Fortis Healthcare: Hospitals + Diagnostics = Double dose of growth

Fortis Healthcare

BSE Sensex

27,674

S&P CNX

8,583

Fortis

Initiating Coverage | Sector: Healthcare

CMP: INR170

TP: INR240 (+41%)

Buy

Fortifying growth

Hospitals + Diagnostics = Double dose of growth

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val, INRm

Free float (%)

FORH IN

463.1

199 /41

0/-14/20

78.3

1.2

181.0

28.7



Financial Snapshot (INR b)

Y/E Mar

FY16 FY17E FY18E

Sales

42.7 47.4 53.7

EBITDA

2.2

4.4

6.8

-0.9

-0.6

1.6

EPS (INR)

-1.9

-1.3

3.5

EPS Gr. (%)

-58.3 -51.2 -283.8

BV/Sh. (INR)

86.3 85.0 100.7

P/E (x)

-87.9 -127.6 47.8

P/BV (x)

2.0

1.7

EV/EBITDA (x)

39.6 22.6 13.3

EV/Sales (x)

2.0

2.1

1.7

RoE (%)

-2.2

-1.5

3.8

RoCE (%)

1.1

3.0

4.2

Shareholding pattern (%)

Jun-16 Mar-16 Jun-15

Promoter

71.3

DII

5.3

0.3

FII

13.6

12.8

9.3

Others

9.8

10.6

19.1

FII Includes depository receipts

We expect hospital business EBITDA to grow >10x over next three years on the

back of lower base, coupled with strong growth in EBITDAC and relatively flattish

BT cost.

We expect EBITDA margin for the diagnostics business to improve by another

200bp by FY19E, given deeper penetration in existing markets, rationalization of

low-margin centers, growth in samples tested and higher share from the O&M

model.

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

and an SOTP-based target price of INR240, implying an upside of ~40%.

Two-pronged growth strategy in hospital business – no major greenfield

expansion required



We believe asset sweating and introduction of high-end medical programs

will be the key growth drivers for FORH’s hospital business in the medium

term. Despite restrained capex, the company should be able to drive growth

by improving occupancy at existing hospitals and bolt-on additions.

FORH has installed capacity of ~4,200 beds, of which ~3,600 (FORH/RHT-

owned) are operationalized. Total potential bed capacity stands at ~10,000.

We expect FORH to add ~800-900 beds over next three years, which is easily

achievable without any M&A or major greenfield expansion in the near term

(no greenfield in the pipeline, except Chennai and Ludhiana).

The company’s occupancy levels are at ~72%, which suggests that ~1,000 out

of its 3,600 operational beds are not utilized. FORH is focusing on increasing

occupancy at existing facilities by initiating new medical programs.

We expect robust EBITDAC (EBITDA before business trust cost) CAGR of 19%

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

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.

Hospital business EBITDA to grow 10x in three years



Fortis Healthcare

Fortifying growth



91 22 3982 5584

Please click here for Video Link

Kumar.Saurabh@motilaloswal.com

14 October 2016

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 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). FORH’s 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.

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 FORH’s 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%.

SRL demerger – value unlocking opportunity



Valuations attractive – SRL business comes for free



14 October 2016

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

Hospital Revenues (INR m)

43,644

49,754

Exhibit 2: EBITDA margins to improve over FY16-19E

Hospital EBITDA (INR m)

EBITDA margins (%)

6.1%

2,349

4,312

9.9%

11.3%

5,616

19,120

22,929

27,950

32,070 34,490

38,284

-0.5%

(130)

0.4%

143

1.5%

510

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

Fortis Healthcare

Exhibit 3: EBITDA margins to improve due to robust EBITDAC growth and lower BT costs

11,000

8,250

EBITDAC

BT Costs

EBITDA

BT costs are expected to

decline significantly by

INR2b owing to the

acquisition of FHTL.

5,500

2,750

-2,750

Source: Company, MOSL

Exhibit 4: Hospital business snapshot

Fortis Hospital

Fortis Hospital Sales (INR m)

YoY growth (%)

EBITDAC (INR mn)

EBITDAC margins (%)

Fortis Hospital EBITDA (INR m)

EBITDA margin (%)

Mature Hospitals (ex-FEHI)

Matured hospital(ex FEHI) revenue (INR m)

YoY growth (%)

Matured Hospital (ex-FEHI) EBITDAC (INR m)

EBITDAC margin (%)

FMRI

FMRI revenue (INR m)

YoY growth (%)

FMRI EBITDAC (INR m)

EBITDAC margin (%)

FEHI

FEHI revenue (INR m)

YoY growth (%)

FEHI EBITDAC (INR m)

EBITDAC margin (%)

436

13%

3,350

3,440

396

12%

3,853

12%

578

15%

4,315

12%

734

17%

4,833

12%

870

18%

455

13%

3,500

4,130

18%

661

16%

4,956

20%

892

18%

5,699

15%

1,140

20%

6,554

15%

1,442

22%

4,719

20%

24,200

26,015

5,073

20%

28,617

10%

6,009

21%

32,050

12%

7,051

22%

35,897

12%

8,256

23%

4,590

14%

143

0.45%

FY15

32,070

FY16

34,490

5,080

15%

510

1.48%

FY17E

38,284

11%

6,049

16%

2,349

6.14%

FY18E

43,644

14%

7,201

17%

4,312

9.88%

FY19E

49,754

14%

8,458

17%

5,367

10.79%

Source: MOSL, Company

14 October 2016

Fortis Healthcare

Exhibit 5: FY16 revenue composition

Start-Ups, 2%

FEHI, 10%

FMRI, 12%

Mature Hospitals,

75%

Source: MOSL, Company

Exhibit 6: Incremental revenue contribution over FY16-19E

1,393

1,193

372

Exhibit 7: Incremental EBITDAC contribution over FY16-19E

781

3,183

474

-680

330

9,882

2,424

-711

49,754

34,490

5,080

8,458

Source: MOSL, Company

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

Fortis Healthcare

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

Location

Ludhiana (Greenfield)

Bengaluru, BG Road

(Brownfield)

Jaipur CE

Nagarbhavi (Bengaluru)

Amritsar

Shalimar Bagh CE (Delhi)

Mulund (Mumbai)

Noida

Chennai

FMRI (Flagship) (Brownfield)

Total

Capacity

(beds)

200

102

192

150

913

Source: MOSL, company

Addition of Oncology Programme

Mother and Child Health Programme

Type

Mother and Child Programme

Oncology, Operation Theatre

Mother and Child Health Programme,

Orthopedics

Addition of 2 operating theatres and

a cath-lab

Estimated time

of completion

FY17

FY18

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)

14.2

15.1

15.7

299

-150

283

3600

9.3

10.3

11.2

12.6

13.7

3320

Source: MOSL, company

Source: MOSL, Company

14 October 2016

Fortis Healthcare

Exhibit 12: ALOS also declined significantly over FY12-16

3.80

3.64

3.56

3.54

3.52

3.50

ALOS (in days)

Exhibit 13: Occupancy rate exhibited early signs of recovery

Bed occupancy rate (%)

Source: MOSL, Company

Steady growth in flagship hospital; occupancy improvement to drive growth

FORH’s 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

34%

Revenue CAGR (FY14-16)

Exhibit 15: ARPOB improvement across key hospitals

ARPOB CAGR (FY14-16)

17%

14%

13% 14%

12% 12%

18%

10%

-1%

11% 11% 10%

Source: MOSL, Company

Further ramp-up in FMRI and turnaround in FEHI remain key growth drivers

over next 2-3 years

Commencing operations in May 2013, the company’s 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 company’s voluntary exit from the

Central Government Health Scheme (CGHS) and other related government

businesses with a view to improve the patient mix. Consequently, the hospital’s

ARPOB exhibited 14% CAGR over FY14-16 to reach INR18.2m in FY16 from INR14m

in FY14.

14 October 2016

Fortis Healthcare

Exhibit 16: FMRI’s occupancy to improve further

ARPOB (m)

Bed occupancy rate (%)

Exhibit 17: Improvement in FEHI’s occupancy to also drive

growth

ARPOB (m)

Bed occupancy rate (%)

62%

50%

61%

63%

65%

69%

82%

63%

67%

69%

72%

74%

18.4

21.5

25.1

27.5

28.7

28.8

16.2

18.2

18.6

20.0

21.8

Source: MOSL, Company

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

EBITDAC margin (%)

23.10%

24.70%

19.40%

12.40%

Exhibit 19: Occupancy rate based on maturity profile

Occupancy (%)

74%

77%

73%

56%

10 Years +

5-10 Years

3-5 Years

0-3 years

10 Years +

5-10 Years

3-5 Years

0-3 years

Source: MOSL, Company

Higher occupancy rate to drive operating leverage

FORH’s 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 management’s

focus will be on improving utilization levels across its existing hospitals. We expect

14 October 2016

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.

FORH’s 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

Source: MOSL, company

14 October 2016

Fortis Healthcare

Deal to acquire stake in FHTL to also drive operating leverage

In February 2016, the company’s 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 company’s operating

profitability (EBITDA). However, net impact on PAT will be neutral initially as seen in

Exhibit 22.

Exhibit 22: Acquisition deal

Acquisition Structure

Initial Cash Consideration

Debt @17.5% interest

Gross Acquisition amount

Funding of deal

Bridge Financing Debt @8%

Debt @17.5% interest

Gross increase in debt

(-) Receipt of dividend from RHT after 3 months (28% stake)

Net increase in debt

P&L impact

(+) Incremental EBITDA owing to Lower BT costs

(+) Interest Income on NCD's

(-) interest cost on bridge finance Debt@8%

(-) interest cost on Debt@17.5%

(-) Depreciation

(-) Incremental Tax and Minority interest

PAT

INR m

9,700

4,200

13,900

9,700

4,200

13,900

2,500

11,400

1,960

350

600

750

350

610

Neutral

Source: MOSL, Company

As operating profitability of FORH’s 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 FORH’s 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

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 company’s

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

Fortis

FEHI

FMRI

Apollo

Chennai Cluster

Hyderabad Cluster

Karnataka Cluster (NICS, MSMC)

Eastern Cluster (RTICS)

* only operated beds

Nos of Operating Beds

FY14

3,320

5,811

1,264

930

4,697

2,187

1,534

FY15

3,562

299

280

6,321

1,491

930

5,352

2,344

1,827

FY16

3,600

299

284

6,724

1,526

930

5,397

2,026

1,893

Occupancy (%)*

FY14

FY15

FY16

ARPOB (INR m)*

FY14

11.2

14.0

18.4

8.6

12.2

7.3

5.2

5.1

6.4

FY15

12.6

16.1

21.4

9.3

12.5

8.4

5.8

5.9

6.2

FY16

13.7

18.2

25.1

10.2

14.4

9.7

6.4

6.6

6.7

3.8

4.5

4.4

4.5

4.9

5.2

4.3

ALOS (days)*

FY14

FY15

3.6

4.4

4.2

4.3

4.9

4.2

FY16

3.6

4.2

4.0

4.3

4.6

4.2

Source: MOSL, Company

14 October 2016

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. SRL’s

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,

16%

International ,

East India,

22%

West India,

27%

Source: MOSL, Company

5,320

6,440

7,410

8,320

8,980

9,968

11,214

North India,

35%

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: SRL’s existing Infrastructure

SRL

Clinical Labs

FY14

281

141

104

5,800

Reference Labs

Self-Operated

Hospital based Labs

Wellness centers

International Laboratories

Other

Collection points

Collection Centers

FY15

264

131

6,400

1,250

FY16

314

161

108

7,200

1,074

SRL has been rationalizing

its radiology, wellness lab

network over FY14-16.

Some collection centers

were also exited in FY16.

Source: MOSL, Company

14 October 2016

Fortis Healthcare

Exhibit 27: Geographical scale (SRL map – India)

Source: MOSL, Company

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

Fortis Healthcare

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

Source: MOSL, Company

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 SRL’s high fixed asset

turnover (see Exhibit 29).

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

Fixed asset turnover (Gross)

2.8

1.9

1.8

2.8

1.7

1.1

Fixed asset turnover (Net)

2.8

2.1

1.6

1.3

FY11

FY12

FY13

FY14

FY15

Source: MOSL, Company

14 October 2016

Fortis Healthcare

Exhibit 30: Diagnostic business assumptions snapshot

FY14

Diagnostic Standalone Revenues (INR m)

YoY Growth (%)

Revenues from Fortis hospital based labs

(%) of gross revenues

Diagnostic Net Revenues (INR m)

YoY Growth (%)

EBITDA (INR m)

EBITDA margin (%)

Samples Processed (accessions) (in millions)

YoY Growth (%)

Tests/Accessions(Sample)

Tests Conducted (in millions)

YoY Growth (%)

Avg realization per test

YoY Growth (%)

258.2

2.24

28.7

7,410

15.1%

880

11.9%

6,530

12.8%

1,170

17.9%

12.8

FY15

8,320

12.3%

1,100

13.2%

7,220

10.6%

1,470

20.4%

13.7

7.0%

2.22

30.4

5.9%

273.7

6.0%

FY16

8,980

7.9%

1,340

14.9%

7,640

5.8%

1,820

23.8%

14.5

5.8%

2.26

32.7

7.6%

274.6

0.3%

FY17E

9,968

11.0%

1,595

16.0%

8,373

9.6%

2,123

25.4%

15.4

6.5%

2.30

35.5

8.6%

280.1

2.0%

FY18E

11,214

12.5%

1,906

17.0%

9,307

11.2%

2,467

26.5%

16.4

6.0%

2.40

39.3

10.6%

285.7

2.0%

FY19E

12,615

12.5%

2,271

18.0%

10,345

11.1%

2,902

28.0%

17.4

6.0%

2.50

43.4

10.4%

291.4

2.0%

Source: MOSL, company

Radiology network rationalization masks robust pathology business



SRL’s 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 company’s radiology and wellness business.

As seen in Exhibit 31, SRL’s standalone pathology business has exhibited 14%

CAGR over last two years, largely in line with industry growth. Further, the

company’s in-house hospital business has demonstrated 23% CAGR over the

same period.

The company’s 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)

21%

YoY growth (%)

SRL’s revenues exhibited

14% CAGR over FY12-16

5,320

6,440

15%

12%

8,320

7,410

8,980

FY 12

FY 13

FY 14

FY 15

FY 16

Source: MOSL, Company

14 October 2016

Fortis Healthcare

Exhibit 32: Nevertheless, pathology business growth in line with industry over FY14-16

Diagnostic Revenues

Ex-in-house Fortis Hospital business

Pathology

Imaging business

Clinical Trial, Wellness and International

In-House Fortis Hospital business

Standalone revenues from Operations



FY14

6,530

FY15

7,220

5,898

939

384

FY16

7,640

6,723

611

306

1,340

8,980

YoY gr.

14%

-35%

-20%

22%

CAGR

(FY14-16)

880

7,410

1,100

8,320

23%

10%

Source:

SRL’s 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)

Revenues (INR m)

Clinical Laboratories

Samples Processed (Accessions)

Tests Conducted

Tests/Accessions(Sample)

FY14

7,410

281

12.8

28.7

2.24

FY15

8,320

264

13.7

30.4

2.22

FY16

8,980

314

14.5

32.7

2.26

CAGR (FY14-16)

10%

Source: MOSL, Company

Margins doubled in four years; improvement to continue



SRL’s 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 35: EBITDA margins more than doubled over FY12-16

EBITDA margin (%)

20%

21%

22%

23%

Exhibit 34: EBITDA exhibited 35% CAGR over FY12-16

2,902

2,467

1,820

800

FY 13

1,160

1,450

2,093

10%

12%

16%

17%

540

FY 12

FY 14

FY 15

FY 16 FY 17E FY 18E FY 19E

Source: MOSL, Company



FY 12

FY 13

FY 14

FY 15

FY 16 FY 17E FY 18E FY 19E

Source: MOSL, Company

SRL’s 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

Fortis Healthcare

Exhibit 36: Operational performance has significantly improved

Diagnostic standalone business (in m)

Clinical Laboratories

Revenue/Lab

EBITDA/Lab

Samples Processed (accessions)

Revenue/Sample (INR)

EBITDA/Sample (INR)

Tests Conducted

Revenue/Test (INR)

EBITDA/Test (INR)

Tests/Accessions(Sample)

FY14

281

26.4

4.1

12.8

578.9

90.6

28.7

258.2

40.4

2.24

FY15

264

31.5

5.5

13.7

607.3

105.8

30.4

273.7

47.7

2.22

FY16

314

28.6

5.8

14.5

619.3

125.5

32.7

274.6

55.7

2.26

CAGR (FY14-16)

18%

17%

Source: MOSL, Company

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 SRL’s 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

Revenue (m)

EBITDA margin (%)

Clinical Laboratories

Revenue (m)/Clinical Laboratories

Tests offered

SRL Diagnostics

8,980

20%

314

>3800

Dr. Lal

7,913

26%

172

3,495

Thyrocare*

2,410

39%

344

209

Metropolis

6,000

25%-30%

130

>4500

*Financials are not directly comparable due to different revenue recognition methodology

Source: MOSL, Company

14 October 2016

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 SRL’s 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, SRL’s 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%

South India

North India

West India

East India

International

Source: MOSL, Company



SRL’s 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 40: SRL’s revenue/sample is improving YoY, while

peers are witnessing downward trend

SRL

578.9

Thyrocare

607.3

Dr Lal

619.3

Exhibit 39: SRL’s EBITDA margin has improved over FY16-18,

while that of peers has declined

SRL

46%

28%

Thyrocare

41%

27%

Dr Lal

40%

26%

20%

293.7

302.6

300.9

16%

FY 14

17%

FY 15

197.1

FY 14

175.7

FY 15

176.6

FY 16

Source: MOSL, Company

FY 16

Source: MOSL, Company

14 October 2016

Fortis Healthcare

Growth can be fuelled without additional capex



As highlighted earlier, SRL’s reference lab geographical expansion is largely

done. The company’s 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 42: Contains all components for safe home collection

Exhibit 41: Sealed BUC (blood urine collection) box

Source: MOSL, Company

14 October 2016

Fortis Healthcare

Exhibit 43: Home collection test packages offered by SRL

Name

HCP Advanced

HCP+

Healthy Lady

Healthy Gentlemen

Youthful He

Youthful She

Diabetes Check

Extensive Diabetes Check

Thyroid Profile

Thyroid Panel II, Serum

Healthy Heart Package

Advanced

Healthy Liver Check

Hypertension Profile

Lipid Profile Plus

Obesity Package

Arthritis Screen

Vitamin Plus

Tests covered



Allergy Screening, Metal Toxicity, Anemia, Diabetes, Heart, Liver, Kidney, Thyroid, General body checkup,

Vitamin B12, Bone Health



Diabetes, Heart, Liver, Kidney, Thyroid, General body checkup, Bone Health, Nerve Health



Diabetes, Heart, Liver, Kidney, Thyroid, General body checkup

Diabetes, Liver, Kidney, Thyroid, General body checkup, Bone Health

Diabetes

Diabetes, Heart, Kidney, General body checkup

Thyroid

Diabetes, Heart, Kidney, Thyroid, General body checkup, Complete Body count, Urinalysis, WBC differential

Count

Diabetes, Heart, Kidney, Thyroid, General body checkup, Complete Body count, Urinalysis, WBC differential

Count

Liver

Diabetes, Heart, Kidney, Electrolytes, General Body Checkup, Urinalysis

Diabetes, Heart

Diabetes, Heart, Kidney, Electrolytes, General Body Checkup, Urinalysis, Thyroid

General body checkup, Complete Body count, Urinalysis, WBC differential Count, Antistreptolysin O, C-

reactive protein

Vitamin B12, Vitamin D

Source: MOSL, Company

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 SRL’s

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

Wellness, 4.1%

Clinical Trial, 0.5%

Direct Client,

16.2%

International,

2.5%

Walk-in,

32.6%

Hospitals,

20.4%

Collection

centers, 23.6%

Source: MOSL, Company

14 October 2016

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

1.3

0.6

0.2

FY16

FY17E

0.2

FY18E

0.2

FY19E

Net Debt/Equity (x)

0.2

FY12

FY13

FY14

0.3

FY15

However owing to the acquisition of 51% economic interest in FHTL, we believe

FORH’s 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 FORH’s non-core assets would reduce

overall debt levels. We believe FORH’s financial leverage should remain at

comfortable levels, with net debt to equity of 0.2x at end-FY18E.

Debt as of end-1HFY17 may

be higher than MOSL FY17E

estimates on account of

time lag between initial cash

consideration to acquire

economic interest in FHTL to

RHT, and receipt of special

dividend from RHT (FORH

owns 28.8% stake in RHT)

Exhibit 46: Leverage to increase in near term owing to FHTL acquisition

Debt calculation

As of end 1Q FY17

INR m

Total debt (incl FCCB's)

18,380

(-) Cash and Cash Equivalents

9,660

Net debt before FHTL acquisition

8,720

Funding of deal

(+) Bridge financing @8%

9,700

(+) Debt on consolidation @17.5% interest

4,350

(-)Receipt of dividend from RHT after 3 months

2,500

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

Source: MOSL, Company

14 October 2016

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 Healthcare’s diagnostic business in

2010. As a result of these acquisitions, goodwill of ~INR4000m is recognized in

FORH’s 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 FORH’s 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 (%)

9.4

5.1

3.3

1.5

(4.6)

(2.8)

(2.2)

12.6

13.6

RoE (%)

6.4

3.8

(1.5)

Source: MOSL, Company

Exhibit 49: ROCE to also improve over FY16-19E

RoCE (%)

3.0

1.1

(0.2)

5.6

4.2

Exhibit 50: ROIC to also witness significant improvement

RoIC (%)

9.7

6.9

3.6

(2.0)

(2.6)

(0.2)

0.4

Source: MOSL, Company

14 October 2016

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 SRL’s 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 company’s free cash flows to

improve over next 3-4 years.

Exhibit 51: SRL’s cash flows improved significantly over

FY14-15

FCF (INR m)

518

226

Exhibit 52: We expect FORH to generate INR10b free cash

flows over FY18-19E

FCF (INR m)

6,465

3,476

(140)

(583)

(810)

(1,739)

625

-622

1,999

-1,248

Source: MOSL, Company

14 October 2016

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

(INR m)

SRL (56% stake Diagnostic business)

Domestic hospital

Fortis stake in business trust (~29%)

Target EV (INR m)

Net debt/cash

Monetization of non-core assets

Minority interest in FHTL

Implied Equity Value

Diluted Shares Outstanding

Target Price (INR/share)

1H FY19E

37,580

106,470

12,213

25 x

22 x

CMP

INR/ Share

204

156,264

-15,000

5,000

-20,000

126,264

523

240

Source: MOSL, Company

EV/EBITDA x

CMP

Methodology

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

Fortis Healthcare

Exhibit 54: Peer Valuation

Company

Fortis Healthcare

Hospital chains

Domestic

Apollo Hospitals Enterprise

Narayana Hrudayalaya Ltd

International

Universal Health Services Inc

IHH Healthcare Bhd

Bumrungrad Hospital PCL

Diagnostic chains

Domestic

Dr Lal PathLabs Ltd

International

Quest Diagnostics Inc

Laboratory Corp of America

*FY15-18E

11,840

14,298

10.3

10.4

9.9

9.6

9.5

9.0

14.9

15.0

14.3

14.7

14.8

16.5

(1.6)

14.3

1.4

5.9

1,303

35.0

29.3

23.6

24.9

24.7

29.7

18.3

18.4

11,853

12,942

3,484

8.9

20.9

19.7

8.4

17.8

17.6

7.8

16.7

13.6

15.7

5.2

25.4

16.3

6.4

24.3

16.6

6.0

21.2

6.3

14.4*

8.5*

9.6

14.9*

6.4*

2,813

1,032

23.8

28.7

19.4

23.3

16.4

18.8

9.6

7.8

12.1

10.5

14.5

12.8

13.5

27.3

15.4

15.6

Mcap

(USD m)

1,203

FY17E

22.8

EV/EBITDA (x)

FY18E

13.5

FY19E

10.3

FY17E

ROE (%)

FY18E

3.8

FY19E

6.8

CAGR (FY16-19E)

EBITDA

57.8

Revenue

12.7

Source: MOSL, Bloomberg

14 October 2016

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

Assumptions

Base Case

1H FY19E EBITDA

(INR m)

4,839

1,503

5,250

1,721

4,060

1,340

Target

Multiple (x)

240

310

145

(16%)

80%

40%

(INR)

Upside/

(Downside)

Bull Case

Bear Case



Hospital business-

SRL (56%)

Target price

Hospital business-

SRL (56%)

Target price

Hospital business-

SRL (56%)

Target price

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. Lal’s 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

310

240

TP- Base case

Valuation multiple at par

with peers

SRL- FY19 margins @ 25% Faster ramp-up in hospitals

TP-Bull case

Source: Company, MOSL

14 October 2016

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 FORH’s 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 company’s

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

145

TP- Base case

Valuation multiple at par SRL- FY19 margins @ 25%

with peers

Faster ramp-up in

hospitals

TP-Bear case

Source: Company, MOSL

14 October 2016

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). SRL’s 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)

ROCE

ROCE (ex-cash, current investments)

ROCE (ex-cash, current investments, goodwill)

SRL Limited

6.65

6.84

12.71

Thyrocare

15.65

24.79

40.80

Dr. Lal

36.54

71.25

Source: MOSL, Company

Fragmented business with low entry barriers

India’s 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

Thyrocare’s price disruptive strategy with a view to enhance volumes and market

penetration may impact SRL’s 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

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

Lipid Profile

Vitamin B12

Vitamin D

*Includes collection charges

SRL

600

900

1,500

Dr Lal PathLabs

750

900

1,250

Metropolis

675

1,000

1,500

Thyrocare*

310

445

1,030

Regional Chain

650

900

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 company’s

operating margins.

14 October 2016

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



India’s 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.

SRL’s pan-India hub-and-spoke network should allow it to reach customers across

India at limited incremental cost.

SRL’s international business operates at substantially higher operating margins

compared to the company’s 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 India’s

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 FEHI’s 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

Fortis Healthcare

Story in charts

Exhibit 60: FORH revenues to exhibit 13% CAGR over

FY16-19E

Revenues (INR m)

61,000

Exhibit 61: FORH EBITDA to exhibit 58%CAGR over FY16-19E

EBITDA (INR m)

26,177

30,423

34,919

39,659 42,651

47,357

53,745

3,282

2,224

521

1,309

2,169

4,472

6,779

8,517

Source: MOSL, Company

Exhibit 62: EBITDA margin improvement to continue

15.0

12.5

EBITDA margins (%)

9.4

7.3

5.1

3.3

1.5

12.6

14.0

Exhibit 63: Financial leverage should remain at comfortable

levels

2.0

1.3

Net Debt/Equity (x)

10.0

5.0

0.6

0.2

FY12

Source: MOSL, Company

FY13

FY14

0.3

0.2

FY16

0.2

FY15

FY17E FY18E FY19E

Source: MOSL, Company

Exhibit 64: ROCE to also improve over FY16-19E

RoCE (%)

3.0

1.1

(0.2)

5.6

4.2

Exhibit 65: ROIC to also witness significant improvement

RoIC (%)

9.7

6.9

3.6

(2.0)

(2.6)

(0.2)

0.4

Source: MOSL, Company

14 October 2016

Fortis Healthcare

Story in charts: Hospital

Exhibit 66: Hospital revenues to exhibit 13%CAGR over

FY12-16

Hospital Revenues (INR m)

43,644

49,754

Exhibit 67: EBITDA margins to improve over FY16-19E

Hospital EBITDA (INR m)

EBITDA margins (%)

6.1%

2,349

4,312

9.9%

11.3%

5,616

19,120

22,929

27,950

32,070 34,490

38,284

-0.5%

(130)

0.4%

143

1.5%

510

Source: MOSL, Company

Exhibit 68: ARPOB improved significantly over FY12-16

ARPOB (m)

9.3

10.3

11.2

12.6

13.7

14.2

15.1

15.7

Exhibit 69: ALOS also declined significantly over FY12-16

3.80

3.64

3.56

3.54

3.52

3.50

ALOS (in days)

Source: MOSL, Company

Exhibit 70: Revenue growth across key hospitals

34%

Revenue CAGR (FY14-16)

Exhibit 71: ARPOB improvement across key hospitals

ARPOB CAGR (FY14-16)

17%

14%

12% 12%

18%

10%

-1%

11% 11% 10%

13% 14%

Source: MOSL, Company

14 October 2016

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

5,320

6,440

7,410

8,320

8,980

9,968

11,214

12,615

2,093

2,467

2,902

1,820

540

800

1,160

1,450

Source: MOSL, Company

Exhibit 74: EBITDA margins improvement to continue

EBITDA margin (%)

17%

20%

21%

22%

23%

Exhibit 75: No of samples processed to grow 6%YoY over

FY16-19E

Samples Processed (in m)

7.0%

6.5%

YoY Growth (%)

6.0%

10%

12%

16%

5.8%

12.8

13.7

14.5

15.4

16.4

17.4

Source: MOSL, Company

Exhibit 76: Tests conducted to witness 10% CAGR over FY16-

19E owing to increased tests/sample

Tests Conducted (in millions)

8.6%

YoY Growth (%)

10.6%

5.9%

28.7

30.4

7.6%

10.4%

Exhibit 77: Average realization per test to witness modest

2%YoY growth over FY16-19E

Avg realisation per test

6.0%

273.7

274.6

280.1

2.0%

0.3%

YoY Growth (%)

285.7

291.4

32.7

35.5

39.3

43.4

258.2

2.0%

Source: MOSL, Company

14 October 2016

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

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

Fortis Healthcare

Scope for growth as healthcare services remain under represented

India’s 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

Healthcare expenditure as % of GDP

11.6

10.9

10.3

9.3

5.4

3.8

4.5

India’s healthcare

expenditure as % of GDP

was 3.8% (government

spends: 1.2%), compared to

global average of 8.6%

(government spends: 5.0%)

8.6

Source: WHO-World Health Statistics 2015

Exhibit 81: India’s healthcare infrastructure gap remains substantial

India's share in global

disease burden is 20%,

while its share of healthcare

infrastructure is much lower

with only 6% of global

hospital beds and 8% share

of doctors and nursing staff.

20%

India's share in global healthcare infrastructure

Disease Burden

Beds

Doctors

Nurses

Community & Lab Technicians

Health Workers

Source: FICCI and E&Y

14 October 2016

Fortis Healthcare

Exhibit 82: India lags behind developed and other emerging economies in healthcare

infrastructure

Beds per 10,000 people

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 sector’s share in healthcare/hospitals

spending is estimated at 81% in-2015…

Share in healthcare spending in India, 2015

Nursing

home, 30%

Government

hospital, 19%

Exhibit 84: …up from 66% in-2005

Share in healthcare spending in India,

2005

Nursing

home, 26%

Government

hospital, 34%

Mid tier, 14%

Mid tier, 11%

Top tier, 40%

Source: WHO-World Health Statistics 2013

Top tier, 26%

Source: WHO-World Health Statistics 2013

The private hospital market in India was estimated at USD54b as of end-CY2014.

Over 2009–14, 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

Fortis Healthcare

Exhibit 85: Private sector has emerged as a vibrant force in

India’s healthcare industry

Market size of private hospitals (USD b)

54.0

45.0

29.9

22.0

35.4

India

South East Asia

Africa

America

Exhibit 86: Private sector contribution (%) is among the

largest globally within Indian healthcare industry

Private Sector Expenditure on Healthcare

(as a % of total healthcare expenditure)

69.7%

62.9%

50.7%

24.8%

Source: World Health Statistics 2012

2009

2010

2011

2012

2014

Source: IBEF

Europe

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

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

country’s 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

114.8

66.3

81.1

130.9

Rising health insurance

premium is accompanied by

rising income levels and

awareness. Higher health

insurance penetration

allows greater access to

quality healthcare.

16.7

FY05

22.2

FY06

32.1

51.2

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 India’s 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

4.91

3.31

3.7

2.8

2.5

2.7

2005

2015E

0.18

Cardiac

Diabetes

Asthma

0.20

Cancer

Source: Crisil Research

14 October 2016

Fortis Healthcare

Exhibit 90: Increasing in-patient volumes due to non-

communicable lifestyle diseases

In-patient market size (INR b)

2008

2013P

2018P

Exhibit 91: Cardiac,

oncology

and

diabetes-related

hospitalizations to exhibit 8-11% CAGR over FY08-18

Number of hospitalised cases (m)

8.3

2008

2013P

2018P

1030

509

201

Cardiac

118

274

519

Diabetes

Source: Crisil Research

163

2.9

5.2

3.1

4.2

2.3

1.2

3.4

Oncology

Cardiac

Oncology

Diabetes

Source: Crisil Research

Medical tourism – X factor for India’s 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 India’s position as a

preferred destination for medical tourism.

Exhibit 92: Medical tourism is burgeoning industry in India

(USD b)

6.0

4.2

4.8

170,000 190,000

230,000

270,000

300,000

350,000

Exhibit 93: Medical tourist arrivals in India

430,000

2.0

2.4

3.0

3.5

2012

2013

2014

2015

2016

2017

2018

2012

2013

2014

2015

2016

2017

2018

Source: Ministry of Tourism, CII, RNCOS

14 October 2016

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

quality care at substantially

lower cost.

144

100

15 11

Korea

Thailand

Malaysia

India

Heart Bypass

Hip Replacement

Knee Replacement

Spinal Fusion

Source: Crisil Research

Exhibit 95: Comparison of major medical tourism destinations in Asia

Country

Thailand

India

Malaysia

Indonesia

Taiwan

Average saving

% compared to the US

50-75

65-90

65-80

40-55

Popular treatment option



Alternative medicine, cosmetic surgery, dental care, gender realignment, heart surgery,

obesity surgery, oncology and orthopedics

Cardiology, orthopedics, nephrology, oncology and neuro-surgery

Cardiology, orthopedics, oncology, obstetrics and gynecology

Cosmetic surgery and dentistry procedures

Cardiology, fertility treatment, orthopedics and cosmetic surgery

Source: KPMG- FICCI- Medical Value Travel in India (Sep 2014), RNCOS

14 October 2016

Fortis Healthcare

Annexure II - Diagnostics industry overview

Fast-growing segment within healthcare market

Based on industry estimates, India’s 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

7.9

9.1

10.5

6.0

6.9

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 1–2

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. Dang’s Lab (Delhi).

14 October 2016

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

11%

20%

27%

35%

14%

21%

29%

15%

21%

28%

27%

11%

16%

23%

26%

25%

13%

16%

24%

23%

Brazil

India

Source: Industry Reports

Exhibit 99: Diagnostic presence relatively under penetrated

No. of diagnostic labs per million population

418

0 - 14 years

15 - 29 years

30 - 44 years

45 - 59 years

60+ years

Source: Industry Reports

Low entry barriers

India’s 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

Fortis Healthcare

Exhibit 100: High-volume pathology business accounts for

larger share of diagnostics industry

Exhibit 101: Biochemistry tests accounts for larger share of

diagnostics industry

Immunology,

21%

Imaging,

30%

Others, 22%

Pathology,

70%

Hematology,

18%

Biochemistry,

39%

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

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

company’s 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 company’s hospital assets.

The scheme is subject to various statutory and regulatory approvals.

Exhibit 102: Current company structure

Exhibit 103: Proposed structure

Source: MOSL, Company

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

Fortis Healthcare

Exhibit 104: Composite Scheme of Arrangement

Exhibit 105: Fortis Malar: Proposed share holding pattern

Fortis Malar Hospitals Limited

Particular

Promoters & Promoter Group

Public

Total

No of Shares

11,753,202

7,071,057

18,824,259

62%

38%

100%

Fortis Malar (Resultant co; to be renamed SRL)

Particular

Promoters &

Promoter Group

Public

Total

SRL Limited (Fully Diluted)

Particular

Promoters & Promoter Group

Public

Total

No of Shares

49,536,779

30,718,317

80,255,096

62%

38%

100%

No of Shares

381,470,755

528,469,636

909,940,391

42%

58%

100%

Fully diluted shareholding assuming full outstanding ESOP conversion

Fully diluted shareholding assuming all CCPS and outstanding ESOP conversion

(adjusted for 6% cancelled ESOP's)

Source: MOSL, Company

14 October 2016

Fortis Healthcare

Financials and valuations

Consolidated - Income Statement

Y/E March

Total Income from Operations

Change (%)

Raw Materials

Employees Cost

Other Expenses

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Total Tax

Tax Rate (%)

Minority Interest/ associate income

Reported PAT - Continuing Opr.

Adjusted PAT - Continuing Opr.

Change (%)

Margin (%)

FY12

26,177

75.0

6,386

5,510

10,998

22,894

87.5

3,282

12.5

1,745

1,537

2,512

1,156

181

750

931

366

39.3

-69

634

179

-109.6

0.7

FY13

30,423

16.2

7,769

6,277

14,154

28,199

92.7

2,224

7.3

2,288

-63

4,613

1,478

-3,198

9,992

6,793

1,748

25.7

195

4,850

-2,571

-1,536.8

-8.4

FY14

34,919

14.8

8,807

6,952

18,639

34,398

98.5

521

1.5

1,828

-1,307

2,502

1,674

-2,135

-51

-2,186

107

-4.9

-105

-2,188

-2,134

-17.0

-6.1

FY15

39,659

13.6

9,345

7,646

21,358

38,349

96.7

1,309

3.3

2,346

-1,036

1,518

887

-1,667

-1,599

-2.8

-458

-1,186

-1,256

-41.1

-3.2

FY16

42,651

7.5

9,572

8,260

22,650

40,482

94.9

2,169

5.1

2,295

-125

1,249

926

-448

212

-236

466

-197.4

-443

-259

-890

-29.1

-2.1

FY17E

47,357

11.0

10,418

8,524

23,972

42,915

90.6

4,442

9.4

2,650

1,792

2,850

600

-458

500

-109.2

-344

-614

-31.1

-1.3

(INR Million)

FY18E

53,745

13.5

11,555

9,405

26,005

46,966

87.4

6,779

12.6

3,000

3,779

2,000

300

2,079

686

33.0

-243

1,636

-366.7

3.0

FY19E

61,000

13.5

12,810

10,675

29,246

52,731

86.4

8,268

13.6

3,200

5,068

1,000

300

4,368

1,442

33.0

-182

3,109

90.0

5.1

Consolidated - Balance Sheet

Y/E March

Equity Share Capital

Preference Capital/ FCCB

Total Reserves

Net Worth

Minority Interest

Total Loans

Deferred Tax Liabilities

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Goodwill on Consolidation

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and cash equivalents

Loans and Advances

Curr. Liability & Prov.

Account Payables

Other Current Liabilities

Provisions

Net Current Assets

Appl. of Funds

E: MOSL Estimates

FY12

4,052

28,468

32,563

8,308

68,630

-416

109,085

36,598

9,619

26,980

64,823

5,658

2,348

23,968

799

5,461

4,210

13,498

14,691

8,102

5,676

912

9,277

109,085

FY13

4,052

6,743

33,013

43,809

10,212

64,712

261

118,994

28,405

10,232

18,172

74,569

2,438

10,055

29,903

925

6,628

6,936

15,415

16,144

9,267

5,318

1,559

13,759

118,994

FY14

4,628

6,700

38,196

49,524

1,393

18,803

350

70,070

27,751

10,056

17,695

23,773

1,471

10,314

25,255

620

4,407

10,446

9,782

8,438

5,061

2,477

899

16,817

70,070

FY15

4,628

35,848

40,476

1,529

17,843

-71

59,777

29,230

11,726

17,504

24,673

2,282

10,561

20,826

640

4,094

5,970

10,122

16,069

5,649

9,316

1,103

4,757

59,777

FY16

4,631

35,342

39,973

1,431

14,960

-506

55,858

26,997

12,569

14,428

23,328

2,010

10,784

21,264

619

4,438

7,369

8,838

15,957

6,071

8,872

1,013

5,307

55,857

FY17E

4,631

34,713

39,344

1,431

26,460

-506

66,729

29,855

15,219

14,636

23,328

1,652

22,284

20,508

656

5,838

4,200

9,813

15,679

4,703

9,851

1,125

4,828

66,728

(INR Million)

FY18E

5,231

41,390

46,621

1,431

16,460

-506

64,006

27,676

18,219

9,457

23,328

1,830

22,284

24,066

718

7,362

4,849

11,137

16,961

4,504

11,180

1,277

7,106

64,006

FY19E

5,231

44,576

49,808

1,431

16,460

-506

67,192

30,641

21,419

9,221

23,328

1,866

22,284

29,687

806

8,356

7,884

12,640

19,195

5,056

12,689

1,449

10,492

67,192

14 October 2016

Fortis Healthcare

Financials and valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Leverage Ratio (x)

Net Debt/Equity

FY12

0.4

4.2

70.3

0.0

FY13

-5.6

-0.6

94.6

0.0

FY14

-4.6

-0.7

106.9

0.0

-0.2

FY15

-2.7

2.4

87.4

0.0

-0.9

-62.3

71.8

1.9

2.3

68.9

0.0

1.3

-2.8

-0.2

-2.6

1.4

0.7

0.3

FY16

-1.9

3.0

86.3

0.0

-2.4

-87.9

55.7

2.0

39.6

0.0

4.3

-2.2

1.1

-0.2

1.6

0.8

0.2

FY17E

-1.3

4.4

85.0

0.0

-2.5

-127.6

38.4

2.0

2.1

22.6

0.0

-2.7

-1.5

3.0

3.6

1.6

0.7

0.6

FY18E

3.5

10.0

100.7

0.0

-2.5

47.8

16.9

1.7

13.3

0.0

14.0

3.8

4.2

6.9

1.9

0.8

0.2

FY19E

6.7

13.6

107.5

-0.1

-2.5

25.2

12.4

1.6

1.4

10.5

0.0

7.5

6.4

5.6

9.7

2.0

0.9

0.2

0.0

-5.2

0.5

2.3

1.4

0.7

0.2

113

2.0

0.0

26.9

-6.7

1.0

0.0

1.1

0.3

111

1.3

0.0

-1.3

-4.6

0.4

-2.0

1.3

0.5

0.2

Consolidated - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(Inc)/Dec in FA

Free Cash Flow

(Pur)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

FY12

1,131

1,822

1,708

-1,073

-544

3,044

-67

2,977

-5,397

-2,420

583

-3,124

-7,937

3,005

6,418

-2,031

-479

6,912

1,952

2,257

4,210

FY13

7,313

2,922

4,483

-2,496

2,240

14,461

1,975

16,436

-3,978

12,458

-6,971

-2,020

-12,969

3,002

-3,916

-5,553

5,725

-741

2,726

4,210

6,936

FY14

1,491

2,479

1,839

-1,049

-203

4,556

235

4,791

-5,413

-622

-5,858

42,162

30,891

10,196

-37,737

-3,777

-854

-32,172

3,510

6,936

10,446

FY15

-1,374

2,628

1,048

-1,193

-280

829

-587

242

383

625

4,097

-6,162

-1,682

-1,539

-1,400

-98

-3,035

-4,475

10,446

5,970

FY16

552

2,305

587

-1,544

126

2,026

-352

1,674

325

1,999

-1,393

5,229

4,162

-3,255

-1,248

-4,438

1,399

5,970

7,369

FY17E

-458

2,650

2,250

-500

-2,690

1,252

-2,500

-1,248

-11,500

600

-13,400

11,500

-2,850

-15

344

8,979

-3,169

7,369

4,200

(INR Million)

FY18E

2,079

3,000

1,700

-686

-1,628

4,465

2,000

6,465

300

2,300

5,600

-10,000

-2,000

243

-6,116

649

4,200

4,849

FY19E

4,368

3,200

700

-1,442

-351

6,476

-3,000

3,476

300

-2,700

-1,000

182

-741

3,035

4,849

7,884

14 October 2016

REPORT GALLERY

RECENT INITIATING COVERAGE REPORTS

Fortis Healthcare

NOTES

14 October 2016

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