CORPORATE GOVERNANCE REPORTWe recommend that you read this discussion together with our financial statements andrelated notes included elsewhere in this report. Unless otherwise indicated, all relevantfinancial and statistical information included herein relates to our continuingoperations. We make forward-looking statements in this report; In addition, our seniormanagement makes forward-looking statements orally to analysts, investors, the media andothers. Do not unduly rely on forward-looking statements, which give our expectationsabout the future and are not guarantees. We do not undertake any obligation to update ourforward-looking statements to reflect events or circumstances after the date of thisdocument or to reflect the occurrence of unanticipated events.
Global Perspective
There is growing evidence that the current health systems of nations around theworld will be unsustainable if unchanged over the next 15 years. Globally, healthcare isthreatened by a confluence of powerful trends –increasing demand, rising costs,uneven quality, misaligned incentives. If ignored, they will overwhelm health systems,creating massive financial burdens for individual countries and devastating healthproblems for the individuals who live in them. PwC Health Cast 2020: Creating aSustainable Future Global health care costs are rising unabatedly-almost everywherehealthcare inflation is increasing faster than the consumer price index (CPI) and, in manycountries, the growth rate of government expenditures on health is exceeding the economicgrowth rate. The forecasts for the not-too-distant future are troubling. Some analystsproject that global healthcare spending could triple in the next 15 years. In the UnitedStates some large employers are spending as much on health-care benefits as they earn inprofits. It is interesting to note that in the automotive sector when General Motorsrecently reported a $1.1 billion first-quarter loss, it announced that the increased costsof providing health-care coverage for its employees, retirees, and their dependents wasthe most significant factor. The company reported that healthcare expenditures amounted to$1,525 per car produced, and that there is more healthcare than steel in a GMvehicle’s price tag. In Europe, Latin America, and Asia, governments could beginprivatising at least some, if not all, elements of healthcare delivery in order to relievethe pressure that growing costs are placing on the national budget.
The global healthcare industry is on the threshold of transformation with changes indemography and a shift in the socio-economic profile of consumers.
As per a study done by Pricewaterhouse Coopers Health Research Institute, the economiccrisis will cost the healthcare industry to seek ways to deliver value in spite of marketconditions. In addition to the economic crisis, the industry will continue to seeinvestments from unusual sectors. The health industry is most likely to be a source ofprofitable growth during a period of slowdown. Increasing investments in healthcare wouldbe the next focus as it may be viewed as a way to stimulate the economy.
Indian Perspective Indian Economy1
While there has been a slowdown in the economy for the past 12 months due to variousreasons including the global financial crisis and tighter money supply, economists believethat the initial conditions for a domestic demand-led recovery are now in place. Analystshave raised FY10 (year starting April 2009) GDP forecast to between 6.3% - 7% y-o-y from5.2-5.6% and expect growth of 7.5% in FY11.
India is much less affected (by the global slowdown) than other global marketsand represents a huge opportunity to not only grow sales in India, but even developproducts...
Gottfried Dutine
Executive Vice-President Philips, The Netherlands
INDUSTRY AND BUSINESS
India presents a unique opportunity for healthcare providers, policy makers and serviceproviders alike. With 16% of the world population and 21% of total global diseases, Indianhealthcare is not only grossly under-staffed, with a doctor to thousand population ratioof 0.5 as against 1.5 of comparable emerging economies, but also faces ever widening gapsin physical infrastructure.
Healthcare spending forecast to grow at 15% p.a
Healthcare spending in India is expected to rise by 15% per annum. As per an estimateby Ernst & Young, healthcare spending could contribute 6.1% of GDP in 2012 and employaround 9 million people.
Increasing incidence of lifestyle diseases
The shift in disease profiles from infectious to lifestyle-related diseases is expectedto raise expenditures per treatment. In-patient revenues expected to significantly outpaceout-patient revenues leading to a significant increase in the number of beds required toservice the population.
Per capital health expenditure in India is currently low
Population growth, positive social and economic shift and better healthcare awarenessare expected to result in both higher disposable incomes and higher expenditure onhealthcare.
Public healthcare infrastructure is inadequate
As compared to developing world average of 4.3 per 1000 (China, Korea, Malaysia, etc.),India has an average of one bed per 1,000 population. Beds
Increasing penetration of organised pharmacies
The organised pharmacy retail market currently accounts for only 2% of the pharmacyretail business, but it is growing at a rapid pace, with several new chains expandingaggressively. The concern around in excess of 1 million need to be added to reach a ratioof 1.85 per thousand. About 80% of total healthcare spending in the country (US $25billion) is provided by private service providers. Even among the poorest 20% of thepopulation, 39% of hospitalisations are in private hospitals; for the richest 20% ofhouseholds, the ratio is as high as 67%.
Private sector to lead bed additions
Of the total gap of over 1 million beds to reach a ratio of 1.85 per thousand, about896,500 beds will be added by the private sector which shall need a total investment of US$ 69.7 billion (Rs. 222,000 crore) from the private sector over the next six years. Mostof the private facilities are currently small and fragmented in nature. With increasinginvestment from corporates, larger healthcare facilities (typically 200-300 beds) arecoming up in major cities and towns.
Growth in medical tourism
India is one of the leading medical tourism providers with more than 500,000 foreignmedical tourists in 2006. Apart from India, countries like Singapore, Thailand, SouthAfrica, Malaysia, Cuba, and Cost Rica are some of the other emerging destinations formedical tourism. In India, the medical tourism market is estimated at US $ 0.33 billionand is estimated to grow to US $ 2 billion by 2012.
spurious drug sales and better service/ convenience to customers are expected to leadto strong growth for organised retail pharmacies.
Key challenges
The biggest challenge for the healthcare industry today is an acute shortage of trainedpersonnel, ranging from doctors, nurses, technicians and even healthcare administrators.
Hospitals are a capital-intensive business with major investment going in to land,building and medical equipment. Depending upon location and accordingly patient volumeramp-up, it can take two years or more for EBITDA break-even and three years or more forcash break even.
Health insurance, though currently small, is growing very rapidly which may lead topricing pressure for the private healthcare providers in future.
Opportunities
First, there are economic factors that make India an exciting market.
Since healthcare is dependent on the people served, India’s huge population of abillion people represents a big opportunity. Today, people are spending more on healthcareand preferring private services to government ones. Hospitals in India are running at80-90% occupancy. With the demand for healthcare far exceeding supply, India’shealthcare industry is expected to grow by around 15% a year for the next six years.Hospitals in India conduct the latest surgeries at very low cost.Corporate entitiesentering the healthcare sector, introducing managerial practices and tools are showing amarked preference for professionals, leading to the expansion of the hospital managementeducation industry.
Rapid growth
According to the ‘Indian healthcare trends report published by Technopak, Indianhealthcare industry is growing at over 18% making it the fastest growing in the world andhighest growing sectors in India. As per the report, the industry is currently valued atUS $ 35 billion and is expected to reach over US $ 75 billion by 2012 and US $ 150 billionby 2017.
Such a high growth provides lot of opportunities to existing market players and alsoentices newer entrants into the sector.
Healthcare bed need-supply gap
According to a FICCI-Ernst and Young study, beds in excess of 1 million need to beadded to reach a ratio of 1.85 per thousand at an investment of US $ 77.9 billion.
For nine states that comprise almost 53% of Indian population, hospital beds per 1,000population are less than the current national average. In effect, the‘effective’ bed density is lower since due to shortage of staff, available bedsremain under utilized.
Health insurance
Only about 10 per cent of the Indian population has some form of health insurance,which means that there is tremendous scope for growth in this area. The Indian healthinsurance business is growing at 50 per cent. The sector is projected to grow to US $ 5.75billion by 2010 - (PHD Chamber of Commerce and Industry, New Delhi).
Increase in health insurance coverage will lead to increased accessibility andaffordability and therefore increase demand for hospital beds and medical equipment.
Shift to Lifestyle Related Diseases
Similar to the experience in developed countries India is going through a shift in thedisease patterns from communicable diseases to high incidence of non- communicable andlifestyle-related diseases.
This trend would trigger a need for more number of tertiary care hospitals to cater tothe demand.
Threats
The cost burden is set to increase due to the limited resources, and rising incomeswill translate to higher wages, supply and capital costs. Real estate prices have becomeprohibitively high and a deterrent to take on new projects. This will add to higher costsof Healthcare delivery which has to be borne by the consumer.
Medical equipment accounts for 40-45% of the total expenditure in hospitals. Any changein technology will make existing medical equipments obsolete. High rate of advancement inmedical technology is leading to shorter lifespan, obsolescence of medical equipment,requiring medical professionals to upgrade their skills on a constant basis.
The density of doctors per 10,000 population in India is 6 while the world average is13. There could be a shortfall of over 450,000 doctors in the year 2012. Density of nursesper 10,000 population is 13 in India while world average is 28. The migration of skilledtechnicians and nursing personnel to developed countries due to higher compensation levelsleaves behind a void in quality of personnel at the disposal of hospitals.
Apollo is one of the strongest brands with minimal threats in the near time. Thismeans, easier access to capital, continuing with the current leadership position in themarket and comprehensive services with relatively greater margin. Apollo’s successhas been drawn from the fact that it has added a number of synergic revenue streams to itsbusiness. As a result, its multi-income inflow has helped it cover its fixed investmentsfaster than the other companies in the sector.
Company Overview
Apollo Hospitals Enterprise Limited (AHEL) owns and operates a network of leadingprimary, secondary and tertiary hospitals and clinics across India. The Company also has apan India footprint of 873 standalone pharmacies.
As of March 2009, AHEL directly owns total of 20 hospitals across India with a capacityof 2,481 beds, of which [all the] beds are operational. In addition, we have a capacity of1,875 beds through subsidiaries, joint venture and Associate hospitals.
| Owned Hospitals | No. of Beds as on 31st March 2009 |
| Apollo Main & | 619 |
| Sindoori Hospitals, Chennai | |
| Apollo Specialty Hospital, | 251 |
| Chennai | |
| Apollo First Med Hospital, | 88 |
| Chennai | |
| Apollo Speciality Hospital, | 60 |
| Tondiarpet, Chennai | |
| Apollo Speciality Hospital, | 17 |
| Sowcarpet, Chennai | |
| Apollo Speciality Hospital, | 165 |
| Madurai | |
| Apollo Speciality Hospital, | 546 |
| Hyderabad | |
| Apollo Loga Hospital, Karur | 70 |
| Apollo Reach Hospital, | 120 |
| Karim Nagar | |
| Apollo Speciality Hospital, | 176 |
| Mysore | |
| Apollo Speciality Hospital, | 65 |
| Visakhapatnam | |
| Apollo Speciality Hospital, | 250 |
| Bilaspur | |
| Apollo Speciality Hospital, | 54 |
| Aragonda | |
| Total | 2,481 |
| Apollo Speciality Hospital, | 150 |
| Kakinada | |
| Apollo Speciality Hospitals, | 250 |
| Bangalore | |
| Indraprastha Apollo Hospitals, | 632 |
| Delhi | |
| Apollo Speciality Hospital, | 100 |
| Noida | |
| Apollo Gleneagles Hospitals, | 423 |
| Kolkata | |
| Apollo Speciality Hospital, | 320 |
| Ahmedabad | |
| Total | 1,875 |
Our hospitals can be grouped into the following categories based on their stage ofmaturity and occupancy levels:
Mature hospitals at Chennai, Hyderabad, Madurai, Bilaspur, Mysore, and Visakhapatnamhave occupancy levels exceeding 75%.
New hospitals at Bangalore, Ahmedabad, have occupancy levels of 60%.
Two Hospitals were commissioned during the year, Apollo Loga Hospital at Karur, TamilNadu, having 70 beds and a Hospital at Karim Nagar, Andhra Pradesh with 120 beds.
As per the Accounting Standard 17 issued by The Institute of Chartered Accountants ofIndia, AHEL has two reportable segments, healthcare services and Standalone Pharmacies,Healthcare services segment comprises hospitals, hospital-based pharmacies and ConsultancyDivision. The other segment comprises standalone pharmacies.
A brief description of our activities follows:
Hospitals
We generate revenues primarily through hospital services offered at our facilities. Wegenerated Rs 7,651 million, Rs. 9,253 million and Rs. 11,261 million in revenues fromhospitals during fiscal years 2007, 2008 and 2009, respectively. In 2009 we derived 84% ofour hospital revenues from the Chennai and Hyderabad facilities. Our patients are mostlyself-pay, with only 25% and 10% of the total patients in fiscal year 2009 being corporatesand insurance respectively.
Projects and Consulting
AHEL provides project management and operations consulting services to other hospitals.We deploy staff and share hospitals management expertise with our clients and deriverevenues either as a flat fee or as a percentage of the value of the project.
Apollo Group Projects
The Company has embarked upon a major expansion drive, to add 3,000 beds over the next4 years.
During current year, 475 beds were added in the existing hospitals and new facilitiesat Karim Nagar (AP) and Karur (TN). The Company has commissioned a 81-bed Super SpecialtyHospital, exclusively for children in Chennai, in May 2009. Our new hospital atBhubaneswar is nearing completion and will be launched in this year.
The Company is in the process of implementing new projects at Vizag, Navi Mumbai andThane where land parcels are already procured.
In addition, a fully-automatic Multi Level Car Parking (MLCP) facility is underimplementation near Apollo Main Hospital, Chennai, to enhance patient comfort.
Apollo Reach Hospitals
We are embarking upon a new concept for taking healthcare delivery to semi-urban andrural areas of all the states in India with a new brand name Apollo ReachHospitals for serving the increasingly health conscious populace. Hospitals underthis new brand are proposed to have a capacity of 100-200 beds focusing on critical careand capability to perform cardiac surgeries as well. This will also provide healthcare incritical time, improving the chances of every patients’ life as well as reduction inoverall costs these patients will be incurring in terms of the added expenses towardstravel to nearby city, accommodation conveyance etc.
The concept was inaugurated by our Hon’ble Prime Minister, Dr. Manmohan Singh on5th Sep’08 at a grand function in Chennai. The first such hospital has commenced atKarim Nagar, Andhra Pradesh soon after and is exceeding the expectations of the localcommunity. We are planning to establish about 100 such hospitals in the next 10-15 yearsin a phased manner. We have tied up with International Finance Corporation, Washington,the private funding arm of the World Bank to fund Apollo Reach Hospitals and otherexpansion programs of the company.
Currently, planning is in progress for Apollo Reach Hospitals at Karaikudi, NashikTiruchirapalli, Nellore, and Ayanambakkam (on the outskirts of Chennai Metropolitan Area)and are awaiting statutory approvals for commencement of construction. These hospitalswill become functional within 12-15 months.
Apollo Reach Hospitals are being designed to incorporate green building concepts. Thesehospitals will follow Apollo standard operating protocols thereby will be fully functionalfrom the day one. We are also planning to provide effective and efficient hospitalinformation system combined with advanced digital technologies.
The hospitals will create employment opportunities for the local educated youth invarious disciplines. In addition, as part of Apollo Reach Hospital projects, we areplanning to establish nursing and paramedical educational institutions in nearby locationsto cater to the captive demands of the hospitals.
Projects under JV and Associates
Apollo Bramwell Hospitals, Mauritius
Apollo has formed a Joint Venture Company viz., British American Hospitals EnterpriseLtd. (BAHEL) along with BAI Medical Centres Ltd., a subsidiary Company of British AmericanInvestment Company (Mauritius) Ltd. The building infrastructure has been completed andequipment installation is in progress. The hospital will be commissioned in August 2009.The Company has signed Technical Consultancy Agreement and Licensing-Cum- OperationsManagement Agreement with BAHEL.
Apollo Hospitals, Lavasa
The Company has formed a Joint Venture Company with Lavasa Corporation Ltd, toestablish a healthcare city at Lavasa, a hill station near Pune. During the initial phase,a 50-bed Secondary Care Hospital is being established.
StemCyte Therapeutics India Private Limited
Apollo Hospitals entered into an agreement with StemCyte Inc., USA, to set up astate-of-the-art Umbilical Cord Blood Bank at Ahmedabad. StemCyte Therapeutics IndiaPrivate Limited will process and store umbilical cord blood units that will be used totreat patients across the world. Research on stem cells is producing encouraging resultsacross the world in the treatment of life threatening disorders and diseases.
Consultancy Services Domestic Projects
The Company has signed Project Management Agreement with Ashok Birla Apollo HospitalsEnterprise Limited, for setting up 225 bed tertiary care hospital at Thane.
International projects
This year, the Company saw increased activity in executing and managing internationalprojects despite global economic slowdown. The services were offered on a fee for servicemodel and include projects across Middle East, Africa and Asia. Some of the key projectshandled during the year include,
1. Yemen International Hospital, a 135-bed tertiary care hospital and the firstcorporate hospital in the country was commissioned. The hospital is providing advanceddiagnostic and surgical services that were not available to the local population earlier.Cardiothoracic surgery services were also launched.
2. Assistance was provided in planning a 200-bed heart hospital in China for ahealthcare organisation. Apollo team assisted in preparing the clinical plan and assistedin the finalisation of architectural drawings.
Construction of the hospital is expected to start during the third quarter of 2009.
3. Consultancy work for US $ 125 million project in Nigeria has commenced. Land in apremium location in Lagos has been identified and architectural drawings are underprogress. Earlier your Company was involved in advising on the clinical services mix,facility plan and estimating the project cost and the space requirements.
4. The Company was mandated to recommend a model for a large business group in Africato enter the healthcare services sector with
Apollo Hospitals as the technical partner.
5. MOU was signed with Seychelles International Specialist Medical Center (SISMC) tocommission and manage the hospital. The US $ 40 million hospital is a 100-bed facilitywith a built-up area of over 190,000 sq. ft. and is promoted by local businessorganisations in Seychelles.
6. Training of doctors and nurses from Africa, Middle East and other regions in superspecialty disciplines is underway.
Significant numbers of enquiries from different geographies are currently under reviewby the Company for providing assistance to investors and hospital owners to establish newhospitals or to improve operations.
Pharmacies
We operate a network of 873 standalone pharmacies across India that generated Rs. 1,313million,
Rs. 2,020 million and Rs. 3,343 million in revenues during fiscal years 2007, 2008 and2009 respectively.
| | No. of Pharmacies | |
| Sl. No. | State | Hospital based Pharmacies | Standalone Pharmacies | Total |
| 1 | Andaman & Nicobar | - | 1 | 1 |
| 2 | Andhra Pradesh | 8 | 231 | 239 |
| 3 | Assam | - | 2 | 2 |
| 4 | Chandigarh | - | 3 | 3 |
| 5 | Chattisgarh | 1 | 8 | 9 |
| 6 | Goa | 1 | 3 | 4 |
| 7 | Gujarat | 1 | 63 | 64 |
| 8 | Haryana | - | 10 | 10 |
| 9 | Himachal Pradesh | - | 1 | 1 |
| 10 | Jharkhand | - | 3 | 3 |
| 11 | Karnataka | 9 | 81 | 90 |
| 12 | Madhya Pradesh | - | 5 | 5 |
| 13 | Maharashtra | - | 103 | 103 |
| 14 | New Delhi | 5 | 47 | 52 |
| 15 | Orissa | - | 14 | 14 |
| 16 | Puducherry | - | 6 | 6 |
| 17 | Punjab | 1 | 4 | 5 |
| 18 | Rajasthan | 3 | 24 | 27 |
| 19 | Tamil Nadu | 17 | 210 | 227 |
| 20 | Uttar Pradesh | 2 | 12 | 14 |
| 21 | West Bengal | 1 | 42 | 43 |
| Total | 49 | 873 | 922 |
Our pharmacy business comprises one of the largest chain of pharmacies in India. Ourpharmacies offer a wide range of medicines, surgical, hospital consumables and health-careproducts. Most of our pharmacies have nursing stations attached. The Nursing stationsprovide basic medical services like measuring blood pressure, dressing, etc.
Our hospital-based pharmacies form an integral part of our hospital business. Weoperate standalone pharmacies on a 24-hour basis across various locations. The pharmaciesprovide several value-added services to customers such as free delivery, appointment withdoctors at the hospitals, etc. We attribute the success of our pharmacy business largelyto the brand value and recognition of the Apollo brand name.
We intend to take our total tally of stand alone pharmacies to 1,200 by the end of thefinancial year 2009-10.
Business strategy
Apollo’s business model has been a successful as it is able to generate profiteven in the face of being capital intensive in nature.
Our mission is to continuously keep improving the quality of healthcare servicesprovided to the communities we serve and strive to bring healthcare services ofinternational standards within the reach of every individual. At the same time, we seek togenerate strong financial performance and appropriate returns to our investors throughdisciplined and balanced execution of a comprehensive business strategy that reinforcesboth quality of care and financial strength.
We seek to further strengthen our position as a leading healthcare service company bysuccessfully differentiating our service offerings and increasing the scale of operations.We would be looking to dominate the healthcare space by increasing bed strength in thecities where we are already present in addition to commissioning of new hospitals in Tier2 and Tier 3 cities through the Reach initiative.
The Reach model is expected to be a no-frills model, providingcost-effective quality healthcare. The facilities shall be of the level of highersecondary and acute care, capable of developing into a tertiary care centre. Each facilitywill be conceptualized to cater to the shortage in nursing infrastructure in the country,by providing for nursing colleges.
Leverage our intellectual property and domain knowledge to create Centres ofExcellence of high-end medical care services at the new and existing facilities.Share best practices across all the locations to enable increase occupancies at newlylaunched hospitals. Improve asset utilisation across all the hospitals.
We have also made significant investment in our human capital to meet both our in-houseneeds and our consultancy services business through the establishment of nursing schoolsand colleges and hospital administration colleges.
Growth in Standalone Pharmacies revenues would be driven by new store rollouts as wellas maturity of existing stores.
We also believe that growth can also be achieved as we add new service lines in ourexisting markets, invest in new technologies desired by physicians and patients, anddemonstrate the quality of the care provided in our facilities.
Given the non-availability of adequate health care facilities in most parts of India,we believe that high-growth opportunities remain in our existing markets as well as newgeographies that we are seeking to enter.
Competitive and Regulatory Environment
In the healthcare services segment, we face competition from other acute carehospitals, including tertiary hospitals located in larger markets; specialty hospitalsthat focus on one or a small number of lucrative service lines; stand-alone centres atwhich surgeries or diagnostic tests can be performed; and physicians on the medical staffsof our hospitals. The shortage of bed supply in India continues to be high, althoughseveral healthcare service providers have aggressive organic growth plans. In addition,our competitors are also expanding presence by acquiring/ partnering with existing smallerhospitals. Going forward, pricing could come under pressure in our key markets andcompetition for medical staff could intensify both of which may have an adverse effect onour operations. It is widely recognised that India has a shortage of physicians in certainpractice areas, including specialists such as cardiologists and orthopedists, in variousareas of the country. Healthcare insurance penetration is increasing rapidly, which maylead to a scenario where the costs of providing care rise faster than reimbursement rates.We are putting in place systems and procedures to increase cost efficiency and transferbest practices across our hospital network.
Our standalone pharmacies (SAPs) compete primarily with the unorganised sector.Organised sector penetration in the pharmacy sector is currently only 2%, and unorganisedplayers are able to offer similar services as the organised players. We differentiateourselves by ensuring high quality of the drugs supplied through SAPs, ensuringconvenience for and building deeper relationships with the end-customer and creatinglinkages between our hospitals and SAPs. The pharmacy supply chain in India has multiplelayers of suppliers, middlemen and retailers. Apart from distribution, costs are anotherimportant element in this price-sensitive market.
Strengths
Apollo is an integrated healthcare organisation with a comprehensive span of healthcarecapabilities, enabling us to provide end-to-end services to patients. We provide seamlessdelivery of services at every level of care – primary, secondary and tertiary.
Being the largest purchaser and consumer of medical consumables in the private sector,we are able to leverage on cost and benefit from our group bargaining position to obtainbetter terms from our suppliers and service providers.
Our quality consciousness and patient-centric approach has improved our operational andclinical efficiency, and led to numerous accolades in the medical arena in India. We haveimplemented clinical governance measures that have gone a long way in ensuring andimproving the quality of clinical care at all levels of healthcare provision in ApolloHospitals.
We have obtained 4 JCI accreditations across all specialties, the first in the countryto do so. Also, our quality programmes are registered by the Indian Council of MedicalResearch, ISO 9002, from Bureau of Indian Standards & British Standards of India.
We have focused on the provision of high-quality healthcare at affordable rates. Ourbrand name has helped us to expand our operations in India and overseas, besides extendingour range of services. High-quality medical facilities and services are offered at costcompetitive rates when compared to the Western and European regions making India thepreferred choice for medical travel.
We have consistently invested in medical technology and equipment so as to offer thehighest quality healthcare services to our patients. The availability of sophisticatedmedical equipment, such as the PET-CT scan, 320 Slice CT Scanner, Cyber knife ensures thatwe are among the few healthcare providers in India capable of offering advanced healthcareprocedures such as stereo tactic radio surgery and bone marrow transplants to ourpatients.
The major strength contribution to the success of Apollo Hospitals has been theclinical excellence governed by strong medical value system and ethics. Our Medicalsuccess rates have been world class. Apollo stands unique among the few providers ofquaternary care for complicated medical conditions, and is saving more and more livesevery day.
We have a professional management team with a strong performance culture. We maintainstrong, enduring relationships with doctors and medical professionals. This has attractedmedical professionals returning from abroad to work with us. We believe one of the pillarsof our success is our huge talent of approximately 811 doctors across 50 specialties. Weare among the largest networks of doctors in India, and have approximately 3,130 nurses,1,104 paramedical personnel and 513 executives.
Weakness
We have added 297 Stand-alone pharmacies during the year, since most of the pharmaciesare in the incubation stage which can depress the margins.
High attrition rates among the nursing workforce to Western countries and competitorsdue to higher salaries and perks being offered necessitates higher investment in trainingto ensure that the clinical staff is equipped with the right skills, competencies andexpertise needed to deliver quality healthcare.
The rising costs of healthcare delivery makes majority of the private hospitalsexpensive for a normal middle-class family.
Internal control systems and their adequacy
The company deploys a robust system of internal controls to allow optimal use andprotection of assets, facilitate accurate and timely compilation of financial statementsand management reports, and ensure compliance with statutory laws, regulations and companypolicies. The company has also put in place an extensive budgetary and other controlreview mechanisms whereby the management regularly reviews actual performance withreference to the budgets and forecasts.
The company has an independent firm of internal auditors that continuously monitors allthe operations of the company. They constantly review the system/ processes and bring tothe notice of the management any recommendations for strengthening the system. They alsoreview the implementation of the recommendations.
The internal auditors report their findings to the audit committee of the board and thetop management.
Discussion on Financial Performance and Results of operations
The following tables present summaries of results of operations for the years ended31st March 2007, 2008 and 2009
| | | | | | (Rs in million) |
| 2007 | 2008 | 2009 |
| Amount | % of | Amount | % of | Amount | % of |
| (Rs.) | Revenues | (Rs.) | Revenues | (Rs.) | Revenues |
| Revenues | 8,995 | 100% | 11,516 | 100% | 14,804 | 100% |
| Salaries and benefits | 1,279 | 14.2% | 1,685 | 14.6% | 2,211 | 14.9% |
| Material costs | 4,551 | 50.6% | 5,817 | 50.5% | 7,686 | 51.9% |
| Other operating & | 1,600 | 17.8% | 1,959 | 17.0% | 2,487 | 16.8% |
| Administrative expenses | | | | | | |
| Provision for doubtful accounts | 63 | 0.7% | 39 | 0.3% | 35 | 0.2% |
| Depreciation and amortization | 308 | 3.4% | 368 | 3.2% | 439 | 3.0% |
| Interest expense | 164 | 1.8% | 199 | 1.7% | 223 | 1.5% |
| Total | 7,965 | 88.5% | 10,066 | 87.4% | 13,081 | 88.4% |
| Profit before Income Tax | 1,031 | 11.5% | 1,451 | 12.6% | 1,723 | 11.6% |
| Provision for Income Taxes | 355 | 3.9% | 433 | 3.8% | 542 | 3.7% |
| Profit after Tax | 676 | 7.5% | 1,018 | 8.8% | 1,181 | 8.0% |
For the Years Ended 31st March 2009 and 2008
Revenues
The 30% increase in our revenues for 2009 as compared to 2008 was primarily the resultof an increase in occupancy and revenue per bed day (RPBD) for hospitals as well as ahigher number of SAPs. RPBD increased from Rs. 8,767 to Rs. 9,667. The increase in RPBD islargely a result of changes in the acuity of our patients as well as better pricerealisations. HBP revenues grew faster than the corresponding hospital revenues mainly asa result of addition of managed pharmacies. AHEL rolled out SAPs rapidly from 576 storesas at March 2008 to 873 stores on March 2009. These rollouts together with maturity ofexisting stores led to 65% yoy revenue growth in the pharmacy segment.
The following table shows the key drivers of our revenues for the periods presented:
| | | | Years Ended 31st March |
| 2008 | 2009 | Increase (Decrease) | % Increase (Decrease) |
| Admissions | 121,377 | 131,558 | 10,181 | 8.0% |
| Revenues per patient Rs. | 32,484 | 35,165 | 2,681 | 8.0% |
| Average length of stay (days) | 5.18 | 5.15 | 0.03 | (0.57%) |
| Out-patients | 662,031 | 728,701 | 66,670 | 10.0% |
| Revenue per bed day (Rs) | 8,767 | 9,667 | 900 | 10.0% |
Expenses
Salaries and Benefits
Our salaries and benefits expense of Rs. 2,061 million during 2009 increased Rs. 496million from Rs. 1,565 million in 2008. This increase was a result of annual compensationincreases for our employees, plus the impact of an increasing number of employedphysicians within our hospitals and pharmacists for the SAPs.
| Year Ended 31st March | | | | | | (Rupees in million) |
| 2008 Rs. | % of Revenues | 2009 Rs. | % of Revenues | Rs. Increase (Decrease) | % Increase (Decrease) |
| Salaries, wages and benefits (excluding Managerial Remu- neration) | 1,565 | 13.6% | 2,061 | 13.9% | 496 | 31.7% |
| No. of employees | 15,927 | | 19,088 | | 3,161 | 20.0% |
| Average salary per employee per month ( Rs) | 8,188 | | 8,998 | | | 10.0% |
| Employee to bed ratio | 4.44 | | 4.52 | | 0.08 | 1.8% |
Material costs
During 2009, our supplies expense of Rs. 7,687 million increased 32%, as compared toRs. 5,817 million in 2008. The increase in supplies cost increased in line with therevenues.
Other Operating Expenses
The following table summarizes our operating and Administrative expenses for theperiods presented
| Year Ended 31st March | | | | | | (Rupees in million) |
| 2008 | % of | 2009 | % of | Rs. | % Increase |
| Rs. | Revenues | Rs. | Revenues | Increase (Decrease ) | (Decrease) |
| Repairs and maintenance | 328 | 2.8% | 367 | 2.5% | 39 | 11.9% |
| Utilities | 267 | 2.3% | 281 | 1.9% | 14 | 5.2% |
| Rents and leases | 384 | 3.3% | 571 | 4.0% | 187 | 48.7% |
| Outsourced labour | 108 | 0.9% | 182 | 1.2% | 74 | 68.5% |
| Marketing and advertising | 154 | 1.3% | 188 | 1.3% | 34 | 22.0% |
| Service and professional fees | 88 | 0.8% | 113 | 1.0% | 25 | 28.4% |
| Non-income taxes | 39 | 0.3% | 45 | 0.2 % | 6 | 15.4% |
| Provision for doubtful debts | 39 | 0.3% | 35 | 0.2% | (4) | (10.3%) |
| Other operating expenses | 607 | 5.3% | 691 | 4.7% | 84 | 13.8% |
| 2,014 | | 2,473 | | 459 | |
Depreciation and Amortization
Our depreciation and amortization expense increased to Rs. 439 million during 2009, ascompared to Rs. 367 million during 2008. The increase in our depreciation and amortizationexpense is largely due to capital improvement projects completed during 2009 and normalreplacement costs of facilities and equipment.
Financial Expenses
Our Financial Expenses increased to Rs. 223 million during 2009, as compared to Rs. 199million during 2008. The increase is largely due to additional borrowings for financingthe capital improvement projects completed during 2009 and normal replacement costs offacilities and equipment.
Provision for income taxes
The provision for taxes during the year ended 31st March 2009 is Rs. 542 million ascompared to Rs. 434 million in the previous year ended 31st March 2008.
Liquidity and Capital Resources
Liquidity
Our primary sources of liquidity are cash flows provided by our operations and our debtborrowings. We have signed agreement with International Finance Corporation (IFC) to tieup around Rs. 2,500 million of additional debt funding.
We believe that our internally generated cash flows, amounts available under our debtagreements and the further debt that is proposed to be raised will be adequate to serviceexisting debt, finance internal growth, expend funds on capital expenditures and fundcertain small to mid-size hospital acquisitions.
Capital Expenditures
As we continue to increase bed capacity and roll-out new hospitals, capitalexpenditures continue to be high. We have made targeted investments at our hospitals toadd new technologies, modernize facilities and expand the services available. Theseinvestments should assist in our efforts to attract and retain physicians and to make ourhospitals more desirable to our employees and potential patients.
The following table reflects our capital expenditures for the years indicated
| | | (Rupees in million) |
| 2007 | 2008 | 2009 |
| Capital Work In Progress | 296 | 260 | 1,665 |
| Capital Expenditure including technical upgradation | 939 | 1,608 | 1,814 |
| 1,235 | 1,868 | 3,479 |
| RoCE | 14.95 % | 13.5 % | 11.33 % |
As the new projects have a gestation period of 3 years, RoCE has decreased over thepast 2 years as we have deployed additional capex. We expect high-growth capex to continueover the next two years as we roll-out the Reach Hospitals.
Material developments in human resources
Human Resources role as a strategic business partner is pivotal for all the changeinitiatives at Apollo. Human Resources are our assets as they are the key drivers for oursustained growth and success. The services they render at every touch point helps inenhancing the service excellence to our patients thereby supporting the mission of Apolloof touching a billion lives.
Human Resource at Apollo has evolved with new employee initiatives across all levelsfrom Senior Management to grass root level. Building knowledge-sharing practices, creatingpool of process specialists through the interventions of Six Sigma, engaging employeesthrough various employee-engagement activities have been the areas of key focus.
Knowledge Sharing
A knowledge sharing portal for the CEOs titled The CEO Handbook andThe DMS Handbook for the Medical Administrators have been developed in-houseincorporating the best practices with measures and metrics and the same has been uploadedin the Apollo’s Light house (in-house on-line forum). This has been integrated withan on-line balanced scorecard termed as the Apollo Performance Monitor (APM) to track theperformance of individual units.
Six Sigma
In our effort to inculcate a high-performance culture, Lean Six Sigma initiative hasbeen institutionalized. At present there are more than 100 trained Lean Six Sigma GreenBelts and 20 certified Green Belts in our Group. We target to train more than 200 GreenBelt Champions and 20 Black Belt Champions this year.
Employee Engagement
Engaging employees-being the key focus area, a number of employee engagement activitieswas operational. Infotainments, party games, sports activities were conducted at regularintervals. Two mega infotainment shows were conducted before the final audit of JCIA. Astandardized group induction kit has also been developed in a video interactive mode toalign Apollo’s mission and values across hospitals.
Our human resources team strives to align the HR policies with the business goals ofthe organisation, and also help in creating a performance-driven culture. Variousinitiatives such as performance- linked rewards, transparent review process, building ahigh-performance work teams have helped in controlling attrition at different levels.Introduction of new services, additional pharmacies and additional beds have resulted inthe increase of human resources strength at Apollo.
Employee Count
The total employee strength as on March 2009 is 19,088 as against 15,927 for the yearended March 2008, an increase of 19.8%. The increase of 3,161 employees is due to theopening of 297 additional standalone pharmacies during the said year and an increase of200 beds, coupled with new value-added services in the hospital division for improvingservice delivery to the customer.
Cautionary Statement
Statements in this Management Discussion Analysis describing the company’sobjectives, projections, estimates and expectations maybe ‘forward lookingstatements’ within the meaning of applicable laws and regulations. Actual results maydiffer substantially or materially from those expressed or implied. Important developmentsthat could alter your company’s performance include increase in materials costs,technology developments, and significant changes in political and economic environment,tax laws and labour relations.