Hitesh Mendha poly medicure jan2009 picks

MOST PROMISING SECTOR IN INDIA

HEALTHCARE

HITESH MENDHA
LONG TERM INVESTMENT

PREPARED BY HITESH MENDHA, PUNE

Health is ascribed to be a dynamic
equilibrium, out come of which is
determined by a wide variety of
biological,socio,cultural,economic,
political, physical, psychological and
environmental factors.
In a nation like India, where there is no
formal social security system in place,
notwithstanding the high tax rates,
healthcare and health insurance become
that much more crucial.
The sector offers immense potential to
healthcare players as the country
witnesses a rise in the incidence of
lifestyle-related and other diseases.
A growing elderly population and rise in
income levels are also pushing for better
facilities in the country.
One of the fastest growing and most
potent sectors in India is the healthcare
sector.


Financial Resources in the Healthcare Industry
Healthcare is one of India’s largest sectors, in
terms of revenue and employment, and the sector
is expanding rapidly .
Today the total value of the sector is more than
$36 billion. This translates to $36 per capita, or
roughly 6% of GDP and is expected to grow to
contributing 8% of India's GDP by 2012.
The Healthcare industry in India is estimated to
achieve a market size of $ 77 billion by 2012, and
US$ 150 billion by 2017, this translates into an
investment opportunity of over $30 billion by 2012.
The Government contributes 20% to the total
healthcare expenditure in India, the remaining
80% comes from the private sector
Driven by strong local demand, Indian
Figure 1: Healthcare spending as part of GDP
healthcare market is expected to continue growing (Source: The Economist)
close to previously projected rates of 15 per cent.
India has one of the highest private spending in
healthcare as compared to other countries (Fig. 1)


Financial Resources in the Healthcare Industry
With average household consumption expected to increase by more than seven per cent
per annum, the annual healthcare expenditure is projected to grow at 10 per cent and also
the number of insured is likely to jump from 100 million to 220 million, golden days for
healthcare sector is ahead.
India's healthcare industry registered 42.44 per cent growth in net profit during April-June
2009, according to the Associated Chambers of Commerce and Industry (ASSOCHAM).
In the healthcare sector, the leading 10 companies posted a growth of 23.94 per cent in
total income and 21.37 per cent in total expenditure during the quarter.

Government and public
employers
Private providers
(individual, charitable
and for-profit)


Indian Healthcare

Current Healthcare


Indian Healthcare
THE HEALTHCARE DELIVERY SECTOR PLAYS AN
IMPORTANT ROLE IN THE ECONOMY TODAY
Sector Direct employment Revenues/GDP

Healthcare

Education

Healthcare is the
Retail banking largest service
industry in terms
Power of revenues and
the second
largest after
Railways
education in
terms of
Telecom employment

Hotels, restaurants

IT

By 2012, the sector could account for 7 to 8 per cent of GDP and provide
direct and indirect employment of 9 million


Indian Healthcare

INDIA: AN EMERGING HEALTHCARE HUB


Indian Healthcare capability
Over 60,000 cardiac surgeries done per year
with out comes at par with international standards.

Multi organ transplants like Renal, Liver, Heart,
Bone Marrow Transplants, are successfully
performed at one tenth the cost.
Patients from over 55 countries treated at Indian
Hospitals.

India has become a hot medical destination for
patients in the Middle East, Africa and even the
West.
Word is fast-spreading that Indian hospitals can
provide world-class care at competitive rates.

India today has big names in healthcare like the
All India Institute of Medical Sciences (AIIMS),
Apollo Hospitals and Shankara Netralaya

Growing population and economy
One driver of growth in the healthcare sector is
India’s booming population, currently 1.1 billion
and increasing at a 2% annual rate.

By 2030, India is expected to surpass China as
the world’s most populous nation. By 2050, the
population is projected to reach 1.6 billion.

By 2025, an estimated 189 million Indians will be
at least 60 years of age—triple the number in
2004.

Goldman Sachs predicts that the Indian
economy will expand by at least 5% annually for
the next 45 years (see chart)

To meet this growing demand, the country needs US$ 50 billion annually for the next 20 years,
says a Confederation of Indian Industry (CII) study.

India needs to add 3.1 million beds by 2018 to the existing 1.1 million, and requires immediate
investments of US$ 82 billion, as per the Technopak Advisors report.


Medical Tourism
In 2007, India treated 450,000 foreign patients
ranking it second in medical tourism.

According to a study by McKinsey and the CII,
medical tourism in India could become a US$ 2
billion industry by 2012 (from US$ 350 million in
2006). Credit Suisse estimates medical tourism to
be growing at between 25-30 per cent annually.

The key selling points of the medical tourism
industry are its cost effectiveness and its
combination with the attractions of tourism.

Treatment cost is lowest in India – 20 per cent of
the average cost incurred in the US, Singapore,
Thailand and South Africa.

Besides world-class medical facilities, India is
also trying to promote its traditional medicine such
as ayurveda.


Medical Tourism
Indian Systems Of Medicine “ Staging a Comeback”

In Ayurveda recognized as an official healthcare system in
Hungary.

Doctors in the west are increasingly prescribing Indian Systems
of Medicine

More than 70% of the American population prefer a natural
approach to health

Americans are said to spend around $25bn on non-
traditional medical therapies and products *

India’s Gift to the World
Ayurveda

Yoga

Siddha


Rise in disease
Another factor driving the growth of India’s healthcare sector is a rise
in both infectious and chronic degenerative diseases, like swine –flue
(H1N1) recently.

India faces high burden of disease because of lack of environmental
sanitation and safe drinking water, under-nutrition, poor living
conditions, and limited access to preventive and curative health
services

Lack of education, gender inequality and explosive growth of
population contribute to increasing burden of disease.

Full impact of the HIV epidemic and tobacco related diseases is yet
to be felt

Indians account for one-third of the world’s patients suffering from
diarrhoea, TB, respiratory infections, parasitic infestations and prenatal
conditions, and a quarter of patients with maternal conditions, a fifth of
nutritional deficiencies, diabetes, and the second largest number of
HIVAIDS cases, which alone stand at 5.19 million.


Expanding Middle Class
India’s thriving economy is driving urbanization and creating an expanding middle class, with
more disposable income to spend on healthcare.

More women are entering the workforce as well, further boosting the purchasing power of
Indian households, Many of these women are highly educated: the ratio of women to men who
have a college degree or higher level of education is 40:60.

If the economy continues to grow faster than the economies of the developed world, and the
literacy rate keeps rising, much of western and southern India will be middle class by 2020.

The increasing size and spending power of this group is driving growth opportunities for
corporate healthcare providers.

This has to be read with the fact that India's urban middle class is expected to swell more
than ten times to 500 million by 2025. The government can meet only 15% of this demand.


Deteriorating Infrastructure
The physical infrastructure is woefully inadequate to meet today’s healthcare demands,
much less tomorrows.

While India has several centers of excellence in healthcare delivery, these facilities are
limited in their ability to drive healthcare standards because of the poor condition of the
infrastructure in the vast majority of the country.

The number of public health facilities also is inadequate. For instance, India needs
74,150 community health centers per million populations but has less than half that
number.

At least 11 Indian states do not have laboratories for testing drugs, and more than half
of existing laboratories are not properly equipped or staffed.

The demand for quality healthcare infrastructure and services in India far
exceeds the supply.


Rapid Growth in Health Insurance
Currently only 10 per cent of the Indian population has health insurance, which means that
there is tremendous scope for growth in this area.

The Indian health insurance business is growing at 50 per cent. The sector is projected to
grow to US$ 5.75 billion by 2010, according to a study by the PHD Chamber of Commerce
and Industry.

An increase in health insurance coverage (at present, out-of-pocket expenses account for
90 per cent of the total spend; just 10 per cent is through insurance) is expected to lead to
more hospitals coming up.

The comprehensive health insurance programmes currently on offer will mandate
accreditation of non-hospital players.

International insurance companies are being permitted to enter India under joint venture
agreements with local companies

Private insurance will drive the healthcare revenues.


2012 – Demand Opportunity Overview

Demand Opportunity

Addition of 750,000 extra beds Tertiary Healthcare
facilities
500,000 more Doctors & Medical Education &
1 million more qualified Nurses Nursing Schools
Infrastructure Additional investment of $
25 – 30 billion required
Government & International Balance investment to
Agencies only geared for up to come from private sector
US $ 7 billion


Recent Development
Reduction of customs tariffs on life saving medical equipment and critical drugs.

Depreciation rates for medical equipment under the Income tax law have been increased.

Lowest interest on lending for private sector hospitals exceeding 100 beds will improve
access to low cost funding for hospitals.

Health insurance schemes for the poor. But the biggest leap has been the community-
based universal health insurance scheme for the poor whereby a cover of Rs 30,000 is
available for as low as Rs 2 per day with the Government contributing Rs 100 per annum for
families below the poverty line.

Reduction of excise on certain critical drugs and abolition of duty on drugs and materials
imported for clinical trials.

The entry of big pharmaceutical companies into this segment is a clear sign of corporate
focus on this sector.

In case of medical tourism patients not only come to India from Asian countries but also
from countries like UK where the waiting period for any surgery sometimes is several
months.


What is driving the sector ?
The increase in expenditure by government towards
enhancement of medical facilities is a big plus, as is
the involvement of large corporate houses.

The reduction in customs and excise duties on
various items is proving to be of great help to the
sector resulting in the formation of the healthy
competition.

Constant research and development have led to the
discovery of new and better life saving drugs while the
development of infrastructure and various incentives
provided by the government is proving to be a great
booster.

The government has also come up with various
insurance schemes, which could help the sector and
this is aided by the formation of various institutes,
which have given the country the best of the doctors.


Where are the roadblocks?

One of the biggest roadblocks is the fact
that the cost of many of the required
equipments in this segment is too high.
Resultantly, small healthcare centres cannot
afford them and lag behind.

Many people are unable to enjoy the
benefits of the new and advanced
technology, as the cost of treatment by these
advanced equipments is very high which is
often not affordable.

There are many dealers in the market who
dupe people by selling them outdated
medicines. However, the government is using
legislation to place serious curbs on this
malpractice.


Investments in Healthcare
The sector has been attracting huge investments from domestic players as well as financial
investors and private equity (PE) firms.

Funds such as ICICI Ventures, IFC, Ashmore and Apax Partners invested about US$ 450
million in the first six months of 2008-09 compared with US$ 125 million in the same period a
year ago.

PE funds to invest at least US$ 1 billion in the healthcare sector in the next five years.

In February 2009, India Venture invested almost US$ 18 million in Tamil Nadu-based Kavery
Medical while in June IFC invested US$ 30 million in Max India.

Piramal Life Sciences, the research and development (R&D) arm of Piramal Group is
investing US$ 41.17 million in the next two years’ period to discover and develop new chemical
entities and novel drug delivery systems.

The Hinduja Group will invest up to US$ 72 million in increasing capacity of its hospital in
Mumbai by 350 beds in the next four years through expansion of existing facility and setting up
of a new unit.

The government, along with participation from the private sector, is planning to invest US$ 1
billion to US$ 2 billion in an effort to make India one of the top five global pharmaceutical
innovation hubs by 2020.


Areas of Opportunity
Medical infrastructure forms the largest portion of the healthcare pie. Beds in excess
of one million need to be added to reach a ratio of 1.85 per thousand at an investment of
US$ 77.9 billion.

The medical equipment industry is growing at 15 per cent per year. It is estimated to
reach US$ 4.97 billion by 2012.

The medical textiles industry is projected to double to reach US$ 753 million by 2012.

Clinical trials have the potential to become a US$ 1 billion industry by 2010 and the
health services outsourcing sector has the potential to grow to US$ 7.4 billion by 2012,
from US$ 3.7 billion in 2006.

Rejuvenation services such as spas, alternative therapies, ayurveda treatments and
beauty services are expected to grow by as much as 30 per cent


Indian Healthcare

INDIA OFFERS HUGE POTENTIAL FOR INVESTMENTS IN
HEALTHCARE OVER THE NEXT 10 YEARS

Investment requirements in India (Estimates)

US $ in Billion Next 10 years

Healthcare 22-31

Investment needs
of the healthcare
Power** 95-126 sector are
comparable to
other infrastructure
sectors
Telecom**
40-51

Roads** 24-33

Indian Healthcare

HUGE GROWTH POTENTIAL – TO GROW BETWEEN
US $ 43 – US $ 77 BILLION IN 2012
60.0
US $ IN BILLION
ESTIMATE
51.0 17.0
43 8.0
8.0

36 43.0
Government 43.0
spending
7 35.0
Private
spending
29

2010 2012 2012 2012
Scenario 1: Scenario 2: Scenario 3:
Baseline Baseline Baseline with
increase in with insurance and
private spend insurance in high
middle class government
spending
Key Government
Spending 1% GDP 1% GDP 2% GDP
Assumption
* With 6% GDP real growth per year


Government Initiative
The Government launched the National Rural Health Mission (NRHM) in 2005. It aims to
provide quality healthcare for all and increase the expenditure on healthcare from 0.9
per cent of GDP to 2-3 per cent of GDP by 2012.

During the 2009 interim budget, the government allocated US$ 2.42 billion for NRHM.

The Tamil Nadu government has allocated US$ 698.16 million for health and family care for
the year 2009-10, up from US$ 564.34 million a year ago. The increased budget includes
creating a mega blood bank—Asia’s largest—in Chennai and upgrading several hospitals,
besides launching a new insurance scheme.

The government has announced a US$ 63.2 million initiative to promote domestic
manufacture of medical devices such as stents, catheters, heart valves and orthopaedic
implants that will lead to lower prices of these critical equipment.


Indian Healthcare

PROMINENT HEALTH CARE COMPANIES
IN INDIA


Prominent Health care companies in India
Apollo Hospitals: Apollo Hospitals group owns and manages 41 hospitals in and
around India, becoming the largest healthcare provider in Asia.

Cipla Ltd. -: Cipla founded as The Chemical, Industrial & Pharmaceutical
Laboratories is a major Indian pharmaceutical company, best-known for
manufacturing economical anti-AIDS drugs.

Ranbaxy Laboratories Ltd. -: Ranbaxy Laboratories Limited, headquartered in
India, is an integrated, research based, international pharmaceutical company,
producing a wide range of quality, affordable generic medicines, trusted by
healthcare professionals and patients across geographies.

Dr Reddy's Laboratories Ltd. -: DRL initially began as a supplier to Indian drug
manufacturers, but soon started exporting to other less-regulated markets.

AKAS Medical Technologies, Chennai -: AKAS Medical is an ISO 9001:2000
Certified critical care equipment manufacturing company.


Prominent Health care companies in India

Electronic Engineering Corporation, Chennai -: Electronic Engineering
Corporation, manufacturers and exporters of a wide range of bio-medical electronic
instruments and scientific pumps.

Abi Herbal Products, Erode District -: Producing home made 100% herbal
cosmetics.

M. S. S. Asan Exports -: Exporter of wide range of medicinal herbs, herbal
products, edible oil and organic fertilizer.

Poly Medicure Ltd.-: Poly Medicure today counts amongst world’s leading
medical disposables manufacturer with a core focus on R&D and innovation.


Multibagger in the Making

POLY MEDICURE


POLYMED- Leading the future
POLYMED was conceived and established by a
group of engineers and technocrats dedicated to
the idea of providing the benefits of modern
healthcare to the mankind at affordable price.

This unique philosophy has been the driving
force behind the company since its inception in
1995.

Today it has grown into one of the most
dynamically versatile manufacturers of disposable
healthcare products in the region with over 60
different products.

POLYMED has successfully implemented a well documented QMS (Quality
Management System) which has been accredited by SGS Yarsley International
Certification Services, United Kingdom with ISO 9001:2000, ISO-13485:2003 and CE
mark from DNV, Norway thus making the entire product range compliant with
International Quality Standards.

POLYMED’s some specialist products are also US FDA 510k approved.


POLYMED- Leading the future
Modern Production Facilities & Processes

POLYMED manufactures its products using state
of the art technology in ultra modern facilities
covering over 300,000 square feet of manufacturing
floor space with about 50,000 square feet of clean
rooms of class 100,000 to class 1,000.

A tool room with modern facilities & CNC
machines supports the manufacturing processes. A
high degree of automation and an effective process
control helps in delivering consistent product quality.

Innovation & continuous improvement

POLYMED has a fully staffed and highly equipped
R & D section to design and develop new and
innovative products.


Investment Rationale

Established in 1995, Poly Medicure today counts amongst world’s leading medical
disposables manufacturer with a core focus on R&D and innovation.

Research efforts put-in by the company in last several years has led to it filing more
than 70 patents out of which it has already got 10 in its kitty with 2 being in world’s
largest medical disposables market viz., USA.

Polymed has state-of-the-art manufacturing plants in Haridwar, Jaipur & Faridabad in
India and one in China and one joint venture in Egypt.

It exports nearly 34 % of its products to Europe while Indian market contributes 25 % to
Polymed’s sales. It exports its products to 50 countries currently with Europe being the
major market at present.


Business at its Inflexion Point

The efforts Polymed has put-in since last several years and the aggressive approach
Polymed’s management is now pursuing promises the start of golden phase for Polymed
starting from current FY10.

Research efforts put-in by the company in last several years has led to it filing more
than 70 patents out of which it has already got 10 in its kitty with 2 being in world’s
largest medical disposables market viz., USA.

The efforts which I am talking is the R&D efforts because of which Polymed has, since
last 4 years, constantly launched 10 new innovative products every year and has filed for
more than 70 patents out of which 10 it has already got with 2 being in USA.
The main fruit of these efforts has come in the form of USFDA approval in June 2009
for launch of five of Polymed’s products in US market which happens to be the largest
and most fruitful market for medical disposables manufacturers.
Out of these five products, which have got approval, two products are the one, which
had got the patent in USA. Hence, launch of these two products will mean healthy
margin for Polymed.


Financials
Some important financial to look at: -

Equity Capital – 5.50 cr

Promoter Holding – 49%

FY09 Revenue - 112.22 cr.
FY09 Operating Profit – 10.79 cr.
FY09 Net profit – 5.92 cr.
FY09 EPS – 10.76 cr.

FY10 1st Half Revenue – 62.49 cr.
FY10 1st Half Operating Profit – 8.55 cr.
FY10 1st Half Net profit – 6.32 cr
FY10 1st Half EPS – 11.49
FY10 Annualized EPS – 22.98


Financials
By Conservative estimates, Polymed is likely to post a top line of Rs. 132 cr. and a
bottomline of 11.5 cr. for FY10, which translates into FY10 EPS of Rs.20.90. In my FY10
estimates, I have included only March2010 qrtr. sales of products to be launched in USA.

For FY11, Polymed is expected to post a topline of 186 cr. with bottomline expected to
zoom to Rs. 20.40 cr., which will translate, into FY11 EPS of Rs. 37.

. These are only conservative estimates as from 3 out of 5 USFDA approved products viz.,
IV Catheter, Safety Scalp Vein Set and Safety Infusion Set, Polymed expects to rake in Rs.
50 cr. sales every year.

The potential of Polymed’s major product viz., IV Catheter can be judged from the fact that
B. Braun AG is going all out to restrict Polymed from selling this product because it has the
potential to significantly affect B. Braun’s own product sales as Polymed’s IV Catheter is far
more superior and competitive in pricing than B. Braun’s.

B. Braun first tried to restrain Polymed in India but it failed to do so as Indian court gave a
clean chit to Polymed. Hence, B. Braun did it in its own tertiary by restraining Polymed in
December 2009 from marketing its IV Catheter in Germany. This retrainment is expected to
affect only Germany sales of Polymed and is not expected to have any major impact on its
sales in US and other countries.


CONCLUSION

In current market which is at a twenty two month high, an investor needs to look at two
angles – First, not to lose the opportunity of multiplying the money by remaining in cash
and missing the rally & Second, not to invest in those stories which seem fully priced at
the moment and so have the potential to correct significantly if a correction sets in.
Hence, if I look at both the angles then Poly Medicure seems to be the safest bet.

Poly Medicure is a decent medium to long-term bet if we consider its business, its
financials and recent development.

It is operating in a segment which is recession- proof.

Recent developments like USFDA approval, opening of sales offices, focus on
domestic as well as international makets, etc. all give safety to future financial growth of
the company the verge of reaping rewards of past efforts.

Valuations are very cheap as Polymed’s closest Indian peer (not strictly- as no other
listed company is into medical disposables) Opto Circuits is quoting at a 17+ PE while
Polymed is available at a PE of 6.9 based of FY10 EPS estimates and at a PE of just 3.9
based on FY11 conservative estimates. This valuation is pretty cheap in current market
scenario, which calls for a significant rerating of Poly Medicure soon.


THANK YOU


Hitesh Mendha poly medicure jan2009 picks

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