MANAGEMENT DISCUSSION AND ANALYSIS REPORT Indian Healthcare Sector: An Overview Today, the Indian Healthcare Sector is at crossroad. As a nation, we have made noteworthy progress across various dimensions, and India is healthier today than ever. We have successfully eradicated multiple diseases including smallpox, polio and guinea worm diseases. HIV infections and AIDS related deaths have dropped significantly. Despite this, India still struggles with substantial issues and gaps in its healthcare systems. Healthcare in India is under-served and under-consumed. The Indian healthcare market is expected to grow at a CAGR of ~15% from USD 85-90 billion in 2014 to between USD 450 - 470 billion by 2015. This would reflect in India's spend on healthcare which is expected to increase from 4% of GDP currently to approximately 6% of GDP by 2025. The growth in population, increase in lifestyle related diseases, rising purchasing power of the middle class and higher awareness of chronic illnesses will be the key growth drivers for the sector. The Indian healthcare delivery system can be segregated into two major segments; public and private. Government of India / public hospitals provide treatment at the taxpayers' expense. Most essential drugs are offered free of charge in these hospitals. The Indian private healthcare sector is highly fragmented with approximately 90% of the hospitals being established and operated by doctors and trusts and the remainder being corporate hospitals (chain of hospitals run by professional healthcare groups). Most of the private hospitals are usually smaller scale establishments (50-200 bed) that are managed as standalone entities. The corporate hospital chains have been playing a key role in driving expansion and growth in the industry. So far, the corporate hospitals have mostly concentrated on expanding in Tier I cities (including metros) with large scale multi-specialty tertiary care facilities. If we look at India's public healthcare system, it is underfunded and its hospitals are overcrowded with inadequate rural coverage. The government's low spending on health care places much of the burden on patients and their families, as evidenced by the country's out-of-pocket (OOP) spending rate, one of the world's highest. According to the World Health Organization (WHO), just 33% of Indian health care expenditures in 2012 came from government sources. Of the remaining private spending, around 86% was OOP. Several public health insurance systems exist, such as state-level employee insurance for industrial workers and the central government's health care plan for civil servants. Several large companies also operate employee health policies. While health insurance penetration in India is increasing, it has been proposed that better accessibility to quality health care could be made possible by extending coverage to all employees in the private sector and by offering inexpensive health plans for the poor. This way, people can have full coverage for themselves, their families and elders. The Indian Government has accorded priority in its 2014-2015 budget to the health care sector. Key recommendations that will have a direct impact on enhancing health care access include a rise in foreign direct investment (FDI) limit in the medical insurance business to 49 percent; four more medical institutions of the status of All India Institute of Medical Sciences (AIIMS); 12 more medical colleges in the public sector; and broadband connections in rural areas to expand the reach of telemedicine. In addition, a $1.7 billion fresh fund allocation to encourage start-ups and another scheme for establishing biotech clusters will help to develop innovative health care technologies. Finally, the budget provisions also aim to address the infrastructure deficit by establishing institutions like AIIMS in all states and setting up 15 model rural health research centers to bridge the rural-urban divide. However, challenges remain. The vision for the plan period of 2012-2017 is to achieve acceptable standards of health care for the Indian populace. However, India still doesn't have a central regulatory authority for its health care sector. KEY GROWTH DRIVERS Improved access and affordability with higher public spending on healthcare The current healthcare infrastructure in India is quite inadequate to meet the growing demand for healthcare services. India's expenditure on healthcare is close to 4 % of GDP, which is much below the global average. Today, Healthcare spending in the country is driven by out-of-pocket rather than government spending. However, according to a Healthcare Report by Bain & Company and NATHEALTH, the total spending on healthcare is anticipated to reach about 6% of GDP by 2025, with out of pocket spending at less than 30%. Inadequate Healthcare Infrastructure and Resources India's ratio of 0.9 beds, 0.7 doctors and 1.5 nurses per 1,000 people is dramatically lower than the WHO average. And industry faces an acute shortage of paramedical and administrative professionals as well. Given the inadequate healthcare infrastructure and human resources in India, the sector requires huge investment to bridge the increasing gap arising due to the growing Indian population including significant development in Government's policies related to medical education, health insurance and brventive healthcare. It is estimated that capex spending will grow from less than 10% of overall healthcare spending to 15% by 2025. This would lead to 1.8 million additional functional beds, improving the density of beds from 0.9 per 1000 population today to 2.0 by 2025. Health Insurance Though, there has been a considerable progress in the healthcare ecosystem, including healthcare delivery and insurance in the past decade. However, India still trails in health coverage when compared to other developed and developing countries. For instance, the penetration levels of the health insurance is much lower in our country whereas the share of out of pocket expenditure, for a majority of population is significantly higher. Nonetheless, the rising healthcare cost inflation, due to advancements in medical technology, changing disease pattern (which are more towards lifestyle diseases) and increase in awareness, the health insurance market has significant headroom for growth in the coming years. Medical Tourism India has emerged as one of the most sought after destinations for medical tourists across the globe owing to its high value proposition in terms of quality healthcare, pool of specialists and availability of alternate treatment options such as ayurveda and yoga. SAARC countries in particular (namely Afghanistan, Pakistan, Nepal, Bhutan, Bangladesh, Maldives and Sri Lanka) are a major source of medical tourists owing to the physical proximity and political co-operation agreements. According to KPMG and FICCI, India's medical tourism market is expected to expand at a CAGR of 27% to reach USD 4.9 billion in 2015, from USD 1.9 billion in 2011. With the emergence of newer needs and with India establishing a firmer footprint as a healthcare delivery destination, medical tourism is likely to gain impetus. India's favorable demographics India's population is expected to cross 1.3 billion by 2017 and this growing population would translate into an incremental demand for healthcare services. Analyzing the demographic profile of India, around 65% of the Indian population is below 35 years of age and over 50% of the population is below 25 years of age (the median age of India's population is 24 years). Further, the proportion of geriatric population (60 years and above) is increasing at a faster rate than the rest of the population. The increasing geriatric population is expected to boost demand for the healthcare and related services significantly. Rise in Life Style related / Non Communicable diseases In recent years, India has managed to control communicable diseases like malaria, cholera and polio. However, the country is dealing with a new breed of developed world obesity-fuelled diseases like diabetes and cardiovascular ailments. Coupled with a sedentary urban lifestyle, increased alcohol consumption and smoking, the urban youth are particularly prone to the aforementioned lifestyle diseases. • A report on non-communicable diseases released by the World Health Organization paints a grim picture of India. The risk of dying from a non-communicable disease (NCD) for persons aged between 30 and 70 years in India is a high 26 per cent, according to the second set of NCD profiles for 194 countries, released by WHO in 2014. What's more, Indian males are more prone to dying of these diseases than women. • Among the risk factors that lead to these NCDs, high blood brssure was the biggest reason. Twenty-one percent of all Indians were found to be suffering from high blood brssure, with equal share among men and women. The higher rate among men is explained by increased consumption of tobacco and alcohol. Almost 25 per cent of all males consume tobacco while only 4 per cent females do so. Similarly, 8 per cent of all males consume alcohol and only 0.5 per cent females do so. KEY CHALLENGES IN THE HEALTHCARE INDUSTRY Healthcare workforce remains inadequate: India has a ratio of 0.7 doctors, 1.5 nurses and 1.3 beds per 1,000 people compared to the WHO average of 2.5 doctors & nurses and 3 beds per 1,000 people. The shortage of qualified professionals is one of the key challenges for the Indian Healthcare Industry. The situation is aggravated by the concentration of medical professionals in urban areas. Many Indians, especially those living in rural and semi urban areas, are still receiving services from unqualified providers. The Industry needs an additional 1.54 million doctors and 2.4 million nurses to match the global averages. Furthermore, there is an acute shortage of paramedical and administrative professionals in the country. Inadequate number of Public Private Partnerships (PPP): The Public Private Partnership (PPP) model is yet to gather momentum. If the PPP model is implemented widely it can enhance the quality of health care services in the country as the healthcare infrastructure can be provided by the government and management skills can be provided by the private sector. Such initiatives will enhance the quality of healthcare services at affordable price points. Outlook Current status of Indian Healthcare delivery sector provides significant opportunity for private healthcare organisations. Continuing lack of adequate healthcare infrastructure and limited access to quality tertiary healthcare delivery services would result in private players playing a critical role in bridging the increasing demand supply gap in the sector. The private players continue to explore new business models to expand their brsence in new geographies and specialties with rising demand. However, given the capital intensive nature of the sector and the gap of over 2 million beds to reach 3 beds per thousand population, it seems like a non-achievable target for both private and public sector. The focus, instead, should be on better utilization of under-utilized government infrastructure, incentivizing fund flows into the sector and technological enhancement. PPP models across the country would have to gain momentum so that the skill set of both private and public sector and public infrastructure can be leveraged to provide quality healthcare services to the population of country. The Company Fortis Malar Hospital was acquired by Fortis Healthcare Limited in early 2008. The hospital founded in 1992, is established as one of the largest corporate hospitals in Chennai providing quality super specialty and multi-specialty healthcare services. Fortis Malar Hospital, with 170 beds, focuses on providing combrhensive medical care in the areas of Cardiology and Cardiac Surgery, Neuro Surgery, Gynaecology, Orthopedics, Gastroenterology, Neurology, Pediatrics, Diabetics, Nephrology and Internal Medicine. Fortis Malar Hospital has a state of the art Cath Lab and multiple dedicated cardiac operation theatres and intensive coronary care units. Several rare and complex Adult and Pediatric Cardiac surgeries, Orthopedic and Joint replacements, Neurosurgeries and Plastic reconstruction surgeries have been performed at this hospital. The hospital's Obstetrics and Gynaecology services are among the best in the city, successfully performing many complicated deliveries and surgeries. They are supported by a dedicated Neonatology unit. HUMAN RESOURCE Talent acquisition and retention is key to the success of any organization and during the year, your company continued to source and retain competent employees. All our employees undergo an induction which enables them to understand and "live the values" of the company. Fortis Malar has a robust performance management which facilitates identifying talent, giving them appropriate opportunities and reward for performance. The company has a focused Training and development program that plays a key role in ensuring all our staff continue to perform at the high standards expected of them and enables them to be brpared for taking on greater challenges. The number of employees stood at 516 as on 31st March, 2015 OPERATIONAL AND FINANCIAL PERFORMANCE Your company achieved a consolidated income from operations of Rs. 117.93 Crores against Rs. 108.38 Crores during the last financial year ended 31st March, 2014, rebrsenting a growth of 9%. The Profit before exceptional and extra-ordinary items and tax for the period stood at Rs. 11.97 Crores as against Rs. 13.39 Crores during the corresponding period. Profits after tax stood at Rs. 7.86 Crores in the current financial year compared to Rs. 8.78 Crores in the brvious year. Regarding the key performance indicators, the company's average revenue per occupied bed (ARPOB) improved significantly during the current year to Rs. 118 lakhs from Rs. 109 lakhs in the brvious year. The average length of stay (ALOS) stood at 3.82 days in FY2015 compared to 3.81 days in FY2014. Occupancy of the hospital during the year was at 60%, similar to the brvious year. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY The overall responsibility to design, implement and monitor effective risk and control environment rests with the management A framework has been institutionalized for the identification, evaluation and management of significant risks that may impact achievement of business objectives. The framework entails a structured process to identify, assess and monitor the risks and initiate suitable mitigation strategies for effective risk management. The internal control framework is designed to manage and mitigate the risks faced by the Company. The organizational roles, responsibility and accountability structures with appropriate performance oversight process are defined and aligned to provide an enabling environment to the business units and functions to operate as per the design control environment. Review and oversight procedures are designed to monitor effective adherence. The Internal Audit function provides an independent assurance to the Audit Committee that system of internal control deployed is designed to manage key business risks and is operating effectively. Management provides action plans to address the observations noted from the internal audit reviews and action plans are monitored towards resolution under the supervision and guidance of Audit Committee. A quarterly report on the findings is brsented to the Audit Committee which reviews the adequacy and effectiveness of the Company's internal control environment and monitor implementation of internal audit observations. CAUTIONARY STATEMENT Statements in this management discussion and analysis describing the company's objectives, projections, estimates and expectations may be "forward looking statement" within the meaning of applicable laws and regulations. Actual results may differ substantially or materially from those exbrssed or implied. Important developments that could affect the company's operations include Government regulations, litigation, tax laws and significant changes in the political and economic environment in India. References 1. Aarogya Bharat - India Healthcare Roadmap for 2025 by Bain & Company and NATHEALTH 2. 2015 Healthcare Outlook - Deloitte 3. Medical Value Travel in India, KPMG & FICCI, FICCI Heal Conference 4. 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