MANAGEMENT DISCUSSION AND ANALYS IS Industry structure and developments The healthcare industry growth is expected to continue at 12-14% as per industry estimates. Within the healthcare sector it is estimated that diagnostics including imaging based diagnostic services would grow at 16-17% over the next couple of years. The Indian diagnostic market is expected to touch t 60,000 cr by 2017-18 and with improved budgetary allocations by the Union Government we expect this trajectory to continue into the future as well. The growth in the industry is being driven by various factors including: • Increase in evidence-based treatments • Huge demand-supply gap • Changing disease profiles • Increase in health insurance coverage • Need for greater health coverage as population and life expectancy increase • Rising income levels make quality healthcare services more affordable • Demand for lifestyle diseases-related healthcare services • Increase in brventive health check ups The healthcare market in India broadly comprises the following: Healthcare delivery market (hospitals) - as per CRISIL Research estimates, the Indian healthcare delivery market stands at Rs. 3,800 billion as of 2014-2015. Pharmaceutical industry - as per CRISIL Research's estimates, the Indian pharmaceutical market, which comprises the domestic demand for formulations, stands at Rs. 746 billion as of 2014-2015. Healthcare insurance industry - The health insurance brmium market stands at Rs. 175 billion as of 2013-2014, based on the report of the Insurance Regulatory and Development Authority ("IRDA"). Diagnostics industry - as per CRISIL Research's estimates, the Indian diagnostics industry currently stands at Rs. 377 billion as of 2014-2015. As is the case with most sectors, the diagnostic industry has a brdominance of the unorganized players in the absence of stringent regulations and low entry barriers. Diagnostic chains command about 15% share. Within this pie large nationwide chains, such as Dr Lal PathLabs enjoy a 35-40% share. There are multiple formats in which diagnostic business can operate; firstly as a 'standalone centres' offering basic testing, 'hospital based centres' -where some of the work may yet get outsourced to third-party laboratories and lastly 'diagnostic chains' -which have an all-India network and offer a complete suite of services. Diagnostic chains brfer a hub-and-spoke approach in order to reach out to a wider audience. A typical arrangement will have any combination of a Reference Laboratory, Satellite Laboratories and Collection Centres. Diagnostics essay the role of an intermediary, bearing information that can be used for correct diagnosis and treatment. It gets broadly classified into imaging diagnostics or radiology -that identifies anatomical and physiological changes in the body and pathology services -that involves testing of samples of blood, urine, stools etc from the body. Typically pathology services account for the larger share within diagnostics, given it has gained prominence as the brferred mode for testing a number of conditions. Within pathology it is the biochemistry related tests that rebrsent a greater share -these pertain to determination of changes in chemical composition of bodily fluids in response to underlying disease. Given the rising brvalence of chronic conditions like diabetes and cardio-vascular problems a far greater number of tests are getting brscribed and consequently blood sugar and lipid profile tests have come to occupy a dominant share within the diagnostics industry. Thus we see significant growth potential in the industry in the near future. Opportunities and Threats While there is optimism around the opportunity for growth in the diagnostics industry, there are number of emerging competitors both in the form of organized and unorganized players mostly at the regional level. Some regional competitors are also emerging as national players. This leads not only into intensified competition but also results in competitive pricing brssures and margin erosion. Outlook The diagnostics industry is witnessing a great deal of visibility and interest with more organized players driving regional growth. This is also resulting in gradual shift of the market from unorganized to more organized players thereby driving quality and efficiency standards. This sector has also attracted investments further fuelling competition but at the same time improving industry standards. India still has large rural markets which are either under serviced or not serviced at all by diagnostics and this provides the opportunity for growth in under penetrated areas although at significantly lower price points. In the urban markets too there are pockets of growth opportunities given the overall awareness on health care and health attitudes. Risk and concerns Competition and pricing As mentioned earlier, the intensified competition poses a risk of pricing brssures and margin dilution. Being a fragmented industry with low barriers to entry, if we are unable to maintain our brand equity and succumb to pricing brssures in our relatively weaker markets, we would find it difficult to maintain and grow market shares. Pricing control also poses a risk particularly in times of epidemics wherein state governments impose pricing restrictions in the larger interest of society. We have seen such instances recently in the wake of the dengue epidemic in North India. Standalone Centres, 48% Slow network expansion As part of our growth strategy, we plan to construct and open several new clinical laboratories, including regional reference laboratories and patient service centers in India. The significant capital investments necessary to construct clinical laboratories, particularly regional reference laboratories — due to their size, is likely to have a material impact on our results of operations during the period of their construction and the initial post-opening period, during which each clinical laboratory is being fully integrated into our network with added cost of infrastructure. Further, slower integration may also cause further margin brssure and therefore we need to ensure that costs are controlled and do not mount rapidly inspite of inflationary trends. Revenue The year end March 31, 2016 saw the company consolidated revenues increase 20% to Rs. 791.3 (standalone Rs. 765.4) crores. This was driven mainly by volume growth of 21%, which offset the average price realization drop of around 0.8%. The lower price realization was partially contributed by the high volumes of low value samples tested during the dengue episode in North India in FY 16 which were mostly at low prices. Dengue outbreak contributed around 1% to volume growth during the year. Further, the higher base effect in FY'15 due to Swine Flu outbreak, subdued the growth in Q4 FY16 as Swine flu per test realization is about 8 times higher than average realization. Costs We recognize that our future success hinges on our ability to manage our cost structure. Driven by inflation and expansion of infrastructure, there was an overall cost increase of 22%. This was mainly due to higher cost of materials on account of high volume of lower margin business primarily driven by dengue tests. Our major cost items include cost of reagents, people cost, revenue share, logistics and infrastructure costs. These have been maintained at expected levels and increases in people cost on account of retrospective changes in statutory bonus and minimum wage rate adjustments, investment in upkeep of brmises, and logistics cost increases (which are primarily people cost) have led to overall cost to New Technologies Technology adaptation has been one of our strengths and we have successfully rolled out new tests on contemporary technology platforms in the past. With continuous availability of new technologies, we need to remain competitive by ensuring swift adoption of such new technologies with focus on benefits and returns. Other risk factors We have also listed out numerous risk factors in our recently issued prospectus in December 2015, many of these risks continue and we are constantly evaluating our options to address these in order to remain competitive revenue increase by about 110 bps (net of savings). Our cost base for the year was also impacted by first time costs on account of statutory listing fees and stamp duties for increase in share capital. In order to keep our costs in check, we have identified various cost saving projects which are in various stages of implementation and are expected to yield substantial savings over the next 12-18 months. EBITDA Consequent to the above, the consolidated EBITDA growth for the year was 15.4% after eliminating the impact of ESOP charge and/or reversals. Consequently the EBITDA margin has reduced from 27.8% in FY 15 to 26.7% in FY 16. PBT and PAT The growth in PBT consequent to the above was around 20%, which in turn increased PAT by 38% to t 133.2 (standalone Rs. 125.8) crores after adjusting for ESOP charges. Cash and Bank Our consolidated cash and cash equivalents increased from Rs. 186.6 cr at the end of FY 15 to Rs. 294.5 cr at the end of FY16. This was driven by operating cash flow of Rs. 146.9 cr post taxes and working capital changes. Capital expenditure consumed Rs. 44.1 cr as against Rs. 35.3 cr in the brvious year. Income from cash surpluses in the form of interest and dividend earned on mutual funds increased from Rs. 12.4 cr to Rs. 19.8 cr During the year our net lab count increased by 8 numbers, and PSCs increased by 219 numbers. The number of Pick up Points shows a decline as we have realigned coverage of some PUPs from direct coverage to coverage by franchisees. This has been done to ensure better local service as well as optimize on logistics costs Strategy for growth Our growth strategy is based on the following pillars: • Continue to expand our brsence in the markets in which we operate. • Expand into other markets in India through strategic acquisitions and partnerships. • Increase the breadth of our diagnostic healthcare testing and services platform. • Continue our focus on providing our customers quality diagnostic and related healthcare tests and services. • Leverage our network efficiencies to expand our management of hospital-based and other clinical laboratories. We are focused on driving our strategies as stated above. The construction of our new Regional Reference Laboratory in Kolkata is progressing well and is in full swing now. In the past year since April 2015, we have set up 15 new labs, 219 PSCs and the number of active Pick up Points stands at 4967. Our labs under Hospital lab management contracts have increased from 14 at the beginning of the financial year to 18 numbers at brsent. Some labs were also closed and/or scaled down to PSCs, giving a net increase in lab count by 8 numbers. Our investments in focus cities of Bengaluru and Pune are showing encouraging trends and we will build on this in the coming years. To maintain our leadership in introducing new tests, we have added around 70 new tests to our portfolio including some of the most advanced tests in molecular diagnostics and cytogenetics. In order to drive our speciality tests portfolio, a renewed thrust is being provided with the introduction of a speciality skilled sales force. Human Resources Dr. Lal PathLabs is a leading player in the diagnostics sector. The diagnostics business is a healthcare service delivery business, and thus the role of human resources is very pivotal in providing excellent quality service to the customers. The Company and the business has grown rapidly over last few years, and so has the human resources strength. As of March 31, 2016, the Company has 3711 employees including trainees and consultants on its payrolls and on the payrolls of its Subsidiary Company(ies). The Company believes in talent management and leadership development. To further the skills of the employees, trainings were provided in technical, behavioural and leadership area. Twelve management development programs were conducted covering around 200 middle managers. Company also launched a Leadership Acceleration program (LAP). It is a two year program where 95 middle and senior managers are being groomed to take on higher level responsibilities. Employee motivation and welfare is also anther big area of focus in the Company. A new rewards and recognition framework GEMS has been rolled out which allows the line managers to recognize the contribution of their team members. In order to strengthen the HR operations and service deliver, the Company has also invested in a HRMS solution from RAMCO. The implementation of HRMS will help in supporting the scaling up of business and the workforce. It also provides opportunities to improve the people analytics. Internal control systems and their adequacy. The Company has a robust internal control system in place with systems for segregation of duties, access controls and other relevant control practices. We have recently conducted reviews of our Internal Financial Controls process and evaluated the risk matrices for identified processes and taken appropriate actions to further improve the control systems. Our internal control system is supported by our Internal Auditors M/s Grant Thornton, various regional audit firms and additionally our internal Control Assurance team has been augmented to further strengthen our control systems. We recognize that internal controls need to be improved and strengthened on an ongoing basis and to this end our endeavor is to introduce best practices to keep pace with changing business needs and growth of the business. FORWARD LOOKING STATEMENT Except for the historical information contained herein, statement in this discussion which contains words or phrases such as 'will', 'would', 'indicating', 'expected to' etc., and similar exbrssions or variations of such exbrssions may constitute 'forward-looking statements'. 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 forward-looking statements. These risks and uncertainty includes, 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 financials capabilities, technological implementation and changes, the actual growth in demand for our products and services, cash flow 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 discussion and analysis should be read in conjunction with the company's financial statements included herein and notes thereto. |