Independent Equity Research ACCENTIA TECHNOLOGIES LTD ACCENTIA TECHNOLOGIES LIMITED IT/ ITES: BUSINESS PROCESSING OUTSOURCING BSE Scrip Code:

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1 CARE Independent Equity Research ACCENTIA TECHNOLOGIES LTD ACCENTIA TECHNOLOGIES LIMITED IT/ ITES: BUSINESS PROCESSING OUTSOURCING BSE Scrip Code: CMP th Dec 2010 Leading player in healthcare outsourcing business Accentia Technologies Limited (ATL or Accentia) is a medium-sized growing company in India s BPO industry. The company is primarily into healthcare related outsourcing business (also known as HRCM) and earns almost all of its revenues from overseas clients. It offers services such electronic medical record, medical transcription, billing and coding, insurance claim processing, receivables management/collections. ATL has operations in over 15 locations in India in addition to marketing offices and personnel in different cities of the United States. Their clients include large hospitals, healthcare networks and physician practices throughout the US and parts of Europe. Outlook for business outsourcing looks promising The Indian BPO industry was one of the most affected during the global financial crisis, especially companies that catered to the BFSI segment. However, healthcare related outsourcing is a defensive sector and was not affected during economic downturn. Furthermore, in the last few years the BPO industry has undergone a complete change in their business model. Global clients today are more interested in the qualitative final outcome and service providers now have to provide not just plain-vanilla services but end-to-end processes and solutions that would boost revenues for clients. Key concerns Shortage of skilled manpower and attrition Exchange rate volatility Non-existent domestic market for HRCM Valuations ATL is currently trading at trailing P/E and EV/EBITDA multiples of 3.0x and 2.3x respectively. 1

2 ACCENTIA TECHNOLOGIES LTD. CARE HISTORY AND BACKGROUND ATL s Business Model: Healthcare Receivable Cycle Management (HRCM) Legend: Accentia's Presence Patient Doctor/Hospital Verbal diagnosis as an audio file Transcripts/Notes Transcription Coding Summary codes for service rendered versus diagnosis by doctor Billing & Collection Bills/Invoice/ Claims Health Insurer/Govt Agencies Payment Source: CARE Equity Research Transcription: Process of converting dictations by doctors into transcripts/notes. Medical transcription is considered to be high-skill work given the complex names of drugs/diseases. Coding: Process of developing software codes that compares diagnosis done by doctor with actual service rendered. This service is also known as insurance coding and is primarily used by insurance providers. The health insurance providers utilize these codes in accessing and compensating the health care provider/hospitals. Billing & Collection: Process of generating bills/invoice/claims. Medical billers typically deal with insurance companies on behalf of hospitals or patients for collection/explanation of medical care expenses. 2

3 CARE ACCENTIA TECHNOLOGIES LTD Background Accentia Technologies Ltd (ATL) is a leading provider of information technology enterprise solutions and business process outsourcing (BPO) services in the healthcare segment. It was established in 1998 primarily focusing on medical transcription business. Over the next decade, ATL diversified its revenue stream by venturing into medical coding segment (2004) and medical billing/collection services (2006). Today, ATL is present across the entire value chain of healthcare receivable cycle management (HRCM) segment and has build its reputation as an established and trusted collaborator in healthcare services segment. Operations ATL is present across sixteen Indian as well as overseas locations. In India, ATL s facilities are located at Mumbai, Hyderabad, Kolkata, Chandigarh, Bangalore, Cochin, Trivandrum and Bhubaneswar. The company also has expanded its international presence with facilities located at Portland, New Jersey, Fort Lauderdale, Florida and the UAE. Recently, the company started its operations in the UK to provide HRCM services in Northern Ireland, England and Scotland. In addition, the company established a back office at Kochi SEZ and at Vishakhapatnam SEZ to serve its European clientele. Accentia has marketing offices and personnel in different cities of the United States, which gives them an advantage in getting new customers. ATL s clients include large hospitals, healthcare networks and physician practices throughout the US and parts of Europe. Industry segments ATL is one of the few companies that is focused on providing full gamut of services and solutions in the HRCM segment. Within HRCM, ATL provides services like electronic medical records (EMR), medical transcription (MT), medical coding, billing and collections. Share of medical transcription segment, one of the most widely outsourced jobs in the healthcare industry, increased from 60.7% in FY09 to about 62.2% in FY10. Contribution from the billing and collections segment has remained relatively flat within 25-27% range in last few years. Share of medical coding segment, which has relatively higher margins compared to the medical transcription segment, has reduced from about 13.6% in FY09 to about 11.2% in FY10. It may be noted that the decline in share of coding revenue does not necessarily refers to reduction in total coding activities done by the company as the coding revenues segment refers to revenue received only from pure-play coding assignments. In most cases, ATL secures basket assignments combining coding and billing & collections together than separate services. In such cases, ATL levies about 7-9% service charge, which cannot be bifurcated into different segments. Cost Structure ATL s cost structure is dominated by staff expenses which contribute about 70-80% to the total operating expenses. Apart from wages, ATL also spends considerable funds in imparting initial as well as specialized training for its staff. The other two major cost heads being expenses related to overseas business and medical transcription 3

4 ACCENTIA TECHNOLOGIES LTD. CARE contributing about 6-14% and 2-3% respectively. Overseas business expenses are primarily incurred towards the charges for proofing work in the US and maintenance for offices located in US and has been declining on a y-o-y basis, whereas medical transcription expenses are the charges that ATL incur by outsourcing some of its transcription work on contract basis. ATL: Total Revenue Break-up (Rs Crore) ATL: Segment-wise Revenue Break-up (%) FY08 (Rs cr) FY09 (Rs cr) 2.05 FY10 (Rs cr) 100% 80% 60% 40% 20% 0% FY08 (Rs cr) FY09 (Rs cr) FY10 (Rs cr) Medical Transcription Billing and Collections Medical Transcription Billing and Collections Coding Others* Coding Others* Notes: 1) Figures in parenthesis indicates consolidated annual income. ATL: Cost Structure (Rs Crore) ATL: Cost Structure (%) Staff FY08 (Rs 89.0 cr) Medical Transcription FY09 (Rs cr) FY10 (Rs cr) Overseas Business Others 100% 80% 60% 40% 20% 0% Staff FY08 (Rs 89.0 cr) Medical Transcription FY09 (Rs cr) FY10 (Rs cr) Overseas Business Others Notes: 1) Figures in parenthesis indicates total operational expenses. Source: Company and CARE Research 4

5 CARE ACCENTIA TECHNOLOGIES LTD Peer comparison At present, none of the major IT companies in India is involved in the medical transcription business or executing the entire range of services under HRCM. There are a few companies involved in claims processing business in general, but are not specialized for the healthcare industry. However, globally ATL faces major competition from other HRCM players located in the US. The enormous US HRCM market which is estimated to grow to $113 billion by FY2015, currently outsources only about 50% of its requirement and a mere 1-2% is off shored to countries like India. This is partly contributed by several regulations in the US prohibiting off-shoring in healthcare domain. ATL has responded to this by acquiring few US-based companies to capture on-shore business. ATL is expecting that these acquisitions would not only help in capturing a sizable pie in the US HRCM market but also gives the company direct access to clients in the US. We have compared ATL with other HRCM companies located in the US. ATL has exhibited significantly higher net profit margins (~28%) compared to its US pure-play transcription peers (~8-10%). This outperformance is primarily contributed by ATL s low cost base. ATL s typical cost of delivery for a normal transcription assignment is around 7.5 cents as compared to 13.5 cents for an exclusive US onshore company. ATL: Comparison with Global Peer Group Parameters Unit Accentia CBay Transcend Medquist Nuance Comm. Technologies Systems Services Country -- India India US US US Business -- 1) Transcription 1) Mobile: Enterprise 2) Coding Medical Medical Medical 2) Healthcare: Dictation 3) Billing & Transcription Transcription Transcription 3) Imaging Collection Customer Number of Base healthcare org 2,400 1, Employee Strength nos. 2,000 6,200 7,500 5,800 3,500 Revenue Rs Crore n/a 1, (Healthcare share- 44%) Net Profit Rs Crore 72.5 n/a Net Profit Margin % 27.3% 7.6% -1.3% 9.4% Per Employee Statistics Revenue Rs lakhs per employee n/a Net Profit Rs lakhs per employee 3.63 n/a Notes: 1) ATL s financial statistics are as on 31-March For US based companies, financial data reported for the year ending Dec-2009 have been used. Source: Prowess and CARE Research 5

6 ACCENTIA TECHNOLOGIES LTD. CARE As explained earlier, there are very few established BPO companies in India operating in HRCM segment. Most of these companies are subsidiaries of US entities and do not pose substantial risk to ATL s market share. Nevertheless, CARE Equity Research has compared ATL with other domestic BPO companies, albeit operating in segments other than healthcare. The company s EBITDA and PAT margins are one of the highest in the domestic peer group. Furthermore, the company s net profit per employee stands at respectable Rs 3.63 lakh per employee. ATL: Comparison with Domestic Peer Group Parameters Accential Technologies Tutis Technologies Zylog Systems Tricom India R Systems International Financial Indicators (Rs Crore) Market Cap Revenue EBITDA PAT Margins (%) EBITDA 40.3% 21.0% 18.0% 33.2% 6.9% PAT 27.3% 4.3% 10.4% 16.1% 2.3% Per employee indicators (Rs. Lakh per employee) Employee (nos) 2, ,018 2,000 2,048 Revenue PAT Source: Prowess and CARE Research 6

7 CARE ACCENTIA TECHNOLOGIES LTD CONSOLIDATED FINANCIAL PERFORMANCE AND ANALYSIS Top line increased 12.6% in FY10 ATL s net revenues increased to Rs crores in FY2010, registering a y-o-y growth of 12.6%. The company was not affected during the financial crisis as it operates primarily into the healthcare segment. Operating profit in FY10 remains flat Despite the reasonable growth in the top-line, ATL s operating margins remained nearly flat at 40.3% compared to 39.6% reported in FY09. This can be attributed to nearly 30% growth in staff expenses. The total staff expenses increased from 70.7% of the total income in FY09 to about 79.0% in FY10. EPS growth remains muted reflecting flat growth in operating profit Net profit for the company increased by a mere 0.6% y-o-y in FY10 in line with flat growth in operating profit which resulted into net margins to decline by about 3.2% to 27.3% in FY10. This subdued growth at net profit level of the company also led to decline in its EPS levels from Rs per share in FY09 to Rs per share in FY10, posting a marginal de-growth of around 2.8%. ATL: Financial Performance (FY07-10) FY07 FY08 FY09 FY10 Net sales (Rs crore) EBITDA (Rs crore) PAT (Rs crore) EBITDA margins 27.8% 32.5% 39.6% 40.3% Net margins 20.5% 25.4% 30.5% 27.3% EPS (Rs) Source: Company and CARE Research 7

8 ACCENTIA TECHNOLOGIES LTD. CARE NEW INITIATIVES AND EXPANSION PLANS Expansion plans and initiatives The US HRCM market is expected to grow to $113 billion by FY2015 from the current levels of about $86 billion. Currently only about 50% of this HRCM requirement is outsourced outside the US; and a mere 1-2% is off shored to countries like India. However, in light of growing US healthcare spending along with the healthcare reforms bill would provide tremendous opportunities for HRCM players like ATL. To capture this huge opportunity, ATL has formulated aggressive growth plans spanning across following two verticals: SaaS (Software-as-a-Service) initiative: ATL is planning to expand its presence across the entire value chain of HRCM services. The SaaS business model would allow ATL to integrate all functions of HRCM under one umbrella, thereby achieving significant cost/time savings. In this regard, ATL has acquired the UK based IQ Group of Companies to get access to its software/hardware and technology maintenance capabilities. Legal Process Outsourcing (LPO): Apart from its expansion plans in the healthcare outsourcing segment, ATL is also planning to diversify into Legal Process Outsourcing (LPO) space through a combination of both inorganic and organic routes. The company was planning to acquire an established LPO outsourcing company located in South India, employing around 100 people. The company has also recruited couple of executives in the UK/US to initiate the LPO arm. ATL aiming to become one of the top 5 global LPO companies in the next 4-5 years. Key concerns Shortage of manpower: A major risk for Accentia is limited availability of trained and skilled professionals in HRCM industry for Medical transcription, Coding and Billing. The company spends significant amount (Rs 1.7 lakhs) on training fresh recruits which includes training in spoken English skills to cater to ever increasing demand for more capacity. The company also faces attrition of approximately 6% which disrupts smooth operation. US dollar fluctuations: A significant proportion of Accentia s revenue accrues in US dollars. Any adverse movement of the US Dollar versus the Indian Rupee could impact the company s bottom-line and margins. Lack of domestic market: The company is dependent entirely on overseas business given lack of demand of market for healthcare documentation in India. 8

9 CARE ACCENTIA TECHNOLOGIES LTD SECTOR OUTLOOK Sector outlook The Indian BPO industry was one of the most affected during the global financial crisis, especially the companies that catered to the BFSI segment. However, healthcare related outsourcing is a defensive sector and was not affected during the economic downturn. Furthermore, in the last few years the BPO industry has undergone a complete change in their business model. Global clients today are more interested in the qualitative final outcome and service providers now have to provide not just plain-vanilla services but end-to-end processes and solutions that would boost revenues for clients. With cost-reduction being an important factor, overseas clients are looking at end-to-end capabilities from their vendors. Moreover, there is increasing potential in newer segments of BPO like healthcare and legal outsourcing services. A recent study by Nasscom states that, the BPO addressable market will be larger than IT by The market is likely to grow in size from $200 billion in 2010 to $980 billion by It has been observed that the domestic market is also a significant driver for the Indian BPO industry. CARE Research expects potential demand from domestic industries such as telecom, BFSI and from government/public sector companies who will require outsourcing services from IT enabled companies. However, local market for HRCM is still non-existent making companies like ATL rely entirely on exports. Going forward, CARE Research believe ATL s ability to directly engage with their US-based clients coupled with their back end operations in India and expertise in several areas of HRCM increases their probability to capitalize on new opportunities arising in global healthcare industry. Industry concerns Although overall outlook for the BPO services in healthcare segment appears to be healthy, there are some key concerns factors that may impact industry s growth. The outsourcing industry in India is increasingly being challenged by their counterparts in Philippines, Malaysia, Sri Lanka, Brazil, Mexico, Egypt, China and Vietnam. These countries are fast emerging as heavy weights in the global outsourcing industry. Rupee appreciation is another area where the industry can impact the bottom-line of their client. Apart from that rising salary levels and attrition levels is turning to be counter-productive for India s outsourcing industry. There is a strong antioutsourcing lobby in western countries given high unemployment level in their home market which could impact future growth. 9

10 ACCENTIA TECHNOLOGIES LTD. CARE CONSOLIDATED FINANCIAL SUMMARY Rs (crore) FY07 FY08 FY09 FY10 Net sales EBITDA Depreciation and amortisation EBIT Interest and financial expenses PBT PAT EPS Dividends Balance sheet Net worth (incl minority interest) Long term debt Current liabilities and provisions Deferred tax liability/(assets) Capital employed Net fixed assets Investments Sundry debtors/ receivables Inventory Loan and advances Cash and bank balances Ratios Growth in net sales 178% 290% 77% 13% Growth in EBITDA 39% 355% 115% 15% Growth in PAT 27% 384% 113% 1% EBITDA margins 28% 32% 39.6% 40.3% PAT margins 20% 25% 30.5% 27.3% ROCE 30% 51% 48% 34% ROE 29% 49% 46% 31% Debt-Equity (times) Receivable days (days) Price/Earning (P/E) (times) 3.0 Price/Book value (times) 0.9 Enterprise value (EV)/EBITDA (times) 2.3 Source: PROWESS and CARE Research 10

11 CARE ACCENTIA TECHNOLOGIES LTD DISCLAIMER DISCLOSURES Each member of the team involved in the preparation of this grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company. This report has been sponsored by the Bombay Stock Exchange (BSE). DISCLAIMER This BSE sponsored report is prepared by CARE Research, a division of Credit Analysis & REsearch Limited [CARE]. CARE Research has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain or from sources considered reliable. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Research operates independently of ratings division and this report does not contain any confidential information obtained by ratings division, which they may have obtained in the regular course of operations. Opinions expressed herein are our current opinions as on the date of this report. Nothing in this report can be construed as either investment or any other advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of this report or data herein. CARE specifically states that it or any of its divisions or employees have any financial liabilities whatsoever to the subscribers / users of this report. This report is for personal information only of the authorised recipient in India only. This report or part of it should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied for any purpose. Published by Credit Analysis & REsearch Ltd., 4th Floor Godrej Coliseum, Off Eastern Express Highway, Somaiya Hospital Road, Sion East, Mumbai CARE Research is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this product. This report is for the information of the intended recipients only and no part of this report may be published or reproduced in any form or manner without prior written permission of CARE Research. 11

12 ACCENTIA TECHNOLOGIES LTD. CARE ABOUT US Credit Analysis & REsearch Ltd. (CARE) is a full service rating company that offers a wide range of rating and grading services across sectors. CARE has an unparallel depth of expertise. CARE Ratings methodologies are in line with the best international practices. CARE Research CARE Research is an independent research division of CARE Ratings, a full service rating company. CARE Research is involved in preparing detailed industry research reports with 5 year demand and 2 year profitability outlook on the industry besides providing comprehensive trend analysis and the current state of the industry. CARE Research also offers research that is customised to client requirements. CARE Research currently offers reports on more than 18 industries that include Cement, Steel, Aluminium, Construction, Shipping, Ship-building, Commercial Vehicles, Two-Wheelers, Tyres, Auto Components, Pipes, Natural Gas, Gems and Jewellery, Retail, Sugar, etc. HEAD OFFICE Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai Tel: , Fax: NEW DELHI 710, Surya Kiran, 19, Kasturba Gandhi Marg, New Delhi Tel: / / AHMEDABAD 32, Titanium, Prahaladnagar Corporate Road, Satellite, Ahmedabad Tel: KOLKATA 3rd Floor, Prasad Chambers (Shagun Mall Building), 10A, Shakespeare Sarani, Kolkata Tel: / / HYDERABAD 401, Ashoka Scintilla, , Himayat Nagar, Hyderabad Tel: CHENNAI Unit No. O-509/C, Spencer Plaza, 5th Floor, No. 769, Anna Salai, Chennai Tel: / BANGLORE Unit No. 8, I floor, Commander's Place, No. 6, Raja Ram Mo han Roy Road, (Opp. P F Office), Richmond Circle, Bangalore Tel: Published on behalf of The Stock Exchange Investors' Protection Fund Bombay Stock Exchange Ltd. P J Towers, Dalal Street, Mumbai. Tel: /