636122917776478561 (1)

Initiating Coverage | 14 October 2016
Sector: Healthcare
Fortis Healthcare
Leading Robust distribution

hospita
l chain
network
Asset Sweating
Enhanced
penetration
Asset right model
Largest
diagnostic chain
La
rism rg
es
Tou tg
l re eo
ica ac gr
ed h ap
M hi
c
Fortifying growth
Kumar Saurabh (Kumar.Saurabh@MotilalOswal.com); +91 22 6129 1519
Gaurav Tinani (Gaurav.Tinani@motilaloswal.com); +91 22 6129 1552
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Fortis Healthcare
Contents: Fortis Healthcare | Fortifying growth

Summary....................................................................................................................... 3
Fortis Healthcare two-pronged strategy to drive growth ........................................ 5
SRL Cash cow of the portfolio ................................................................................. 14
Financials: Asset light strategy on track; return ratios to improve .......................... 23
Valuations attractive SRL demerger to unlock value ............................................. 26
Key risks/concerns ..................................................................................................... 30
SWOT Analysis ............................................................................................................ 32
Story in charts............................................................................................................. 33
Story in charts: Hospital ............................................................................................. 34
Story in charts: Diagnostics ........................................................................................ 35
Annexure I Healthcare industry .............................................................................. 36
Annexure II - Diagnostics industry overview............................................................. 43
Annexure III SRL demerger structure...................................................................... 46
Financials and valuations ........................................................................................... 48
14 October 2016 2
Fortis Healthcare
Initiating Coverage | Sector:
Fortis Healthcare
BSE Sensex S&P CNX
27,674 8,583
CMP: INR170 TP: INR240 (+41%) Buy
Fortifying growth
Hospitals + Diagnostics = Double dose of growth
Stock Info
Bloomberg FORH IN We expect hospital business EBITDA to grow >10x over next three years on the
Equity Shares (m) 463.1 back of lower base, coupled with strong growth in EBITDAC and relatively flattish
52-Week Range (INR) 199 /41 BT cost.
1, 6, 12 Rel. Per (%) 0/-14/20 We expect EBITDA margin for the diagnostics business to improve by another
M.Cap. (INR b) 78.3 200bp by FY19E, given deeper penetration in existing markets, rationalization of
M.Cap. (USD b) 1.2 low-margin centers, growth in samples tested and higher share from the O&M
Avg Val, INRm 181.0
model.
Free float (%) 28.7
Currently, the hospital and diagnostics businesses are trading at >30% discount to
peers. We thus initiate coverage on Fortis Healthcare (FORH) with a Buy rating
Financial Snapshot (INR b)
Y/E Mar FY16 FY17E FY18E
and an SOTP-based target price of INR240, implying an upside of ~40%.
Sales 42.7 47.4 53.7 Two-pronged growth strategy in hospital business no major greenfield
EBITDA 2.2 4.4 6.8
expansion required
NP -0.9 -0.6 1.6
EPS (INR) -1.9 -1.3 3.5
We believe asset sweating and introduction of high-end medical programs
EPS Gr. (%) -58.3 -51.2 -283.8 will be the key growth drivers for FORHs hospital business in the medium
BV/Sh. (INR) 86.3 85.0 100.7 term. Despite restrained capex, the company should be able to drive growth
P/E (x) -87.9 -127.6 47.8 by improving occupancy at existing hospitals and bolt-on additions.
P/BV (x) 2.0 2.0 1.7 FORH has installed capacity of ~4,200 beds, of which ~3,600 (FORH/RHT-
EV/EBITDA (x) 39.6 22.6 13.3
owned) are operationalized. Total potential bed capacity stands at ~10,000.
EV/Sales (x) 2.0 2.1 1.7
We expect FORH to add ~800-900 beds over next three years, which is easily
RoE (%) -2.2 -1.5 3.8
RoCE (%) 1.1 3.0 4.2 achievable without any M&A or major greenfield expansion in the near term
(no greenfield in the pipeline, except Chennai and Ludhiana).
Shareholding pattern (%)
The companys occupancy levels are at ~72%, which suggests that ~1,000 out
Jun-16 Mar-16 Jun-15 of its 3,600 operational beds are not utilized. FORH is focusing on increasing
Promoter 71.3 71.3 71.3 occupancy at existing facilities by initiating new medical programs.
DII 5.3 5.3 0.3 Hospital business EBITDA to grow 10x in three years
FII 13.6 12.8 9.3
We expect robust EBITDAC (EBITDA before business trust cost) CAGR of 19%
Others 9.8 10.6 19.1
FII Includes depository receipts
over FY16-19E (implying addition of INR3.6b to EBITDAC). We estimate that
almost one-fourth of this addition to EBITDAC would be driven by the ramp-
up of Fortis Memorial Research Institute (FMRI; occupancy increasing from
61% to ~70% with EBITDAC margins greater than 20% from ~16% over next
Fortis Healthcare three years). Apart from this, shift in business mix away from government
Fortifying growth
schemes as well as recovery in occupancy (from 67% in FY16 to ~74% in
FY19E) at Fortis Escorts Heart Institute (FEHI) will contribute ~15% of
EBITDAC growth over next three years.
Given that a large part of business trust (BT) cost is fixed (except Chennai, no
major greenfield addition expected in the near term), we expect normalized
growth in BT cost to be in mid-single-digits (much lower than EBITDAC CAGR
of ~19%). We expect one-time reduction of INR2b in BT cost on annualized
basis from 2HFY17 (>40% reduction in BT cost) due to the FHTL transaction.
Lower base, coupled with strong growth in EBITDAC and relatively flattish BT
+91 22 3982 5584
Kumar.Saurabh@motilaloswal.com
cost, would result in a multifold increase in hospital EBITDA for FORH from
Please click here for Video Link INR0.5b in FY16 to INR5.4b in FY19E.
14 October 2016 3
Fortis Healthcare
Stock Performance (1-year) Acquisition of economic interest in FHTL to create value in medium term
FORH plans to acquire 51% economic interest in Fortis Hospotel Ltd (FHTL) for a
net transaction value of INR7.4b. FHTL is a subsidiary of Religare Health Trust
(RHT) and owns two key FORH hospitals FMRI, Gurgaon and Shalimar Bagh,
Delhi.
Due to consolidation of the business, BT cost for the company will reduce
significantly by INR2b (around one-third of hospital EBITDAC). Although the deal
will be EPS-neutral in FY17, it will become value-accretive going forward as large
part of below-the-line cost would remain stable, but operating profits would
continue growing at a robust pace (should be PAT accretive by FY18E).
Hospital sector still significantly under-penetrated bodes well for market

leaders
India has 9 beds per 10,000 people, which is significantly lower than other
countries and global median of 30 beds/10,000 people. This indicates that there
is significant opportunity for companies to establish and expand hospital
facilities in India. Given that there are only a few organized players in the Indian
healthcare sector (as the industry is capital-intensive and it takes 3-5 years for
new hospitals to achieve breakeven), we believe pan-India players like FORH are
well poised to capitalize on this inherent demand.
The medical tourism market in India was estimated at around USD3b in 2015. It
is expected to exhibit >20% CAGR to reach USD8b by 2020. International patient
revenue for FORH has grown at robust CAGR of >35% since FY13, contributing
~11% of domestic hospital sales (v/s ~6% in FY13).
SRL demerger value unlocking opportunity

SRL is the largest diagnostics chain in India with four reference labs and a pan-
India network of 310 clinical labs, 1,074 collection centers and 7,200 collection
points.
SRL is one of the early movers to establish its presence across India (SRL and Dr.
Lal generate 35% and 72%, respectively, of revenues from their respective
strongest zones). FORHs EBITDA margins in the diagnostics business have
almost doubled in last four years to >20% (as of FY16) due to its better capacity
utilization, change in business mix and improvement in realizations. We expect
EBITDA margins for the diagnostics business to improve by another 200bp by
FY19E on the back of deeper penetration in existing markets, rationalization of
low-margin centers, growth in samples tested and higher share from the O&M
model.
Valuations attractive SRL business comes for free

Currently, the hospital and diagnostics businesses of Fortis are trading at >30%
discount to peers. We believe stake acquisition in FHTL, coupled with demerger
of the SRL business, will help unlock significant value for FORHs shareholders.
Asset sweating, coupled with high operating leverage, will play a key role in
driving a multifold increase in hospital business EBITDA.
We argue for a multiple re-rating in the stock based on factors mentioned
above. We value the hospital business based on 22x Sep-18 EV/EBITDA and the
diagnostics business based on 25x Sep-18 EV/EBITDA. We thus initiate coverage
on FORH with a Buy rating and an SOTP-based TP of INR240, implying an upside
of ~40%.
14 October 2016 4
Fortis Healthcare
Fortis Healthcare two-pronged strategy to drive

growth
Leading private player in an underserved sector
FORH operates one of the largest private hospital networks in India. The company
recorded hospital revenues CAGR of 16% over FY12-16, driven by an increase in
operating beds to 3,600 at end-FY2016 with bed occupancy of more than 70%. FORH
has strong presence in north India and reasonable traction in the western and
southern parts of the country.
Exhibit 1: Hospital revenues to exhibit 13%CAGR over

FY12-16 Exhibit 2: EBITDA margins to improve over FY16-19E
11.3%
Hospital Revenues (INR m) Hospital EBITDA (INR m) 9.9%
EBITDA margins (%) 5,616
49,754
43,644 6.1% 4,312
38,284
32,070 34,490
27,950 1.5% 2,349
22,929 0.4%
19,120 -0.5% 510
143
(130)
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY14
FY15
FY16
FY17E
FY18E
FY19E
Source: MOSL, Company Source: MOSL, Company
Hospital business EBITDA to grow 10x in three years

We expect robust EBITDAC (EBITDA before business trust cost) CAGR of 19%
over FY16-19E (implying addition of INR3.2b to EBITDAC). We estimate that
more than one-fourth of this addition to EBITDAC would be driven by the ramp-
up of Fortis Memorial Research Institute (FMRI; occupancy increasing from 61%
to ~70%, and EBITDAC margins greater than 20% from 16% over next three
years). Apart from this, shift in business mix away from government schemes as
well as recovery in occupancy (from 67% in FY16 to ~74% in FY19E) at Fortis
Escorts Heart Institute (FEHI) will contribute ~15% of EBITDAC growth over next
three years.
Given that a large part of business trust (BT) cost is fixed (except Chennai, no
major greenfield addition expected in the near term), we expect normalized
growth in BT cost to be in mid-single-digits (much lower than EBITDAC CAGR of
~19%). We expect one-time reduction of INR2b in BT cost on annualized basis
from 2HFY17 (>40% reduction in BT cost) due to the FHTL transaction.
Lower base, coupled with strong growth in EBITDAC and relatively flattish BT
cost, would result in a multifold increase in hospital EBITDA for FORH from
INR0.5b in FY16 to INR5.4b in FY19E.
14 October 2016 5
Fortis Healthcare
Exhibit 3: EBITDA margins to improve due to robust EBITDAC growth and lower BT costs
EBITDAC BT Costs EBITDA
11,000
8,250
5,500
BT costs are expected to
2,750
decline significantly by
INR2b owing to the 0
acquisition of FHTL.
-2,750
FY 2014
FY 2015
FY 2016
FY 2017E
FY 2018E
FY 2019E
Source: Company, MOSL
Exhibit 4: Hospital business snapshot

Fortis Hospital FY15 FY16 FY17E FY18E FY19E
Fortis Hospital Sales (INR m) 32,070 34,490 38,284 43,644 49,754
YoY growth (%) 8% 11% 14% 14%
EBITDAC (INR mn) 4,590 5,080 6,049 7,201 8,458
EBITDAC margins (%) 14% 15% 16% 17% 17%
Fortis Hospital EBITDA (INR m) 143 510 2,349 4,312 5,367
EBITDA margin (%) 0.45% 1.48% 6.14% 9.88% 10.79%
Mature Hospitals (ex-FEHI)
Matured hospital(ex FEHI) revenue (INR m) 24,200 26,015 28,617 32,050 35,897
YoY growth (%) 8% 10% 12% 12%
Matured Hospital (ex-FEHI) EBITDAC (INR m) 4,719 5,073 6,009 7,051 8,256
EBITDAC margin (%) 20% 20% 21% 22% 23%
FMRI
FMRI revenue (INR m) 3,500 4,130 4,956 5,699 6,554
YoY growth (%) 18% 20% 15% 15%
FMRI EBITDAC (INR m) 455 661 892 1,140 1,442
EBITDAC margin (%) 13% 16% 18% 20% 22%
FEHI
FEHI revenue (INR m) 3,350 3,440 3,853 4,315 4,833
YoY growth (%) 3% 12% 12% 12%
FEHI EBITDAC (INR m) 436 396 578 734 870
EBITDAC margin (%) 13% 12% 15% 17% 18%
Source: MOSL, Company
14 October 2016 6
Fortis Healthcare
Exhibit 5: FY16 revenue composition

Start-Ups, 2%
FEHI, 10%
FMRI, 12%
Mature Hospitals,
75%
Exhibit 6: Incremental revenue contribution over FY16-19E Exhibit 7: Incremental EBITDAC contribution over FY16-19E
1,193 474 330

1,393 372 781 -680
2,424 -711
9,882 3,183
49,754 8,458
34,490
5,080
Mature
FEHI
O&M
Mature
FEHI
O&M
HO cost
FY19
FY16
FY19E
FMRI
Start-Ups
FMRI
Start-Ups
FY16
Option to increase bed capacity without significant capex

FORH will not opt for any new greenfield expansion (apart from Ludhiana) over
the medium term. Over next three years, the company will be expanding via
brownfield projects with a focus on better operational bed occupancy and
utilization in existing hospitals.
As seen in Exhibit 8, FORH operates 3,600 of its 4,100 installed beds. It also has
potential to add ~3,200 beds (~90% of current operational capacity) without any
significant capital expenditure. With infrastructure (i.e. hospital building)
already in place, FORH only has to invest in additional beds and medical
equipment.
Exhibit 8: FORH bed capacity

6,823
4,156
3,600
Current Operational Beds Installed Capacity Total Potential Capacity
Source: MOSL, company
14 October 2016 7
Fortis Healthcare
Exhibit 9: 750-900 beds expected to come up over next three years

Location Capacity Estimated time
Type
(beds) of completion
Ludhiana (Greenfield) 79 Mother and Child Programme FY17
Bengaluru, BG Road
200 Oncology, Operation Theatre FY18
(Brownfield)
Mother and Child Health Programme,
Jaipur CE 40 FY18
Orthopedics
Addition of 2 operating theatres and
Nagarbhavi (Bengaluru) 60 FY18
a cath-lab
Amritsar 102 FY18
Shalimar Bagh CE (Delhi) NA Addition of Oncology Programme FY18
Mulund (Mumbai) 50 Mother and Child Health Programme NA
Noida 40 Mother and Child Health Programme NA
Chennai 192 NA
FMRI (Flagship) (Brownfield) 150 NA
Total 913
Key parameters improved consistently over last few years

FORH has increased the number of operational beds by 250-300 over last 2-3 years
(net of discontinued operations). Moreover, it has seen consistent improvement in
average revenue per operational bed (ARPOB) and average length of stay (ALOS).
With a 200bp improvement to 72% in FY16, bed occupancy rate has also witnessed
signs of recovery. All this has helped increase the patient turnover rate, thereby
leading to revenue/EBITDA CAGR of 11%/28% over last three years.
Exhibit 10: FORH added 250-300 beds over last 2-3 years Exhibit 11: ARPOB improved significantly over FY12-16
ARPOB (in million) 15.7

93 41 15.1
13.7 14.2
299 -150 283 12.6
11.2
10.3
9.3
3600
3320
Net Additions
Discontinued
Bangalore
End FY14
FMRI
Ludhiana
End FY16
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017E
FY 2018E
FY 2019E
Source: MOSL, company Source: MOSL, Company
14 October 2016 8
Fortis Healthcare
Exhibit 12: ALOS also declined significantly over FY12-16 Exhibit 13: Occupancy rate exhibited early signs of recovery
4 ALOS (in days) Bed occupancy rate (%)
74 74 74
3.80 3.80 73
72 72 72
3.64
3.56 3.54 3.52 3.50
70
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017E
FY 2018E
FY 2019E
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017E
FY 2018E
FY 2019E
Steady growth in flagship hospital; occupancy improvement to drive growth

FORHs top 10 hospitals exhibited revenue CAGR of 11% over FY14-16, primarily
driven by revenues at FMRI (34% CAGR over last three years), which recorded
impressive ARPOB (16.8% CAGR over last three years) and bed occupancy (up to
61% in FY16 from 50% in FY14). Further ramp-up in FMRI, FEHI and new hospitals
remains the key growth driver over next 2-3 years.
Exhibit 14: Revenue growth across key hospitals Exhibit 15: ARPOB improvement across key hospitals
34% Revenue CAGR (FY14-16) ARPOB CAGR (FY14-16)
18%
17%
14%
12% 12%
13% 14% 9%
10% 11% 11% 10%
7% 7%
5% 6% 6%
4%
-1%
Noida
Mulund
FEHI
Jaipur
Mohali
FMRI
BG Road
Shalimar Bagh
Vashi
Anandpur
Noida
Mulund
FEHI
Jaipur
Mohali
Shalimar Bagh
Vashi
FMRI
BG Road
Anandpur
Further ramp-up in FMRI and turnaround in FEHI remain key growth drivers
over next 2-3 years
Commencing operations in May 2013, the companys flagship hospital, FMRI, in
Gurgaon is already generating the highest ARPOB across the FORH network, with a
17% CAGR over FY14-16. However, we believe there is significant potential to
improve the bed occupancy rate as this hospital matures (110 beds still unutilized on
average out of total 284 operational beds).
Another key hospital, FEHI, in Delhi witnessed a decline in utilization levels to 67% in
FY16 from 82% in FY14, primarily due to the companys voluntary exit from the
Central Government Health Scheme (CGHS) and other related government
businesses with a view to improve the patient mix. Consequently, the hospitals
ARPOB exhibited 14% CAGR over FY14-16 to reach INR18.2m in FY16 from INR14m
in FY14.
14 October 2016 9
Fortis Healthcare
Exhibit 17: Improvement in FEHIs occupancy to also drive

Exhibit 16: FMRIs occupancy to improve further growth
ARPOB (m) Bed occupancy rate (%) ARPOB (m) Bed occupancy rate (%)
69% 82%
62% 63% 65%
61% 72% 74%
67% 69%
50% 63%
28.7 28.8 20.0 21.8

25.1 27.5 16.2 18.2 18.6
18.4 21.5 14
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY14
FY15
FY16
FY17E
FY18E
FY19E
FORH has an advantage over peers, in our view. It has scope to improve the
occupancy rate (even at its key hospitals) with the voluntary exit now largely
completed (100 beds are unutilized on average out of total 299 operational beds).
We expect the utilization rate to gradually increase for FORH over next 2-3 years
and thus help it yield higher margins. On the other hand, utilization is already at the
highest level at many private hospital networks.
Ramp-up of new hospitals key monitorable

New hospitals have a long gestation period. As of end-FY16, three hospitals
(including FMRI) with 433 beds (~12% of total operating beds) were less than three
years old. As can be seen in Exhibit 18 and 19, operating parameters for hospitals
more than three years old (matured category) are much healthier than those of
hospitals below three years old. It is expected that in next two years, these hospitals
will fall in the matured category and start generating healthy profitability.
Exhibit 18: EBITDAC margins based on maturity profile Exhibit 19: Occupancy rate based on maturity profile
EBITDAC margin (%) Occupancy (%)
24.70%
23.10% 74% 77%
73%
19.40%
56%
12.40%
10 Years + 5-10 Years 3-5 Years 0-3 years 10 Years + 5-10 Years 3-5 Years 0-3 years
Higher occupancy rate to drive operating leverage

FORHs overall occupancy rate stood at ~74% as of end 1QFY17. This implies that
~950-1,000 beds are unutilized out of the total ~4,700 operational beds. We believe
that FORH will not need significant capex over the medium term and managements
focus will be on improving utilization levels across its existing hospitals. We expect
14 October 2016 10
Fortis Healthcare
the occupancy rate to improve to 74% by FY19E within the FORH network. As seen
in Exhibit 18 and 19, higher occupancy rates will yield higher operating margins.
Asset right model; lower capital cost

FORH largely operates in hospitals that are leased under a Hospital and Medical
Services Agreement (HMSA) with RHT (as seen in Exhibit 20). This asset right model
for expansion is mainly based on RHT investing and owning fixed assets (like land
and building) and FORH investing in medical equipment and operating hospitals on a
service fee basis (fixed quarterly payments + 7.5% of quarterly operating income).
This arrangement with RHT lowers capital expenditure as FORH does not have to
lock up capital in assets. It has also helped the company to de-leverage its balance
sheet significantly.
FORHs asset light arrangement with RHT, created in October 2012, has resulted in
efficient use of capital.
Exhibit 20: FORH: Breakup of operating model of hospitals (Operating Model)
Owned, 6
Leased, 18
Exhibit 21: Key Terms of Hospital and Medical Services Agreement
(A) Variable service fee

(i) 7.5% of FORH operating
income
(B) Base service fee

(i) Fixed at the start with a
3.0% p.a. escalation
(ii) Revised upward for any
capex/expansion
14 October 2016 11
Fortis Healthcare
Deal to acquire stake in FHTL to also drive operating leverage

In February 2016, the companys board approved the acquisition of 51% economic
rights in Fortis Hospotel Limited (FHTL), a subsidiary of RHT. FHTL is the owner of
Shalimar Bagh (New Delhi) and FMRI (Gurgaon) clinical establishments. Net
investment consideration for the transaction is estimated to be ~INR11.6b (net of
receipt of dividend).
Following the transaction, FHTL will become a subsidiary of the company and thus
be consolidated with FORH. The deal will result in lower service fees, i.e. net BT fees
that FORH pays to RHT, thereby positively impacting the companys operating
profitability (EBITDA). However, net impact on PAT will be neutral initially as seen in
Exhibit 22.
Exhibit 22: Acquisition deal

Acquisition Structure INR m
Initial Cash Consideration 9,700
Debt @17.5% interest 4,200
Gross Acquisition amount 13,900
Funding of deal
Bridge Financing Debt @8% 9,700
Debt @17.5% interest 4,200
Gross increase in debt 13,900
(-) Receipt of dividend from RHT after 3 months (28% stake) 2,500
Net increase in debt 11,400
P&L impact
(+) Incremental EBITDA owing to Lower BT costs 1,960
(+) Interest Income on NCD's 350
(-) interest cost on bridge finance Debt@8% 600
(-) interest cost on Debt@17.5% 750
(-) Depreciation 350
(-) Incremental Tax and Minority interest 610
PAT Neutral
As operating profitability of FORHs flagship FMRI hospital and Shalimar Bagh

hospital increases owing to higher occupancy rates and higher ARPOB, the deal will
be margin-accretive for the company. FMRI, Gurgaon, is the largest hospital in the
FORH chain in terms of revenues. The asset has the highest ARPOB with strong
occupancy growth prospects.
Operating metrics better than peers

We have done an analysis to understand FORHs positioning versus Indian
players with respect to operational and financial parameters. Following are the
key takeaways:
ARPOB is the best in the industry. FORH clearly benefits from its strong anchor
hospitals, which shore up its overall operating metrics. For instance, as seen in
14 October 2016 12
Fortis Healthcare
Exhibit 23 below, FEHI and FMRI have much stronger metrics than the overall
blended numbers.
However, we believe FORH clearly has an advantage as occupancy at its anchor
hospitals (~61% for FMRI and ~67% for FEHI) is much lower than the companys
overall blended occupancy of ~72%. We note that FMRI is still at a nascent stage
of growth and further increase in occupancy would be immensely beneficial
over the medium term. Also, turnaround in FEHI is expected to drive higher
occupancy and ARPOB over next 2-3 years.
Exhibit 23: Operational Peer analysis

Indian Companies Nos of Operating Beds Occupancy (%)* ARPOB (INR m)* ALOS (days)*
FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY16
Fortis 3,320 3,562 3,600 73 70 72 11.2 12.6 13.7 3.8 3.6 3.6
FEHI NA 299 299 82 67 67 14.0 16.1 18.2 NA NA NA
FMRI NA 280 284 50 62 61 18.4 21.4 25.1 NA NA NA
Apollo 5,811 6,321 6,724 71 68 63 8.6 9.3 10.2 4.5 4.4 4.2
Chennai Cluster 1,264 1,491 1,526 72 67 63 12.2 12.5 14.4 4.4 4.4 4.0
Hyderabad Cluster 930 930 930 67 63 60 7.3 8.4 9.7 4.5 4.2 4.0
NH 4,697 5,352 5,397 48 53 54 5.2 5.8 6.4 4.9 4.3 4.3
Karnataka Cluster (NICS, MSMC) 2,187 2,344 2,026 53 57 55 5.1 5.9 6.6 5.2 4.9 4.6
Eastern Cluster (RTICS) 1,534 1,827 1,893 41 54 58 6.4 6.2 6.7 4.3 4.2 4.2
* only operated beds Source: MOSL, Company
14 October 2016 13
Fortis Healthcare
SRL Cash cow of the portfolio

Largest diagnostics player in India
SRL is the leading pathology service provider in India in terms of revenues. SRLs
standalone revenues exhibited 14% CAGR over FY12-16. It has strong presence in
north and west India. Additionally, SRL has gained reasonable traction in the eastern
and southern parts of the country.
Exhibit 24: Revenues exhibited 14% CAGR over FY12-16 Exhibit 25: Diversified revenue base
SRL Revenue breakup (%)
12,615 South India,

11,214 16%
9,968 North India,
8,980 International , 35%
8,320
7,410 1%
6,440
5,320 East India,
22%
West India,
FY 12
FY 13
FY 14
FY 15
FY 16
FY 17E
FY 18E
FY 19E
27%
Robust distribution network

SRL operates four reference labs (one each in New Delhi, Mumbai, Bangalore and
Kolkata). Additionally, it provides diagnostic services through a pan-India network of
310 clinical labs (including hospital-based labs, 1,074 collection centers and 7,200
collection points). Apart from acquiring the diagnostic business from Piramal in
2010, the company has not acquired any other laboratory.
Exhibit 26: SRLs existing Infrastructure

SRL FY14 FY15 FY16
Clinical Labs 281 264 314
SRL has been rationalizing Reference Labs 12 12 4
its radiology, wellness lab Self-Operated 141 131 161
network over FY14-16.
Hospital based Labs NA 90 108
Some collection centers
Wellness centers 21 21 18
were also exited in FY16.
International Laboratories 3 3 3
Other 104 7 20
Collection points 5,800 6,400 7,200
Collection Centers NA 1,250 1,074
14 October 2016 14
Fortis Healthcare
Exhibit 27: Geographical scale (SRL map India)
Asset light hub-and-spoke model

SRL has employed an asset-light model. It operates on a hub-and-spoke model,
where the four reference laboratories operate as the primary hub, other clinical
laboratories operate as secondary hubs and collection centers help connect patients
to the hubs (laboratories). Hub-and-spoke model is scalable for future growth and
ensures better profitability as business activities increase.
14 October 2016 15
Fortis Healthcare
Exhibit 28: Hub-and-spoke model for a diagnostic chain
Additionally, SRL performs test and services on equipment and instruments that
generally are leased under reagent rental. This enables SRL to reduce capital
expenditure for diagnostic equipment. This is evidenced by SRLs high fixed asset
turnover (see Exhibit 29).
Exhibit 29: Asset turnover trend for SRL over FY11-15

Fixed asset turnover (Gross) Fixed asset turnover (Net)
2.8 2.8 2.8
2.1
1.9 1.8 1.7 1.6
1.3
1.1
FY11 FY12 FY13 FY14 FY15

14 October 2016 16
Fortis Healthcare
Exhibit 30: Diagnostic business assumptions snapshot

FY14 FY15 FY16 FY17E FY18E FY19E
Diagnostic Standalone Revenues (INR m) 7,410 8,320 8,980 9,968 11,214 12,615
YoY Growth (%) 15.1% 12.3% 7.9% 11.0% 12.5% 12.5%
Revenues from Fortis hospital based labs 880 1,100 1,340 1,595 1,906 2,271
(%) of gross revenues 11.9% 13.2% 14.9% 16.0% 17.0% 18.0%
Diagnostic Net Revenues (INR m) 6,530 7,220 7,640 8,373 9,307 10,345
YoY Growth (%) 12.8% 10.6% 5.8% 9.6% 11.2% 11.1%
EBITDA (INR m) 1,170 1,470 1,820 2,123 2,467 2,902
EBITDA margin (%) 17.9% 20.4% 23.8% 25.4% 26.5% 28.0%
Samples Processed (accessions) (in millions) 12.8 13.7 14.5 15.4 16.4 17.4
YoY Growth (%) 7.0% 5.8% 6.5% 6.0% 6.0%
Tests/Accessions(Sample) 2.24 2.22 2.26 2.30 2.40 2.50
Tests Conducted (in millions) 28.7 30.4 32.7 35.5 39.3 43.4
YoY Growth (%) 5.9% 7.6% 8.6% 10.6% 10.4%
Avg realization per test 258.2 273.7 274.6 280.1 285.7 291.4
YoY Growth (%) 6.0% 0.3% 2.0% 2.0% 2.0%
Radiology network rationalization masks robust pathology business

SRLs standalone sales/EBITDA exhibited ~14%/35% CAGR over FY12-16.
However, over FY14-16, revenue growth has largely been weighed down by
network rationalization within the companys radiology and wellness business.
As seen in Exhibit 31, SRLs standalone pathology business has exhibited 14%
CAGR over last two years, largely in line with industry growth. Further, the
companys in-house hospital business has demonstrated 23% CAGR over the
same period.
The companys network rationalization is now largely over, and we expect
diagnostic revenues to exhibit 12% CAGR over FY16-19E. Growth over next 2-3
years will primarily be driven by regional penetration as SRL looks to leverage its
geographically well-spread presence.
Exhibit 31: Revenue growth over FY14-FY16 weighed down by network rationalization
Revenues (INR mn) YoY growth (%)
21%
SRLs revenues exhibited 15%

14% CAGR over FY12-16 12%
8,320 8%
7,410
6,440
5,320
8,980
FY 12 FY 13 FY 14 FY 15 FY 16
14 October 2016 17
Fortis Healthcare
Exhibit 32: Nevertheless, pathology business growth in line with industry over FY14-16
CAGR
Diagnostic Revenues FY14 FY15 FY16 YoY gr.
(FY14-16)
Ex-in-house Fortis Hospital business 6,530 7,220 7,640 6% 8%
Pathology 5,898 6,723 14%
Imaging business 939 611 -35%
Clinical Trial, Wellness and International 384 306 -20%
In-House Fortis Hospital business 880 1,100 1,340 22% 23%
Standalone revenues from Operations 7,410 8,320 8,980 8% 10%
Source:
SRLs revenue growth was supported by 6% CAGR in sample collections over
FY14-16. In FY15 and FY16, the company collected approximately 13.7m and
14.5m samples and conducted about 30.4m and 32.7m tests, respectively. This
amounts to processing more than 39,000 samples and conducting more than
89,000 tests daily in FY16. We believe increasing preference for evidence-based
treatment will fuel growth over next 2-3 years.
Exhibit 33: Sample/No of Tests metrics

Diagnostic Standalone business (in m) FY14 FY15 FY16 CAGR (FY14-16)
Revenues (INR m) 7,410 8,320 8,980 10%
Clinical Laboratories 281 264 314 6%
Samples Processed (Accessions) 12.8 13.7 14.5 6%
Tests Conducted 28.7 30.4 32.7 7%
Tests/Accessions(Sample) 2.24 2.22 2.26 0%
Margins doubled in four years; improvement to continue

SRLs EBITA grew at 35% CAGR over last five years, aided by economies of scale.
Its standalone EBITDA margins have improved to 20.3% in FY16 from ~10% in
FY12.
Exhibit 34: EBITDA exhibited 35% CAGR over FY12-16 Exhibit 35: EBITDA margins more than doubled over FY12-16
EBITDA margin (%)
22% 23%
20% 21%
2,902 17%
2,467 16%
2,093 12%
1,820 10%
1,450
1,160
800
540
FY 12 FY 13 FY 14 FY 15 FY 16 FY 17E FY 18E FY 19E FY 12 FY 13 FY 14 FY 15 FY 16 FY 17E FY 18E FY 19E
SRLs revenue/test and EBITDA/test have also improved 3% and 17% per annum,
respectively, over FY14-16 owing to its strategy to focus on pricing and quality
rather than volumes.
14 October 2016 18
Fortis Healthcare
Exhibit 36: Operational performance has significantly improved

Diagnostic standalone business (in m) FY14 FY15 FY16 CAGR (FY14-16)
Clinical Laboratories 281 264 314 6%
Revenue/Lab 26.4 31.5 28.6 4%
EBITDA/Lab 4.1 5.5 5.8 18%
Samples Processed (accessions) 12.8 13.7 14.5 6%

Revenue/Sample (INR) 578.9 607.3 619.3 3%
EBITDA/Sample (INR) 90.6 105.8 125.5 18%
Tests Conducted 28.7 30.4 32.7 7%

Revenue/Test (INR) 258.2 273.7 274.6 3%
EBITDA/Test (INR) 40.4 47.7 55.7 17%
Tests/Accessions(Sample) 2.24 2.22 2.26 0%

EBITDA margins to catch up with peers

SRL is the largest diagnostic company in India (in terms of revenues), followed by Dr.
Lal PathLabs, Metropolis Healthcare and Thyrocare. However, in terms of
profitability, it lags industry peers.
Although SRLs EBITDA margin has improved from 10% in FY12 to 20% in FY16, it is
still lower compared to industry peers (Exhibit 37). This can largely be attributed to
higher staff costs (~30% of revenues) SRL has ~500 doctors on its payroll, as
against <100 for industry peers. Additionally, we note that SRL incurred capex
toward setting up its reference lab network and establishing its lower-margin B2B
business.
However, we expect EBITDA margins for SRL to continue improving (to 23% in FY19E
from 20% in FY16) and catch up with peers, driven by deeper penetration into its
existing markets and growth within its higher-margin B2C business.
Exhibit 37: Operational peer comparison table

FY16 SRL Diagnostics Dr. Lal Thyrocare* Metropolis
Revenue (m) 8,980 7,913 2,410 6,000
EBITDA margin (%) 20% 26% 39% 25%-30%
Clinical Laboratories 314 172 7 130
Revenue (m)/Clinical Laboratories 29 46 344 46
Tests offered >3800 3,495 209 >4500
*Financials are not directly comparable due to different revenue recognition methodology
14 October 2016 19
Fortis Healthcare
Geographical expansion largely done

SRL has set up four reference labs (in Delhi, Mumbai, Bangalore and Kolkata),
apart from a network of clinical labs to conduct routine tests. On the other
hand, Dr. Lal PathLabs (DLPL) has only one reference lab operational currently
and is setting up the second one in Kolkata, which should become operational in
FY17.
As observed in Exhibit 38, SRL has a well-distributed revenue base, while peers
like DLPL and Thyrocare are currently adding new clinical labs and expanding
their regional footprint. SRL has also established its lower-margin B2B business
in its geographies and created a reputable doctor base.
We believe SRLs medium- to long-term revenue performance will be driven by
growth within the higher-margin B2C businesses via its wide network and
established doctor base. On the other hand, SRLs peers would first have to
develop lower-margin B2B businesses, which would weigh down on their near-
term margins.
Exhibit 38: SRL has well-diversified geographical mix; while DLPL has concentrated revenue
base
72%
SRL Revenue breakup (%) Dr Lal Pathlab revenue breakup (%)
35%
27%
22%
13% 16%
7% 7%
1% 1%
North India West India East India South India International
SRLs standalone EBITDA margins have improved from 16% in FY14 to 20% in
FY16, mainly attributable to improving per sample revenue (up from INR579 in
FY14 to INR619 in FY16) and EBITDA (from INR91 to INR126) (see Exhibit 40).
This trend is in contrast to peers like DLPL and Thyrocare which adopt a price
disruptive strategy with a view to enhance their volumes/market penetration.
Exhibit 39: SRLs EBITDA margin has improved over FY16-18, Exhibit 40: SRLs revenue/sample is improving YoY, while
while that of peers has declined peers are witnessing downward trend
SRL Thyrocare Dr Lal SRL Thyrocare Dr Lal
46% 607.3 619.3

578.9
41% 40%
28% 27% 26%

293.7 302.6 300.9
20%
16% 17%
197.1 175.7 176.6
FY 14 FY 15 FY 16 FY 14 FY 15 FY 16
14 October 2016 20
Fortis Healthcare
Growth can be fuelled without additional capex

As highlighted earlier, SRLs reference lab geographical expansion is largely
done. The companys pan-India hub-and-spoke network should allow it to reach
customers at limited incremental cost.
We believe the company can drive huge operating leverage by processing
additional samples while keeping incremental cost of sample collection low over
the medium term. Efficiency of a clinical laboratory improves as a function of
quantity of tests performed. As sample volumes increase, they become
progressively less expensive relative to fixed costs.
Backed by an established B2B business, SRL has forayed into the home
collection market across 13 prominent Indian cities to raise its appeal with
individual/walk-in customers. As highlighted in Exhibit 41, SRL has introduced a
hygienic, single-use BUC Box to collect samples based on convenience of
patients. SRL will gradually expand its home collection services over the medium
term. This is evidenced by an increase in revenue contribution from home
collection centers to 2.5% of revenues from ~1% in just one year.
Exhibit 41: Sealed BUC (blood urine collection) box Exhibit 42: Contains all components for safe home collection
14 October 2016 21
Fortis Healthcare
Exhibit 43: Home collection test packages offered by SRL

Name Tests covered
Allergy Screening, Metal Toxicity, Anemia, Diabetes, Heart, Liver, Kidney, Thyroid, General body checkup,
HCP Advanced
Vitamin B12, Bone Health
HCP+ Diabetes, Heart, Liver, Kidney, Thyroid, General body checkup, Bone Health, Nerve Health
Healthy Lady Diabetes, Heart, Liver, Kidney, Thyroid, General body checkup
Healthy Gentlemen Diabetes, Heart, Liver, Kidney, Thyroid, General body checkup
Youthful He Diabetes, Liver, Kidney, Thyroid, General body checkup, Bone Health
Youthful She Diabetes, Liver, Kidney, Thyroid, General body checkup, Bone Health
Diabetes Check Diabetes
Extensive Diabetes Check Diabetes, Heart, Kidney, General body checkup
Thyroid Profile Thyroid
Thyroid Panel II, Serum Thyroid
Diabetes, Heart, Kidney, Thyroid, General body checkup, Complete Body count, Urinalysis, WBC differential
Healthy Heart Package
Count
Healthy Heart Package Diabetes, Heart, Kidney, Thyroid, General body checkup, Complete Body count, Urinalysis, WBC differential
Advanced Count
Healthy Liver Check Liver
Hypertension Profile Diabetes, Heart, Kidney, Electrolytes, General Body Checkup, Urinalysis
Lipid Profile Plus Diabetes, Heart
Obesity Package Diabetes, Heart, Kidney, Electrolytes, General Body Checkup, Urinalysis, Thyroid
General body checkup, Complete Body count, Urinalysis, WBC differential Count, Antistreptolysin O, C-
Arthritis Screen
reactive protein
Vitamin Plus Vitamin B12, Vitamin D
Expansion within higher-margin international business bodes well

SRL operated three international laboratories, which contributed only 2.5% of FY16
revenues. Over FY16-FY18E, the company intends to expand its international
laboratory network to eight labs in Africa, Sri Lanka and Nepal. International
business operates at substantially higher operating margins compared to SRLs
blended EBITDA margins. Consequently, we believe higher revenue contribution
from the international business should aid margin expansion over FY16-18E.
Exhibit 44: Customer revenue mix

Clinical Trial, 0.5%
Wellness, 4.1%
Direct Client,
16.2% International, Walk-in,
2.5% 32.6%
Hospitals,
20.4%
Collection
centers, 23.6%
14 October 2016 22
Fortis Healthcare
Financials: Asset light strategy on track; return ratios to improve

Leverage to increase in near term owing to FHTL acquisition; FCCB
redemption and sale of non-core assets to pare debt
Fortis net debt to equity ratio improved from 2.0x as of end FY12, to 0.2x as of end
FY16. As of end-1QFY17, FORH had ~INR18b (USD275m) of gross debt and INR9.7b
of cash and cash equivalents on books. However, a significant part of this debt is
related to foreign currency convertible bonds (FCCBs) aggregating INR5.7b
(USD87m), which are currently deep in the money (conversion at INR99/share). We
believe these FCCBs will be converted into equity shares before the demerger
materializes to enable FCCB holders shares in both the demerged entities.
Accordingly, as of end 1QFY17, net debt stood at INR2.98b and net debt to equity at
0.2x.
Exhibit 45: Financial leverage should remain at comfortable levels
2.0 Net Debt/Equity (x)
1.3
0.6
0.3 0.2 0.2
0.2 0.2
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
However owing to the acquisition of 51% economic interest in FHTL, we believe

FORHs net debt should increase by INR11.5b. Additionally, management has guided
for capital expenditure of INR1.5b annually in FY17E and FY18E. Nevertheless, FCCB
redemption coupled with monetization of FORHs non-core assets would reduce
overall debt levels. We believe FORHs financial leverage should remain at
comfortable levels, with net debt to equity of 0.2x at end-FY18E.
Exhibit 46: Leverage to increase in near term owing to FHTL acquisition
Debt as of end-1HFY17 may Debt calculation
be higher than MOSL FY17E As of end 1Q FY17 INR m
estimates on account of Total debt (incl FCCB's) 18,380
time lag between initial cash (-) Cash and Cash Equivalents 9,660
Net debt before FHTL acquisition 8,720
consideration to acquire
Funding of deal
economic interest in FHTL to
(+) Bridge financing @8% 9,700
RHT, and receipt of special (+) Debt on consolidation @17.5% interest 4,350
dividend from RHT (FORH (-)Receipt of dividend from RHT after 3 months 2,500
owns 28.8% stake in RHT) Net increase in debt 11,550
Net debt after FHTL acquisition 20,270
(+) Net capex requirements in FY17 1,500
Net debt in end FY17 21,770
(-) Foreign currency convertible bonds
5,740
(currently in the money with conversion at INR99/share)
(Assume the same will be converted into equity shares before the demerger materializes)
(-) Sale of non-core assets (incl land in Ahmedabad) 5,000
(+) Net capex requirements in FY18 1,500
Effective net debt in end FY18 12,530
14 October 2016 23
Fortis Healthcare
Goodwill to decrease on demerger of diagnostics business

Goodwill should come down as the diagnostics business gets demerged. FORH has
grown its business historically via strategic acquisitions. Some of these acquisitions
include Escorts Heart Institute in 2005, Wockhardt Hospitals in 2010 and SRL in
2011. Additionally, SRL had acquired Piramal Healthcares diagnostic business in
2010. As a result of these acquisitions, goodwill of ~INR4000m is recognized in
FORHs consolidated accounts as of end-FY16. We expect goodwill to reduce upon
completion of demerger of the diagnostics business on account of de-recognition of
goodwill outstanding on FORHs books due to its acquisition of SRL in 2011.
RoE to improve with better margins

Positive operating leverage in the hospital business coupled with higher margins
from the diagnostics business are likely to result in better margins over next two
years. It will also improve return ratios from -2.2% in FY16 to 6.8% in FY19E.
Exhibit 47: EBITDA margins to improve significantly over

FY16-19E Exhibit 48: ROE to improve over FY16-19E
EBITDA margins (%) 6.4
13.6 RoE (%)
12.6
9.4
3.8
5.1
3.3 (1.5)
1.5 (2.2)
(2.8)
(4.6)
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY14
FY15
FY16
FY17E
FY18E
FY19E
Exhibit 49: ROCE to also improve over FY16-19E Exhibit 50: ROIC to also witness significant improvement
5.6
RoCE (%) RoIC (%)
4.2 9.7
3.0 6.9
1.1 3.6
0.4
(0.2) (0.2)
(2.0)
(2.6)
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY14
FY15
FY16
FY17E
FY18E
FY19E
14 October 2016 24
Fortis Healthcare
Operating cash flows to improve

SRL generated INR1.4b in operating cash flows over FY12-15, aided by its higher
operating profit and network rationalization strategy. Additionally, SRL generated
INR743m in free cash flows over FY14-15. We expect SRLs free cash flows to
improve further over the medium term as geographical expansion of the reference
laboratories is completed.
FORH generated INR6.7b in operating cash flows over FY14-16. The company has
maintained an adequate level of capex over past few years. Also, there are no major
capex needs (greenfield projects) in the medium term as key facilities (including
FMRI and FEHI) are still underutilized. We expect the companys free cash flows to
improve over next 3-4 years.
Exhibit 51: SRLs cash flows improved significantly over Exhibit 52: We expect FORH to generate INR10b free cash
FY14-15 flows over FY18-19E
518 FCF (INR m)
FCF (INR m) 6,465
226
3,476
(140) 1,999
(583) 625
(810) -622
-1,248
(1,739)
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY10
FY11
FY12
FY13
FY14
FY15
14 October 2016 25
Fortis Healthcare
Valuations attractive SRL demerger to unlock value
We believe FHTL acquisition, coupled with demerger of SRL business, will help
unlock significant value for FORH shareholders. Operating profit growth of the
hospital business is at an inflection point. Asset sweating, coupled with high
operating leverage, will play a key role in driving a multifold increase in EBITDA.
We expect hospital business EBITDA to grow more than 10x over next three years on
the back of its strong operational performance, acquisition of FHTL and flattish BT
cost. Also, ex-SRL and RHT stake, the hospital business is trading at a significant
discount to peers (~10-11xx 1HFY19E EV/ EBITDA; >30% discount to peers).
We value the hospital business based on 22x Sep-18 EV/ EBITDA (in line with peers)
and the diagnostic business based on 25x Sep-18 EV/ EBITDA (~10% discount to Dr.
Lal).
We thus initiate coverage on FORH with a Buy rating and an SOTP-based TP of

INR240, implying an upside of ~40%.
Exhibit 53: SOTP based target price of INR240 provides ~40% to CMP
SOTP Methodology
(INR m) 1H FY19E INR/ Share
SRL (56% stake Diagnostic business) 37,580 25 x 72 EV/EBITDA x
Domestic hospital 106,470 22 x 204 EV/EBITDA x
Fortis stake in business trust (~29%) 12,213 CMP 23 CMP
Target EV (INR m) 156,264
Net debt/cash -15,000
Monetization of non-core assets 5,000
Minority interest in FHTL -20,000
Implied Equity Value 126,264
Diluted Shares Outstanding 523
Target Price (INR/share) 240
Key catalysts driving stock performance over medium term are:

Faster ramp-up of new hospitals, including FMRI, Bangalore, Ludhiana and
Chennai.
100% acquisition of FHTL will lead to a significant reduction in interest cost and
minority interest.
SRL business, in our view, trades at a significant discount to peers. Demerger of
the business should help unlock value for shareholders.
14 October 2016 26
Fortis Healthcare
Exhibit 54: Peer Valuation

Company Mcap EV/EBITDA (x) ROE (%) CAGR (FY16-19E)
(USD m) FY17E FY18E FY19E FY17E FY18E FY19E EBITDA Revenue
Fortis Healthcare 1,203 22.8 13.5 10.3 - 3.8 6.8 57.8 12.7
Hospital chains
Domestic
Apollo Hospitals Enterprise 2,813 23.8 19.4 16.4 9.6 12.1 14.5 13.5 15.4
Narayana Hrudayalaya Ltd 1,032 28.7 23.3 18.8 7.8 10.5 12.8 27.3 15.6
International
Universal Health Services Inc 11,853 8.9 8.4 7.8 15.7 16.3 16.6 6.3 9.6
IHH Healthcare Bhd 12,942 20.9 17.8 16.7 5.2 6.4 6.0 14.4* 14.9*
Bumrungrad Hospital PCL 3,484 19.7 17.6 13.6 25.4 24.3 21.2 8.5* 6.4*
Diagnostic chains
Domestic
Dr Lal PathLabs Ltd 1,303 35.0 29.3 23.6 24.9 24.7 29.7 18.3 18.4
International
Quest Diagnostics Inc 11,840 10.3 9.9 9.5 14.9 14.3 14.8 (1.6) 1.4
Laboratory Corp of America 14,298 10.4 9.6 9.0 15.0 14.7 16.5 14.3 5.9
*FY15-18E Source: MOSL, Bloomberg
14 October 2016 27
Fortis Healthcare
Sensitivity analysis Upside potential outweighs downside risk
Exhibit 55: Scenario analysis suggests 80% upside in bull case v/s 16% downside in bear case
1H FY19E EBITDA Target TP Upside/
Assumptions
(INR m) Multiple (x) (INR) (Downside)
Base Case Hospital business- 4,839 22
SRL (56%) 1,503 25
Target price 240 40%
Bull Case Hospital business- 5,250 25
SRL (56%) 1,721 30
Target price 310 80%
Bear Case Hospital business- 4,060 18
SRL (56%) 1,340 20
Target price 145 (16%)
Bull case suggests 80% upside from current levels

Our sensitivity analysis suggests that FORH could generate consolidated EBITDA of
INR9.3b in bull case (v/s INR8.3b in base case). Valuing the hospital business at 25x
and the diagnostics business at 30x 1HFY19E EV/ EBITDA yields a fair value of
INR310 (v/s TP of INR240), implying an upside of >80% from CMP.
Faster-than-expected ramp-up of hospital business: We expect hospital
business occupancy to stay at ~74% until FY19E in our base case, given new bed
additions. Given that most of new bed additions (out of ~850 over next three
years) will be in the form of brownfield expansion, a faster ramp-up could lead
to an improvement in occupancy by ~200-300bp over next three years. This will
also lead to an improvement in margins by ~50-100bp in hospital business.
SRL margins to reach Dr. Lals levels by FY19E: In our base case, we expect
revenue CAGR of 12% until FY19E and EBITDA margin improvement to ~23%
over next three years. In our bull case, we have assumed revenue CAGR of ~15%
and margin improvement to ~25% (in line with peers) on the back of strong
ramp-up in direct client-based revenue, international and O&M business.
Valuation multiples in line with peers and not at discount: We believe strong
operational performance, coupled with significant improvement in return ratios,
will help narrow the valuation gap. We have assumed valuation multiple of 25x
and 30x 1HFY19E EV/ EBITDA for hospital and SRL businesses, respectively, in
our bull case (v/s 22x and 25x in base case).
Exhibit 56: Triggers for bull case- Occupancy improvement; margin expansion and multiple re-rating
20
10
40
310
240
TP- Base case Valuation multiple at par SRL- FY19 margins @ 25% Faster ramp-up in hospitals TP-Bull case
with peers
14 October 2016 28
Fortis Healthcare
Bear case analysis indicates limited downside from current levels

Our bear-case sensitivity analysis shows that FORH could generate consolidated
EBITDA of ~INR6.7b (v/s INR8.5b in base case). Valuing FORHs hospital and
diagnostics businesses at a 20% discount to base case at 18x and 20x 1HFY19E
EV/EBITDA, respectively, yields a fair value of INR145 (v/s TP of INR240), implying a
downside of <16% from CMP.
Slower-than-expected ramp-up of hospital business: We assume hospital

business occupancy to stay at ~74% until FY19E in our base case because of new
bed additions. However, slower ramp-up could lead to a decline in margins by
~50-100bp in hospital business.
SRL margins to stay below peers: In our base case, we expect revenue CAGR
of 12% until FY19E and EBITDA margin improvement to ~23% over next three
years. In our bear case, we have assumed revenue CAGR of ~12% and margin
improvement to ~22% (~300-400bp lower than peers) on the back of lower
ramp-up in direct client-based revenue, international and O&M business.
Valuation multiples to remain at 25-30% discount to peers: We have assumed
target multiple at ~18x and 20x 1HFY19E EV/EBITDA for hospital and SRL
businesses, respectively, in our bear case (v/s 22x and 25x in base case). This
could happen if macro factors become progressively worse or if the companys
growth outlook turns uncertain.
Exhibit 57: Triggers for bear case- Slow ramp-up in hospital and diagnostic coupled with flattish margins and multiple
downgrade
240 55
15
25
145
TP- Base case Valuation multiple at par SRL- FY19 margins @ 25% Faster ramp-up in TP-Bear case
with peers hospitals
14 October 2016 29
Fortis Healthcare
Key risks/concerns
Fortis Healthcare
Pending litigations related to Escorts acquisition
FORH acquired Escorts Hospitals, Delhi, in 2005. However, litigations continue
relating to i) lease of land by Delhi Development Authority, ii) dispute with Income
Tax department over tax demands and iii) dispute with Directorate of Health
Services (DHS) relating to unwarranted profits owing to non-compliance of provision
of free treatment/beds to poor. An adverse ruling in any of the three litigations may
hamper earnings in the near term.
Lower-than-expected ramp-up in occupancy in FMRI

FORH is a fixed-cost intensive business with high operating leverage. Inability to
scale up occupancy levels and realizations could hamper its operating margins.
Accordingly, lower-than-expected performance at its mature hospitals and slower
occupancy ramp-up at FMRI (Gurgaon) or FEHI (New Delhi) could hamper its growth
prospects.
SRL
Relatively low return ratios
Compared to Dr. Lal PathLabs and Thyrocare, SRL exhibits inferior return ratios,
primarily due to its lower profitability (Exhibit 58). SRLs core return ratios (adjusted
for goodwill, cash) are also lower compared to its listed peers. Nevertheless, all
three companies have strong balance sheets, driven by their asset light model
(centralized testing, rental reagent model for equipment purchase) and low working
capital requirements.
Exhibit 58: Relatively low return ratios

Return ratios (FY15) SRL Limited Thyrocare Dr. Lal
ROCE 6.65 15.65 36.54
ROCE (ex-cash, current investments) 6.84 24.79 71.25
ROCE (ex-cash, current investments, goodwill) 12.71 40.80 71.25
Fragmented business with low entry barriers

Indias diagnostic healthcare services industry is highly competitive and fragmented
with low barriers to entry. Entry for new players is very flexible since capital
investment for setting up diagnostic centers performing basic tests is generally low.
Furthermore, the competitive scenario may intensify, forcing players to cut prices.
However, large-scale diagnostic healthcare providers can enhance cost efficiencies
through automated testing, which helps to protect margins.
Peers price disruptive strategy may hamper growth

Thyrocares price disruptive strategy with a view to enhance volumes and market
penetration may impact SRLs operating margins/pricing strategy. As seen in exhibit
58, Thyrocare offers certain tests at prices 30-50% lower than SRL and other
14 October 2016 30
Fortis Healthcare
industry peers. Additionally, increase in the rupee price of reagents owing to further
depreciation of INR against USD may cap operating margins in the near term.
Exhibit 59: Diagnostic companies pricing for certain tests in Mumbai

INR SRL Dr Lal PathLabs Metropolis Thyrocare* Regional Chain
Lipid Profile 600 750 675 310 650
Vitamin B12 900 900 1,000 445 900
Vitamin D 1,500 1,250 1,500 1,030 NA
*Includes collection charges Source: MOSL, Company
Potentially adverse government regulations

Unlike the pharmaceuticals market, the diagnostics healthcare services industry
in India is not subject to extensive government regulations. Any potential
regulations governing prices of tests conducted by private healthcare providers
can materially impact profitability.
In recent times, some state governments have capped the pricing for certain
tests. These include dengue diagnostic test prices capped by the Maharashtra
government in September 2016, Chikungunya diagnostic test prices capped by
the Delhi and Gurgaon governments in September 2016, and Swine flu
diagnostic test prices capped by the Delhi state government in February 2015.
However, this policy is currently seen only in case of disease outbreaks, and
higher volumes may help offset capped prices and protect the companys
operating margins.
14 October 2016 31
Fortis Healthcare
SWOT Analysis
Strengths
Largest diagnostic player in India.
Robust distribution network: SRL provides diagnostic services through a pan-India
hub-and-spoke network of four reference labs, 310 clinical labs, 1,074 collection
centers and 7,200 collection points.
Operates one of the largest private hospital networks in India.
Average revenue per operating bed (ARPOB) is the best in the industry. FORH clearly
benefits from the presence of strong anchor hospitals, which shore up its overall
operating metrics.
Weaknesses
Indias diagnostic healthcare services industry is highly competitive and fragmented
with low barriers to entry. We note that the entry for new players is very flexible
since capital investment for setting up diagnostic centers performing basic tests is
low.
Relatively low return ratios.
Opportunities
Rising income levels, ageing population, growing health awareness and increased
penetration of health insurance to boost demand for healthcare services.
SRLs pan-India hub-and-spoke network should allow it to reach customers across
India at limited incremental cost.
SRLs international business operates at substantially higher operating margins
compared to the companys blended EBITDA margins. Consequently, we believe that
further expansion of the international business should aid margin expansion over the
medium term.
Shift from communicable to lifestyle diseases to lead to demand growth in tertiary
care.
According to independent research agency estimates, additional three million beds
will be needed for India to achieve the target of 30 beds per 1,000 people by 2025.
The private sector is expected to continue driving majority of bed additions over the
medium term.
Rise in medical tourism: Quality healthcare with low treatment costs, coupled with
well-educated, English-speaking medical professionals, has strengthened Indias
position as a preferred destination for medical tourism.
Threats
Competitive intensity from unorganized as well as organized players continues to
remain high. Peers price disruptive strategy may hamper growth in the diagnostics
business.
Adverse ruling in any of the three litigations related to Escorts acquisition may
hamper FEHIs turnaround.
Inability to scale up occupancy levels and realizations in the fixed-cost intensive
hospital business could hamper operating margins.
Any adverse government regulation governing prices of tests conducted by private
healthcare providers can materially impact profitability.
Exit of key do ctors may hamper occupancy of hospitals in the near term.
14 October 2016 32
Fortis Healthcare
Story in charts
Exhibit 60: FORH revenues to exhibit 13% CAGR over

FY16-19E Exhibit 61: FORH EBITDA to exhibit 58%CAGR over FY16-19E
Revenues (INR m) EBITDA (INR m)
61,000
53,745
47,357
39,659 42,651
34,919
30,423
26,177
3,282 2,224 521 1,309 2,169 4,472 6,779 8,517
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
Exhibit 63: Financial leverage should remain at comfortable

Exhibit 62: EBITDA margin improvement to continue levels
15.0 14.0
12.5 EBITDA margins (%) 12.6 Net Debt/Equity (x)
2.0
9.4
10.0
7.3 1.3
5.1
5.0 3.3
0.6
1.5
0.3 0.2
0.2 0.2 0.2
-
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Exhibit 64: ROCE to also improve over FY16-19E Exhibit 65: ROIC to also witness significant improvement
5.6
RoCE (%) RoIC (%)
4.2 9.7
3.0 6.9
1.1 3.6
0.4
(0.2) (0.2)
(2.0)
(2.6)
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY14
FY15
FY16
FY17E
FY18E
FY19E
14 October 2016 33
Fortis Healthcare
Story in charts: Hospital
Exhibit 66: Hospital revenues to exhibit 13%CAGR over

FY12-16 Exhibit 67: EBITDA margins to improve over FY16-19E
11.3%
Hospital Revenues (INR m) Hospital EBITDA (INR m) 9.9%
EBITDA margins (%) 5,616
49,754
43,644 6.1% 4,312
38,284
32,070 34,490
27,950 1.5% 2,349
22,929 0.4%
19,120 -0.5% 510
143
(130)
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY14
FY15
FY16
FY17E
FY18E
FY19E
Exhibit 68: ARPOB improved significantly over FY12-16 Exhibit 69: ALOS also declined significantly over FY12-16
ARPOB (m) 15.7 4 ALOS (in days)

14.2 15.1
13.7
12.6 3.80 3.80
10.3 11.2
9.3 3.64
3.56 3.54 3.52 3.50
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017E
FY 2018E
FY 2019E
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017E
FY 2018E
FY 2019E
Exhibit 70: Revenue growth across key hospitals Exhibit 71: ARPOB improvement across key hospitals
34% Revenue CAGR (FY14-16) ARPOB CAGR (FY14-16)
18%
17%
14%
12% 12%
13% 14% 9%
10% 11% 11% 10%
7% 7%
5% 6% 6%
4%
-1%
Noida
Mulund
FEHI
Jaipur
Mohali
Shalimar Bagh
Vashi
FMRI
BG Road
Anandpur
Noida
Mulund
FEHI
Jaipur
Mohali
Shalimar Bagh
Vashi
FMRI
BG Road
Anandpur
14 October 2016 34
Fortis Healthcare
Story in charts: Diagnostics
Exhibit 72: Diagnostic revenues to exhibit 12% CAGR over

FY16-19E Exhibit 73: EBITDA to witness 17%CAGR over FY16-19E
12,615
11,214 2,902
9,968 2,467
8,980 2,093
8,320
7,410 1,820
6,440 1,450
5,320 1,160
540 800
FY 12
FY 13
FY 14
FY 15
FY 16
FY 17E
FY 18E
FY 19E
FY 12
FY 13
FY 14
FY 15
FY 16
FY 17E
FY 18E
FY 19E
Exhibit 75: No of samples processed to grow 6%YoY over

Exhibit 74: EBITDA margins improvement to continue FY16-19E
EBITDA margin (%) Samples Processed (in m) YoY Growth (%)
22% 23%
20% 21% 7.0%
17% 6.5%
5.8% 6.0% 6.0%
16%
12%
10%
15.4 16.4 17.4
12.8 13.7 14.5
FY 12
FY 13
FY 14
FY 15
FY 16
FY 17E
FY 18E
FY 19E
FY14
FY15
FY16
FY17E
FY18E
FY19E
Exhibit 76: Tests conducted to witness 10% CAGR over FY16- Exhibit 77: Average realization per test to witness modest
19E owing to increased tests/sample 2%YoY growth over FY16-19E
Tests Conducted (in millions) YoY Growth (%) Avg realisation per test YoY Growth (%)
10.6% 10.4% 6.0% 291.4
8.6% 285.7
7.6% 280.1
273.7 274.6
5.9%
39.3 43.4 258.2 2.0% 2.0% 2.0%

30.4 32.7 35.5
28.7
0.3%
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY14
FY15
FY16
FY17E
FY18E
FY19E
14 October 2016 35
Fortis Healthcare
Annexure I Healthcare industry

One of the fastest growing industries in India
According to various industry estimates, healthcare was ~USD100b market in 2015.

The industry is expected to almost triple in size by 2020. Rising income levels, ageing
population, growing health awareness and increased penetration of health
insurance are expected to boost healthcare services demand in future. Additionally,
low cost of medical services has made India one of the most attractive countries in
the world for medical tourism.
Exhibit 78: Healthcare sector to exhibit 16% CAGR over 2015-2020E

280
160
100
73 81
52 60 63
45
2008 2009 2010 2011 2012 2014 2015 2017E 2020E
Source: IBEF
Hospital sector
Key growth drivers in place
Exhibit 79: Growing healthcare demand
Source: MOSL
14 October 2016 36
Fortis Healthcare
Scope for growth as healthcare services remain under represented

Indias healthcare expenditure as % of GDP in 2015 was relatively low at 3.8%,
compared to global average of 8.6%. This indicates that the healthcare industry has
tremendous growth potential in India.
Additionally, as per the WHO report-2013, healthcare infrastructure gap remains

substantial. India has 9 beds per 10,000 people, significantly lower than other
countries and global median of 30 beds/10,000 people. This indicates that there is a
great opportunity for companies to establish and expand hospital facilities in India.
According to independent research agency estimates, additional 3m beds will be

needed for India to achieve the target of 30 beds/1,000 people by 2025. Rural India,
which accounts for over 70% of population, is set to emerge as the biggest potential
demand source. The private sector is expected to continue driving majority of bed
additions over the medium term.
Exhibit 80: India is ranked lower in terms of healthcare spending

17
Healthcare expenditure as % of GDP
Indias healthcare 11.6 10.9 10.3

expenditure as % of GDP 9.3 8.6
was 3.8% (government
5.4 4.5
spends: 1.2%), compared to 3.8 4
3
global average of 8.6%
(government spends: 5.0%)
France
Canada
Indonesia
Malaysia
Thailand
India
US
UK
China
Japan
Global
Source: WHO-World Health Statistics 2015
Exhibit 81: Indias healthcare infrastructure gap remains substantial

India's share in global
20% India's share in global healthcare infrastructure
disease burden is 20%,
while its share of healthcare
infrastructure is much lower
with only 6% of global 9%
hospital beds and 8% share 8% 8%
6%
of doctors and nursing staff.
1%
Disease Burden Beds Doctors Nurses Community & Lab Technicians

Health Workers
Source: FICCI and E&Y
14 October 2016 37
Fortis Healthcare
Exhibit 82: India lags behind developed and other emerging economies in healthcare
infrastructure
39 Beds per 10,000 people
30 30 30
23 21
18
Brazil
Thailand
Malaysia
China
India
UK
US
Global
Source: WHO-World Health Statistics 2013
Significant opportunity for private healthcare providers

The Indian healthcare sector is dominated by private players (account for more than
80% of the total market delivery in India) as government investment in the
healthcare sector is significantly low (Exhibit 64).
Large investment by private sector players is likely to contribute significantly to the
development of India's hospital industry, and the sector is poised to grow to
USD160b by 2017 and to USD280b by 2020.
Exhibit 83: Private sectors share in healthcare/hospitals

spending is estimated at 81% in-2015 Exhibit 84: up from 66% in-2005
Share in healthcare spending in India, 2015 Share in healthcare spending in India,
2005
Government
Nursing Nursing
hospital, 19%
home, 30% home, 26%
Government
hospital, 34%
Mid tier, 14%
Mid tier, 11% Top tier, 40% Top tier, 26%
Source: WHO-World Health Statistics 2013 Source: WHO-World Health Statistics 2013
The private hospital market in India was estimated at USD54b as of end-CY2014.

Over 200914, the market size of private hospitals exhibited 19.7% CAGR. Increase
in the number of hospitals in tier-II/III cities has fuelled growth of the private sector.
14 October 2016 38
Fortis Healthcare
Exhibit 85: Private sector has emerged as a vibrant force in Exhibit 86: Private sector contribution (%) is among the
Indias healthcare industry largest globally within Indian healthcare industry
Market size of private hospitals (USD b) Private Sector Expenditure on Healthcare
(as a % of total healthcare expenditure)
54.0
India 69.7%
45.0
35.4 South East Asia 62.9%

29.9
Africa 50.7%
22.0
America 50.7%
Europe 24.8%
2009 2010 2011 2012 2014
Source: IBEF Source: World Health Statistics 2012
There are only a few organized players in the Indian healthcare system, as the
industry is capital-intensive and breakeven for a new hospital takes 3-5 years. The
following table lists some major players in the Indian healthcare sector.
Exhibit 87: Key players in the market (India)
Source: CRISIL Research
14 October 2016 39
Fortis Healthcare
Health insurance driving affordability, standardization

As of end-FY13, it was estimated that less than 15% of the Indian population was
covered by health insurance. However, increasing healthcare cost and burden of
new diseases, along with low government funding, are raising demand for health
insurance coverage. Gross healthcare insurance premium was USD2.9b in 2013,
exhibiting 26% CAGR over FY08-13. This trend is likely to continue, benefiting the
countrys healthcare industry.
We believe growth in health insurance i) improves affordability of healthcare
services and ii) drives standardization. We believe organized healthcare players will
be the direct beneficiaries of this growth.
Exhibit 88: Increasing penetration of health insurance
Health insurance premium collection (INR b)
174.9
154.5
Rising health insurance 130.9
premium is accompanied by 114.8
rising income levels and
81.1
awareness. Higher health 66.3
insurance penetration 51.2
32.1
allows greater access to 16.7 22.2
quality healthcare.
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: CRISIL research

Shift from communicable to lifestyle diseases to increase demand for
tertiary care
With a rise in Indias population, both infectious and chronic diseases have also
increased in the recent decade. While the country has made significant
advancements in eradicating diseases like polio, leprosy and tetanus, other diseases
like flu, malaria, dengue and hepatitis are becoming more malicious.
Additionally, lifestyle diseases like diabetes, obesity and cardiovascular ailments are
on the rise. The present generation due to obesity, alcohol consumption and
smoking, among others is prone to such lifestyle-related diseases. This has
increased demand for tertiary care.
Exhibit 89: Increase in prevalence of lifestyle diseases in India

2005 2015E
4.91
3.7
3.31
2.8 2.7
2.5
0.18 0.20
Cardiac Diabetes Asthma Cancer

Source: Crisil Research
14 October 2016 40
Fortis Healthcare
Exhibit 90: Increasing in-patient volumes due to non- Exhibit 91: Cardiac, oncology and diabetes-related
communicable lifestyle diseases hospitalizations to exhibit 8-11% CAGR over FY08-18
In-patient market size (INR b) 2008 2013P 2018P Number of hospitalised cases (m) 2008 2013P 2018P
8.3
1030 5.2
4.2
3.1 3.4
509 519 2.9
2 2.3
201 274 1.2
118 163
29 79
Cardiac Oncology Diabetes Cardiac Oncology Diabetes

Source: Crisil Research Source: Crisil Research
Medical tourism X factor for Indias healthcare sector

One of the main external factors contributing to growth of the Indian healthcare
sector is medical tourism. The medical tourism market in India was estimated at
around USD3b in 2015, and is expected to exhibit >20%CAGR to reach USD8b by
2020. Quality healthcare with low treatment costs, coupled with well-educated,
English-speaking medical professionals, has strengthened Indias position as a
preferred destination for medical tourism.
Exhibit 92: Medical tourism is burgeoning industry in India

(USD b) Exhibit 93: Medical tourist arrivals in India
6.0 430,000
4.8 350,000
4.2 300,000
3.5 270,000
3.0 230,000
2.4 170,000 190,000
2.0
2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018
Source: Ministry of Tourism, CII, RNCOS Source: Ministry of Tourism, CII, RNCOS
14 October 2016 41
Fortis Healthcare
According to industry estimates, in some cases, India provides treatment at one-

tenth of cost incurred in the US. India also attracts medical tourists from developing
nations due to the lack of advanced medical facilities in many of these countries.
We expect organized hospitals in India to benefit from medical tourism. Details of

expenses in India and other countries are indicated in the following chart.
Exhibit 94: Cost (USD 000) of various surgeries in different countries

India offers world-class and US Korea Thailand Malaysia India
quality care at substantially 144
lower cost.
100
50 50
29
15 11 14 20 15
5 8 8 7 12 7 6 9 7 7
Heart Bypass Hip Replacement Knee Replacement Spinal Fusion
Source: Crisil Research
Exhibit 95: Comparison of major medical tourism destinations in Asia

Average saving
Country Popular treatment option
% compared to the US
Alternative medicine, cosmetic surgery, dental care, gender realignment, heart surgery,
Thailand 50-75
obesity surgery, oncology and orthopedics
India 65-90 Cardiology, orthopedics, nephrology, oncology and neuro-surgery
Malaysia 65-80 Cardiology, orthopedics, oncology, obstetrics and gynecology
Indonesia NA Cosmetic surgery and dentistry procedures
Taiwan 40-55 Cardiology, fertility treatment, orthopedics and cosmetic surgery
Source: KPMG- FICCI- Medical Value Travel in India (Sep 2014), RNCOS
14 October 2016 42
Fortis Healthcare
Annexure II - Diagnostics industry overview

Fast-growing segment within healthcare market
Based on industry estimates, Indias diagnostics market was valued at USD6b in

FY2015. It is expected to exhibit a 15% CAGR over next five years to reach USD12b
by FY2020, despite unavailability of certain high-end tests in India. With most
companies primarily focusing on pathology currently and no issues as far as
sustainability is considered, there remain considerable opportunities in the
diagnostic industry.
Exhibit 96: Diagnostic services industry to exhibit 15% CAGR over FY15-20E
Diagnostic Services Market size (USD b)
12.1
10.5
9.1
7.9
6.9
6.0
2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Source: Industry Reports
Highly fragmented market

The diagnostic landscape in India is highly fragmented, with standalone labs
controlling 46% market share, while diagnostic chains have combined market share
of only 17%.
Diagnostic operations are normally conducted in 3-4 formats:

Standalone centres (local Labs): These are present locally and have just 12
branches; some basic tests are performed here; for high-end tests, samples are
sent to bigger labs.
Labs in hospital: Most hospitals have their own labs, where around 120-130
different tests are conducted; bigger hospitals also perform high-end tests.
Diagnostic chains (large players): These provide services across a larger
area/region with their network of central/regional labs, customer service and
pick-up points. There are four pan-India diagnostic chains: SRL Diagnostics, Dr.
Lal PathLabs, Thyrocare and Metropolis. Regional chains include players like
Suraksha Diagnostic (Eastern India), Suburban Diagnostics (Western India), Vijay
Diagnostics (Karnataka), Dr. Dangs Lab (Delhi).
14 October 2016 43
Fortis Healthcare
Exhibit 97: USD6b market is highly fragmented
Source: Company, Industry research
Significant scope for growth within diagnostics market

Factors such as an underpenetrated Indian healthcare market, rising income levels
and increasing health awareness among consumers provide existing players with
ample opportunities of growth. Rising proportion of geriatric population (60+ years),
increasing incidence of lifestyle-related diseases, growth in medical tourism and
increasing penetration of health insurance in the country also significantly boost
demand for diagnostic services.
Exhibit 98: Geriatric population increasing at faster rate

than rest of the population Exhibit 99: Diagnostic presence relatively under penetrated
No. of diagnostic labs per million population
7% 8% 9% 11% 13%
11% 14% 15% 418
16% 16%
20% 21% 21% 23% 24%
27%
29% 28% 26% 24%
35% 29% 27% 25% 23%
60 39
2001
2011E
2016P
2021P
2026P
US Brazil India
0 - 14 years 15 - 29 years 30 - 44 years 45 - 59 years 60+ years
Source: Industry Reports Source: Industry Reports
Low entry barriers

Indias diagnostic healthcare services industry is highly competitive with low barriers
to entry. In India, the diagnostics and pathology laboratory industry comprises more
than 100,000 labs. Entry for new players is very flexible since capital investment
required for setting up diagnostic centers performing basic pathology tests is low.
Further, the competitive scenario may intensify, forcing players to cut prices. Large-
scale diagnostic healthcare providers are able to increase cost efficiencies through
automated testing. This, in turn, may lead to pricing pressure on players in future.
14 October 2016 44
Fortis Healthcare
Exhibit 100: High-volume pathology business accounts for Exhibit 101: Biochemistry tests accounts for larger share of
larger share of diagnostics industry diagnostics industry
Immunology,
Others, 22%
Imaging, 21%
30%
Hematology,
18%
Pathology,
70% Biochemistry,
39%
Source: Industry Reports Source: Industry Reports
Health insurance to drive growth within preventive healthcare market

The overall market for wellness and preventive diagnostics was estimated at 6%-8%
of the total diagnostic services market in 2014-2015. The preventive healthcare
market is poised to grow faster than the diagnostic industry owing to increased
health insurance coverage. As per CRISIL estimates, this segment is expected to
grow to INR48b in FY18 from INR26.4b in FY15, implying CAGR of 23%-25%.
The health insurance sector will also provide additional boost to the overall
diagnostics sector: with an increase in coverage provided, patients will not have to
pay for many tests out of pocket and doctors will be able to prescribe the same
more liberally.
14 October 2016 45
Fortis Healthcare
Annexure III SRL demerger structure

New structure to help unlock shareholder value
The Board of Directors of Fortis Healthcare has approved the demerger of the
companys diagnostic business SRL Limited and SRL Diagnostics Pvt. Ltd (diagnostic
business acquired from Piramal) into another majority owned listed subsidiary,
Fortis Malar Hospital Limited. Simultaneously, the hospital business of Fortis Malar
by way of slump sale (INR43cr) is being transferred to Fortis Healthcare.
The composite scheme of arrangement and amalgamation will eventually result in

two listed entities:
(i) Fortis Malar (to be renamed SRL), which will house the entire diagnostics
business.
(ii) Fortis Healthcare, which will continue to hold the companys hospital assets.
The scheme is subject to various statutory and regulatory approvals.
Exhibit 102: Current company structure Exhibit 103: Proposed structure
Composite scheme of arrangement

Initially, Fortis Malar will issue 98 shares of Fortis Malar for every 100 shares
held in Fortis Healthcare (~512m shares to be issued).
Post the amalgamation of SRL into Fortis Malar, Fortis Malar will issue 108
shares of Fortis Malar for every 1 share of SRL (excluding itself; ~378m shares to
be issued).
Subsequently, Fortis Malar to be renamed to SRL. The total number of fully
diluted shares outstanding for SRL (resultant company) would be 909.9m.
14 October 2016 46
Fortis Healthcare
Exhibit 104: Composite Scheme of Arrangement
Exhibit 105: Fortis Malar: Proposed share holding pattern

Fortis Malar Hospitals Limited
Particular No of Shares %
Promoters & Promoter Group 11,753,202 62%
Public 7,071,057 38%
Total 18,824,259 100% Fortis Malar (Resultant co; to be renamed SRL)
Fully diluted shareholding assuming full outstanding ESOP conversion Particular No of Shares %
Promoters &
381,470,755 42%
Promoter Group
Public 528,469,636 58%
Total 909,940,391 100%
SRL Limited (Fully Diluted)
Particular No of Shares %
Promoters & Promoter Group 49,536,779 62%
Public 30,718,317 38%
Total 80,255,096 100%
Fully diluted shareholding assuming all CCPS and outstanding ESOP conversion
(adjusted for 6% cancelled ESOP's)
14 October 2016 47
Fortis Healthcare
Financials and valuations

Consolidated - Income Statement (INR Million)
Y/E March FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Total Income from Operations 26,177 30,423 34,919 39,659 42,651 47,357 53,745 61,000
Change (%) 75.0 16.2 14.8 13.6 7.5 11.0 13.5 13.5
Raw Materials 6,386 7,769 8,807 9,345 9,572 10,418 11,555 12,810
Employees Cost 5,510 6,277 6,952 7,646 8,260 8,524 9,405 10,675
Other Expenses 10,998 14,154 18,639 21,358 22,650 23,972 26,005 29,246
Total Expenditure 22,894 28,199 34,398 38,349 40,482 42,915 46,966 52,731
% of Sales 87.5 92.7 98.5 96.7 94.9 90.6 87.4 86.4
EBITDA 3,282 2,224 521 1,309 2,169 4,442 6,779 8,268
Margin (%) 12.5 7.3 1.5 3.3 5.1 9.4 12.6 13.6
Depreciation 1,745 2,288 1,828 2,346 2,295 2,650 3,000 3,200
EBIT 1,537 -63 -1,307 -1,036 -125 1,792 3,779 5,068
Int. and Finance Charges 2,512 4,613 2,502 1,518 1,249 2,850 2,000 1,000
Other Income 1,156 1,478 1,674 887 926 600 300 300
PBT bef. EO Exp. 181 -3,198 -2,135 -1,667 -448 -458 2,079 4,368
EO Items 750 9,992 -51 68 212 0 0 0
PBT after EO Exp. 931 6,793 -2,186 -1,599 -236 -458 2,079 4,368
Total Tax 366 1,748 107 45 466 500 686 1,442
Tax Rate (%) 39.3 25.7 -4.9 -2.8 -197.4 -109.2 33.0 33.0
Minority Interest/ associate income -69 195 -105 -458 -443 -344 -243 -182
Reported PAT - Continuing Opr. 634 4,850 -2,188 -1,186 -259 -614 1,636 3,109
Adjusted PAT - Continuing Opr. 179 -2,571 -2,134 -1,256 -890 -614 1,636 3,109
Change (%) -109.6 -1,536.8 -17.0 -41.1 -29.1 -31.1 -366.7 90.0
Margin (%) 0.7 -8.4 -6.1 -3.2 -2.1 -1.3 3.0 5.1
Consolidated - Balance Sheet (INR Million)

Equity Share Capital 4,052 4,052 4,628 4,628 4,631 4,631 5,231 5,231
Preference Capital/ FCCB 43 6,743 6,700 0 0 0 0 0
Total Reserves 28,468 33,013 38,196 35,848 35,342 34,713 41,390 44,576
Net Worth 32,563 43,809 49,524 40,476 39,973 39,344 46,621 49,808
Minority Interest 8,308 10,212 1,393 1,529 1,431 1,431 1,431 1,431
Total Loans 68,630 64,712 18,803 17,843 14,960 26,460 16,460 16,460
Deferred Tax Liabilities -416 261 350 -71 -506 -506 -506 -506
Capital Employed 109,085 118,994 70,070 59,777 55,858 66,729 64,006 67,192
Gross Block 36,598 28,405 27,751 29,230 26,997 29,855 27,676 30,641
Less: Accum. Deprn. 9,619 10,232 10,056 11,726 12,569 15,219 18,219 21,419
Net Fixed Assets 26,980 18,172 17,695 17,504 14,428 14,636 9,457 9,221
Goodwill on Consolidation 64,823 74,569 23,773 24,673 23,328 23,328 23,328 23,328
Capital WIP 5,658 2,438 1,471 2,282 2,010 1,652 1,830 1,866
Total Investments 2,348 10,055 10,314 10,561 10,784 22,284 22,284 22,284
Curr. Assets, Loans&Adv. 23,968 29,903 25,255 20,826 21,264 20,508 24,066 29,687
Inventory 799 925 620 640 619 656 718 806
Account Receivables 5,461 6,628 4,407 4,094 4,438 5,838 7,362 8,356
Cash and cash equivalents 4,210 6,936 10,446 5,970 7,369 4,200 4,849 7,884
Loans and Advances 13,498 15,415 9,782 10,122 8,838 9,813 11,137 12,640
Curr. Liability & Prov. 14,691 16,144 8,438 16,069 15,957 15,679 16,961 19,195
Account Payables 8,102 9,267 5,061 5,649 6,071 4,703 4,504 5,056
Other Current Liabilities 5,676 5,318 2,477 9,316 8,872 9,851 11,180 12,689
Provisions 912 1,559 899 1,103 1,013 1,125 1,277 1,449
Net Current Assets 9,277 13,759 16,817 4,757 5,307 4,828 7,106 10,492
Appl. of Funds 109,085 118,994 70,070 59,777 55,857 66,728 64,006 67,192
E: MOSL Estimates
14 October 2016 48
Fortis Healthcare
Financials and valuations

Ratios
Basic (INR)
EPS 0.4 -5.6 -4.6 -2.7 -1.9 -1.3 3.5 6.7
Cash EPS 4.2 -0.6 -0.7 2.4 3.0 4.4 10.0 13.6
BV/Share 70.3 94.6 106.9 87.4 86.3 85.0 100.7 107.5
DPS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1
Payout (%) 0.0 0.0 -0.2 -0.9 -2.4 -2.5 -2.5 -2.5
Valuation (x)
P/E -62.3 -87.9 -127.6 47.8 25.2
Cash P/E 71.8 55.7 38.4 16.9 12.4
P/BV 1.9 2.0 2.0 1.7 1.6
EV/Sales 2.3 2.0 2.1 1.7 1.4
EV/EBITDA 68.9 39.6 22.6 13.3 10.5
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
FCF per share -5.2 26.9 -1.3 1.3 4.3 -2.7 14.0 7.5
Return Ratios (%)
RoE 0.5 -6.7 -4.6 -2.8 -2.2 -1.5 3.8 6.4
RoCE 2.3 1.0 0.4 -0.2 1.1 3.0 4.2 5.6
RoIC 1.4 0.0 -2.0 -2.6 -0.2 3.6 6.9 9.7
Working Capital Ratios
Fixed Asset Turnover (x) 0.7 1.1 1.3 1.4 1.6 1.6 1.9 2.0
Asset Turnover (x) 0.2 0.3 0.5 0.7 0.8 0.7 0.8 0.9
Inventory (Days) 11 11 6 6 5 5 5 5
Debtor (Days) 76 80 46 38 38 45 50 50
Creditor (Days) 113 111 53 52 52 36 31 30
Leverage Ratio (x)
Net Debt/Equity 2.0 1.3 0.2 0.3 0.2 0.6 0.2 0.2
Consolidated - Cash Flow Statement (INR Million)

OP/(Loss) before Tax 1,131 7,313 1,491 -1,374 552 -458 2,079 4,368
Depreciation 1,822 2,922 2,479 2,628 2,305 2,650 3,000 3,200
Interest & Finance Charges 1,708 4,483 1,839 1,048 587 2,250 1,700 700
Direct Taxes Paid -1,073 -2,496 -1,049 -1,193 -1,544 -500 -686 -1,442
(Inc)/Dec in WC -544 2,240 -203 -280 126 -2,690 -1,628 -351
CF from Operations 3,044 14,461 4,556 829 2,026 1,252 4,465 6,476
Others -67 1,975 235 -587 -352 0 0 0
CF from Operating incl EO 2,977 16,436 4,791 242 1,674 1,252 4,465 6,476
(Inc)/Dec in FA -5,397 -3,978 -5,413 383 325 -2,500 2,000 -3,000
Free Cash Flow -2,420 12,458 -622 625 1,999 -1,248 6,465 3,476
(Pur)/Sale of Investments 583 -6,971 -5,858 4,097 -1,393 -11,500 0 0
Others -3,124 -2,020 42,162 -6,162 5,229 600 300 300
CF from Investments -7,937 -12,969 30,891 -1,682 4,162 -13,400 2,300 -2,700
Issue of Shares 3,005 3,002 10,196 1 32 0 5,600 0
Inc/(Dec) in Debt 6,418 -3,916 -37,737 -1,539 -3,255 11,500 -10,000 0
Interest Paid -2,031 -5,553 -3,777 -1,400 -1,248 -2,850 -2,000 -1,000
Dividend Paid 0 0 0 0 0 -15 41 78
Others -479 5,725 -854 -98 34 344 243 182
CF from Fin. Activity 6,912 -741 -32,172 -3,035 -4,438 8,979 -6,116 -741
Inc/Dec of Cash 1,952 2,726 3,510 -4,475 1,399 -3,169 649 3,035
Opening Balance 2,257 4,210 6,936 10,446 5,970 7,369 4,200 4,849
Closing Balance 4,210 6,936 10,446 5,970 7,369 4,200 4,849 7,884
14 October 2016 49
REPORT GALLERY
RECENT INITIATING COVERAGE REPORTS
Fortis Healthcare
NOTES
14 October 2016 51
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Initiating Coverage | 14 October 2016

Leading Robust distribution

Contents: Fortis Healthcare | Fortifying growth

Fortis Healthcare two-pronged strategy to drive growth ........................................ 5

SRL Cash cow of the portfolio ................................................................................. 14

Financials: Asset light strategy on track; return ratios to improve .......................... 23

Valuations attractive SRL demerger to unlock value ............................................. 26

Key risks/concerns ..................................................................................................... 30

SWOT Analysis ............................................................................................................ 32

Story in charts: Hospital ............................................................................................. 34

Story in charts: Diagnostics ........................................................................................ 35

Annexure I Healthcare industry .............................................................................. 36

Annexure II - Diagnostics industry overview............................................................. 43

Annexure III SRL demerger structure...................................................................... 46

Financials and valuations ........................................................................................... 48

Hospital sector still significantly under-penetrated bodes well for market

SRL demerger value unlocking opportunity

Valuations attractive SRL business comes for free

Fortis Healthcare two-pronged strategy to drive

Exhibit 1: Hospital revenues to exhibit 13%CAGR over

Hospital business EBITDA to grow 10x in three years

Exhibit 4: Hospital business snapshot

Exhibit 5: FY16 revenue composition

Source: MOSL, Company

1,193 474 330

Source: MOSL, Company Source: MOSL, Company

Option to increase bed capacity without significant capex

Exhibit 8: FORH bed capacity

Current Operational Beds Installed Capacity Total Potential Capacity

Source: MOSL, company

Exhibit 9: 750-900 beds expected to come up over next three years

Key parameters improved consistently over last few years

ARPOB (in million) 15.7

Source: MOSL, company Source: MOSL, Company

Steady growth in flagship hospital; occupancy improvement to drive growth

Source: MOSL, Company Source: MOSL, Company

Exhibit 17: Improvement in FEHIs occupancy to also drive

28.7 28.8 20.0 21.8

Ramp-up of new hospitals key monitorable

Higher occupancy rate to drive operating leverage

Asset right model; lower capital cost

Exhibit 21: Key Terms of Hospital and Medical Services Agreement

(A) Variable service fee

(B) Base service fee

Source: MOSL, company

Deal to acquire stake in FHTL to also drive operating leverage

Exhibit 22: Acquisition deal

Net increase in debt 11,400

As operating profitability of FORHs flagship FMRI hospital and Shalimar Bagh

Operating metrics better than peers

Exhibit 23: Operational Peer analysis

SRL Cash cow of the portfolio

12,615 South India,

Source: MOSL, Company Source: MOSL, Company

Robust distribution network

Exhibit 26: SRLs existing Infrastructure

Exhibit 27: Geographical scale (SRL map India)

Source: MOSL, Company

Asset light hub-and-spoke model

Exhibit 28: Hub-and-spoke model for a diagnostic chain

Source: MOSL, Company

Exhibit 29: Asset turnover trend for SRL over FY11-15

2.8 2.8 2.8

FY11 FY12 FY13 FY14 FY15