MANAGEMENT DISCUSSION AND ANALYSIS REPORT Indian Healthcare Sector: An Overview Today, the Indian Healthcare Sector is at a 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 2025. 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 provides 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. However, shortage of qualified medical professionals is one of the key challenges in the Indian health care industry. India's ratio of 0.7 doctors and 1.5 nurses per 1,000 people is dramatically lower than the WHO average of 2.5 doctors and nurses per 1,000 people. Furthermore, there is an acute shortage of paramedical and administrative professionals. The situation is aggravated by the concentration of medical professionals in urban areas, which have only 30 percent of India's population. Many patients, especially those living in rural and semi urban areas, are still receiving services from unqualified practitioners. The industry needs an additional 1.54 million doctors and 2.4 million nurses to match the global average. India's health care professional and infrastructure shortage is one of the major reasons for the country's high mortality rate. Although there has been a consistent decline in the Infant Mortality Rate (IMR) and the Under-Five Mortality Rate (U5MR), based on robust projections, at the current rate of decline, India is unlikely to meet the targets for Millennium Development Goal (MDG)-4, which aims to reduce by two-thirds, between 1990 and 2015, the under-five mortality rate. India's new Bharatiya Janata Party (BJP)-led government has announced a new health policy to focus on reducing malnutrition, improving the use of essential medicines, expanding immunization, modernizing public hospitals, and instituting a better tobacco control program. The government wants a holistic health care system that is universally accessible, affordable, and dramatically reduces OOP expenditures. 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 startups 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. Also, India's health care sector is capital-intensive, with long gestation and payback periods for new projects. Land and infrastructure costs account for 60-70 percent of the capital expenditure for hospitals. Further, the industry also requires capital for upgrade/maintenance/replacement of medical equipment and expansion. Availability of capital at a reasonable cost remains a major hurdle. 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%. Public spending on healthcare should increase to 3% of GDP and account for over 50% of the overall health expenditure, driven by greater government prioritization of healthcare. Inadequate Healthcare Infrastructure and Resources Healthcare continues to be limited by infrastructure short-comings and lack of an organized delivery system. Low spending on healthcare coexists with disproportionately high out-of-pocket spending, given that less than 25% of the population is covered by health insurance. Regional distribution of infrastructure and human resources remains imbalanced. Although rural India accounts for about 70% of the population, it has less than one-third of the nation's hospitals, doctors and beds, resulting in large disparities in health outcomes across states. Furthermore, healthcare in India is biased towards curative care, with a significant drop-off in number of patients along the treatment cycle, due to under-diagnosis and inappropriate care. As discussed above, India's ratio of 1.3 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 to 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 considerable progress in the healthcare ecosystem, including healthcare delivery and insurance, in the past decade. However, India still trails in health outcomes 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. Besides, with the new government's special focus on brventive care, accessibility of healthcare facilities, including AYUSH treatments and insurance to all, the outlook for this segment looks positive. Medical Tourism The medical tourism industry has witnessed a steady growth in the recent years globally. As the world population becomes more aware of healthcare options and quality healthcare delivery becoming priority in the minds of the majority, patients are bound to pursue cross border healthcare. The primary reasons for medical tourism therefore are high quality healthcare, specialized treatment options, immediate service opportunity for travel coupled with affordability. Reasons for medical travel differ for countries. In regions where quality healthcare is unavailable, accessing healthcare may lead to medical travel, for others, cost effectiveness may be a reason. 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. In addition to rising population, the no of middle/ Upper income households are expected to increase 4x over 2010-2020, as per McKinsey Global Institute (MGI). This will shift consumption from necessities to needs such as healthcare. 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. oo 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. oo WHO notes "the new WHO NCD Country Profiles 2014 show progress has been insufficient and uneven" in controlling NCDs. In 2000, nearly 1.6 million males under age 70 died of the four NCDs in India. The figure increased to 2 million in 2012. This happened despite the Union health ministry launching a programme in 2008 targeting NCDs. Among women, the deaths increased from nearly 1.25 million to almost 1.45 million during the same period. o 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. INDIAN DIAGNOSTIC INDUSTRY The Indian diagnostics industry is among the fastest growing segment of the healthcare sector. In 2014, the estimated size of the diagnostics industry was ~USD 2.9 billion, growing at a CAGR of 20% which is ~3.2% of the healthcare sector. The industry is highly fragmented, with over 100,000 labs in the country. The organized sector accounts for ~10-12% of the market and is growing faster than industry on account of consolidation and better value/quality proposition for customers. However, estimates also suggest that the size of the diagnostic industry is approx. USD 9 billion if we were to include the Organised and Unorganised Hospital labs. In India, the diagnostics sector has been witnessing immense progress. Technological advancements and higher efficiency systems are taking the market to new heights. Advanced and cutting-edge technologies are being used in understanding disease prognosis. This has strengthened the sophistication level of participants in the sector. The diagnostic lab business has traditionally been considered a high margin, asset-intensive business. Thus, in an effort to match increasing demand, large players have endeavoured to increase their pan-Indian brsence, by building national networks, over the last few years. Simultaneously, the market has witnessed a continuous mushrooming of foreign players as well as standalone regional players. In addition, market leaders have exbrssed intent to penetrate foreign markets such as the Middle East and Sri Lanka, whose economies are growing on par with India. Growth is being pursued via a combination of organic and inorganic routes. A major part of growth in the organized sector has occurred through acquisitions and Brownfield projects, rather than setting up Green field laboratories. Different approaches have included expansion via hub and spoke models (one reference lab - many collection centres), PPP initiatives, IPOs, and funding from private equities. In terms of growth opportunity, Tier II and III cities brsent an attractive opportunity for large corporate players. These cities rebrsent an area of underserved need, with a growing desire for improved health infrastructure. From the standpoint of large players, seeking to establish brsence, expansion into these unexplored regions is associated with certain drivers and challenges. However, it is thus easier for large players, to partner with a renowned local lab in the region which has got a good brand, accreditations, good quality and service. Thus, a hub and spoke model is a popular strategy and is typically established in the following manner: 1. Reference labs, which act as regional hubs, are set up in large metropolitan areas. They offer combrhensive and specialized testing capabilities. 2. Satellite labs feed reference labs, and offer a limited test menu. These can be either owned or franchised. 3. Collection centres are located in hospitals, nursing homes, pathology labs, doctors' clinics, etc. Here samples are collected and forwarded to either a satellite/ reference lab. Diagnostic plays a critical role in the overall healthcare delivery: Timely diagnosis can mean the difference between life and death for a patient. It also has far reaching consequences on driving down the overall treatment costs/ healthcare spend. This can occur either via early recognition of an acute, life threatening condition or brventive screening of a chronic disease. However, in an emerging country, like India, few primary healthcare centres are located within the reach of well-equipped and staffed laboratories. Thus, easy to use, rapid and low cost devices, can improve access of patients living in underserved areas, to healthcare testing and consequently disease specific treatment. Diagnosis of certain endemic/infectious/ viral diseases such as tuberculosis, malaria and dengue at a community level, can also facilitate reduction in disease burden and associated morbidity and mortality. Decentralization of diagnostic testing, from the lab to the immediate vicinity of the patient, is facilitated through point of care diagnostics. Point of care testing (POCT) makes it possible for physicians to receive test results for critically ill patients in real time, conveniently monitor patients suffering from a disease and enables patients to receive quicker results of their tests. Such technologies and devices if used as a complement, to central laboratory services can bring about a complete turnaround in clinical diagnostic testing. In terms of challenges, absence of a proper regulatory framework and weak accreditation system are the major industry roadblocks that may hinder the future growth of the diagnostic industry. Accreditation is not mandatory and less than 1% labs across the country are accredited by NABL, only accreditation agency in India. Very few labs are CAP accredited in the country. The only requirement to open a diagnostic lab is the need for registration under the Shops and Establishment Act. This leaves the market highly unorganized, prying it open for competition from players who offer poor quality services at low costs. This makes the market volatile and price sensitive. The importance of the diagnostics industry can be derived from the fact that 70% of the clinical decisions are based on diagnostic inputs. Around 40 laboratories in India have received international recognition from the College of American Pathologists (CAP). National certification of diagnostic laboratories is the responsibility of the National Accreditation Board for Testing and Calibration Laboratories (NABL), an autonomous body under the aegis of Department of Science & Technology, Government of India. Around 250 diagnostic centres in India are NABL accredited. There is a clear increase in the number of accreditations for the Government hospitals from the National Accreditation Board for Hospitals and Healthcare Providers (NABH). The Indian market is evolving into an outsourcing market for diagnostics testing. It is for example estimated that specialized tests like molecular diagnostics or hormone related tests cost 7080% less in India than in the US. The Diagnostic majors with accredited labs are partnering with American and British hospitals, as well as insurance companies, for the same. Indian CROs (contract research organizations) are providing an opportunity for diagnostic majors to tap into the global market for clinical trials. India is becoming a brferred destination for clinical trials due to its large pool of proficient medical and paramedical professionals, cost advantages, and a huge pool of patients. Key challenges for the diagnostic industry are a) no regulation regarding the accreditations, b) low level of automation, c) integrity of the sample while transport (usage of cold chain/dry ice), d) intense price competition which in turn raises the question on quality testing and e) shortage of manpower. KEY CHALLENGES IN THE HEALTHCARE INDUSTRY Long gestation period and capital intensive nature of the sector: The healthcare sector is capital intensive with long gestation and payback periods for new projects. Land and infrastructure costs account for 60-70% of the capital expenditure in case of hospitals. Further, the business also requires capital for upgradation/ maintenance / replacement of equipment and expansion. Therefore, availability of capital at a reasonable cost remains a key challenge for the 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. Rising real estate costs: One of the key constraints in expansion for the private sector is the high cost of real estate. Over the last few years, land cost has risen and the land acquisition process has only become more complex with increasing regulations, making projects in many large city locations, unviable. Hospitals are looking to mitigate this by shifting to a rent model or looking at other alternatives which could provide asset light growth & expansion opportunities. Outlook The current status of the 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. Furthermore, our country should aspire to universal insurance coverage for essential care with low out-of-pocket spending. And the Government should focus on its role as a payer and regulator and drive the provision of healthcare in under-served areas, across the care continuum. In addition, the Government should take the lead in facilitating public health through focus on awareness, education, sanitation, immunization and implementation of public health initiatives. The private sector should lead in the provision of care and enable expansion of insurance coverage to urban India. The Company Fortis Healthcare is one of the leading healthcare delivery providers in Asia. Founded by the iconic Indian business leader, the Late Dr. Parvinder Singh, architect of growth at Ranbaxy Laboratories, Fortis is a manifestation of his vision "to create a world-class integrated healthcare delivery system in India, entailing the finest medical skills combined with compassionate patient care". Fortis aspires to remain a leader in the healthcare delivery space and is driven by the larger purpose of "SAVING AND ENRICHING LIVES" through clinical excellence. Fortis commissioned its first hospital in 2001 in North India and, in just over a decade, has grown to become a leading healthcare service provider with a brsence in day care specialty, diagnostics and tertiary and quaternary care. As of March 31, 2015, the company had a network of 54 healthcare facilities (including projects under development), with approximately 4,700 operational beds1 and the potential to reach over 9,000 beds. In India, the Company is one of the largest private healthcare chains comprising a network of 52 healthcare facilities, including 32 operating facilities, 14 satellite and heart command centres located in public and private hospitals and 6 healthcare facility projects which are under development or are greenfield land sites. In addition, its Indian diagnostics business has a brsence in over 450 cities and towns, with an established strength of 264 laboratories including 131 self-operated laboratories2, 27 laboratories located in Fortis healthcare facilities, 21 wellness centres and 3 international laboratories. It also has over 6,400 collection points, which includes 68 collection centers that are owned and 59 collection centres at locations outside India. The Company's healthcare facilities use advanced technology and its doctors, nurses and other healthcare professionals follow treatment protocols that parallel international standards. A majority of the healthcare facilities provide secondary, tertiary and quaternary healthcare services to patients in cardiac care, orthopaedics, neurosciences, oncology, renal care, metabolic diseases and mother and child care. The Company has also developed healthcare facilities around some of these specialties, which it internally classifies as "Centres of Excellence". Awards & Recognitions Divestments o In line with its strategy to strengthen its focus on India, the company successfully completed the last of its international divestments. On May 1, 2015, announced its decision to divest 100% shareholding in RadLink-Asia Pte Ltd and its subsidiaries, "RadLink", Singapore, to Fullerton Healthcare Group Pte. Limited for SGD 111 million. The deal was concluded on May 12, 2015. x In March 2015, the company announced the sale of its Singapore hospital to Concord Medical Services (International) Pte Ltd (CCM), for a consideration of SGD 55 Mn with the deal being consummated in April 2015. Strategic Direction and Focus Area With the international divestments successfully completed, the Company strategy is to firmly enhance its focus on the India market. To this effect, the Company's emphasis would largely be on strengthening existing operations while utilizing its asset light growth strategy to expand organically and primarily through brownfield expansions. With its substantial scale and leadership position in the country, the Company expects that India, a high growth market will continue to perform well and will be the mainstay of its operations for the foreseeable future. The Company has embarked on a transformational organization wide plan, "Lakshya" focusing on the strategic levers of Patient Care, Clinical Excellence, Community Connect, Talent Engagement and Investor Confidence to provide sustained leadership and a long term competitive advantage in the sector. Growth & Expansion Plans The Company's plans for future growth are primarily based on bolt on and existing bed expansions. It has formulated an "Earn the Right to Grow Strategy" which encapsulates defined metrics for future bolt on expansion with a focus on expanding margins, adding high end medical programs and ensuring additional operational beds are margin accretive at the earliest. Such calibrated expansion would entail investment primarily by the Religare Health Trust in line with the Company's stated asset light growth strategy. The Company does not envisage any M&A in the near future and would steadfastly focus on growth and expansion by adding beds in existing facilities across locations such as Mumbai, Amritsar, NCR, Kolkata, Jaipur, Bengaluru and Ludhiana. It expects to add approximately 400 beds each year over the next three years. In FY16, two greenfield hospitals are slated to be commissioned i.e. Arcot Road, Chennai, a 200 bed multispecialty hospital and Sacred Heart, Bengaluru a 70 bed boutique Mother & Child facility. Both these facilities will consolidate and further strengthen the Company's brsence in these key markets. Select Key upcoming projects Set forth below are certain details relating to our Greenfield / Brownfield projects, which are currently at various stages of development: x Fortis Hospital Arcot Road, Chennai Fortis Hospital Arcot Road, 200+ bed tertiary care multi-speciality hospital, would be the second hospital by the company in the city. The hospital shall enhance the scope of services and consolidate its brsence in the Chennai market. All medical equipment like Cath Lab, MRI, CT, X-ray, OT lights etc have been installed and commissioned. The hospital is awaiting approval from Chennai Municipal Development Authority and Fire Authorities to begin operations. X Fortis La Femme Bengaluru: Fortis La Femme, Bengaluru, a 70 bed hospital for Women and Children, is inspired by the core belief that a woman is a very special person with special needs. Medical care at the hospital would include Obstetrics (Painless Labour), Gynaecology, Neonatology, Anaesthesia, General & Laparoscopic Surgery, Cosmetic Surgeries and Genetic & Foetal Medicine. All the medical equipment including the X-ray, Ultrasound etc have been installed. Regulatory approvals from the Bangalore Development Authorities have been obtained and the facility is expected to be launched in Q2FY16. X BG Road, Bengaluru expansion: The expansion plans at BG road facility have been initiated wherein a new 210 bed tower with a combrhensive cancer-care facility will be set up. Fortis' combrhensive Centre for Oncology will provide end to end cancer care from diagnostics to rehabilitation, integrating cutting-edge medical technology and internationally acclaimed clinical expertise to provide treatment across Medical, Radiation and Surgical Oncology. The latest advancements in Linear Accelerators, Brachy Therapy, and Nuclear medicine will be incorporated. In addition to Oncology, the new expansion will have additional operation theatres with a high end Brain Suite and state-of-the-art ICU's. Financial & Operational Highlights For the financial year 2014-2015, the Company reported a consolidated total income of Rs. 4,140 Crore which includes revenue of Rs. 3,928 Crore from the India Operations and Rs. 212 Crore from the International Operations. This compares to the overall consolidated revenue of Rs. 4,759 Crore in the brvious year. The decline in revenue is primarily due to divestments of various international assets during the financial year 2013-14. Consolidated Operating EBITDAC (before the net business trust fees) stood at Rs.579 Crore, rebrsenting a margin of 14.0%. EBITDA (including other income and before exceptional item) for the year was at Rs. 225 Crore. Net profit/ (loss) for the company was at Rs.144) Crore compared to a profit of Rs. 123 Cr (including gain arising due to divestment of international assets) in FY14. The India business comprising the Hospital and the Diagnostic business contributed Rs. 3,928 Crore, a growth of 14% over the corresponding year. For the year FY2014-15, the hospital business contributed 82% to the overall India business and grew by 15% to Rs. 3,207 Crore, compared to Rs. 2,795 Crore in FY14. The India Diagnostic business reported a net revenue of Rs.722 Cr compared to Rs. 653 Crore in the corresponding brvious period. For the India business, the operating EBITDAC before net business trust costs stood at Rs.607 Crore, rebrsenting a margin of 15.4%. The India Hospital business reported operating EBITDAC before net business trust costs at Rs. 459 Cr, a margin of 14.3% as compared to Rs. 311 Crore (11.1% margin) reported in FY2014, a growth of 48%. The Diagnostic business in India reported an EBITDA of Rs. 147 Cr, a growth of 26% and a margin of 20.4% as compared to a 17.9% margin reported in FY14. In December 2014, Fortis received its first dividend of approx. Rs.38 Cr for H1FY15 from Religare Health Trust (RHT) for ~ 28% equity stake in the trust, as a sponsor. The company's key facilities performed well both in terms of revenue and operating profit. These facilities include Fortis Mohali, Fortis Amritsar, Fortis Mulund, Fortis Shalimar Bagh, FMRI, Fortis Noida, Fortis Jaipur and Fortis Vashi. Amongst the newer facilities, FMRI Gurgaon, the company's flagship facility launched in May 2013, became the second largest revenue contributor across the Fortis network recording a growth of 52% in revenues to reach X 350 Cr for the year. FMRI in a short span of time has become the highest ARPOB generating facility in the network of Fortis multispecialty hospitals. Fortis Ludhiana, launched in January 2014, witnessed a breakeven in its operating profit within one year of its launch. The year also witnessed the launch of a number of new medical programs and dedicated super specialty centers across the company's various facilities. International patient revenues contributed approximately 10% to the overall revenue from Hospitals & recorded a growth of 33%. During the year, the company executed strategic exits from certain non-core facilities. These include facilities in Moradabad, Agra and Mysore. Key operating metrics in the Company's hospital business continued to see a healthy improvement. The ARPOB (Average Revenue per Occupied Bed) stood at Rs. 1.26 Cr as compared to Rs. 1.12 Cr in FY14, a growth of 13%. ALOS (Average length of stay) was at 3.64 days versus 3.80 days while Occupancy stood at 70% versus 73% in FY 14 respectively. The net debt of the Company as on 31 March 2015 was at Rs.1,183 Cr, rebrsenting a net debt to equity ratio of 0.25x as compared to 0.17x as on 31 March 2014. This is consistent with the Company's plans to continue to maintain a healthy balance sheet. The Company has also recently (May 21, 2015) redeemed USD 100 Mn Foreign Currency Convertible Bonds (FCCBs) which it had issued in 2010. The redemption of the bonds was made from the Company's existing cash proceeds. As a result, the net debt to equity ratio of the Company stood at 0.13x as on June 30, 2015 In the Indian hospital business, key specialties such as Cardiac Sciences, Orthopedics, Renal Sciences, Neuro Sciences, Oncology, Pulmonology and Gynaecology continue to perform well in terms of revenue as well as volumes. The hospitals across the network performed approximately 85,000 Cardiac procedures, 36,000 Oncology procedures, approx. 27,000 Renal procedures and over 21,000 Orthopaedic procedures. Being a renowned healthcare chain, medical operations continue to be the key focus area at all the Fortis hospitals. The Medical Operations of the company include clinical excellence, clinical outcomes, quality control and process standardization across the Fortis network. The aim is to achieve greater Clinical Excellence across the network by implementing Organizational priorities through a) identification & recruitment of the best Clinical Talent, b) standardization of Medical processes, c) setting up of world class Medical Infrastructure and Medical Technology Management. Under the Clinical outcomes, Radiation Oncology outcomes were added to the list of Clinical Outcomes monitored at Fortis following a successful pilot conducted at FMRI. These clinical outcomes are tracked as per International Outcomes registries. Pursuant to Fortis Medical Council being constituted in FY14, Regional Medical Councils were constituted for all the regions in FY15. These medical bodies comprising of top clinicians and senior management guide the company on medical matters, discuss key clinical issues & help formulate the clinical strategy for the company at various levels. Fortis has been leading initiatives and establishing medical programmes to strengthen disease control and improve effectiveness of healthcare delivery services. In partnership with MSD pharmaceuticals Fortis had initiated the Anti-Microbial Stewardship (AMS) programme across all its major facilities. Antimicrobial resistance is one of the major public health problems especially in developing countries due to easy availability and higher consumption of antibiotics/antimicrobials. Under this program, an AMS mobile app was launched in 10 of the Fortis hospitals and two new hospitals were added to the AMS initiative. During the year, Fortis BG Road and Fortis Mulund successfully received their reaccreditations by the Joint Commission International (JCI) while Fortis Mohali and Fortis Mulund received accreditations from the National Accreditation Board for Hospitals (NABH). The Fortis network currently has 4 JCI accredited hospitals, 16 NABH accredited hospitals and 7 NABH accredited blood banks. New medical programs and specialties commissioned During FY15, a number of new medical programs and dedicated super specialty centers were commissioned across various Fortis facilities. X The Company strengthened its specialty service offering in the state of Punjab with the launch of the Fortis Cancer Institute (in July 2014), a 55 bed facility in Mohali. The Institute is by far one of the most combrhensive cancer treatment centres in Punjab providing the latest available modalities in Medical, Surgical and Radiation Oncology. This is amongst the many other initiatives that the Company is currently undertaking in order to bolster its Oncology program and create significant brsence in offering oncology healthcare services on a pan — India basis. X FMRI commissioned an advanced GI physiology laboratory, becoming the only centre in North India to offer multiple new panel tests for advanced diagnosis and treatment in Gastroenterology and Hepatobiliary sciences. X Fortis Malar launched India's first combrhensive centre for the management of end stage heart failure called the Fortis Centre for Heart Failure Management and Heart Transplant. It offers combrhensive heart disease management programmes that include brventive measures to avoid Heart Failure and is the largest in India. X Fortis Hospital, BG Road, Bengaluru, launched a dedicated Centre for Sports Orthopaedics and Arthroscopy to help sportspersons and fitness enthusiast's deal with injuries and other related ailments. The centre will cater to the specific needs of professional and amateur sportspersons across all age groups, as well as the general public looking for treatment of chronic joint, ligament and cartilage problems. The centre is fully equipped with cutting edge technology and expertise in the realm of sports medicine. X FEHI launched a high-end, fully integrated Orthopaedics and Spine super-speciality centre, Fortis Escorts Bone & Spine Institute (FEBSI). FEBSI offers the entire spectrum of orthopaedic services, from diagnosis to treatment and rehabilitation. The Company's diagnostic business, SRL Limited, has been able to create an unparalleled reach through its imbrssive Network comprising 264 laboratories (including 12 Reference Labs and 90 Labs in the Hospitals) and over 6400 collection points. SRL is brsent in more than 450 cities/towns covering substantial districts of India and offers a service portfolio of over 3,500 tests. Today SRL is the only one in the country to offer Complete Diagnostic Services - Pathology, Radiology, Wellness, Occupational Health and Clinical Trials. Lab Medicine makes up 80% of SRL's business, Radiology 14% with Wellness (brventive health check) & Clinical Trials constituting the remaining 6%. SRL today offers more than 3500 tests and conducts approx. 107,000 tests in a day, ranging from simple to high-end esoteric tests in both Pathology and Radiology segments. Following a process of rationalization wherein it exited its non-accretive laboratory practices, SRL opened 29 new laboratories while exiting 44 laboratories. It also expanded its reach by adding approximately 460 collection points and released a total of 35 new tests in FY15. SRL's operations are not limited to India alone. SRL is brsent in the Middle East, SAARC Countries, Africa and South East Asia and is further eyeing asset light expansion in the fast growing markets of Africa, CIS countries and South East Asia. SRL continues to stand strong on its credo of "Total Quality Management". This year SRL has increased the number of NABL accredited labs to 38 which is the highest among all players in India. It has 4 CAP and 2 NABH accredited labs and also adheres to numerous global benchmarks. The business undertook a total of over 13.7 million accessions for Pathology and Radiology during the year, a 7% growth over FY14. SRL performed approximately 30.4 million tests in FY15 as compared to 28.7 million tests in FY14. During the last year, SRL critically evaluated some of the centers that were not performing well despite best efforts. A conscious call was taken to close down some of those centers that were non- accretive and continuously losing money. This augurs well for the Company as it will be able to deploy its resources in more promising geographies. International Business: SRL seized the opportunity to set up, Operate and Manage the Labs (both Pathology and Radiology) in some of the countries. SRL expanded its wings in the International Markets by signing long term Operation and Management contracts with partners in Congo and Nigeria where the entire investment is being made by the local partners. The plan is to open 3 labs in Congo and 9 labs in Nigeria. SRL is looking at many more Asset Light projects. Government Support & PPP: SRL is successfully running the labs in 24 of the largest Government Hospitals across Himachal Pradesh. To continue the responsibility of reaching out to the masses alongside the Government at its price points. SRL is joining hands with the Govt. of Jharkhand and opening 12 labs in the Government Hospitals across the state of Jharkhand. SRL is also in talks with other State Governments and is committed towards providing quality diagnostics to each and every citizen of the country. Apart from running PPPs, SRL was at the forefront and supported the Government at the time of the Swine Flu crisis which again struck our nation in January 2015. During this calamity, the sole objective of the SRL Team was to test as many patients as possible, following the laid down protocols by the Govt. Within 48 hours, SRL doubled its testing capacity and performed the tests at the Government determined prices, thereby working shoulder to shoulder with the Authorities. HUMAN RESOURCE Being a service organization with a strong emphasis on quality of patient care, it is important that all f our employees, are fully engaged and motivated, so they can deliver a superior performance at all times. At Fortis, emphasis is placed on partnering and supporting the business and creating human resource systems, procedures and a positive environment which enables our people to deliver their best. The year gone by was a significant one for the Human Resources function — concrete steps were taken in critical areas like Learning & Development, Leadership Development and Career Management. Leadership School of Excellence (LSE), a combrhensive 10 day program sbrad over 5 months was conducted for 37 Facility/ Zonal Directors. The program focused on enhancing Leadership Capability, Health Care Management, Business Acumen / Management and Business planning. Leadership Insights, a 360 degree feedback survey was initiated in September 2015 for the senior management team. This program was designed to provide leaders with a deeper insight and understanding of their demonstrated leadership behaviours through a structured system to solicit feedback. Each participant had a one-on-one session with an executive coach with a detailed discussion on the identified developmental focus areas. This was followed by a leadership brsentation and a group session to analyse the trends emerging from the survey and identify actionables for the leadership team as a whole. Operational Leadership Program, a talent pipeline building exercise was initiated for employees across the country in Q3FY15. After the detailed assessment of all shortlisted candidates through a psychometric test (OPQ), a behavioural event interview (external partner) and a panel interview, detailed talent profiles were created and communicated. Several policies were revised during the course of the year to ensure relevance to current business requirements and incorporate best practices. The recruitment and selection policy was created to familiarize the users with basic processes involved in recruitment and selection across Fortis. The PMS policy and process details were revised and updated to create a combrhensive policy on the same. The company also launched a best employer study in association with Aon Hewitt in March 2015. This study consists of three parts — a) Business Understanding through Leadership Interviews, b) A People Practices audit to evaluate business alignment and c) An Employee Opinion survey to measure engagement levels. The company intends to conduct this study annually to assess and measure the progress towards its Lakshya goal of being amongst the top 20 employers in the country by 2017. Project Fl: Oracle, the new ERP system has gone live in identified units for the pilot study. The transition to the ERP has been smooth and employees have started using the employee self-service for basic HR and Finance transactions. Training and on-ground support has been provided to ease the transition to the new system. As on March 31, 2015, the company had a total employee base in the hospitals & the diagnostics business of 22,507 employees. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY At Fortis, management has the overall responsibility to design, implement and monitor an effective process and control environment that is aligned to the inherent risk profile of the organization. Management is responsible for the identification, evaluation and management of significant risks. The Company has institutionalized a framework to focus on key risks that might 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 Board monitors exposure to these risks with the assistance of various committees and senior management. The internal control framework is designed to manage and mitigate the risks faced by the Company. The company has designed and implemented an entity level control framework setting the control philosophy and principles which guide the organization policy and operating process framework. The organizational role, responsibility and accountability structures with appropriate performance oversight processes 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 as per design. The internal control system is commensurate with the nature of business, size and complexity of operations and has been designed to provide reasonable assurance on the achievement of objectives in effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations. As part of the Corporate Governance Report, CEO/ CFO certification is provided for assurance on the existence of effective internal control systems and procedures in the Company. The internal control framework is supplemented with an internal audit program that provides an independent view of the efficacy and effectiveness of the process and control environment and supports a continuous improvement program. The internal audit program is managed by an Internal Audit function with direct reporting to the Audit & Risk Committee of the Board. The scope and authority of the Internal Audit Function is derived from the Audit Charter approved by the Audit & Risk Committee of the Board. The Internal Audit function develops an internal audit plan to assess control design and operating effectiveness, as per the risk assessment methodology. The Internal Audit function provides assurance to the Board and management that a system of internal control is designed and deployed 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 the Audit and Risk Committee. The Audit Risk and Controls Committee reviews the adequacy and effectiveness of the Company's internal control environment and monitors the implementation of internal audit observations. FORWARD LOOKING STATEMENT Except forthe historical information contained herein, statements in this discussion which contain words or phrases such as '¦will', '¦would', 'indicating, 'expected to' etc., and similar exbrssions or variations of such exbrssions may constitute forward-lookingstatements'. These forward looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to successfully implement our strategy, future business plans, our growth and expansion in business, the impact of any acquisitions, our financial capabilities, technological implementation and changes, the actual growth in demand for our products and services, cashflow projections, our exposure to market risks as well as other general risks applicable to the business or industry. The Company undertakes no obligation to update forward looking statements to reflect events or circumstances after the date thereof. These discussions and analysis should be read in conjunction with the Company's financial statements included herein and the notes thereto. References 1. Aarogya Bharat — India Healthcare Roadmap for 2025 by Bain & Company and NATHEALTH 2. Excellence in Diagnostic Care, KPMG & CII 3. 2015 Healthcare Outlook — Deloitte 4. Medical Value Travel in India, KPMG & FICCI, FICCI Heal Conference 5. Market Research, reports, web articles, brss & media reports and others |