Research Report- Durdans

Table of Content


The Company Background

The ongoing journey of Durdans hospital began during World War II between the year 1939 and 1945.

During this era Durdans hospital had been a haven for the sick and injured British military personnel stationed in Ceylon. By the end of World War II a group of visionary medical professionals incorporated a Company known as “Ceylon Hospitals Limited” to own and operate Durdans hospital. Today Ceylon Hospitals PLC is a subsidiary of Durdans Management Services Ltd (DMSL). Durdans Heart Surgical Centre (Pvt) Ltd (DHSC) and Durdans Medical & Surgical Hospital (Pvt) Ltd (DMSH) are two subsidiaries of the Ceylon Hospitals Plc (CHPLC).

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The Corporate structure is given below:- DMSL(Public Company) CHPLC (Quoted public Company) / Durdans hospital DHSC (Private Company) DMSH (Private Company) Source: Company Annual Reports However, my research is confined to the Ceylon Hospitals Plc and not to any of its subsidiaries, holding Company or the group as such. 1. 2 The Private Health Care Sector in Sri Lanka Public health care, free of charge, or at subsidized cost is considered a basic human need and as a citizen’s right in some developed, developing and under-developed countries.

On the other hand, public health care to its people, at full cost of the State, or at subsidized cost is a challenge for many developing and under developed countries. Therefore some developing and under developed countries encourage the private health care sector of the economy to grow, compete with the state owned public health care institutions and provide health care to its citizens. Sri Lanka being a developing country has many such private health care institutions enjoying the above incentives and benefits offered by the State.

Among these there are about 6 Private Hospitals that can substantially match the standards of a fully fledged state-of-the-art hospital. Sri Lanka has been confirmed of having the fastest ageing population among the Asian countries. The majority of the ageing population is having to cater to their own needs independently as their children have moved overseas for career opportunities and for better prospects. Source: (vide-Reference No. 1) Further local health care business was estimated to be over Rs. 0bn (approximately over ? 170mn) in year 2008/09 with a rapid growth year on year. Source: (vide-Reference No. 2) 1. 3 Objectives of the Research and the Research Approach * To analyze the business performance of the Company by applying relevant and appropriate business performance analysis, techniques and models. * To analyze the financial performance of the Company with special reference to revenue, profitability and efficiency; liquidity and gearing, investor attractiveness and overall financial health of the Company.

My research will further examine in a critical manner the financial reporting and compliance aspects by:- (a) a detailed ratio analysis of financial information, to examine profitability and efficiency, liquidity and gearing, and the state of attractiveness of the business to potential investors and the Company’s overall financial health; * *


Secondary and Primary sources of Information

Ceylon Hospitals Plc is a Quoted Public Company. The ordinary shares of the Company are listed on the CSE of Sri Lanka and I own some shares in this Company.

The Annual Report of the Company is available for reference or examination in the Website of the CSE, (www. cse. lk) search (chl. n000). The main source of secondary information and data for this research project will be the Annual Reports of the Company for the financial years 2007/08; 2008/09 and 2009/10. Information made available to the shareholders in the Annual Reports are authentic and verified. Therefore there are substantial justifications to rely on the secondary data and information made available in such Annual Reports. Therefore my research is substantially based on secondary source of information.

However in order to supplement the study with primary source of information I performed:- * a visit to the Durdans hospital’s Emergency Unit (vide Reference-No. 5) * * an interview with a patient who had undergone a coronary artery bypass surgery on the 13th of December 2010, at the Durdans hospital (vide Reference-No. 6) I have made several visits to the Company website within the CSE website (www. cse. lk) (chl. n000) to ascertain information relating to Company’s business and financial performance, and other investor information.

Limitations of Information Gathering

I find the following limitations: (1) The published Financial Statements do not provide a lot of detailed information available in the detailed Audited Financial Statements. This is because detailed information available in the Financial Statements are with-held for sake of confidentiality, as publishing such information may reach the business competitors and could cause a threat for survival. However, the Annual Report provides information to be furnished according to the Companies Act, SLAS and other statutory requirements. Examples * Income Statement

Revenue, cost of sales and gross profit- This information is not available major activity wise or SBU wise and therefore the profitability of the different business activities cannot be ascertained; Source: Company Annual Reports * Other Operating Income and Sundry Income Other operating income amounts to Rs. 63. 7mn in year 2009/10. Out of this Rs. 46. 99mn is dividend income and Rs. 6. 9mn is sundry income. No detail of the sources of dividend income is available to ascertain whether the investment portfolio is properly diversified or managed. Similarly no detail of sundry income is available although it amounts to nearly 10. % of the operating income. * Administration Cost These costs amount to 41. 7% of the Company’s revenue in the year 2009/10 and 43. 7% of the Company’s revenue in the year 2008/09. But no details whatsoever of the administration cost is available in the Annual Report, to ascertain the costs that should be controlled by the Company. 2. 3 Ethical Issues and Information Gathering I cannot find any incidence of ethical issues arising in my information gathering process for this research. I am a shareholder of Ceylon Hospital Plc. Therefore I have access to the Annual Reports of Ceylon Hospitals Plc. The Use of Accounting Tools and Techniques SWOT Analysis SWOT analysis helps to analyze an organization’s strengths, weaknesses, opportunities and threats. It assists an organization to look closely and analyze every aspect of its operation and to develop suitable strategies that could change the weaknesses into strengths and threats into opportunities. Source: Stephen Danks’s Business Studies book 3rd edition. Porter’s Five Forces Porter’s strategic management model known as the five forces model explains the five key factors which must be analyzed to evaluate the profitability of a business entity.

This model also makes a strategic assessment of a business entity’s competitive position in the market in which it survives. The five forces are:- 1. threat of potential entrants 2. existence of substitutes 3. bargaining power of buyers 4. bargaining power of suppliers 5. intensity of rivalry among existing firms Source: Stephen P. Robbins Management book 7th edition PESTEL Analysis This helps to analyze the macro environment and it impact in an organization. The analysis mainly focuses on political, environmental, social, technological, economic and legal factors that are not directly under the control of the organization.

Source: ACCA business analysis text book


Strategic Business Development

SWOT ANALYSIS * Strengths * Strategic business location, in the heart of the city with substantial road network. * Renowned brand name in private health care. * State-of-the-art medical infrastructure, equipment and laboratory, to be the best in the private health care sector, in Sri Lanka. * Availability of a team of renowned Medical Consultants and Specialists in every narrow field of medicine. * Trained, professional and skillful staff in the ield of laboratories to handle sophisticated hi-tech medical equipment. * Business innovation as a significant feature in the Corporate Governance. * Tremendous investments in all spheres of Human Resource Development. * Identification of revenue within the Company SBU wise, mainly Wards, Diagnostics, Critical care and other services. * Continuous investments in the upgrading of all Medical and hospital infrastructure. * A professional senior management team in charge of the strategic development of the Company. * Innovative establishment of Satellite laboratories. Durdans brand was recognized among the top 100 brands for the year 2007 out of the Companies listed in the CSE. Source: Company Annual Reports * Weaknesses * Non-availability of gross and net profit information identified SBU wise such as Wards, Diagnostics, Critical Care and other services, although the revenue is identified for such SBUs. * Lack of adequate land to provide parking facility and thereby the group having to spend funds to acquire prime land at a market cost. Further three lower levels of the new extension of the hospital building to be used as a car park at an opportunity cost. Rapid growth in interest bearing long term loans and borrowings. * Growing finance costs, due to long term borrowings at high but market interest rates which substantially erodes the profits. Source: Company Annual Reports * Opportunities * Growing demand for private health care in Sri Lanka. * Sri Lanka a developing country with growing life expectancy in both males & females. * Sri Lanka with a Human Development Index (HDI) of 0. 658 in year 2010, highest among the SAARC countries and countries in the South East Asia, only being next to Malaysia (0. 744), Korea (0. 877) and Singapore (0. 48). (Vide-reference No. 2) * Sri Lanka ranks 91 out of 177 countries in the HDI only next to Malaysia, Korea and Singapore which rank as 57, 12 and 27 respectively. * Sri Lanka has the fastest ageing population among the Asian countries, and such aged population having left with no alternative than to cater to their own needs independently as their children have moved overseas for employment and migration purposes. (Source: vide-reference No. 1) * The government policy to encourage private sector health care by providing various fiscal and other incentives. (Vide Reference No. 4) Frequent Trade Union actions and consequent interruption in the health care service of state owned hospitals which makes patients who could afford to seek private health care instead of public health care. * Threats * Entry of new hospitals in the Provincial Capitals of Sri Lanka. * Entry of new hospitals in the outskirts of the Capital of Sri Lanka. * Entry of specialist hospitals in Sri Lanka with foreign collaboration. (These hospitals do specialize in certain areas of medication like Eye Hospital, ENT Hospital) whereas Ceylon Hospitals Plc is considered a General Hospital, with various specialists under one roof. Vide Reference No. 3) * Migration of locally qualified Doctors to western countries and thereby Durdans hospital has to get down medical professionals from other countries at a tremendous cost. For example the Cardiac surgeon who performs around four to five open heart surgeries a day, on an average, is an Indian National, who works on expatriate terms in Durdans hospital. * Agitation among the Sri Lankan population to the government to improve, and stabilize the free health care in state owned hospitals, which means private health care business will decline. Non-availability of branch hospitals of Ceylon Hospitals Plc anywhere in Sri Lanka, which prevents outstation customers unable to reach Durdans hospital. * Sri Lanka is well on its way to be recognized as a “medical hub” and a competitor hospital is ready to start to promote medical tourism, but Durdans hospital has to focus its attention to this aspect. (vide Reference- No. 3 ) * Takeover threats of private hospitals in Sri Lanka by foreign based health care giants as their investment portfolio. (vide Reference- note 3) * Entry of foreign health care giants into niche markets in various parts of Sri Lanka, by stablishing hospitals. (vide Reference- No. 3) * Possible threats of International medical laboratory giants entering local markets with substantial technical knowhow. * Generally all Medical professionals and specialists visit more than one private hospital to provide their services, due to acute shortage of such Doctors. This brings in a question of loyalty of such Doctors, to the hospital they work for.


* Threat of Potential Entrants Establishment of hospitals in the rural areas of Sri Lanka with the assistance of the Indian Government. (Vide Reference No. ) Singapore- based health care provider Fortis Global Health Care Holdings (Pvt) Ltd(FGHCH) eyeing to set up hospitals in Sri Lanka. (Vide reference note 3) Singapore-based health care provider FGHCH(Pvt) Ltd acquiring 28. 6% of Lanka Hospitals Corporation Ltd which has a brand name of Apollo hospital, with its parent Company in India, which is a major competitor of Durdans hospital. (Vide Reference note 3) Very many entry barriers are eminent among which the availability of experienced medical professionals in “hospital administration” and entrepreneurial inclinations are difficult to be found.

In other words medical professionals do not very much enter on “business of health care”. Further people with business mind and entrepreneurial inclinations are constrained to enter the business of “health care” due to lack of knowledge in medicine and related high-tech investments and their inability to find a business partner from the medical profession. Requirement of fabulous investments in high tech equipment, and state-of-the-art hospital infrastructure discourages the new entrants.

New entrants will enjoy BOI (Board Of Investment) status whereas Durdans hospital is not of such status and therefore new entrants will enjoy a comparative advantage than Durdans in the market. This is because BOI status means a lot of fiscal concessions like tax holidays and duty exemptions in its imports and re-patraition of profits and employment for expatriates of the country of investments. * Existence of Substitutes Although there are only 6 state-of-the-art private care institutions in Sri Lanka there is an island wide, well networked state run hospitals.

Such hospitals have ambulances to transport patients if necessary to other state hospitals where a particular patients’ medical care or treatment is required. All these medical facilities are absolutely free of charge. Further there are enough and more medical practitioners all over the country who do private practice. But they are Doctors with a basic degree in medicine and surgery (MBBS) and not Specialists or Consultants or Surgeons. Vast majority of medical attention required by the population are of minor ailments, which could be handled by a general medical practitioner.

It is for complicated ailments, like patients with major accident injuries, chronic ailments and critical illness, mental disorders and surgical cases specialist medical attention is required. So therefore non-hospitalization treatment and outdoor treatment are available in general in Sri Lanka, free of charge in state run hospitals and at private medical Practitioners, at an affordable fee. Now people in Sri Lanka are health conscious. They believe in prevention is better than cure. Further Sri Lanka has various native(indigenous) treatments like Ayurveda, Siddaayurvedic and Unani. Bargaining Power of Buyers The choice of private hospital of a patient is in most instances not in the hands of the patient but in the hands of the Specialist Doctor who treats the patient. This situation exists in a further rigid manner if the patient has to be hospitalized or has to undergo surgery. Normally the Specialist Doctor advices the patient to enter a particular hospital for treatment; if the patient has to obtain in-door treatment from hospital. This is because each specialist Doctor visits not all but a few private hospitals. So the patients bargaining power is limited.

Similarly the medical practitioner prescribes drugs by their brand names and not by generic names. Sometimes such brands of drugs are not available in many pharmacies but available in the pharmacy run by such private hospital, where the Doctor treats the patients. Here again the bargaining power of the patient in limited. Then again when it comes to obtaining x-rays, laboratory reports on blood, urine etc, too the Specialist Doctor advices the patient to obtain them from certain institutions due to quality standards and reliability of such reports.

But here the patient has a little choice. But in most instances the Doctor would prefer reports obtained from the same hospital where the patient undergoes treatment. Then a patient who is already sick would not like to “shop around” for medicines and medical reports. So the choice of bargaining power is limited. * Bargaining Power of Suppliers The Company has established a Purchasing Committee to ensure purchasing efficiency, economies and controls. Whilst delivering buying efficiency, the committee is expected to display transparency and best practices in the purchasing function.

Therefore it is felt that competitive bidding is a strict ingredient in the purchasing function. Source Company Annual Reports I believe that supply of hospital consumables like linen, pharmaceuticals, food items are very competitive because there are enough suppliers in the market. Therefore competitive bidding will be the order of the day. Therefore such supplies will be of a buyers’ market and the buyer is in a demanding and bargaining position than the seller. But supply of high-tech, state-of-the-art medical infrastructure will be in the hands of few suppliers.

Such suppliers also work in an oligopolistic market situation. Therefore in such cases it will be sellers’ market situations. In such situation the seller has a bargaining power than the buyer. If the services of the Doctors are to be considered as “supplies” the demand for such services is more than the supply and therefore the hospital seeks such services from a “sellers market”. * Rivalry among existing firms. Rivalry is there among existing six large state-of-the-art private hospitals, which includes Durdans, in obtaining the services of Specialist Doctors to visit the hospital.

Because patients can be attracted if the required medical Specialists Doctors are available. On the other hand most of such Specialist Doctors are limited in number and as mentioned elsewhere in the research paper, are serving the state sector hospitals and do visit private hospitals. So naturally each Specialist Doctor cannot visit each private hospital due to their time and capacity constraints. Diagnostics is the highest revenue spinner for the Durdans hospital. In order to intensify the competition the Company has set up 9 satellite labs and nearly 240 sample collecting centers for laboratory tests.

Source: Company Annual Reports But the same levels of island wide net work of sample collection centers are available among competitors too. Therefore the competition is high. However, it is the general public opinion that Durdans diagnostic reports are of quality and reliability.


* Political Factors * There is political pressure from various pressure groups in Sri Lanka to upgrade and develop state run hospitals by overcoming existing short comings in such hospitals, so that patients need not seek private health care. Government encourages foreign participation in establishing hospitals in Sri Lanka, to be managed as state run hospitals. (Vide Reference No. 4) * Government encourages foreign private sector participation and investments in the private health care sector of Sri Lanka. (Vide Reference- note 3) * Government policy seems to provide free health care through state run hospitals free of charge to those who cannot afford to seek private health care. This is because government is determined not to allow its people to suffer without medication, as it believes the nation’s health care is an overall responsibility of the government. Economic Factors * Sri Lanka is a developing economy, after the recently ended terrorist problem Per capita G. D. P is growing tremendously. It means opportunities for private health care is growing. * Government is extending various tax concessions to new comers in this sector by providing them BOI status. Whereas Durdans hospital is not so. Most of the existing competitors have obtained BOI status and DMSL has also obtained the BOI status. * Declining level of unemployment, which is a positive sign for all businesses. (Vide Reference No. 2) * Advanced private health care market is at the moment, in the form of an oligopoly. Growing public expenditure for recurrent and social infrastructure development in Sri Lanka is a constraint to the government to spend for public health care free of charge. * Social Factors * Government encourages the population growth by providing incentives for child birth, as the country has lost a large proportion of its young population due to the civil war concluded two years ago. (Central Bank Report) * Sri Lanka is having a large ageing population who need and would afford Private Health Care as their dependents who work overseas remit adequate funds for medical expenses to their elders in Sri Lanka. A large proportion of Sri Lankan population lives in rural areas and is depended upon agricultural livelihood. But recently there is a shift in this demographic phenomenon. People are moving to live in urbanized areas to seek economic and social development and health care. * Technological Factors * Innovation in the business of health care. I would proudly say I have found enough evidence in all Annual Reports that the Company has not left any gaps or shortfall in these areas. * Year by year the Company is incurring capital expenditure to update its medical equipment and the infrastructure of the hospital.

New technological developments are being infused every year. * Environmental Factors * The sustainability report of every Annual Report gives evidence that the Company is satisfying the requirements of the regulatories with regard to environmental concerns. * There is no evidence of violation of any issues of environmental concerns. * Legal Factors * The hospital is governed by the Companies Act, CSE laws, Laws of the Central Environmental Authority, Medical Council of Sri Lanka, Labour laws, Tax Laws, Laws of Fair Trading and laws relating to health and safety at work place.

There is no evidence that the Company is facing any issues of violation of any of these laws. 4. Financial Performance The ratio analysis for the three years 2007/08, 2008/09, 2009/10 is in appendix 3 . Revenue Source Company published information The revenue of the Company has shown steady growth year on year. The years 2007/08 and 2008/09 have recorded progressive steady growth compared to their previous years. But the growth rate in revenue for 2009/10 compared to its previous year was less than its comparative figures of the previous two years.

However it was not possible to ascertain as to which line of business within the Company showed a decline in revenue as the Annual Reports for the year 2009/10 did not disclose the SBU wise revenue details, although such information was available in the previous two years Annual Reports. Gross Profit Source Company published information G. P. percentage has shown a progressive marginal increase year by year. This is a situation to be of satisfaction. However, a gross margin of around 60% is possible because the low level of consumable components used in the production of income; I also believe that such large G.

P. ratio is because human resource cost is a major cost component of the services of the hospital, which is not included with cost of sales. Other Operating Income Source: Company published information Other operating income for 2007/08 appears abnormal compared to its immediate previous year and its subsequent years. However such increase was due to capital gains relating to transaction detailed below. Disposal of land to its subsidiary Company Durdans Medical and Surgical Hospital (PVT) Ltd| Rs. 60,500,000(approx)| Disposal of other fixed assets| Rs. 1,367,170| Disposal of shares| Rs. 6,402,355| Total| Rs. 67,769,525| But disposal of land, fixed assets or shares did not appear in the other income in the Financial Statements for the years 2008/09 and 2009/10. Therefore the comparative figures excluding the above mentioned transactions of disposal of fixed assets or shares would appear as follows:- 2007/08| 2008/09| 2009/10| 58,863,716| 57,420,527| 63,763,150 | The major component of other income was dividend income. In 2007/08 and it was Rs. 46,991,760 but in the year 2008/09 it declined to Rs. 39,159,800.

However, the Annual Report for the three years did not provide details of sources of dividends received and therefore it was not possible to ascertain the cause for the decline in dividend income. Distribution Cost as a percentage of Revenue Source Company published information Distribution cost as a percentage of revenue was 1. 88% in year 2007/08 and 1. 49% in the year 2008/09. However, in the Financial Statements for the year 2009/10 distribution cost have not been disclosed. It is also noted that administration cost is stated as Rs. 714,002,571 in the Financial Statements for the year 2008/09.

This amount appears as Rs. 666,341,592 as comparative figure for the year 2008/09 in the Financial Statement of 2009/10. There is evidence to believe that in re-stating comparative figures for the year 2008/09 in the Financial Statement of 2009/10 distribution cost has not been amalgamated with administration cost. But there is some evidence to say distribution cost could have been amalgamated with other operating costs. Further administration costs have not been supported by a note to ascertain how this re-statement of a previous year figure got so distorted. Finance cost

Source Company published information The table below shows how finance costs have significantly increased. 2007/08| Rs. 43,144,936| 2008/09| Rs. 85,239,144| 2009/10| Rs. 117,209,161| The increase in quantum is more significant than the comparative increase percentage when compared on revenue. This is because year by year the revenue also has increased. Therefore it is more appropriate to look at the actual finance cost amounts. In year 2008/09, the 97. 56% increase in the financial cost compared to the previous year was mainly due to increase in the loan interest from Rs. 4. 7mn to Rs. 66mn. This is mainly due to substantial increase in the interest bearing loan portfolio from Rs. 389. 8mn as on 31. 03. 2008 to Rs. 621. 3mn as on 31. 03. 2009. The increase in interest bearing loan portfolio in the year 2008/09 compared to previous year amounts to Rs. 232mn and investment in the capital expenditure during the year stands at Rs. 134mn and investment in subsidiary stands at Rs. 260mn and acquisition of other investments stands at Rs. 46. 6Mn. However it is also noteworthy that income from investments amounted to Rs. 57. Mn which has been classified as other income and discussed elsewhere in this report. The finance cost for the year 2009/10 rose to Rs. 117. 2mn from its previous years comparative expense of Rs. 85. 2mn. Here again the increase is mainly due to loan interest expense alone which rose from Rs. 66mn in year 2008/09 to Rs. 93. 7mn in 2009/10. A detailed study of the interest bearing loan and borrowings portfolio shows that bank borrowings have increased from Rs. 621. 3mn as on 31. 03. 2009 to Rs. 1051. 6mn as on 31. 03. 2010. Profit from Ordinary Activities before Taxation

Source Company published information Rs. 206,654,022 for the year 2007/08 includes a capital gain of Rs. 67. 7mn. Therefore in order to bring about a comparison with the next 2 years in which no such capital gains were recorded, this amount could be adjusted as (Rs. 206. 6-67. 7)=Rs. 138. 9mn. So now the figures will read as follows:- 2007/08| Rs. 138. 9mn| -26. 7%| 2008/09| Rs. 170. 3mn| +22. 6%| 2009/10| Rs. 156. 7mn| -8%| The increase in profits from ordinary activities in the year 2008/09 compared to 2007/08 is due to the following, intre-alia:- (1) A 20. % increase in the turnover compared to the previous year; (2) Perhaps a resultant increase in the gross profit % due to (1) above; Comparing the figures from the year 2009/10 with that of 2008/09 it shows a decline of 7. 98%. This decrease is despite an 11. 14% increase in the turnover, 0. 48% increase in the Gross profit percentage and a Rs. 7. 3mn increase in other income. So the decline in the level of profit from ordinary activities before taxation was mainly due to:- (a) Rs. 91. 4mn increase in the administration costs; (b) Rs. 18. 8mn increase in the other operating costs; (c) Rs. 2mn increase in the finance cost; The total of these amounts to Rs. 142. 2mn which amounts to 7. 82% of the revenue of the Company. So the additional cost of Rs. 142. 2mn has eroded the total profit from ordinary activities before taxation despite the encouraging increases in turnover, gross profit and other operating income. Taxation It is of my academic interest to ascertain the reason for such significant deviation in the above percentages. (vide Refer note 2). In the year 2007/08 the statutory income tax rate has been 33 1/3% whereas in the years 2008/09 and 2009/10 this rate has been increased to 35%. 2007/08| 2008/09| 2009/10| Accounting Profit before Tax| 206,654,022| 170,525,931| 156,746,662| Aggregated Disallowable items| 93,873,036| 95,642,420| 69,274,222| Aggregated Allowable items| (257,875,147)| (200,613,967)| (139,455,936)| Taxable profit| 42,651,911| 65,554,384| 86,564,948| This was so mainly because the allowable expense for tax purposes including exempt profit in year 2007/08 was Rs. 257,875,147 whereas in the year 2008/09 this amounted to only Rs. 200,613,967. Source Company published information Earnings per share and Dividend per share

Source: Company published information | EPS (Rs. )| DPS (Rs. )| RETAINED EARNINGS PER SHARE (Rs. )| 2007/08| 7. 16| 1. 5| | 2008/09| 5. 5| 1. 5| | 2009/10| 3. 87| 1. 5| | The Company has adopted a consistent policy of paying a fraction of the earnings as dividends. This same policy of consistency could be observed in the dividend of the Company in the years 2008/09 and 2009/10. Statement of Financial Position for the years 2007/08, 2008/09 and 2009/10 Non-Current Assets * Property plant and equipment It is observed that the Company had been investing in assets every year substantially.

Investments in assets| 2007/08| 2008/09| 2009/10| | Rs. 161mn| Rs. 134. 4mn| Rs. 177. 6mn| * Investment in Subsidiaries Year by year investment in subsidiaries keep increasing. This I believe is the policy of the Company in creating SBU. So that such individual SBUs will perform independently under the direction of specialist managers and they will operate to earn their profits for survival and expansion without anticipating any cross-subsidization for the parent Company or other subsidiary Company. Source Company published information Current Assets Inventories As the Company under review is not in the business of trading or manufacturing but a hospital (which provides goods and services) it is difficult to comment about stock levels. Stock position is an important logistical measure in a hospital which may consist of life saving drugs and other consumables. However fluctuations in stock levels are observed. A substantial increase in the stock level of Lab Reagents and consumables is observed in the year 2009/10 compared to its previous two years. Drugs and pharmaceuticals do have expiry dates.

Therefore it is important to discard pharmaceuticals with lapsed expiry dates. But I could not see any reference to this anywhere in the Annual Report or the Financial Statements. * Other Investments This consists mainly of investments in savings accounts, fixed deposits, call deposits, quoted shares and debentures and unquoted shares and debentures. Substantial investments amounting to Rs. 38. 2mn as on 31. 03. 2009 and Rs. 42. 3mn as on 31. 03. 2010 makes me think that the Company takes a conservative approach in building up its reserves.

On each balance sheet date under review the bank overdraft exceeds the total of “other investments”. On top of this “bank overdraft” there were also interest bearing short term loans in substantial amounts. * Trade and other Receivables This consists of trade debtors, advances pre payments and other receivables. (Vide Refer Excel sheet 2). Source vide Appendix No. Therefore the above credit period seems to be very satisfactory and it is good to note the credit period to customers is shortening despite and increasing turnover that means business to the hospital.

However an age analysis of debtors was not available to see whether aged debtors which might become bad debts will arise. Amounts Due to Related Party An analysis of the above which is in (Appendix 8. 1) disclosure the following points. The two important and major “related parties” are DHSL and DMSH. There is some improvement as on 31. 03. 2010 in the overall net due from DHSL. But there is no improvement in the overall net due from DMSH. It is observed that due from related parties are unsecured, interest free and settlement occurs in cash.

I feel because the related parties are within the “group framework” of the parent Company viz. Ceylon Hospitals Plc these dues will get settled in due course, as a measure of good Corporate Governance. Revaluation Reserve Proper disclosures have been made in the note relating to revaluation reserve in compliance with SLAS. The Company’s policy is to revalue its assets between 3 to 5 years continuously. Source Company published information Revenue Reserve The Company has built up substantial revenue reserves amounting to Rs. 677. 7mn as on 31. 03. 2010. These reserves are from the retained earnings of the Company.

At the prevailing rate of paying dividends amounts to Rs. 38. 8mn, the reserves are sufficient to pay dividends to shareholders during difficult times too, subject to liquidity position of the Company. Provisions and other liabilities The only item under this caption is the provision for gratuity payments to employees. There is no disclosure in the Financial Statements as to whether the Company has complied with the statutory requirements of making this provision for those who have served a minimum period of 5 years based on the following formula:- No of years served ? /2 months salary (last drawn salary) However there is disclosure to the effect that the gratuity liability was actuarially valued under the projected unit credit method by an actuarial firm and that such valuation is done every three years and that the liquidity is not externally funded. Liquidity Source Company published information Although there is improvement in the ratio in the year 2008/09 again it deteriorates in the year 2009/10. However, the liquidity ratio should improve to at least 1. 5: 1 and maintained in the region of 1. 5 to 2. 0:1. Vide Excel sheet 2) A suggestion may be to seek settlement of related party dues and payables and to pay up short term interest bearing loans by improving the cash flow. Statement of Changes in Equity Statement of changes in equity shows that in the year 2007/08 a revaluation surplus of Rs. 505. 8mn has arisen. In the year 2009/10 a rights issue has brought in Rs. 118,431,789 in cash and such sum has been added on the stated capital of the Company so it is noteworthy that despite the infusion of additional capital in cash the liquidity position has declined.

Source Company published information


A summary of the cash flow statements for the three years 2007/08, 2008/09 and 2009/10 are shown in Excel sheet 1. A look at the Cash flow Statement shows that this additional inflow of capital has been used mainly for the following purposes:- * to increase stock levels; * to decrease trade and other payables; * to pay up finance cost; * for acquisition of property, plant and equipment; * investment in subsidiary; and * repayment of interest bearing loans and borrowings Net Profit before taxation has decreased year by year.

But operating profit before working capital changes has increased year by year. Cash generated from operations has increased year by year steadily and significantly. Cash flow before extra-ordinary items has increased drastically year by year. Out of this net cash out flow the most significant quantum with a significant increase were finance costs amounting to Rs. 43. 1mn in year 2007/08 and Rs. 85. 2mn in 2008/09 and Rs. 117. 2mn in year 2009/10. However net cash flow from operating activities has had considerable improvement year by year in a positive tone.

Net cash flow from investing activities have risen and sustained at high levels which means the Company believes in sustainable development of its hospital infrastructure, social infrastructure and human resources. In all three year the net cash flow from financing activities had been of a positive tone and had been at considerably high levels. This shows that the Company is trying to achieve substantial financial inflows to ensure liquidity etc… But the position of the bottom line, that is the net increase/ (decrease) in cash and cash equivalent at the end of the three years are as follows: * 2007/08Rs1. 4mn * 2008/09Rs. (17. 66mn) * 2009/10Rs. (16. 01mn) Source Company published information And thereby the cash and cash equivalent at the end of each year has deteriorated by the erosion of the net cash out flow which means an overall deficit in the cash flow position.


Asiri Surgical PLC is one of the head on competitor private health care organization of Durdans hospital. An analysis of comparative ratios is shown below to compare and contract operational efficiency and financial health. RATIO| CEYLON HOSPITALS PLC(2009/10)| ASIRI SURGICAL HOSPITAL PLC(2009/10)| Profitability Ratio| | |

Gross profit margin| 61. 98%| 48. 47%| Net profit margin| 5. 68%| 22. 31%| Administration cost as a % of revenue| 41. 71%| 22. 11%| Finance cost as a % of revenue| 6. 45%| 10. 33%| Tax as a % of revenue| 34. 19%| 0. 22%| ROCE| 8. 69%| 12. 47%| | | | Liquidity Ratios| | | Current ratio| 1. 07:1| 0. 48:1| Acid test ratio| 0. 83:1| 0. 27:1| Interest cover| 2. 33 times| 2. 51 times| Gearing ratio| 40. 74%| 30. 21%| Receivable days| 12. 51 days| 32. 24 days| Payable days| 46. 89 days| 53. 31 days| | | | Investor information| | | EPS| Rs. 3. 87| Rs. 0. 59| DPS| Rs. 1. 5| Rs. 0. 075|


The strategic business journey of Durdans hospital will remain to be a model in the history of corporate business world in Sri Lanka. Business Performance The three Annual Reports reviewed for this research provides enough and more evidence that the Company is in its business perspective focusing its attention in customer care, investing adequately in sustainable development of its human resources, regularly updating medical and surgical equipments and other infrastructure, adopting new technological know-how and findings in medical research in its day to day operational activities.

More than adequate evidence is available to confirm that the Durdans hospital is rapidly expanding its business activities and capabilities to meet the growing demand for private health care by properly developing its activities within the strategic framework of a hospital. There is substantial evidence in the Annual Reports to believe that the Company is a model corporate by virtue of compliance with of various regulatories. Further there is no evidence in the Annual Report of existing or possible litigations or any provision for such contingent liabilities.

Financial Performance The study of the financial performance shows that the Company is in a progressively stable state of financial health, despite shortcomings mentioned in the report, and the strength of visionary Corporate Governance team, I believe this Company will one day be the model Corporate Citizen of this country. I say this because of the commitment, hard work, the business, team spirit and the overall care for human resource, are all evident in the Annual Reports of the Company. 7. References 1.

Sri Lanka fastest ageing country in South Asia, news item in Ceylon Daily News of 06/04/2011 2. Socio-Economic Indices : Sri Lanka and selected countries year 2011 Hand Book published by Central Bank of Sri Lanka. 3. Fortis plans to establish hospital in Hambantota, Jaffna and Kandy paper news item Ceylon Daily News 31st March 2011. 4. Sri Lanka, India to enhance cooperation in health news item Ceylon Daily News 12th April 2011. 5. A visit to the Durdans hospital’s Emergency Unit. 7. An interview with a patient who had undergone a coronary artery bypass urgery on the 13th December 2010 at the Durdans hospital. 8. APPENDICES * Durdans Hospital/ Ceylon Hospital PLC/ Company The above three phrases refer to one and the same. The phrase “Durdans Hospital” has been used where appropriate to give emphasis to the hospital than to the Company and vise-versa. * DMSL – Durdans Management Services Ltd, a Public Company. * DHSC – Durdans Heart Surgical Center (Pvt) Ltd. * DMSH – Durdans Medical and Surgical Hospital (Pvt) Ltd. * CHPLC – Ceylon Hospitals PLC, a Quoted Public Company. DMSL(Public Company) CHPLC (Quoted public Company)

DHSL (Private Company) DMSH (Private Company) * SLAS – Sri Lanka Accounting Standards. * CSE – Colombo Stock Exchange * SBU – Strategic Business Unit * IAS – International Standards of Accounting * HDI – Human Development Index * SAARC – South Asian Association for Regional Cooperation * Singapore Co – Fortis Global Healthcare Holdings (Pvt) LTD * Indian Co – * RAP – Research and Analytical Project * SLS – Skills and Learning Statement * ACCA – Association of Chartered Certified Accountants * OPD – Out Patients Department. GDP – Gross Domestic Product * BOI – Board of Investment. * GP – Gross Profit. * LTD – Limited. * Pvt – Private. * POABT – Profit from Operating Activities Before Taxation. * EPS – Earnings Per Share * DPS – Dividend Per Share Reference note 7: An interview with a patient who had undergone a coronary artery bypass surgery on the 13th of December 2010, at the Durdans hospital. QUESTIONS 1. What made you select Durdans Hospital for the surgery? 2. What information did you gather about the hospital’s capability to perform the surgery? 3.

Was your decision to enter Durdans was because of the Surgeon who is to perform the surgery or the name of the hospital that gave the confidence? 4. Have you entered this hospital before this surgery, if not, what did you feel when you entered this hospital? 5. Do you think you received adequate pre-surgical care? 6. Were you explained about the necessity for the surgery, nature of the surgery, risk of the surgery, duration of the surgery, past surgical complications and the care required? 7. Where you aware of the total financial commitment for the surgery? Answers 1.

When I got the first chest pain I immediately rushed to my Doctor Dr. Keshawa Dev who practices at Durdans hospital where I got my Angeo gram test and the Doctor recommended Durdans hospital for the surgery. 2. I got most of the information about the hospital’s capability to perform the surgery from my friends who have already undergone the same surgery at Durdans. 3. Name of the Surgeon Dr. Keshawa Dev. 4. Yes, I have entered this hospital before once to the OPD unit. The hospital gave me a pleasant environment when I first entered. The staff was quite friendly and helpful. 5.

Yes, I got very good pre surgical services from the entire team of Doctors and Nurses. They took very good care of me. 6. Yes, the Surgeon explained me the nature of the surgery; he said that the risk of failure was 5%. He also said that the surgery will take 6 to 7 Hrs. Past surgical complications were also explained. They also stated ahead of the surgery when I could be discharged. The surgery will be on the 13th of December 2010 and I will be able to discharge on the 23rd of December 2010. A booklet also was given to me before the surgery which had all relevant information. . The financial commitment was well explained to me. They have a package which I took but my actual expenditure Rs. 580,000 exceeded the budgeted expenditure of Rs. 480,000 because I had to stay for a few more days in the hospital. Reference no. 6: A visit to the Durdans Hospital Emergency unit One morning a few months before I started the RAP, my father received a telephone call from his friend. I saw my father getting excited and hurriedly getting ready to go somewhere. I asked him as to why he was rushing to go somewhere.

He said his friend’s wife had badly fallen ill all of a sudden and is in a serious condition and said his friend wanted him to come and help him out. So I asked my father whether I too could join him and he responded positively. So I too joined him. We rushed the patient to the Emergency unit of the hospital. All the beds in the hospital Emergency unit were full and no beds were available. So we tried to admit the patient to the normal ward. There too no vacant bed was available. My father spoke to a staff officer of the hospital and within no time a bed was placed in the side of the corridor f the Emergency unit, and treatment was commenced. My observations:- * The emergency unit was spick and span like a five start hotel; * The staff was courteous and very helpful; * It was a busy place, the staff were actively involved in patient care and treatment to patients; * Substantial stocks of emergency drugs were available in the Emergency unit; * The Doctors on the Emergency unit got in touch with their superior Doctors over the phone and obtained information regarding the treatment to the patients; * The atmosphere was very quite; They had up to date medical equipments; * No cash deposit or any other payment was required before admission or while treatment was going on; All the above shows that Durdans is a hospital in the first instance and not a business concern. Patient care looked the “business philosophy”.

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Research Report- Durdans. (2019, May 02). Retrieved from

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