Nomura research, Fortis Healthcare- Retain TP at INR124 Operations consolidated, with a focus on India and execution

Action: Balance sheet leverage reduced; focus back on India; Buy
FORH has addressed two investor concerns: a) high leverage on balance
sheet and b) higher complexity of business with an international focus.
FORH has divested most of its international operations and India sales
now account for more than 90% of its overall revenue. Through
divestments and fresh equity issuance, we expect net debt to come down
to INR10.8bn by end-FY14F from INR59.6bn in Mar ’13. Net debt-toequity is comfortable at 0.18x (Mar’14) and, in our view, presents enough
room to expand its India operations more aggressively. We incorporate
the impact of recent corporate actions such as the divesture of Quality
Health and Hoan My and equity issuance. Our DCF-based TP remains
unchanged at INR124.
Catalysts
Commissioning and ramp-up of its newly commissioned Gurgaon,
Ludhiana and Chennai facilities and subsequent improvement in margins;
improvement in ROE.
Valuations
Near-term earnings are suppressed due to the high payout to Religare
Health Trust (RHT) (RHT SP, Buy) and high burden of start-up costs. On
EV/EBITDA, the stock trades at 21x FY15F, at a 33% premium to APHS.
Given the operating leverage, we expect EBITDA and earnings to rise
rapidly (we estimate EBITDA and EPS CAGR of 42% over FY15-18F) and
on our FY17F estimates FORH trades at a marginal discount to Apollo
(APHS IN, Buy)

Fortis Healthcare - Stretched balance sheet remains a concern, maintain a Sell :: Anand Rathi

Following a management meet with Fortis Healthcare (FH) we believe
that near- to mid-term pain persists due to a stretched balance sheet
and lower margins in SRL (Super Religare Laboratories). FH has been
affected by uncertainty following its acquisition of Fortis Healthcare
International (FHI) and its resulting stretched balance sheet. The
India hospitals business should continue strong growth led by huge
demand. We maintain a Sell with a target price of `102.

Fortis Healthcare :: ICICI Securities, (pdf link)

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http://content.icicidirect.com/mailimages/ICICIdirect_FortisHealthcare_Q3FY12.pdf


O t h e r   i n c o m e   b o l s t e r s   n e t   p r o f i t …
Fortis Healthcare’s Q3FY12 performance was a mixed bag. Revenues
grew 63% YoY to | 604.6 crore in line with our expectation of | 619 crore.
The quarter sales include sales from the diagnostic business acquired
from Super Religare Laboratories and six newly launched hospitals,
which were not there in the corresponding previous period. Excluding the
diagnostic business and sales from the six newly launched hospitals,
sales grew 20% YoY. The healthcare services business grew 30% YoY to
| 482.4 crore (our expectation: | 484 crore) while the diagnostic business
posted sales of | 122 crore. EBITDA margins declined 70 bps to 13.8% on
the back of lower EBITDA margins  at its diagnostic business. Other
income increased 43% to | 52.8 crore on account of | 40 crore interest
received (one-time) for a security deposit to acquire an asset. Net profit
declined 15% to | 29.3 crore, higher than our expectation of | 16.3 crore.
ƒ Acquires RadLink for S$62.9 million
Recently, Fortis acquired an 85% stake in RadLink-Asia, a Singapore
based outpatient diagnostic and molecular imaging chain for S$62.9
million. It has a strong network across 2000 specialists and
physicians. The annual sales of  RadLink are around S$27 million
with EBITDA margins of 20%.
ƒ International business posts sales of | 618 crore
The company is looking to consolidate the international business
from Q4FY12. It has shared its international business performance
during the quarter. The international business clocked sales of | 618
crore during the quarter. Of this, Dental Corp registered sales of
| 407 crore, Quality Healthcare posted | 207 crore and SRL Dubai
posted | 4 crore. At EBITDA level, it posted EBITDA of | 79 crore.
V a l u a t i o n
As the company is in the process of consolidation after the acquisition of
the global arm, we are withholding our valuation methodology for want of
a clearer picture. The company is  expected to report consolidated
numbers in Q4FY12. Hence, we are keeping the company  UNDER
REVIEW for at least a couple of quarters.

FORTIS HEALTHCARE:: 3QFY12 preview :: Nomura research

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We expect Fortis to report revenue and EBITDA growth of 3% and 4.6% q-q,
respectively. We pencil in a revenue growth of 6% q-q for Super Religare laboratories
(SRL). We expect a marginal improvement of 20bps in EBITDA margins q-q as newer
capacities launched last quarter begin to ramp up.
We believe that the key catalyst for the stock is improved visibility on the international
acquisition and the profitability of the business going forward. Fortis had mentioned that
it will be raising debt to finance the acquisition, which would raise the debt equity ratio to
1.5x from the current levels of less than 1x. In the current environment assuming such
high debt could be challenging, in our view. Management has also guided that the
debt/equity ratio would be restored at 1x by March 2012 by various measures, including
the dilution of its stake in SRL. We would watch out for any further comments on this
front.

Hold Fortis Healthcare; Target : Rs 130:: ICICI Securities

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H i g h e r   i n t e r e s t   c o s t   w ei g h s   o n   p r o f i t a b i l i t y …
Fortis Healthcare’s Q1FY12 revenues  grew 70% YoY to | 610 crore (Idirect estimate: | 571.1 crore) mainly on account of additional revenue
inflow of | 127 crore from Super Religare Labs. The organic growth stood
at 35% over the corresponding period last fiscal. The inorganic growth
remained higher than our estimates. Operating margins saw a sequential
improvement of over 200 bps on account of an improvement in utilisation
levels of newly commissioned hospitals. However, its profitability got
impacted mainly due to a sharp rise in  interest  cost  that  almost  doubled
from | 30.1 crore to | 59.9 crore sequentially due to forex movement on
FCCBs and incremental borrowings to  fund its expansion plans. Due to
this, the company reported a net loss of | 12.8 crore for the quarter.
ƒ Increase in capacity drives revenue growth
With the addition of six new hospitals and acquisition of Super
Religare Labs, the company has been able to post revenue growth
of 71% YoY during the quarter while organic growth stood at 35%
YoY. Hospitals with a maturity period of three years and more (i.e.
78% of operating revenue) continued to perform better recording
average occupancy levels of  over 76% (up 100 bps YoY) and
average revenue per bed of | 0.9 crore per annum.
ƒ Higher interest cost takes a toll on bottomline
Despite an improvement in the operating performance, the
company have been unable to improve its profitability on account of
a sharp rise in finance cost. The increase in finance cost was mainly
due to mark to market losses on foreign loans, reset of interest rates
for long-term loans and incremental borrowings for acquisitions.
V a l u a t i o n s
At the CMP of | 118, the stock is trading at 18.8x and 14.8x its FY12E and
FY13E EV/EBITDA, respectively. The valuations looks stretched compared
to its peer set. Also, we believe, the merger of its international entity
would continue to put pressure on its profitability, going forward, on
account of higher debt and lower profitability of the international firm.
Hence, we remain neutral on the stock with a revised price target of | 130
(i.e.15x FY13E EV/EBITDA). We have a HOLD rating on the stock.

Hold Fortis Healthcare; Target : Rs 140 ::ICICI Securities

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M e r g e r   o f   i n t e r n a t i o n a l   f i r m :   E P S   d r a g g e r ? ? ?
Fortis Healthcare has announced the valuation for the acquisition of Fortis
International at US$665 million (i.e. at ~| 3150 crore). Though, as per the
management, this move seems to look fruitful, considering its long-term
operational synergistic benefit, there is still lack of clarity over profitability
of the international firm and potential of synergistic opportunities for the
domestic entity. In our view, the benefits from these synergies will not
come in to the picture soon. On the other hand, since its an all-cash deal
involving cash outflow of around | 3,150 crore, majority of which would
be funded through debt, it would put pressure on the domestic entity’s
profitability leading to EPS dilution over the next couple of years.
ƒ Profitability of international firm remains key monitorables
Profitability of the international firm that is being acquired by the
domestic firm and a key rationale (in terms of synergistic
opportunities) behind transferring the international entity from fully
promoter owned company into domestic entity still remains key
monitorables, going forward. In our view, the benefits from these
synergies will not come into the  picture soon. On the other hand,
since it’s an all-cash deal involving cash outflow of around | 3,150
crore, majority of which would be funded through debt, it would put
pressure on the domestic entity’s profitability and may lead to EPS
dilution over the next couple of years.
ƒ Downgrade to HOLD
This deal has been done at 17.5x FY11 and 12.5x FY12E EV/EBITDA
(assuming EBITDA growth of 40% for FY12E). If EBITDA growth of
40% is achievable then this valuations looks fair. However, lower
profitability of international firms and higher interest burden may act
as an EPS dragger for the combined entity. Considering this, we
lower our FY13E multiple target and revise our one-year price target
downward to | 140 from | 185 with a HOLD rating (i.e. at 13.5x FY13
EV/EBITDA). We will revisit our assumptions once we get full clarity
on the international firm’s profitability and debt-equity mix for
funding this deal.

Exit Fortis Healthcare :: ICICI Securities,

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L a c k   o f   c l a r i t y   o n   d e al:   A   c o n cer n   f o r m i n ori  ty…
Fortis Healthcare’s board has recently approved the acquisition of
Singapore based firm Fortis Healthcare International (FHI), wholly owned
by promoters, in an all-cash deal to consolidate the group’s healthcare
business under one entity. We believe, though this move will make Fortis
the country’s largest healthcare chain by revenues (over $1 billion) with
over 12,000 beds, it would put pressure on the company’s profitability
and its balance sheet in the near term on account of the large deal size.
We also need to assess at what valuations, FHI is going to be acquired by
the company. Hence, due to lack of clarity over this deal with respect to
valuations and profitability, we recommend our investors exit from this
counter till better clarity emerges.
ƒ Deal may put strain on profitability and balance sheet
The company’s current interest coverage ratio stands at ~1.6x. The
company has recently acquired Super Religare Labs for | 803 crore
and also has ongoing greenfield projects worth | 1,024 crore that
are lined up for over the next  24 months. With this new deal
announcement, the company would be further required to pay ~|
2,000 crore to the promoters in cash (i.e. assuming at cost after
taking into account all seven acquisitions done by FHI in the past 10
months). This, we believe, would not only put a strain on the
company’s balance sheet but also  on its profitability/earnings on
account of high leverage or equity dilution over the medium term.
ƒ Recommend exiting the stock till better clarity emerges
There is a lack of clarity over the international company’s
profitability on account of insufficient data as the international
business is owned by promoters in their personal capacity. Also, the
valuations at which Fortis is going to acquire this international
business will be known only after its complete assessment by an
independent valuation agency. Hence, with this surprise move and
lack  of  clarity  on  the  high  value  deal  size,  we  recommend  that  our
investors stay away from the counter. We will revisit our rating once
better clarity emerge


Upcoming greenfield hospitals by Fortis Healthcare India
Fortis has been expanding aggressively through greenfield projects,
acquisitions and management contracts. It has completed a 350-bedded
greenfield hospital project at Shalimar Bagh and commenced operations
from September 2010. Its 414 bedded project at Kolkata also commenced
OPD and IPD services from September 2010. In addition, its Mulund
facility launched a state-of-the-art oncology block. The details of the other
ongoing hospital projects are mentioned herein below.
Exhibit 2: Upcoming projects
Sr no Location Beds
Capex        (| cr)
Expected date of
commencement
1 Kangra 100 24.0                    Q2FY12
2 Dehradun 50 15.0                    Q3FY12
3 Gurgaon 450 325.0                  Q4FY12
4 Bangalore 100 35.0                    Q1FY13
5 Ludhiana-1 200 50.0                    Q2FY13
6 Ludhiana-2 75 20.0                    Q3FY13
7 Chennai 200 92.0                    Q2FY13
8 Bangalore 120 18.0                    FY13
9 Gwalior 200 72.0                    FY14
10 Ahmedabad 200 50.0                    FY14
11 Pune 350 63.0                    FY13
12 Indore 250 50.0                    FY14
13 Hyderabad 450 210.0                  FY15
Source: Company, ICICIdirect.com Research

Fortis Healthcare : A Surprising Change in Strategy : target price of Rs190 :Citi

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Fortis Healthcare (FOHE.BO)
Alert: A Surprising Change in Strategy
We are surprised at Fortis Healthcare's decision to buy out its founders' privately
held firm, Fortis Healthcare International, which focuses on international operations.
We were never too enamored of overseas expansion by Indian hospitals and were
happy with the management's repeated statements that the listed entity would focus
on India alone. This change in stance thus comes as a negative surprise to us.
What is Fortis Healthcare International? Fortis Healthcare International (FHI) is a
Singapore-based healthcare delivery company with operations outside India - in
Hong Kong, Dubai, Australia, New Zealand, Canada, Singapore, Sri Lanka, Vietnam
and Mauritius. The founders of Fortis Healthcare (Singh brothers) own FHI.
A big consolidated entity - Post acquisition, Fortis Healthcare will have 12,000+
beds across c74 hospitals, 580 primary care centers, 188 day care centers, 190
diagnostic centers and a base of over 23,000 employees and over 4,000 doctors.
We do not have financial details for FHI, other than that its revenues are in the
cUS$500m range.
Await further details - on financials and valuations (to be done by an independent
firm) before revisiting our estimates / target price. However, financials apart, the
diversification and resultant stress on the Fortis Healthcare balance sheet could put
pressure on valuations, in our view.
Fortis Healthcare (FOHE.BO; Rs144.30; 1L)


Fortis Healthcare
(FOHE.BO; Rs144.30; 1L)
Valuation
Our target price for Fortis is Rs190. We prefer to use EV/EBIDTA versus EBIDTA
CAGR as the primary method to value the company. We believe that hospital
companies in India would have a predictable and steady revenue stream, given high
unmet demand and low but growing penetration of organized healthcare. However,
given that these companies are still in an investment phase, we believe EBIDTA
provides a much better reflection of the operating profitability of the business at this
point. Fortis has only one directly comparable company listed on the Indian market -
Apollo Hospitals. We value Fortis at a slight premium to Apollo, at 16x EBITDA (vs 15x
for Apollo) as we believe Fortis' greater scale & geographical diversification post the
WHL hospitals acquisition merit a higher multiple. Our current EV/EBIDTA multiple of
16x is also in the range that Fortis has traded over the last several years. At 16x
Sep'12E EBITDA we arrive at a target price of Rs190.
Risks
Our risk rating for Fortis is Low Risk as suggested by our quants-based rating system,
which tracks 260-day historical share price volatility. Key downside risks to our target
price include: 1) Execution is a key risk - delays in setting up hospital projects; 2)
Rising cost of capital - given the capital intensive nature of the business; 3) Higher cost
of real estate and/or inability to get property at the desired locations could impact
operations

Fortis Healthcare : A Strategic U-Turn? Domestic Business going International::JPMorgan,

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FORH is acquiring Fortis International from the promoters in an all cash
deal. Valuations have not yet been disclosed, though we are surprised at
the sudden and unexpected changed in FORH's stated strategy that it
would only focus on the Indian market and the private entity would be the
vehicle for international expansion. We would review earnings estimates
pending more disclosures, but prima facie, we believe that premium
valuations for hitherto ’India-focus’ business stand to be de-rated.
 An unexpected change in strategy. FORH has announced that it is
acquiring Fortis Healthcare International, a private entity held by the FORH
promoters. This comes as a surprise to us, as in the past FORH management
have maintained that the listed entity in India would focus only on domestic
market, while the privately owned entity would be the vehicle for
international growth.
 What does the acquisition bring to the table? The international
operations have presence in nine countries - HK, Australia, NZ, Singapore,
Sri Lanka, Dubai, Vietnam and Canada and include dental clinics, day care
centers and hospitals. The combined entity will have over 74 hospitals, 188
day care facilities, 190 diagnostic facilities and 12,000 hospital beds.
 Deal value not disclosed. FORH has not disclosed the deal value, except
that it would be an all cash deal and valuation would be carried out by an
independent agency. Financials for the international business have not been
disclosed either, except that the combined entity will have revenues of
USD1B, which on the back of envelope calculation suggests that
international operations have revenues of about USD475M
 Earnings, valuations under review. Our earnings estimates are under
review pending more disclosures on the international business financials.
Given that post acquisition, FORH business will be characterized by multicountry
operations we believe that 'premium' valuations for the hitherto
'India focus business' stand to be de-rated.


Acquisition of Fortis Hospitals International from Promoters
Signaling a major shift in its publically stated stand of focusing only on the Indian
market, FORH has announced that that it is acquiring Fortis Healthcare International,
a private entity held by the FORH promoters. We are surprised at this sudden change
in strategy - management comments on the revenues (USD1B revenues) of the
combined business seems to suggest that achieving 'scale' is the key rational for this
transactions, especially given that FORH had recently acquired 71.4% stake in Super
Religare Laboratories from the promoters for about USD170MM. The deal value has
not been disclosed, only that it will be an all cash deal valued by an independent
entity.
The international operations have presence in nine countries - HK, Australia, NZ,
Singapore, Sri Lanka, Dubai, Vietnam and Canada and include dental clinics, day
care centers. The international operations have largely been built over past 1 year
through multiple acquisitions. We enumerate below the key acquisitions made by
Fortis International over past 1 year. Based on the publicly available information, we
gather that FORH promoters have invested over USD550M over past 1 year on
acquisitions alone.

Premium Valuations May Not Sustain
FORH is trading at a significant valuation premium to its Asian Peers. However, we
believe that premium valuations may not sustain following the deal, given that post
acquisition, FORH business will be characterized by multi-country operations and
we believe that 'premium' valuations for the hitherto 'India focus business' stand to
be de-rated. Our earnings estimates for FORH are under review pending disclosures
on international business financials and deal valuations.

Fortis Healthcare (FOHE.BO, Neutral, PT Rs 170, 12% upside) UBS: India Mid-Caps TOP PICKS - September 2011

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Fortis is the second largest hospital operator which operates
39 hospitals with 2,317 operating beds and 911 beds under
management as of September 2010.
• FOHE has demonstrated an ability to exploit market
opportunities; it acquired Escorts (a 90% stake in 2005),
Malar (a 50% stake in 2007) and Wockhardt (acquired in
December 2009)
• Over FY06-10, its revenue and operating profit recorded a
34% and a 57% CAGR, respectively.
• We expect FOHE to maintain double-digit revenue growth
over FY11-15. With higher revenue and an improving
EBITDA margin (we estimate 14% in FY11 to 18% in FY15)
and a rising net income margin (we estimate 5% in FY11 to
10% in FY15), we forecast a net income CAGR of 38% over
FY10-15.
• Shareholding: promoters – 82%
• Valuation: DCF based methodology using UBS’s VCAM tool
(assume WACC of 12.18% and terminal sales growth rate
of 5.8%).Implied FY13E PE of 34.4x

CLICK HERE TO RETURN TO LIST OF UBS TOP PICK

Fortis Healthcare -Pricey and worth it :Macquarie Research,

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Fortis Healthcare
Pricey and worth it
Event
􀂃 We initiate coverage on Fortis Healthcare (FORH IN) with an Outperform
rating and a TP of Rs180. Fortis’s proven proficiency in quickly turning around
acquisitions and ramping up green-field expansions makes it a compelling
investment, in our view. Growth in the past decade has been driven by the
addition of beds through acquisitions; going forward, we believe growth will be
driven by asset-light Greenfield projects, and this should improve return ratios.
Impact
􀂃 Leveraging healthcare growth: Fortis, with 4,646 owned and 1,796
managed beds (of which ~3950 are operational) is well-placed to capitalise on
the structural shifts that we believe will benefit private players in healthcare.
Presence in high-margin speciality care and maturing beds should help drive
profitable growth. Despite significant bed additions, operational parameters
improved significantly with occupancy now at 72% (from 63% in FY08), ALOS
at 3.7 (from 4.3 in FY08) and ARPOB at Rs8.1m (from Rs7.6m in FY08).
􀂃 Turnaround specialist: Fortis has a robust track record in acquisitions, with>
50% of its current bed capacity coming from acquired facilities. A standardised
and quality-driven business model backed by a premium brand helps Fortis
derive cost and revenue synergy and thereby turn around acquired facilities.
􀂃 Focus on asset-light model: For future growth in the highly capital-intensive
healthcare business, Fortis is adopting an asset-light model, to reduce strain
on its balance sheet and to improve its return ratios despite aggressive bed
additions. Greater than seventy percent of planned bed additions in the
pipeline (~3,300 beds) would be by way of leased facilities.
􀂃 SRL a synergistic buy: Fortis recently acquired a 71.4% stake in SRL for
Rs8bn. The acquisition is value-accretive, in our view, and would help
transform it into an integrated healthcare provider. SRL is a good fit, given
geographical complementarities (fast access to tier II and III cities) and a large
patient pool, as 25% of its lab testing is followed by hospital admissions.
Earnings and target price revision
􀂃 Initiating coverage with Outperform rating and TP of Rs180.
Price catalyst
􀂃 12-month price target: Rs180.00 based on an EV/EBITDA methodology.
􀂃 Catalyst: 1) SRL synergy upside 2) Maturing beds
Action and recommendation
􀂃 We value Fortis at 16x FY13E EV/EBITDA, at a relative premium to its global
peers but in line with the stock’s historical mean. Fortis is at an early phase in
its growth cycle (we estimate 39% revenue and 45% EBITDA CAGR over
FY11–14) and we believe the premium valuations will sustain. Fortis, with its
size and strong brand-equity, is well positioned to capitalise on the significant
opportunity in India’s fast-growing healthcare industry.

Buy Fortis Healthcare; Target : Rs 185::ICICI Securities

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M a r g i n s   i m p a c t   o n   s t a r t - u p   c o s t s   o f   n e w   h o s p i t a l s …
Fortis Healthcare’s Q1FY12 revenues grew 43.0% YoY to | 483 crore. This
robust growth was mainly due to additional revenue inflow of | 62.3 crore
from Super Religare Labs. The organic growth stood at 25% over the
corresponding period last fiscal. The  inorganic growth remained in line
with our estimates. However, operating margins got impacted by 191 bps
YoY due to initial start-up losses  at the newly commissioned greenfield
facilities. With the decline in operating margins and higher tax outgo, its
net profit for the quarter declined sequentially by 52% while it improved
compared to last year.
ƒ Increase in capacity drives revenue growth
With the addition of six new hospitals and acquisition of Super
Religare Labs, the company has been able to post revenue growth
of 43% YoY during the quarter while organic growth stood at 25%
YoY. Hospitals with a maturity period of three years and more (i.e.
82% of operating revenue) continued to perform better recording
average occupancy levels of over 79% and average revenue per bed
of over | 1.1 crore per annum. However, average occupancy levels
and ARPOB witnessed pressure on account of the new launch of
hospitals. As a result, average occupancy levels for the quarter
declined by 600 bps to 72% YoY while average revenue per bed
(ARPOB) saw a marginal rise of 4.8% YoY.
ƒ Margin declines on start-up costs
Operating margins have been impacted by 150 bps YoY to 12.7%
on account of incurring of start-up costs on the launch of three
major hospitals at Delhi, Kolkata and Mulund (Mumbai). However,
on a like-to-like basis, it improved to 14.8%.
V a l u a t i o n s
Post Super Religare Lab’s (SRL) acquisition, we expect FY12E revenue
and EPS growth of 64.7% and 31%, respectively. At the CMP of | 148, the
stock is trading at 20.3x and 16.1x its FY12E and FY13E EV/EBITDA,
respectively. The valuations are looking stretched but the company’s
constant growth focus and strong management team supports our
positive outlook on the company. We have maintained our target price at
| 185 with a BUY rating on the stock (based on DCF model).

Fortis Healthcare::1Q FY12: Reduce PT to Rs160 on hospital margin disappointment:: JPMorgan,

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While hospital revenue growth in 1Q FY12 was robust, margins were below
expectations on account of an adverse product mix, new hospitals, and higher
fee to doctors. Management expects margins to rise over the course of the
year as new hospitals ramp up. We reduce our earnings estimates and cut our
PT to Rs160 to account for lower margins. Maintain Neutral.
 Hospital operating matrices robust, but margins disappoint: FORH 1Q
hospital revenues grew 25% YoY driven by new beds, better ARPOB (+5%
YoY) and lower ALOS (decline by 0.2 days). However, EBITDA margins
were weak at 12.6% (-180bp YoY) due to poor mix (cardiac procedures
down from 40% to 34% of total procedures) and new bed addition.
 Rapid hospital expansion: FORH announced the addition of six new
hospitals with 1400 beds which will increase capacity to 9700 beds by
FY15E. Another four hospitals with 600-700 beds are likely to be
announced in two weeks. New expansion will be based on rented real estate
(10%-11% rental yields), which will aid capital efficiency (management has
a two-year ROCE target of 20%) and help rapid expansion.
 SRL to scale up over the year. SRL contributed Rs620MM in 1Q revenues
with EBITDA margin of 14.3%. Management indicated that synergies
between the hospitals and SRL business should ramp up over the course of
the next two years and offer significant upside potential for margins.
 1Q FY12 result summary: Revenues were up 43% YoY aided by SRL
acquisition (18%) and addition of new hospitals (+26%). EBITDA margins
declined 160bp YoY to 12.9% mainly due to poor hospital margins (12.6%
vs. 14.5% in 1Q FY11) due to mix changes and higher fees to doctors
(+64% YoY). Net profit (pre-exceptional) declined 30% YoY to Rs151MM.
 Reduce Mar-12 PT to Rs160: We reduce our FY12/FY13 EBITDA
estimates by 4%/3% to account for lower-than-expected 1Q margins and
cost pressures on account of higher doctor fees, which is expected to persist
(higher retainer fees in hospitals in Mumbai). Accordingly, we cut our PT to
Rs160 (still based on 15x FY13E EV/EBITDA). Maintain Neutral.

Nomura research-- Fortis Healthcare: Inorganically Ambitious Inorganic ambitions coupled with asset light expansion to drive growth priced in

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Fortis Healthcare: Inorganically Ambitious
Inorganic ambitions coupled
with asset light expansion to
drive growth priced in


Action/Valuation:  Initiate with a NEUTRAL rating; TP of INR170
We initiate coverage with a NEUTRAL rating and a target price (TP) of
INR170. We use DCF to value Fortis at INR136/share, assuming a 20%
medium-term growth rate between FY15F and FY19F, a 7% terminal
growth rate, a cost of equity of 12.5% and a long-term RoE of 20%.
Incorporating the cash value at INR35/share, we arrive at a TP of INR170.
En route to capitalize on burgeoning opportunity
With 3,244 hospital beds (fully and partially owned through subsidiaries,
excluding associates and managed hospitals), Fortis is the amongst the
largest private sector hospitals in India, in our view. The company plans to
expand its hospital bed capacity by 58% over FY11-14.  
Fuelling growth via acquisitions
Our analysis suggests that Fortis has created value via acquisitions
despite challenges such as the departure of Dr. Trehan from Escorts
Delhi. We believe the value creation is a testament to the strategic viability
of Fortis Healthcare’s inorganic strategy and capability of turning around
operations, and deriving cost and revenue synergies.
Asset light focus to drive equity returns
Fortis’ focus on the asset light model should enable it to expand its
presence while negating the hurdle of high capital intensity. Seven out of
the eight pipeline projects under development are under this model.
Catalysts
Execution delays, announcement of new acquisitions and expansions
through current / new facilities

Fortis Healthcare (FOHE.BO; :: Takeaways from Citi India Investor Conference – Day 2

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Fortis Healthcare (FOHE.BO; Rs164.45; 1L)
 Takeaways from Mumbai — Fortis Healthcare presented at the Citi India
Investor Conference in Mumbai. Below are key takeaways.
 What’s New — 1) New hospitals (Shalimar Bagh, Mulund Onco and Kolkata)
continue to ramp up well and are expected to achieve break even within the first
two years of operations; 2) New projects are on track and expect Gurgaon &
Kangra hospitals to come online during FY12 adding capacity of 550 beds; 3)
FOHE plans to open Oncology blocks at Mohali and Jaipur hospitals.
 SRL Acquisition — FOHE has acquired 71% stake in SRL for Rs8bn in cash
(plus Rs4bn of debt). Increase in patient footfalls across Fortis network,
geographical complementarity (SRL is present across 400 cities) and large
patient database for CRM and research highlighted as the key benefits from the
acquisition.
 Maturity Profile of hospitals: a margin lever — The older hospitals have a
higher EBITDA and a higher ARPOB compared to the newer hospitals. Four
hospitals (out of 22 own hospitals) that are older than 5 years contribute 24% of
revenue but 34% of the EBITDA (EBITDA margin at 26%) whereas 1-3 years old
hospitals (nine) contribute 13% of the revenue but only 9% of the EBITDA
(EBITDA margin at 14%). FOHE expects the newer hospitals to achieve a similar
EBITDA margin (~25% +) as they mature (>5 years old).
 Other Key Takeaways — 1) Strong Growth in procedures across key focus
areas – Neuro (+62%), Ortho (+52%), Dialysis (+41%) and Cardiac (+31%)
which is expected to continue; 2) SRL to be consolidated from May 2011.
 Maintain Buy (1L) — We remain positive on the healthcare delivery space in
India and maintain Buy.

Fortis Healthcare -SRL Acquisition; Foray into Diagnostic Space :: Morgan Stanley Research,

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Fortis Healthcare
Limited
SRL Acquisition; Foray into
Diagnostic Space
Board approval for acquisition of Super Religare
Laboratories: Fortis Healthcare (81.5% promoter
holding) has obtained in-principle Board approval for the
acquisition of an approximately 86% stake in Super
Religare Laboratories Ltd (SRL; a privately held Fortis
group company).  The acquisition could take
approximately two to three months to close.  SRL’s total
income for F2011 was Rs5bn with a net loss of
Rs281mn (F1H11 annualized).  
Strategic fit, mid- to long-term positive:  SRL is the
largest player (48% market share) in the organized
diagnostics services market.  It performed
approximately 34,000 diagnostic tests per day and
served over 5.6mn customers in F2011.  Through this
acquisition, Fortis gains: 1) access to a strong diagnostic
laboratory network (with over 181 network laboratories
across India), becoming an end-to-end healthcare
service provider from outpatient consulting to diagnosis
to treatment, 2) access to a much larger patient base,
thereby adding to the referral network; and 3) access to
radiology.  SRL has the largest radiology practice in
India (Fortis currently outsources radiology).  Further,
SRL has a strong presence in tier II and III cities where
Fortis is targeting 25 hospitals over the next two years.
Valuation not yet decided, but benchmarking with
the recent Piramal Diagnostic deal (SRL acquired
Piramal Diagnostics in July 2010) on an EV/sales
(trailing) basis of 2.8x, we arrive at an approximate EV of
Rs14bn and equity value of approximately Rs10bn for
SRL. In our view, Fortis is well positioned to fund this
acquisition (net cash of Rs8bn post capex requirement
for launches over the next 12 months).  
Investment implications:  Short term, this could be an
overhang on the stock until we have further clarity on the
valuation.  Further, we see 8-9% downside to our
F2012E EPS due to a reduction in financial income.  

Hospitals 􀂃 : Q4FY11 Result Preview: ICICI Securities

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Hospitals
􀂃 Hospital revenues to grow 24.4% YoY
We expect revenues of our I-direct hospital universe to increase by
24.4% YoY on the back of robust revenue growth by Apollo
Hospitals. Overall, we expect in-patient volumes and average
revenue per bed (ARPOB) to grow 13% and 8% YoY, respectively,
for the quarter.
􀂃 Operating margins to remain stable
Operating margins of the I-direct hospital universe are likely to
improve by 150 bps to 15.1%. Operating margins of Apollo Hospital
are likely to improve by 230 bps to 15.3% YoY due to an
improvement in the pharmacy segment. However, QoQ it is
expected to remain flat. The operating margin of Fortis Healthcare is
likely to see a marginal improvement of 60 bps YoY to 14.8% for
Q4FY11E.
􀂃 PAT to grow ~53% YoY with Apollo Hospitals leading the pack
The profitability of the I-direct hospital universe will grow 53.3% on
stable operating margins and better revenue growth. Among the
peer set, we expect Apollo Hospitals to report higher growth in
bottomline compared to last year as its business got impacted by
the Telangana crisis. Fortis is expected to report net profit growth of
38% YoY on healthy revenue growth and stable margins.

Healthcare Q4FY11 Preview: In a healthy state : Centrum,

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In a healthy state
We remain Overweight on the Healthcare sector, given
the demand-supply mismatch, good brand building
exercises by companies and robust long-term growth
potential. We retain our Buy rating on Apollo Hospitals
and a Hold on Fortis Healthcare. We believe both the
companies are well-positioned to capitalise on the
increasing demand for healthcare services, sound
business fundamentals and attractive valuations.
�� Sales growth to continue: We expect Apollo Hospitals
to report 30% YoY sales growth in Q4FY11 to
Rs6,278mn. Fortis Healthcare is expected to notch
higher growth of 21.6% YoY to Rs4,006mn.
�� Margins to improve: We expect the EBITDA margin of
Apollo Hospitals to inch up to 16.3%. We expect Fortis
Healthcare to report an EBITDA margin of 16.7%, up
220bp QoQ. In Q3FY11 Fortis had some one time
expenses related to the opening of the Shalimar Bagh
hospital in Delhi. The improvement would primarily be
driven by cost efficiencies and improving operating
leverage.
�� Profitability to grow: We expect Apollo Hospitals’ PAT
to grow by a healthy 55% YoY to Rs500mn and Fortis to
register 34% YoY increase to Rs 366mn.
�� Key points to watch: For Apollo Hospitals, the key
thing to watch out for will be EBIT margins of the
pharmacy segment. After reporting +ve EBIT margins in
Q2FY11 (0.3%), the company once again showed –ve
EBIT margins of 0.5% in Q3FY11. We believe the
company would achieve PAT breakeven by FY12. We
believe the operating performance of pharmacy
vertical would be a key factor in improving the overall
margins. According the last analyst’s presentation on
Fortis, the opening of its 900 bed green-field facility in
Gurgaon (phase 1 450 beds) was delayed by one
quarter to Q2FY12. Any further delay would impact our
estimates.
�� Valuations: We value Apollo Hospitals at 14x FY13E
EV/EBITDA to arrive at a price target of Rs653. We value
Fortis Healthcare at 15x FY13E EV/EBITDA to arrive at a
price target of Rs175.

JP Morgan: Fortis Healthcare- Management meeting: Increasing focus on capital efficiency

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Fortis Healthcare Ltd
Neutral
FOHE.BO, FORH IN
Management meeting: Increasing focus on capital
efficiency



We recently met with Fortis management. Growth remains strong, and
recently started hospitals are scaling up rapidly. Fortis is pursuing an assetlight strategy that entails leasing real estate and managing hospitals. This
should help Fortis scale up at a faster pace and improve its capital return
profile. We are positive on the Fortis growth story, but we see the stock as
fairly valued at the current level. We see Rs120-125 as a good entry point.
• Rapid growth to continue: We estimate that Fortis will add about 1,450
new owned beds over the next two years, increasing its owned beds to 4,075
by FY13. We also expect a rapid scale-up in managed beds, aided by recent
deals that will add 500 beds over the next two years. We estimate a revenue
CAGR of 38.5% and an EPS CAGR of 55% over FY10-FY13.
• Gradual shift towards asset-light models: Fortis is increasing its focus on
operating facilities on management contracts/reverse management contracts
and public-private partnerships. It has recently signed seven such contracts,
where its capital investments will be limited only to medical equipment. We
believe that a shift towards such models will help Fortis scale up at a faster
pace and will improve its capital return profile.
• New additions to limit near-term margin expansion: We expect nearterm margin expansion to be limited due to rapid new room additions and a
shift towards rental models with relatively low operating margins (though
the return on capital employed should  be higher). As a result, we cut our
FY11-FY13 EBITDA margin assumptions by 140bp-180bp, although we
still foresee a healthy margin range of 15%-17% over FY11-FY13.
• Price target, valuation, key risks: We decrease our FY11-FY13 EBITDA
estimates by 11%-14%, factoring in lower margins. We maintain our Neutral
rating on the stock and our PT of Rs160, rolled forward to Sep-11 and based
on 15x Sep-12E EV/EBITDA. Upside risks include value-accretive
acquisitions and early breakeven for new hospitals. Downside risks include
expensive acquisitions and delays in expansion plans.

IDFC research, FORTIS HEALTHCARE - IDFC Emerging Stars Conference

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FORTIS HEALTHCARE 
OUTPERFORMER (RS145, MCAP: RS58.9BN / US$1.31BN)


• FHL is India’s second largest (listed) healthcare player in the secondary/ tertiary segment, with 53 healthcare delivery
facilities on track to take total installed capacity to >8,000 beds by FY13. FHL's existing bed count stands at 6033 beds,
of which 32% are greenfield, 38% brownfield and 29% managed (under O&M).
• FHL’s major expansion plans are progressing on schedule, with Phase 1 of the Gurgaon facility (450 beds) expected to
be commissioned by Q1FY12. FHL plans to commission 75, 200 and 234 beds at Ludhiana I and II and Mulund,
Mumbai, respectively by Q4FY12.
• The company has doubled its operational bed capacity in two years by aggressive inorganic growth and has a good
track record of successfully integrating acquired assets (Escorts Delhi, Fortis Malar, etc). It continues to embrace
innovative strategies to reduce resource intensity (land, employees, equipment, etc) and free up capital to
fund expansion.
• FHL has significantly improved operational parameters in the past two years. ALOS has reduced from 7 days in FY07
to 5.2 now, while ARPOB has increased from Rs6.7m to Rs10.4m.
• It uses the hub & spoke model to reinforce its presence in existing regions and enter new geographies. As part of the
strategy, FHL seeks to establish super specialty “centres of excellence (COE)” in key cities in a region (“hub for the
region”) and then build a series of feeder hospitals across the region to feed these high-end hospitals.
• The promoters remain keen on expanding the company’s global reach by acquiring assets at the right price. FHL
(listed entity) would focus on expanding scale at home, while promoters’ ambition of gaining a global footprint would
be routed through their own holding company.