%

PBT 41.01 47.32 55.38 15% 110.34 172.32 56%

TAX 12.54 15.14 17.28 21% 38.93 56.46 45%

PAT 28.47 32.18 38.09 13% 71.41 115.86 62%

OPM 18% 18% 18% 17% 19%

NPM 8% 9% 9% 6% 9%

Tax Rate 31% 32% 31% 35% 33%

Source: Cygnus ResearchNote: A: Actuals; E: Estimated; P: Projected

(Rs in million)

Quarter Full Year EndedItem

OND 09(A)

OND 10(E)

JFM 11(P)

GrowthRate %Y o Y

March09 (A)

March10 (E)

GrowthRate %

Net Sales 515.80 541.59 637.12 5% 1744.50 2098.10 20%

EBITDA 54.20 61.53 160.43 14% 78.50 220.60 181%

Depreciation 26.70 27.78 25.80 4% 115.40 107.90 -6%

Interest 27.00 27.81 81.42 3% 219.50 222.80 2%

Other Income 123.50 121.03 123.03 -2% 190.00 411.50 117%

PBT 124.00 126.97 176.23 2% -66.40 301.40 -554%

TAX 0.00 0.00 0.00 0% 5.10 0.00 -100%

PAT 124.00 126.97 176.23 2% -71.50 301.40 -522%

OPM 11% 11% 25% 4% 11%NPM 19% 19% 23% -4% 12%

Tax Rate 0% 0% 0% -8% 0%

Source: Cygnus Research

Note: A: Actuals; E: Estimated; P: Projected



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SOURCES & METHODS FOR COMPANY PROJECTIONS

Sources

Company annual reports

Press releases

BSE India

Research reports related to Economy, Industry and Company

Methods

Understanding companies product services

Understanding industry and economic indicators and general economic scenario

Understanding the dynamics between the companies and the industry in relation to demand and

supply, technology, regulation, inflation, etc

Understanding recent strategies and initiatives taken by companies such as product launches,

capacity additions and M&As

Making revenue projections based on the expected business strategies and financial analysis

Validating the financial projections of the company with the overall business strategy

Calculating the cost structure on the basis of sales and past and present trends in the industry

Analysing quarterly growth rates and growth rates of last 8 quarters

The cut-off date for OND quarter results is January 18, 2011. Quarterly performance analysis

of companies announcing their results after this date is based on Cygnus estimates.

Documents

Indian Health Care Industry[1]