CRISIL Research Ier Report Fortis Healthcare

Fortis Healthcare (India) Ltd
Initiating coverage
Enhancing investment decisions
Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).
CRISIL Fundamental Grade

5/5 4/5 3/5 2/5 1/5
Assessment
Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals
CRISIL Valuation Grade

5/5 4/5 3/5 2/5 1/5
Assessment
Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)
Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company.
Disclaimer:
This Company-commissioned Report (Report) is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. The Data / Report are subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this Report. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information only of the authorized recipient in India only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person especially outside India or published or copied in whole or in part, for any purpose.
CRISIL Limited. All Rights Reserved.
Polaris Software Limited Fortismomentum remains (India) Ltd Business Healthcare intact
Forging ahead
Fundamental Grade Valuation Grade Industry 4/5 (Strong fundamentals) (Superior fundamentals) 5/5 (CMP has strong upside) 4/5 upside) Information technologyServices Healthcare Providers &
July 15, 2011

Fair Value Rs 185 CMP Rs 167
CFV MATRIX
Excellent Fundamentals
Fortis Healthcare (India) Ltd (Fortis), one of the leading healthcare service providers in India, is suitably placed to benefit from strong growth in the healthcare industry. While aggressive bed additions via the inorganic route led to strong growth in the past, greenfield projects and asset-light model will ensure future growth with enhanced return ratios. Synergy benefits from the recent acquisition of a diagnostic business and outstanding litigations are key monitorables. We assign Fortis a fundamental grade of 4/5, indicating that its fundamentals are superior relative to other listed securities in India. Journey through the inorganic route ensured growth in the past Fortis has aggressively followed the inorganic route to increase the bed count from 300 in FY01 to 4,800 installed beds now; 60% through acquisitions. Given the timeline of about three years to set up a hospital, we believe acquisitions have enabled Fortis get a head start on others and register faster growth. Greenfield path with focus on asset-light model to aid future growth Fortis plans to add ~1,400 beds over the next two-three years through greenfield projects. Considering rising real estate costs, particularly in metros/ tier I cities, Fortis has adopted the asset-light model for expansion. Of the eight upcoming hospitals, seven are on a lease basis; this will help Fortis grow at a rapid pace and enhance return ratios. Key monitorables: SRL acquisition and pending litigations 1) Fortis recently acquired 71.4% stake in Super Religare Laboratories (SRL) for Rs 8,030 mn. Since 60-70% of treatment decisions are based on diagnostic results, we expect Fortis to derive synergy benefits in the long term. 2) One of the Fortis hospitals in Delhi Escorts - has pending litigations related to right on leasehold land and tax demand of Rs 969 mn. Since the outcome of litigations is pending, this remains a key monitorable. Revenues to grow at a two-year CAGR of 46%, RoCE to increase We expect revenues to register a two-year CAGR of 46% to Rs 31.4 bn in FY13 driven by addition of new beds and contribution from the diagnostics business. EBITDA margin is expected to remain stable at 14.9% in FY13. RoCE is expected to improve to 6.2% in FY13 from 2.1% in FY11. Valuations the current market price has upside CRISIL Research has used the discounted cash flow method to value Fortis and arrived at a fair value of Rs 185 per share. While the hospital services business is valued at Rs 156 per share, the 71.4% stake in SRL has been valued at Rs 29 per share. We initiate coverage on Fortis with a valuation grade of 4/5.
Fundamental Grade
5 4 3 2 1
Poor Fundamentals
Valuation Grade
Strong Downside Strong Upside
KEY STOCK STATISTICS

NIFTY/SENSEX NSE/BSE ticker Face value (Rs per share) Shares outstanding (mn) Market cap (Rs mn)/(US$ mn) Enterprise value (Rs mn)/(US$ mn) 52-week range (Rs) (H/L) Beta Free float (%) Avg daily volumes (30-days) Avg daily value (30-days) (Rs mn) 5600/18618 FORTIS 10 405.7 67,837/1,525 64,737/1,455 177 / 124 0.9 18.5% 275,665 44
SHAREHOLDING PATTERN
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jun-10 Promoter Sep-10 FII Dec-10 DII Mar-11 Others 76.5% 81.5% 81.5% 81.5% 17.0% 1.3% 5.2% 10.3% 2.7% 5.5% 10.2% 2.0% 6.3% 9.4% 1.7% 7.4%
KEY FORECAST
(Rs mn) Operating income EBITDA Adj PAT Adj EPS-Rs EPS growth (%) Dividend yield (%) RoCE (%) RoE (%) PE (x) P/BV (x) EV/EBITDA (x) FY09 6,354 825 87 0.8 NA 2.2 0.9 138.7 1.3 22.1 FY10 9,487 1,352 564 1.4 83.6 9.8 1.7 4.1 77.7 2.4 62.7 FY11# 14,672 2,148 1,091 3.0 117.6 2.1 4.2 62.2 2.1 29.8 FY12E 25,488 3,662 1,653 4.0 32.8 4.8 4.3 41.4 1.5 19.8 FY13E 31,429 4,674 1,907 4.7 15.3 6.2 4.2 35.9 1.5 15.4
PERFORMANCE VIS--VIS MARKET

Returns 1-m Fortis NIFTY 3% 2% 3-m 3% -5% 6-m 24% -1% 12-m 10% 4%
ANALYTICAL CONTACT
Sudhir Nair (Head) Ravi Dodhia Bhaskar Bukrediwala Client servicing desk +91 22 3342 3561 clientservicing@crisil.com snair@crisil.com rdodhia@crisil.com bsbukrediwala@crisil.com
NM: Not meaningful; CMP: Current Market Price #FY11 numbers based on abridged financials Source: Company, CRISIL Research estimate CRISIL Limited. All Rights Reserved.
CRISIL RESEARCH | 1

Table 1: Fortis: Business environment
Product / Segment Sales contribution (FY11) Sales contribution (FY13) Product / service offering Hospitals 100% 74.7% Healthcare delivery services with major focus on specialties such as cardiology, neurology, orthopaedic, renal, gastro, etc. The company is also increasing its focus on oncology Diagnostic Services Nil* 25.3% Provides diagnostic, preventive care and clinical research trial testing services through SRL. In August 2010, SRL acquired Piramal Diagnostic a major player in radiology services Geographic presence Started the first hospital in Mohali in FY01. Pan India
Currently, it has a dominant presence in the North with more than 50% beds. Acquisition of Malar and Wockhardt hospitals ensure a presence in the South and West as well. Market position One of the leading private healthcare service Diagnostic service industry is highly
providers in the country with a network of ~3,600 owned beds and ~1,200 managed beds
fragmented with organised players having ~10% market share. SRL has the largest share, 48%, in the organised diagnostic services market in India
Industry growth expectations
Healthcare delivery services industry to grow at a five-year CAGR of 12% to Rs 3,500 bn by FY15 Lack of government and for spending care players especially to who in are
Diagnostic service industry is expected to grow at a five-year CAGR of more than 25% by FY15
secondary opportunity
tertiary private
provide
increasingly looking to expand in this space Sales growth (FY08-FY11 3-yr CAGR) Sales forecast (FY11-FY13 2-yr CAGR) Key competitors Apollo Hospitals, Max India, Manipal Group Dr. Lal Pathlabs, Metropolis, Thyrocare, Medinova and Quest Diagnostics Demand drivers Low penetration of beds and doctors leads to huge opportunity for private players. India has only nine beds and six doctors per 10,000 people, far below the global average of 27 and 14 respectively Growing medical tourism industry and increasing insurance penetration to enhance growth prospects of leading hospital chains in India Rising lifestyle diseases, increasing health Growing healthcare industry will have a direct results impact as 60-70% treatment decisions are based on diagnostic test 26.0% 27.2%# 40.9% NA*
awareness and preference for healthy lifestyle with preventive care Margin drivers A newly commissioned hospital takes ~two years to break-even at EBITDA level. However margins improve as it matures We expect ~500 beds to be commissioned in next two years, which will moderate margins *Fortis acquired diagnostic business (Super Religare Laboratories) in May 2011 #Considering full-year numbers of FY11 for Piramal, which was acquired in August 2010 Source: Company, CRISIL Research Margins to improve once the recently opened laboratories mature. New laboratories take ~two years to breakeven at PBT level
CRISIL RESEARCH | 2

Grading Rationale
A leading player in Indian healthcare industry
Fortis is one of the leading players in the Indian healthcare services industry with ~4,800 installed beds. Having started its first hospital with 300 beds in Mohali in FY01, it is now present across geographies - ~56 hospitals (eight are under construction) across 17 major cities in India.
Fortis expanded from 300 beds in FY01 to the current 4,833 installed beds
Pan-India footprint of Fortis
Upcoming hospitals Existing hospitals Kangra (100 beds) Noida > Fortis Hospital (350 beds) Gurgaon > FIIBMS (1,000 beds)
Amritsar > Fortis Escorts Hospital (166 beds) Ludhina 1 (200 beds) Ludhina 2 (75 beds) Mohali > Fortis Hospital (300 beds) Faridabad > Fortis Escorts Hospital (250 beds)
Gwalior (200 beds)
Delhi > EHIRC (331 beds) > La Femme (45 beds)
> Flt. Lt. Rajan Dhall (200 beds) >Jessa Ram (150 beds)
> Shalimar Bagh (350 beds) Kolkata >Anandpur (414 beds)
Ahmedabad (200 beds)
Kota >Fortis Modi Hospital (200 beds)
Mumbai >S L Raheja Hospital (280 beds) >Mulund (567 beds) Bengaluru >Fortis Hospital (100 beds) >BG Road (451 beds) >Cunningham Road (128 beds)
Chennai >Fortis Malar Hospital (250 beds)
Bengaluru (120 beds)
Source: Company, CRISIL Research Though Fortis has a dominant presence in North India with more than 50% of the beds, acquisitions of Wockhardt and Malar hospitals have helped it make inroads in western and southern regions. With an aim to further expand and tap opportunities in central India, Fortis plans to add ~1,400 beds over the next two-three years.
CRISIL RESEARCH | 3

Figure 1: Bed details of different players
10,000
Figure 2: Dominating position in northern region

70% 60% 55% 58%
8,000 2,875 6,000 2,220 4,000 2,785 1,276 50% 40% 30% 20% 2,000 3,622 3,557 4,313 10% 0% Apollo Owned Fortis Subs/JV/associates Manipal Managed 14%
16% 8%
17%
20% 11%
North Apollo
South
West Fortis
East and others
Source: Company, CRISIL Research
Over the years, Fortis has shown consistent improvement in operating parameters. While the occupancy rate increased from 63% in FY08 to 72% in FY11 (marginal y-o-y decline of 200 bps as ~350 beds were operational in 2HFY11), average length of stay (ALOS) declined from 4.3 days to 3.7 days during the same period. Average revenue per occupied bed (ARPOB) increased from Rs 7.7 mn in FY08 to Rs 8.1 mn in FY11.
Figure 3: Occupancy rates up in past three years

76% 74% 72% 72% 68% 68%
Figure 4: Improving trend in ARPOB and ALOS

(Rs) 23,000 22,500 22,000 3.7 21,500 3.6 21,000 3.4 3.2 20,959 22,192 FY09 ARPOB 22,740 FY10 22,192 3.0 FY08 FY11 ALOS (RHS) 4.3 4.2 4.1 (Days) 4.4 4.2 4.0 3.8
64%
63%
60%
20,500 20,000 FY08 FY09 Occupancy FY10 FY11
56%
Focused on lifestyle-related diseases

Indias urban population share is expected to increase from 28% now to ~32% by FY14. Given the increase in urban population and sedentary urban lifestyle, profile of diseases is expected to shift from contagious to lifestylerelated such as cancer, cardiac-related and diabetes. We expect cardiac patients in India to increase from 45 mn in FY08 to 72 mn in FY18. According to an IBEF survey, an average treatment cost for lifestyle diseases is ~6-7x that of infectious diseases. Fortis, with its established brand and a major focus on cardiology and oncology, is expected to benefit from the gradual shift in disease profile. Currently, 35% of its revenues are from the cardiac segment and 5% from oncology. However, the latters contribution is expected to increase to 10-12% in FY13 with the commissioning of the oncology block in Mulund.
CRISIL RESEARCH | 4

which is at an inflection point
Fortis is in an industry which is at a nascent stage compared to its counterparts in developed economies. However, we derive our confidence on the industry, which is at an inflection point, based on shift in demographics, rise in per capita income and pick-up in health insurance and medical tourism. CRISIL Research expects the Indian healthcare industry to grow at a five-year CAGR of 12% to Rs 3,500 bn by FY15. India spends ~4% of its GDP on healthcare, significantly lower than the US (15%), Australia (9%) and Brazil (8%). Also, the per capita spend on healthcare in India is merely US$109 (adjusted for PPP) compared to more than US$4,000 in developed economies. According to WHO Health Statistics (WHO) 2010, India faces acute shortage in desired healthcare infrastructure. It has nine beds and six doctors per 10,000 people against the global average of 27 beds and 14 doctors, respectively. CRISIL Research believes that in order to meet
Indias per capita spend on healthcare is mere US$109 (adjusted for PPP)
international benchmarks set by WHO for healthcare infrastructure, India will require an investment of over Rs 6 tn over the next five years.
Figure 5: India has lower per capita spend on healthcare

($) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1,643 799 797 604 233 3,588 3,261 2,992 7,290
109
UK
US
Malaysia
Singapore
Russia
Germany
Australia
Source: CRISIL Research
Shift in demographics spell good tidings

The Indian population is expected to register steady growth of 1.3% by FY26. However, growth in the 30+ age group will be comparatively higher at 2.7%. According to a US-based study by Medicare, US residents incur about 75% of their total medical expenditure after reaching 40. Similar trends and shift in demographics in India signal an increase in healthcare expenditure in the coming years.
China
Brazil
India
Population growth in 30+ age group will be higher at 2.7% in the next 20 years
CRISIL RESEARCH | 5

Health insurance and medical tourism are picking up in India
The health insurance penetration in India is currently low at 5% vs. ~80% in countries such as the US, China and Singapore. Although the insurance coverage is currently low, given the rise in interest from private health insurance companies, we expect penetration to gradually increase to ~50% by FY30. Medical tourism has been gaining momentum in India with the number of medical tourists increasing from 40,000 in FY02 to ~500,000 in FY08. We believe the following factors will further drive growth in the medical tourism industry:
Health insurance is currently at 5% in India
Cost advantage: Complicated procedures in India cost ~one-tenth of that in the developed countries. Limited waiting period: Unlike a waiting period of ~15 days to one month in developed countries, India has minimal or virtually nil waiting period. International quality standards: Some of the well-established hospitals in India are Joints Commission International (JCI) accredited, depicting international quality services at comparatively lower costs.
Figure 6: Growing insurance penetration in India

50 45 40 35 30 25 20 15 10 5 0 2008 2013 2018 2023 2028 3 6 16 30 47
Figure 7: Medical tourists inflow on rise

('000) 1,000 900 800 700 600 500 400 300 200 100 0 FY00 FY02 FY04 FY06 FY08 FY12P 10 40 140 230 500 1,000
% of population covered
Medical tourists
Inorganic route quickened pace of growth in the past

Unlike other established players like Apollo, Manipal which has grown through greenfield projects, Fortis prefers the inorganic route for expansion. Out of the current 3,600-owned beds, ~60% are through acquisitions and 40% via greenfield expansion. Given the timeline of ~3 years to set up a multi-specialty hospital, we believe acquisitions have enabled Fortis get a head-start to register faster growth.
Unlike other established players, Fortis has taken the inorganic route for expansion
CRISIL RESEARCH | 6

Figure 8: Fortis has grown aggressively through acquisitions
10,000 8,717 8,000
6,000 4,833 4,000 2,522 2,000
951
0 FY06 Fortis Apollo FY11
Acquired hospitals are strategically located

In the past five years, Fortis spent ~Rs 15.5 bn to acquire three hospital groups, totalling 2,400 beds, translating into an EV/bed of ~Rs 6.5 mn. Although the cost incurred is at par with the industry standards, Fortis has spent additionally on refurbishment of the hospitals. Considering this, valuations look expensive but given the strategic location of these assets, Fortis will be at an advantage in the long term. For instance, Wockhardt, Mulund which commenced operations in FY05, was the first multi-specialty hospital within a radius of 50 km and is currently operating at occupancy levels of more than 75%.
Fortis acquired ~2,400 beds at an EV/bed of Rs 6.5 mn
Table 2: Details of acquired beds

Particulars No. of beds Total consideration (Rs mn) EV/Bed (Rs mn) Source: Company Malar 178 550 3.1 Wockhardt 1368 9090 6.6 Escorts 881 5850 6.6
Steady improvement in performance of acquired assets

Fortis has been able to successfully integrate acquired hospitals and improve their operating parameters. The acquired hospitals registered strong growth in revenues with a steady improvement in EBITDA margins, which underscores the capability of the management to turn around and successfully handle the operations. Considering the fact that majority of the tertiary care facilities break-even at the EBITDA level in the second-third year of operations, Fortis was able to break even at the Jaipur facility in just 15 months of its operations. Escorts Delhi (acquired in FY05), however, was as exception; post Dr. Naresh Trehans exit in FY08, revenues declined ~34% y-o-y. Nevertheless, its performance showed steady increase from FY08 onwards.
Fortis has turned around acquired hospitals
CRISIL RESEARCH | 7

Figure 9: Margins improved at Escorts, Jaipur
(Rs mn)
900 800 700 600 500 400 300 200 100 FY08 Revenue FY09 FY10 FY11 170 0% 382 -7% 637 0% -5% -10% 841 15% 10% 5% 19% 20% 22% 25%
Figure 10: Fortis Malar had strong revenue growth

(Rs mn) 1,000 29% 800 23% 833 35% 30% 25% 17% 15% 400 179 332 20% 15% 10% 3% 5% 0% FY07 FY08 Revenue FY09 FY10 FY11
644
600
200
140
EBITDA margins (RHS)
Figure 11: Revenues and margins grew at Escorts, Amritsar

(Rs mn) 700 600 500 400 11% 300 200 100 264 0 FY07 FY08 Revenue FY09 FY10 FY11 258 416 501 616 0% 11% 15% 23% 28% 25% 25% 20% 30%
Figure 12: Steady run post FY08 hurdle at Escorts, Delhi

(Rs mn) 3,500 3,000 2,500 2,000 1,500 13.0% 19.2% 17.0% 14.0% 20% 25%
15% 3,112
2,447 1,718 1,903
2,832
10%
10% 5%
1,000 500 0 FY07
5% 4.0% FY08 Revenue FY09 FY10 FY11
0%
Future expansion going greenfield

Fortis has grown through the inorganic route in the past. However, it plans to add ~1,400 beds over the next two-three years through greenfield expansion. The company has a total outlay of Rs 5,740 mn, of which Rs 2,000 mn has already been incurred. Post commissioning of new beds, its total bed capacity will increase to 5,800 beds in FY14. Though the company has executed few greenfield projects in the past, timely execution of the new and comparatively larger hospitals is a key monitorable.
Fortis to add ~1,400 beds in the next twothree years
CRISIL RESEARCH | 8

Table 3: Capacity additions details
Land/ building Location Kangra Dehradun Gurgaon Ludhiana 1 Ludhiana 2 Peenya, Bengaluru Ahmedabad Gwalior Total Beds 100 50 450 200 75 120 200 200 1,395 Area 37,000 sq.ft. 27,000 sq.ft. 11 acres 1,55,000 sq.ft. 60,000 sq.ft. ~70,000 sq.ft. 1,55,000 sq.ft. 2.5 acres ownership Building on lease Public private partnership Owned Building on lease Building on lease Building on lease Building on lease Land on lease Companys expected date of commencement June-11 Sep-11 Mar-12 FY12 FY12 Mar-12 FY14 FY14 Our expected date of commencement Dec-11 Mar-12 Sep-12 FY13 FY13 Dec-12 FY15 FY15 Total outlay (Rs mn) 240 150 3,250 500 200 180 500 720 5,740
Hub and spoke model to ease expansion

Fortis plans to enter new territories and expand its presence in the existing geographies through the hub and spoke model. The company plans to set up a super/multi-specialty hospital (hub) in key cities of the region and then develop secondary/tertiary care hospitals across the region that will nourish the hub or the super/multi-specialty hospital. As per the strategy, Fortis is enhancing its presence in the northern region and eyeing the central region for expansion.
Adopted asset-light model, but there are challenges

Given a rapid increase in real estate costs particularly in metros / tier I cities, healthcare players are increasingly looking for alternatives to tackle higher land costs. Accordingly, Fortis has adopted the asset-light strategy for expansion. Under this model, the company will enter into a lease agreement with the land owner/developers who will provide the land and build the infrastructure as specified by the company. Of the eight upcoming hospitals, seven are on a lease basis; it owns only the Gurgaon facility. Since land and building constitutes ~60% of the total outlay in setting up a hospital, capital requirement will be significantly lower in the assetlight model. Further, lower interest and depreciation costs are expected to increase return ratios in the long run. Therefore, we believe adopting the lease model will enable the company to expand rapidly and enhance return ratios. However, dealing with the land owners/developers and convincing them to invest in a healthcare project is a difficult task. Apart from lease rentals, they might demand revenue-share from the project, wherein the healthcare player may have to forgo some proportion of margin from the project.
Asset-light model helps the company grow faster and enhance return ratios
CRISIL RESEARCH | 9

Figure 13: High margins, low RoCE in asset-heavy model
(as a % of revenues) 130% 110% 90% 70% 50% 30% 10% -10% -7% 110% 100% 0% -5% 92% 86% 78% -5% -10% Year 2 Year 3 Year 4 Year 5 RoCE (RHS) EBITDA margin EBITDA breakeven 0% 8% 14% 6% 16% 20% 15% 22% 10% 5% 0%
Figure 14: Low margins, high RoCE in asset-light model

(as a % of revenue) 130% 110% 90% 70% 50% 30% 10% -10% -30% 19% -19% -29% Year 1 Rent -12% 12% -15% -30% Year 2 Operating costs Year 3 Year 4 EBITDA margin Year 5 RoCE (RHS) 9% -1% 7% 6% 110% 100% 92% 7% 86% 78% -6% 5% 0% -10% -20% 16% 10% EBITDA breakeven 25% 30% 20%
-10% Year 1
Operating Costs
SRL acquisition to aid hospital business

The company recently acquired a 71.4% stake in Super Religare Laboratories (SRL) for Rs 8,030 mn. SRL is one of the largest diagnostic service providers in the country with a network of ~65 laboratories. In August 2010, SRL acquired Piramal Diagnostic Services (Piramal), a dominant player in the radiology segment with 105 laboratories. The diagnostic services industry currently accounts for ~3.6% of the healthcare market and primarily covers clinical pathology and imaging/radiology services. The industry is highly fragmented with organised players accounting for ~9% (top three players account for 7%) of the Rs 59 mn market. Increase in prevalence of lifestyle diseases, growing consumer awareness and preference for healthy lifestyle with preventive care are expected to boost diagnostic services; we expect a five-year CAGR growth of more than 25% by FY15. SRL (along with Piramal) is anticipated to have a market share of 48% in the organised market.
Fortis acquired 71.4% stake in SRL for Rs 8,030 mn
Figure 15: Diagnostic industry is highly fragmented
Figure 16: Robust growth in diagnostic industry

(Rs bn) 200 181
Organised players, 9% 150
100 74 50 41 18 Unorganised players, 91% 0 Pathology FY09 Radiology FY15
CRISIL RESEARCH | 10

Robust growth in the healthcare industry is expected to benefit the diagnostic services industry as 60-70% of the treatment decisions are based on test results. SRL, being a dominant player, will be a key beneficiary of strong growth in the industry. We expect Fortis to derive significant synergy benefits from this acquisition
Table 4: Expected performance of SRL

FY09 No. of labs Revenues (Rs mn) EBITDA (Rs mn) EBITDA margin Source: CRISIL Research 147 3,068 401 13.1% FY10 150 3,749 265 7.1% 6MFY11 150 2,344 309 13.2% FY11 170 4,867 584 12.0% FY12E 175 5,906 755 12.8% FY13E 195 7,880 1,036 13.1%
Group looks beyond India, Fortis focuses at home

To establish a global presence, Fortis acquired 25.3% stake in Parkway Holdings for S$1,000 mn from TPG Capital at S$3.54 per share. Parkway is a Singaporebased healthcare service provider with ~3,600 beds spread across Malaysia (1,900), Singapore (1,022), India (425), UAE (260), Brunei (20) and China (14). Post counter offer from Khazanah, Fortis sold off its entire stake to it.
Khazanah counterbid led to withdrawal

Khazanah, a sovereign fund of Malaysia, counterbid with a price of S$3.95 per share in response to Fortis revised offer of S$3.8 per share. In view of Khazanahs revised bid, Parkways hospital business was valued at ~S$3.1 bn, which translates into EV/bed of ~Rs 30 mn (~5x of average cost to acquire Escorts, Malar and Wockhardt hospitals). Considering this as an expensive deal, management sold off its 25.4% stake to Khazanah and made a net profit of ~Rs 180 mn.
Khazanah valued Parkways hospital business at an EV/bed of Rs 30 mn
Table 5: Net profit of Rs 180 mn from Parkway deal

No. of Particulars Investment in Parkway (A) Khazanah offer (B) Profit (S$) (A-B) Assumed S$/Re rate Profit (Rs mn) Legal expenses (incl. investment banking fees) (Rs mn) Finance costs (Rs mn) Net profit (Rs mn) Source: Company Post closure of Parkway deal, the management decided to concentrate on opportunities in the domestic market through Fortis. Global acquisitions, which provide access to latest technology and technical know-how, will be targeted through the promoters company. We believe this strategy will help the group enhance focus on the domestic market, keeping it abreast with latest technology with limited strain on the balance sheet. 1,610.0 1,804.0 180.0 shares (mn) 282.7 282.7 Price per share 3.54 3.95 Amount (S$) 1,000.8 1,116.7 115.9 31.7 3,670.0

Litigation on Escorts hospital a key monitorable
One of the Fortis hospitals - Escorts Heart Institute and Research Centre (Escorts) - has pending litigations which include: (i) Escorts right on leasehold of the land on which its Delhi hospital is located and (ii) certain income tax exemptions claimed by Escorts predecessors. Escorts was a charitable society, which merged with a non-charitable society and was incorporated as a company. The Delhi Development Authority (DDA), the owner of the land, has considered the merger and the subsequent conversion to a company as prohibited transfers of property under its terms and condition, which are now being challenged in the Delhi High Court. The proceedings of these litigations are pending and the outcome is uncertain. Fortis has exposure of Rs 5,850 mn in five hospitals (881 beds) of Escorts group. Escorts, Delhi has ~320 beds and contributed ~20% to the top-line in FY11. Any adverse ruling by the court may significantly impact Fortis financials.
Fortis has exposure of ~Rs 2,220 mn in Escorts, Delhi

Key risks
Inability to attract or retain healthcare professionals might impact growth prospects
Fortis performance and execution of future growth strategy is highly dependent on the companys ability to attract and retain healthcare professionals. Fortis, in the past, has witnessed loss of services of one of its key personnel Dr Naresh Trehan, which had significantly impacted its operations. Therefore, the inability to retain or attract key professionals might impact the companys future growth prospects.
Loss of key personnel may hamper future growth plans
Delay in expansion plans

Fortis plans to add ~1,400 beds at varied locations such as Gurgaon, Ludhiana, Bengaluru and Ahmedabad over the next three-four years. Previously, the company has witnessed delays in commencement of operations of the Shalimar Bagh hospital. Though we have assumed delays in commissioning of new beds, higher-than-expected delays or cost overruns could impact financials and valuations.
Expensive acquisitions may strain balance sheet

Fortis has adopted the inorganic route to expand its geographic reach and enhance its bed capacity. In a bid to acquire a majority stake in Parkway Holdings in FY10, its debt-to-equity ratio increased to ~3x. However, the company sold its stake to Khazanah considering it an expensive acquisition. Although the company intends to go for a global acquisition through a promoterholding company, any expensive acquisitions in the future might strain its balance sheet.
Debt-to-equity has increased to 3x in FY10 post Parkway acquisition

Financial Outlook
Revenues to grow at a two-year CAGR of 46%
Revenues are expected to increase at a two-year CAGR of 46% to Rs 31.4 bn in FY13 driven by new bed additions and growth in the diagnostics business. Revenues from the hospital business are expected to grow at a two-year CAGR of 26% to Rs 23.6 bn in FY13, while SRL is expected to register 27.2% growth to Rs 7.9 bn during the same period.
Revenue growth of 46% supported by new bed additions and diagnostic business
Figure 17: Revenues to grow at a two-year CAGR of 46%

(Rs bn)
35,000 30,000 25,000 20,000 15,000 10,000 5,000 6,354 0 FY09 FY10 Revenue FY11 9,487 14,672 20% 55% 49%
74%
80% 70% 60% 50% 40% 30% 23% 20% 10%
25,488 FY12E
31,429 0% FY13E
y-o-y growth (RHS)
Figure 18: Revenue break-up from major hospitals

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY09 Escorts, Delhi Fortis, Noida FY10 FY11 FY12E FY13E 29% 28% 33% 0% 14% 0% 24% 30% 21% 24% 25%
Figure 19: SRL to contribute 25% in FY13

100% 23% 80% 25%
11% 12% 1% 17%
29%
29% 9% 6% 13% 19%
30% 9% 6% 13% 18%
60% 100% 40% 100% 100% 77% 75%
11% 5% 14% 21%
20%
0% FY09 FY10 FY11 FY12E Diagnostic services FY13E
Fortis, Mohali Wockhardt
Oncology Block, Mulund Others
Hospital services
EBITDA margin to remain stable in the medium term

We expect EBITDA margin to remain stable from 14.6% in FY11 to 14.9% in FY13. Higher margin from the mature beds is expected to be offset by addition of ~500 beds in next two years, which will have lower margins in the initial years.
EBITDA margin to remain stable at 14.9% in FY13

Figure 20: EBITDA margin to remain stable
(Rs mn) 5,000 14.6% 14.2% 3,000 14.4% 4,674 2,000 3,662 13.0% 1,000 13.0% 825 0 FY09 FY10 EBITDA FY11 FY12E FY13E 1,352 2,148 12.5% 12.0% 14.9% 15.5% 15.0% 14.5% 14.0% 13.5%
4,000
EBITDA margins(RHS)
PAT to grow at a two-year CAGR of ~24%, EPS to increase from Rs 3.0 in FY11 to Rs 4.7 in FY13
Fortis consolidated PAT is expected to grow at a two-year CAGR of 24.2% to Rs 1.9 bn in FY13. Revenue growth will be offset by moderation in margins and higher depreciation expenses. We expect EPS to increase from Rs 3.0 in FY11 to Rs 4.7 in FY13.
PAT to grow from Rs 1.2 bn in FY11 to Rs 1.9 bn in FY13
Figure 21: PAT and PAT margins

(Rs mn) 2,000 1,750 1,500 1,250 1,000 750 1,236 500 250 0 173 FY09 FY10 PAT FY11 FY12E PAT margin(RHS) FY13E 2.7% 445 4.7% 1,907 1,653 6.5% 6.1% 8.4% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
RoCE to improve post FY12

Fortis currently has lower RoCE of 3-4%, significantly below 20-25% that a hospital generates in a steady operational state. Since the company is in a capital expenditure mode and plans to add ~1,400 beds, RoCE is currently low. Also, RoCE in the initial years is lower given that a standalone hospital takes 1824 months to break even at the EBITDA level. Going forward, we expect RoCE to improve once the newly commissioned beds mature. Further, improving performance of mature beds in the northern region is expected to boost RoCE. We expect RoCE to improve from 2.1% in FY11 to 9.9% in FY16.
RoCE to improve from 2.1% in FY11 to 9.9% in FY16

Figure 22: RoCE to improve post commissioning of new beds
(mn) 12,500 11,870 9.9 10,000 9,381 7.2 7,500 4.8 5,000 4.0 2.2 2,500 1,032 FY09 FY10 FY11 Capex FY12E FY13E FY14E FY15E FY16E 1.7 2,639 1,627 2.1 2,204 1,056 1,103 2.0 0.0 6.2 6.0 8.4 10.0 8.0 (%) 12.0
RoCE (RHS)

Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of management quality, apart from other key factors such as industry and business prospects, and financial performance.
Experienced management with domain expertise

Fortis is managed by erstwhile promoters of Ranbaxy Laboratories Mr Malvinder Singh (non-executive chairman) and Mr Shivinder Singh (managing director). The promoters have a strong background in the pharmaceutical industry and more than a decade of experience in the healthcare services industry. Mr Malvinder Singh is a graduate in economics and has done MBA from Duke University, US. Currently, he is on the board of the Indian Council for Research on International Economic Relations (ICRIER). Mr Shivinder Singh is a graduate in mathematics and has done MBA with specialisation in health sector management from Duke University, US. Currently, he is the chairperson of the health services committee of FICCI and board member of National Accreditation Board for Hospital and Healthcare Providers (NABH).
Management has more than a decade of experience in the healthcare industry
Aggressive management; have grown the company through inorganic route

Fortis' management is quite aggressive; it has expanded from a single 300-bed hospital in FY01 to the current 56 hospitals with ~4,800 installed beds. The management has adopted the inorganic route to expand reach; 60% of the total beds are through acquisitions. The management was also able to successfully integrate the operations of the acquired hospitals, which have shown consistent improvement in operating performance. Acquisition of 71.4% stake in SRL (diagnostic services) depicts the management's intent to have a presence in the entire spectrum of healthcare space.
Aims to mark a presence in the entire spectrum of healthcare space
Professional set-up and strong second line

Fortis believes in a professional set-up and has a strong second line of management. This includes Mr Daljit Singh (president strategy & projects) who has over eight years of experience in the healthcare industry and has prior experience of working with ICI (India) Ltd for ~28 years. Mr Yogesh Sareen (CFO) has over 22 years of experience in the healthcare industry and has served as director finance at Ranbaxy Laboratories.

Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate governance and management quality, apart from other key factors such as industry and business prospects, and financial performance. In this context, CRISIL Research analyses the shareholding structure, board
composition, typical board processes, disclosure standards and related-party transactions. Any qualifications by regulators or auditors also serve as useful inputs while assessing a companys corporate governance. Overall, corporate governance at Fortis reflects good practices supported by a strong and fairly independent board, good and relevant experience, and board processes and structures broadly conforming to minimum standards.
Board composition
Fortis board consists of 10 members, of whom six are independent directors, which exceeds the requirements under Clause 49 of SEBIs listing guidelines. The board brings sector expertise relevant to Fortis as well as diversified technical and business experience.
Fortis board consists of 10 members, of whom six are independent directors
Boards processes
The board's processes appear to be well structured, with all the committees audit, remuneration and investor grievance - in place, supporting good corporate governance practices and decision-making framework. The audit committee is chaired by an independent director, Mr Balinder Singh Dhillon. The committee meets at timely and regular intervals. The board also includes other well-known names like Mr Gurucharan Das, who has held positions of CEO in Procter and Gamble India and CMD in Richardson Hindustan Limited. He is an operating advisor and investor in Chrys Capital LLC. Lt. Gen. T. S Shergill is also an independent director; he was chairman of the Punjab Public Service Commission and is currently a member of the board of governors of the University of Petroleum and Energy Studies.
Good disclosure standards

The companys quality of disclosure can be considered good, judged by the level of information and details furnished in the annual report, websites and other publicly available data. For instance, the company discloses hospital-wise performance (revenues and margins) in its quarterly presentations. The disclosure level is sufficient to analyse the various business aspects.

Valuation Grade: 4/5
We have used the discounted cash flow (DCF) method to value Fortis and arrived at a fair value of Rs 185 per share. While the hospital business has been valued at Rs 156 per share based on DCF, its 71.4% stake in SRL is valued at Rs 29 per share based on its DCF value of Rs 13,974 mn. The stock is currently trading at Rs 167 per share. Consequently, we initiate coverage on Fortis with a valuation grade of 4/5, indicating that the current market price has upside from the current levels.
We assign a fair value of Rs 185 per share to Fortis
Key DCF assumptions for hospitals business

We have considered the discounted value of the firms estimated free cash flow from FY13 and have assumed a terminal growth rate of 5%.
WACC computation
FY13-23 Cost of equity Cost of debt (post tax) WACC Terminal growth rate 15.7% 8.0% 10.0% Terminal value 15.7% 8.0% 11.5% 5.0%
Sensitivity analysis to terminal WACC and terminal growth rate

Terminal growth rate Terminal WACC 3.0% 9.5% 10.5% 11.5% 12.5% 13.5% 170 152 138 128 120 4.0% 187 163 146 134 124 5.0% 211 178 156 141 130 6.0% 249 200 170 150 136 7.0% 317 235 190 163 145
Source: CRISIL Research estimates
Key DCF assumptions for diagnostics business

We have considered the discounted value of the firms estimated free cash flow from FY13 and have assumed a terminal growth rate of 5%.
WACC computation
FY13-23 Cost of equity Cost of debt (post tax) WACC Terminal growth rate 17.5% 8.0% 12.6% Terminal value 17.5% 8.0% 13.2% 5.0%
Sensitivity analysis to terminal WACC and terminal growth rate

Terminal growth rate Terminal WACC 3.0% 11.2% 12.2% 13.2% 14.2% 15.2% 33 28 25 22 19 4.0% 37 31 27 23 20 5.0% 42 35 29 25 22 6.0% 49 39 32 27 24 7.0% 59 46 37 30 26
Source: CRISIL Research estimates CRISIL Limited. All Rights Reserved. CRISIL RESEARCH | 19

Factors that can impact the fair value
Upside

Early break-even of the newly established hospitals Faster-than-expected growth in the diagnostics business Deployment of cash for value accretive hospitals
Downside
Delay in commissioning of the new beds
One-year forward P/E band

(Rs) 300 250 200 150 100 50 0
One-year forward EV/EBITDA band

(Rs mn) 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0
Feb-11
Feb-10
Feb-10
Dec-10
Dec-09
Dec-09
Aug-09
Dec-10
Feb-11
Jun-09
Jun-11
Jun-09
Jun-10
Jun-10
Aug-09
Aug-10
Aug-10
Fortis
32x
40x
48x
56x
64x
EV
12x
22x
32x
Source: NSE/BSE, Company, CRISIL Research
P/E premium / discount to NIFTY

1200%
P/E movement
80 70 60
1000%
+1 std dev
800%
50 -1 std dev 40 30 20
600%
400%
200%
Jun-09
Jun-10
Feb-10
Dec-09
Aug-09
Aug-10
Dec-10
Feb-11
Jun-09
Jun-10
Feb-10
Dec-09
Dec-10
Feb-11
Aug-09
Aug-10
Jun-11
Apr-09
Apr-11
Apr-10
Oct-09
Oct-10
Premium/Discount to NIFTY
Median premium/discount to NIFTY
1yr Fwd PE (x)
Median PE
Jun-11
Apr-09
Apr-10
Apr-11
Oct-09
Oct-10
Jun-11
42x
Oct-10
Oct-09
Oct-09
Oct-10
Apr-09
Apr-11
Apr-10
Apr-10
Apr-11
Apr-09

Peer comparison
M.cap Companies Fortis* Apollo Hospitals Enterprise * US players (US$ mn) Universal Health Services-B Health Net Inc Community Health Systems Inc Lifepoint Health Inc Tenet Healthcare Corp Health Mgmt Associates Inc-A Well Point Inc Medco Healthcare Solutions Other global players (US$ mn) Ramsay Healthcare Ltd * Sonic Healthcare * KPJ Healthcare Raffles Medical Bangkok DUSIT Bangkok Chain Hospitals PCL Fresenius SE 3,557 4,836 2,564 1,258 82,682 11,671 11,783 16.5 11.7 16.0 16.5 15.8 19.6 14.5 16.5 11.7 16.0 16.5 15.8 19.6 14.5 17.2 12.8 16.8 16.8 15.3 20.1 14.9 0.8 0.7 0.2 0.1 1.9 0.3 4.1 1.0 0.8 0.2 0.1 2.4 0.4 4.5 1.1 0.9 0.3 0.1 2.8 0.4 5.0 21.1 17.7 20.7 26.5 27.7 19.0 17.6 17.3 16.1 18.8 24.6 22.6 16.6 16.0 15.3 14.5 16.2 22.1 18.8 15.0 14.3 3.5 2.0 3.2 4.2 4.0 3.9 2.4 2.8 1.9 2.9 3.9 2.9 3.0 2.0 2.6 1.8 2.7 3.5 2.7 2.9 1.8 25.1 21.4 58.6 20.9 2.1 8.5 3.6 20.8 19.2 45.7 17.1 1.4 7.8 3.5 18.8 17.3 39.6 14.9 1.1 6.8 3.2 7,059 2,757 2,394 1,984 2,937 2,615 28,110 21,701 17.6 12.6 12.4 8.1 13.9 30.4 10.9 46.4 17.6 12.6 12.4 8.1 13.9 30.4 10.9 46.4 17.2 16.2 15.2 8.4 15.0 24.7 11.4 47.1 3.0 2.4 3.1 3.0 0.4 0.7 7.1 3.3 4.0 3.0 3.2 3.1 0.4 0.8 7.1 4.1 4.5 3.3 3.5 3.4 0.5 0.9 7.7 4.7 17.6 12.5 8.2 12.5 16.2 14.2 10.8 16.4 13.1 10.2 7.9 12.3 14.0 13.6 10.8 13.2 11.6 9.3 7.2 11.1 12.2 11.9 9.9 11.5 2.4 1.9 1.0 1.0 1.9 3.3 1.2 6.0 2.2 1.7 0.9 0.9 1.8 3.5 1.2 6.3 1.8 1.5 0.8 0.8 1.5 2.7 1.1 5.6 15.3 30.2 6.5 21.2 10.6 15.0 2.1 3.7 9.4 23.5 6.0 20.7 9.0 13.8 2.4 3.5 8.8 22.9 5.8 19.6 8.6 12.8 2.3 3.3 (Rs mn) 67,837 61,857 ROE
CY10 CY11E CY12E
EPS
CY10 CY11E CY12E
P/E
CY10 CY11E CY12E
P/BV
CY10 CY11E CY12E
EV/EBITDA
CY10 CY11E CY12E
4.2 10.5
4.3 11.3
4.2 11.8
3.0 14.7
4.0 17.1
4.7 19.4
62.2 33.6
41.4 29.0
35.9 25.6
2.1 3.4
1.5 3.1
1.5 2.9
29.8 16.3
19.8 14.0
15.4 12.4
Note: *For FY11, FY12E and FY13E Source: CRISIL Research, industry sources
Company Overview
Incorporated in 1996, Fortis Healthcare (India) Ltd is a leading chain of hospitals, providing quality and modern healthcare services. The company is managed by the erstwhile promoters of the Ranbaxy group. It started its first 300-bed hospital in Mohali in 2001 and over the years has expanded to ~4,800 beds. Its key areas of specialisation include cardiology, neuro sciences, oncology and orthopedics.
Milestones
2001 2003-04 2005 2007 2008 2009 2010 Inaugurated the first hospital at Mohali with 300 beds Commenced operations in Noida Acquired 90% in Escorts chain of hospitals for Rs 5,850 mn Got listed on the BSE and the NSE Opened a new hospital in Jaipur Acquired Malar Hospitals (178 beds), Chennai for Rs 550 mn Rights issue of Rs 10 each at a premium of Rs 100 per share Acquired 10 hospitals of Wockhardt group at Rs 9,090 mn Acquired 25% stake in Parkway Holdings and sold to Khazanah for a net profit of Rs 180 mn Commenced two greenfield facilities in Delhi and Kolkata Launched an oncology block in Mulund, Mumbai 2011 Signed 5 O&M projects Acquired strategic stake in Super Religare Laboratories (SRL) Source: Company, CRISIL Research

Annexure: Financials
Income statement (Rs mn) Operating income EBITDA EBITDA margin Depreciation EBIT Interest Operating PBT Other income Exceptional inc/(exp) PBT Tax provision Minority interest PAT (Reported) Less: Exceptionals Adjusted PAT Ratios F Y09 Growth Operating income (%) EBITDA (%) Adj PAT (%) Adj EPS (%) Profitability EBITDA margin (%) Adj PAT Margin (%) RoE (%) RoC E (%) RoIC (%) Valuations Price-earnings (x) Price-book (x) EV/EBITDA (x) EV/Sales (x) Dividend payout ratio (%) Dividend yield (%) B/S ratios Inventory days C reditors days Debtor days Working capital days Gross asset turnover (x) Net asset turnover (x) Sales/operating assets (x) C urrent ratio (x) Debt-equity (x) Net debt/equity (x) Interest coverage Per share F Y09 Adj EPS (Rs) C EPS Book value Dividend (Rs) Actual o/s shares (mn) 0.8 2.5 40.4 226.7 FY10 1.4 3.7 58.3 13.5 317.3 F Y11# 3.0 5.0 81.5 405.1 F Y12E 4.0 7.6 108.9 408.3 F Y13E 4.7 8.4 113.9 408.6 10 68 106 54 0.6 0.8 0.7 1.6 0.7 0.7 0.7 13 101 78 17 0.7 1.0 0.7 5.6 3.0 2.2 1.5 14 73 77 22 0.9 1.1 0.9 5.0 0.3 (0.1) 1.8 20 72 74 36 1.1 1.4 1.3 2.2 0.1 0.0 2.2 20 72 73 48 1.1 1.5 1.5 2.0 0.1 0.0 6.3 Quarterly financials (Rs mn) Net Sales C hange (q-o-q) EBITDA C hange (q-o-q) EBITDA margin PAT Adj PAT C hange (q-o-q) Adj PAT margin Adj EPS Q4F Y10 3,295 42% 239 10% 7.3% 267 272 25% 8.3% 0.9 Q1F Y11 3,379 3% 260 9% 7.7% (134) (143) -153% -4.2% (0.4) Q2FY11 3,579 6% 441 69% 12.3% 818 748 -623% 20.9% 1.8 Q3FY11 3,714 4% 270 -39% 7.3% 357 345 -54% 9.3% 0.9 Q4FY11 4,156 12% 199 -26% 4.8% 322 294 -15% 7.1% 0.7 138.7 1.3 22.1 2.9 77.7 2.4 62.7 9.0 964.4 9.8 62.2 2.1 29.8 4.4 41.4 1.5 19.8 2.9 35.9 1.5 15.4 2.3 13.0 1.4 0.9 2.2 6.2 14.2 5.9 4.1 1.7 7.0 14.6 7.4 4.2 2.1 9.6 14.4 6.5 4.3 4.8 10.9 14.9 6.1 4.2 6.2 7.0 Cash flow (Rs mn) Pre-tax profit Total tax paid Depreciation Working capital changes Net cash from operations Cash from investments C apital expenditure Investments and others Net cash from investments Cash from financing Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Others (incl extraordinaries) Net cash from financing C hange in cash position C losing cash (30) 1,727 (1,382) 315 419 579 9,210 48,246 (4,288) 3,867 57,034 12,534 13,113 13,429 (45,180) (33) (31,785) (396) 12,717 5,326 (3,965) 4,419 5,780 (10,174) 2,544 (68) (1,545) (465) 2,079 23 (1,500) (1,032) (211) (1,243) (11,870) (33,944) (45,813) (2,639) 33,089 30,449 (9,381) (7,504) (16,886) (1,627) (6) (1,633) F Y09 160 (21) 487 719 1,346 F Y10 603 (167) 599 277 1,313 FY11# 1,465 (344) 930 (1,112) 939 FY12E 2,228 (521) 1,450 (2,225) 932 FY13E 2,840 (724) 1,539 (942) 2,713 19.9 398.7 (111.9) (111.9) 49.3 63.9 550.9 364.9 54.7 58.9 93.5 51.6 73.7 70.5 51.5 50.3 23.3 27.6 15.4 15.3 FY10 F Y11# F Y12E F Y13E F Y09 6,354 825 13.0% 487 337 486 (148) 308 86 247 41 32 173 86 87 FY10 9,487 1,352 14.2% 599 752 514 238 365 (119) 484 34 5 445 (119) 564 F Y11# 14,672 2,148 14.6% 930 1,218 671 547 918 144 1,609 344 30 1,235 144 1,091 1,653 F Y12E 25,488 3,662 14.4% 1,450 2,212 1,022 1,190 1,038 2,228 521 54 1,653 F Y13E 31,429 4,674 14.9% 1,539 3,135 498 2,637 204 2,840 724 209 1,907 1,907 Balance Sheet (Rs mn) Liabilities Equity share capital Reserves Minorities Net worth C onvertible debt Other debt Total debt Deferred tax liability (net) Total liabilities Assets Net fixed assets C apital WIP Total fixed assets Investments Current assets Inventory Sundry debtors Loans and advances C ash & bank balance Marketable securities Total current assets Total current liabilities Net current assets Intangibles/Misc. expenditure Total assets 133 1,830 710 579 3,253 2,087 1,166 4,306 15,713 238 2,018 1,169 13,113 1,055 17,593 3,114 14,479 9,591 73,184 402 3,064 1,783 12,717 1,055 19,022 3,827 15,195 9,531 42,520 1,021 5,151 3,560 2,544 1,055 13,332 6,085 7,246 13,849 50,007 1,292 6,263 4,437 2,079 1,055 15,126 7,402 7,724 13,788 50,578 7,862 1,836 9,699 541 11,428 4,256 15,684 33,429 14,754 2,700 17,454 341 21,066 21,066 7,845 21,215 21,215 7,851 2,267 6,666 216 9,149 6,551 6,551 12 15,713 3,173 14,989 345 18,507 54,797 54,797 (120) 73,184 4,051 28,651 321 33,023 9,617 9,617 (120) 42,520 4,083 38,278 2,114 44,475 5,652 5,652 (120) 50,007 4,086 40,093 2,367 46,547 4,152 4,152 (120) 50,578 F Y09 F Y10 FY11# FY12E FY13E
#FY11 numbers based on the abridged financials Source: CRISIL Research

Focus Charts
India has lowest per capita spend on healthcare
($)
Fortis has grown aggressively through acquisitions

10,000 8,717 8,000
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
7,290
3,588
6,000 3,261 2,992 1,643 799 797 604 233 109 4,000 2,522 2,000 951
4,833
US
Malaysia
Germany
Russia
China
Brazil
UK
Singapore
Australia
India
0 FY06 Fortis Apollo FY11
Revenue break-up from major hospitals

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY09 Escorts, Delhi Fortis, Noida FY10 FY11 FY12E FY13E 29% 28% 33% 0% 14% 0% 24% 30% 21% 24% 25%
EBITDA margin to remain stable in near term

(Rs mn)
5,000 14.6% 14.2% 3,000 14.4% 4,674 2,000 3,662 14.9%
15.5% 15.0% 14.5% 14.0% 13.5% 13.0%
4,000 11% 12% 1% 17% 29% 29% 9% 6% 13% 19% 30% 9% 6% 13% 18% 1,000 13.0% 825 0 FY09 FY10 EBITDA 1,352
11% 5% 14% 21%
2,148 12.5% 12.0% FY11 FY12E FY13E
Fortis, Mohali Wockhardt
Oncology Block, Mulund Others
EBITDA margins(RHS)
RoCE to grow post commissioning of new beds

(mn) (%)
Shareholding pattern over the quarters

100% 90% 80% 70% 60% 50% 40% 30% 20% 76.5% 81.5% 81.5% 81.5% 12.0 17.0% 1.3% 5.2% 10.3% 2.7% 5.5% 10.2% 2.0% 6.3% 9.4% 1.7% 7.4%
12,500
11,870 9.9
10,000
9,381 7.2
8.4 6.2
10.0 8.0 6.0 4.0
7,500 4.8 5,000 2.2 2,500 1,032 2.1 FY09 FY10 1.7 2,639
1,627
2,204 1,056 1,103 2.0 0.0
10% 0% Jun-10 Promoter Sep-10 FII Dec-10 DII Mar-11 Others
FY11 FY12E FY13E FY14E FY15E FY16E RoCE (RHS)
Capex
CRISIL Research Team

Senior Director
Mukesh Agarwal +91 (22) 3342 3035 magarwal@crisil.com
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July 15, 2011

KEY STOCK STATISTICS

PERFORMANCE VIS--VIS MARKET

Fortis Healthcare (India) Ltd

Industry growth expectations

CRISIL Limited. All Rights Reserved.

Fortis Healthcare (India) Ltd

Pan-India footprint of Fortis

Gwalior (200 beds)

Delhi > EHIRC (331 beds) > La Femme (45 beds)

Ahmedabad (200 beds)

Kota >Fortis Modi Hospital (200 beds)

Chennai >Fortis Malar Hospital (250 beds)

Bengaluru (120 beds)

CRISIL Limited. All Rights Reserved.

Fortis Healthcare (India) Ltd

Figure 2: Dominating position in northern region

East and others

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Figure 3: Occupancy rates up in past three years

Figure 4: Improving trend in ARPOB and ALOS

20,500 20,000 FY08 FY09 Occupancy FY10 FY11

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Focused on lifestyle-related diseases

CRISIL Limited. All Rights Reserved.

Fortis Healthcare (India) Ltd

Figure 5: India has lower per capita spend on healthcare

Source: CRISIL Research

Shift in demographics spell good tidings

CRISIL Limited. All Rights Reserved.

Fortis Healthcare (India) Ltd

Health insurance is currently at 5% in India

Figure 6: Growing insurance penetration in India

Figure 7: Medical tourists inflow on rise

Source: CRISIL Research

Source: CRISIL Research

Inorganic route quickened pace of growth in the past

CRISIL Limited. All Rights Reserved.

Fortis Healthcare (India) Ltd

6,000 4,833 4,000 2,522 2,000

0 FY06 Fortis Apollo FY11

Source: CRISIL Research

Acquired hospitals are strategically located

Fortis acquired ~2,400 beds at an EV/bed of Rs 6.5 mn

Table 2: Details of acquired beds

Steady improvement in performance of acquired assets

Fortis has turned around acquired hospitals

CRISIL Limited. All Rights Reserved.

Fortis Healthcare (India) Ltd

Figure 10: Fortis Malar had strong revenue growth

EBITDA margins (RHS)

EBITDA margins (RHS)

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Figure 11: Revenues and margins grew at Escorts, Amritsar