Citi on Fortis Healthcare High Growth Phase

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High Growth Phase
 Business Snapshot – Fortis Healthcare was incorporated in 1996, set up and
owned by the erstwhile founders of India's largest pharmaceutical company,
Ranbaxy Laboratories. It is a professionally-managed company with a broad
management team, headed by Mr. Shivinder Singh (founder shareholder and
Managing Director). The company went public in May 2007. It is one of the
largest hospital chains in India, with a network of 48 hospitals and c8,000
beds under management in the country. The company acquired ten
hospitals from Wockhardt Hospitals (WHL), giving it a pan India presence
and making it one of the largest hospital groups from India.


 Latest Quarterly Performance – Revenues grew 88% YoY (primarily due to
the integration of Wockhardt Hospitals) and by 6% QoQ. Base operations
EBITDA margins were down to 13.9% (down 120 bps YoY, down 50 bps
QoQ) due to higher other expenditure (on newly commissioned beds). Base
business net profit grew by 61% YoY due to higher other income (Rs 95 mn
vs Rs 36 mn) and lower tax rate (5.8% vs 6.7%). Additionally the company
also registered a net profit of Rs180mn on the stake sale of Parkway during
the quarter.

 Key Catalysts / Issues – a) Inorganic initiatives – acquisitions have formed
an integral part of Fortis’ growth strategy & more cannot be ruled out going
forward; b) Scale up in occupancy levels at the newly commissioned
Shalimar Bagh (Delhi) & Kolkata hospitals as well as new oncology block in
Mumbai; c) Any move to separate the operating and property aspects of the
business – for instance, through a REIT structure; d) Any fiscal incentives or
other policy thrust for the sector.

 Valuations: Closer to Fair Levels – Fortis has traditionally traded at a
premium to its peer, Apollo Hospitals. We believe some premium is
warranted, given that, unlike Apollo, Fortis is a pure hospitals play. The
premium used to be quite high for some time; however, it has narrowed
substantially over the last few months – it currently trades at c 16 x FY12E
EBIDTA. We do not see further de-rating from current levels.