Healthcare Sector Report Oct 16 EDEL PDF

Healthcare
Time to realise true potential

October 7, 2016
N KS
BA
Deepak Malik Rahul Solanki Archana Menon

+91 22 6620 3147 +91 22 6623 3317 +91 22 6620 3020 Edelweiss Securities Limited
deepak.malik@edelweissfin.com rahul.solanki@edelweissfin.com archana.menon@edelweissfin.com
Healthcare
Executive Summary
The investment thesis for Indian healthcare delivery models has always
had a flawless appeal from the vantage of demand. However, the sector
is now ripe to realise its true potential. Increase in insurance
penetration, along with reforms in healthcare and REIT policies can
unlock the sector’s potential. We believe that sector’s capex cycle is
(Click here for now coming to an end, with annual capex to nearly halve over the next
video clip)
5 years versus ~2.5x increase in the last 5 years. Players are now on the
cusp of EBITDA margin and RoCE expansion. Efficacious models that can widen access with
quality while maintaining affordability will inevitably scale up rapidly and deliver
attractive RoCEs, and attractive returns for shareholders. All the companies in the sector
will start generating FCF FY19 onwards. We initiate coverage on Fortis, Max, HCG, Dr Lal
and Thyrocare with ‘BUY’, and maintain ‘BUY’ on Apollo. Max and HCG are our top picks in
the sector.

Healthcare infrastructure: Under‐served
India’s healthcare space is majorly under‐served due to absence of credible infrastructure.
The system has several inherent weaknesses: (1) funding allocated for healthcare nationally
is a paltry 4.1% of GDP primarily due to low government contribution (~1% of GDP); and (2)
domestic healthcare delivery infrastructure is skewed with a substantial 75% catered to by
the organised private sector, which is primarily confined to state capitals or tier‐I cities and
tilted in favour of secondary/tertiary/quaternary care.

Income inequalities lead to under‐consumed healthcare
In India, the flip side of economic development has been rising income level inequalities that
have thus led to healthcare being under‐consumed in the country. Ergo, the divergence
between healthcare expenditure of the top and bottom quintile of population in urban and
rural areas has widened ~10x. Moreover, during FY00‐15, the government’s real
expenditure on healthcare, insurance policies and real per capita income clocked a mere
~10‐11% CAGR, leading to 11‐12% growth in per capita healthcare expenditure.

Sector growth levers: Insurance penetration, healthcare & REIT policy
Sector potential, despite under investment and government apathy, was never in doubt.
Growth drivers seem to be perfectly aligned now more than ever, owing to reforms and a
promising healthcare policy. Going ahead, the sector will witness: (1) increase in insurance
penetration in the most promising middle income segment (~60% of total population) from
current <10%; (2) higher fund allocation by government towards healthcare from current 1%
of GDP. Every 100bps incremental spend (of GDP) by government could boost healthcare
spend growth 300bps; and (3) models like REIT could help segregate real estate and
healthcare management, thus lowering the cost of capital.

Outlook for players: Pick up in margin and expansion in RoCE
We believe that structural drivers and business models are now in place. Post increasing
~2.5x in last 5 years, capex cycle is now coming to an end with overall quantum to nearly
halve over the next 5 years, leading to improving asset turnover. As players look to sweat
their infrastructure and focus on business mix, the sector’s EBITDA margin will inch up
steadily. The net result will be a directional improvement in the sector’s RoCE. Our analysis
indicates ~700‐900bps RoCE expansion for all players over the next 5 years.
1 Edelweiss Securities Limited
Healthcare
Contents

Executive summary .................................................................................................................. 1
Investment Rationale ............................................................................................................... 4
Healthcare in India: Under‐Served, Under‐Consumed .......................................................... 10
Healthcare Infrastructure: Under‐Served .............................................................................. 15
Income Inequalities Lead to Under‐Consumed Healthcare ................................................... 24
Sector Growth Levers: Insurance Penetration, Healthcare & REIT Policy .............................. 29
Outlook for players: Pick up in margin and expansion in RoCE .............................................. 36
Conclusion: Choosing Right Model Key .................................................................................. 42
Appendix I: The Diagnostics Industry ..................................................................................... 40
Appendix II: Health Insurance Sector in India ........................................................................ 43

Companies
Apollo Hospitals Enterprise ................................................................................................ 45
Dr Lal PathLabs ................................................................................................................... 63
Fortis Healthcare ................................................................................................................ 85
Healthcare Global Enterprises .......................................................................................... 111
Max India .......................................................................................................................... 137
Thyrocare Technologies ................................................................................................... 161
Healthcare
Companies mentioned in this report:
Apollo Hospitals Enterprise – Apollo
Fortis Healthcare – Fortis
Super Religare Laboratories ‐ SRL
Max India – Max
Healthcare Global Enterprises – HCG
Narayana Hrudayalaya – Narayana
Dr. Lal PathLabs – Dr Lal
Thyrocare Technologies – Thyrocare
Nueclear Healthcare Limited ‐ Nueclear

Acronyms used in this report:
Average Length of Stay ‐ ALOS
Average Revenue per Operating Bed ‐ ARPOB
Outpatient ‐ OP
Inpatient ‐ IP
Universal Health Coverage ‐ UHC
Gross Written Premium ‐ GWP
Real Estate Investment Trust ‐ REIT
National Capital Region ‐ NCR
EBITDA before net business trust (BT) Costs ‐ EBITDAC

1

Table 1: Valuation and recommendation snapshot
CMP Target Mcap EBITDA (INR mn) P/E (x) EV/ EBITDA (x) ROACE (%)* Net Debt

INR Price Reco (USD bn) FY16 FY17E FY18E FY19E FY17E FY18E FY19E FY16E FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY17E
Apollo Hospitals Enterprise 1,320 1,740 BUY 2.8 7,823 9,031 11,055 13,320 46.9 32.6 24.8 26.2 22.7 18.5 15.4 10.0 10.4 12.6 14.3 22,683
Fortis Healthcare 173 265 BUY 1.2 6,739 8,429 7,502 8,909 139.7 155.6 54.3 17.5 14.0 15.7 13.2 2.2 4.5 4.4 6.4 17,922
Max India (MHC network) 142 175 BUY 0.6 2,147 3,030 3,810 4,560 114.8 107.8 70.7 32.5 23.0 18.3 15.3 6.7 9.2 10.0 11.0 4,546
Healthcare
HCG 227 310 BUY 0.3 897 1,099 1,344 1,714 190.3 197.8 68.7 23.9 19.5 15.9 12.5 6.7 5.6 6.4 9.9 4,032
Narayana Hrudayalaya * 334 NC 1.0 1,743 2,473 3,051 3,765 89.0 63.4 40.5 28.6 23.1 2.3 7.8 10.5 12.8 2,335
Kovai Medical * 801 NC 0.1 991 1,176 1,341 17.1 14.6 9.6 8.1 7.1 25.8 22.5 21.2 753
Indraprastha Medical Corporation * 55 NC 0.1 968 1,111 1,187 10.5 10.3 5.6 4.9 4.6 14.2 21.9 19.6 408
Hospitals 59.6 45.4 30.5 20.3 16.5 15.0 12.5 5.9 7.2 8.3 10.6
Dr Lal Pathlabs 1,050 1,180 BUY 1.3 2,097 2,489 3,045 3,706 54.1 43.0 33.4 40.0 33.7 27.5 22.6 43.5 37.6 36.9 36.8 (3,946)
Thyrocare 616 700 BUY 0.5 935 1,166 1,475 1,797 47.1 36.6 29.1 34.3 27.5 21.8 17.9 23.8 26.9 31.2 34.7 (1,132)
Diagnostics 52.0 41.0 32.1 38.2 31.7 25.7 21.1 35.1 33.8 35.4 36.7 (5,078)
4
Overall 60.2 46.0 32.3 24.3 19.6 17.4 14.4 7.5 8.8 10.1 12.7
Source: Company, Bloomberg, Edelweiss research
Note: * Not covered
Note: RoE estimates for Narayana Hrudayalaya, Kovai Medical and Indraprastha Medical Corporation as RoCEs are not available
Edelweiss Securities Limited
Healthcare
Investment Rationale

The investment thesis for Indian healthcare delivery models has always had a flawless
appeal from the vantage of demand. However, the sector is now ripe to realise its true
potential. Increase in insurance penetration, along with reforms in healthcare and REIT
policies can unlock the sector’s potential. We believe that sector’s capex cycle is now
coming to an end, with annual capex to nearly halve over the next 5 years versus ~2.5x
increase in the last 5 years. Players are now on the cusp of EBITDA margin and RoCE
expansion. Efficacious models that can widen access with quality while maintaining
affordability will inevitably scale up rapidly and deliver attractive RoCEs, and attractive
returns for shareholders. All the companies in the sector will start generating FCF FY19
onwards. We initiate coverage on Fortis, Max, HCG, Dr Lal and Thyrocare with ‘BUY’, and
maintain ‘BUY’ on Apollo. Max and HCG are our top picks in the sector.

Healthcare infrastructure: Under‐served
India lacks an overall robust healthcare infrastructure and its system is characterised by
several inherent weaknesses. Funding allocated for healthcare nationally is abysmally low
(4.1% of GDP) primarily due to low contribution from the government (1% of GDP). Around
75% of India’s total healthcare delivery market is catered to by the private sector. This has
resulted in most organised private infrastructure being confined to state capitals or tier‐I
cities and skewed towards secondary/tertiary/quaternary.

Decades of under‐investment in the health sector has led to immense deficiency in
infrastructure. India is the poorest performer on the health front among 5 BRICS (Brazil,
Russia, India, China and South Africa) nations. Despite higher income per head and 2
decades of sustained economic growth, the country has fallen behind even several ASEAN
countries on many health indicators.

Private investments have largely focused on urban areas that have comparably shorter
gestation period compared to rural areas. The unorganised sector covers majority of the
market and has created relatively fragmented capacity across the country.

Chart 1: Indian healthcare system lags in most parameters compared to other countries
8,895
85
1,440
2.5
3.9
1.9
3.0
(USD)
(USD)
(x)
(%)
(x)
0.7
25
0.9
90
15
322
58
China
India
US
China
India
US
China
India
US
China
India
US
India
US
Per capita spending
on pharma products
Per capita healthcare and medical devices Hospital beds per Doctors per 1000
expenditure (2012) (2013) 1,000 people (2012) % insured (2012)

Source: WHO‐World Health Statistics 2013, Edelweiss research
1
Healthcare
Chart 2: Healthcare supply skewed towards urban geographies and highly unorganised across different formats
100.0 100.0
80.0
80.0
60.0
(%)
60.0 40.0
(%)
40.0 20.0
0.0
Pathology
Multispeciality
Eye care
Imaging
20.0
hospitals
0.0
Population Hospitals Doctors Hospital
beds
Rural Urban Organised players Unorganised players

Source: Census 2011 data; Central Bureau of Health Intelligence (CBHI); Bain analysis, Edelweiss research

Income inequalities lead to under‐consumed healthcare
As development proceeds, earnings of different classes rise asymmetrically in India. Income
levels of the upper and middle‐income classes are rising more rapidly than those of the
lower‐income classes. In addition to continuing globalisation and technological changes,
there are 3 factors intensifying India’s inequality problem, viz., unequal asset distribution,
inadequate job creation and lack of political will. These have cumulatively led to ~10x
difference between healthcare expenditures of the top and bottom quintile of urban and
rural populations. Moreover, during FY00‐15, the government’s real expenditure on
healthcare, insurance policies and real per capita income clocked a mere ~10‐11% CAGR,
leading to 11‐12% growth in per capita healthcare expenditure.

Chart 3: Per capita private healthcare expenditure has grown Chart 4: This has resulted in decline in healthcare
at 9%, lagging GDP per capita growth of 11% expenditure, as a % of GDP
CAGR 11% Healthcare spend as a % of GDP‐India
CAGR 9% 4.5 4.5

CAGR 9% 4.4
4.3
4.1
(x)
4.1
3.9
(%)
3.8
2000 2005 2010 2012

Urban private healthcare expenditure per capita
2000
2002
2004
2006
2008
2010
2012
2014
Rural private healthcare expenditure per capita
GDP per capita

Source: Government of India (PFCE data), National Sample survey, Edelweiss research

Healthcare
Sector growth levers: Insurance penetration, Healthcare & REIT policy
Sector potential, despite under investment and government apathy, was never in doubt.
Growth drivers seem to be perfectly aligned now more than ever, owing to reforms and a
promising healthcare policy. Going ahead, the sector will witness: (1) increase in insurance
penetration in the most promising middle income segment (~60% of total population) from
current <10%; (2) higher fund allocation by government towards healthcare from current 1%
of GDP. Every 100bps incremental spend (of GDP) by government could boost healthcare
spend growth 300bps; and (3) models like REIT could help segregate real estate and
healthcare management, thus lowering the cost of capital.

Total healthcare expenditure in India is USD85bn, having clocked 13% CAGR during FY00‐15.
While private expenditure jumped ~12%, expenditure by government/insurance rose
14%/12%. Going forward, assuming GDP growth of 8% over FY16‐22, there could be 3
scenarios for healthcare expenditure:

(a) In base case scenario, if we assume government expenditure to remain at current level
of 1% of GDP and private/insurance expenditure to increase at 14%/10% CAGR, it
suggests total healthcare expenditure will clock 13% CAGR to ~USD160bn by FY21E
Going forward, the sector will
versus ~USD85bn currently.
witness: (i) increase in insurance
penetration; (ii) higher fund (b) Maintaining similar assumptions for private and government expenditure as base case,
allocation by the government if we assume that universal health coverage (UHC) will map all the currently uninsured
towards healthcare; and (iii) ~188mn BPL (below poverty line) individuals and the claim ratio is ~50% by FY21, total
models like REIT could help lower healthcare expenditure would rise to ~USD190bn (17% CAGR).
the cost of capital.
(c) Keeping similar assumptions for private and insurance expenditure as base case, if one
were to assume that government expenditure on healthcare will rise gradually from 1%
to 3% of GDP, total healthcare expenditure would rise to ~USD200bn (19% CAGR).

Chart 5: Healthcare expenditure growth can be boosted by government (USD bn)
210
168
Government expenditure
increased to ~3% of GDP
Universal Healthcare
126
(USD bn)
launched
84
Government
expenditure
remains at
~1% of GDP
42
0
FY16 base FY21 FY21 FY21
base case UHC case 3% of GDP case

Source: Government of India (PFCE data), Edelweiss research

1
Healthcare
Outlook for players: Pick up in margin and expansion in RoCE
Key trends which will dominate the healthcare space going forward are:
 Shift from unorganised to organised players: We believe structural drivers and strong
business models are in place to propel mid teens overall growth. However, private
Sector capex has jumped to ~2.5x
over the last 5 years, to halve over players in the sector will witness faster growth over next 5 years. The healthcare sector
next 5 years (INR bn) has one of the least penetration of organised players. As organised players become
30 more customer‐centric, outcomes‐driven and prevention‐focused and customers
24 become more brand conscious, organised players will gain market share steadily and
grow 300‐400bps faster than the overall sector (13% base case).
18
12  Decline of cost of capital: Macro trends indicate that interest rates are on a downward
6 trajectory. Moreover, REIT and other models will help hospital players tap markets for
0 cheaper capital. We believe, over the next 5 years, cost of capital for the sector will
FY17E
FY18E
FY19E
FY20E
FY21E
FY12
FY13
FY14
FY15
FY16
plummet to 7‐8% from 13‐14% currently.
 RoCE/ RoE expansion for the sector: Capex has jumped to ~2.5x over the past 5 years.
Source: Company, Edelweiss research We believe the aggressive investment phase in the healthcare sector is now coming to
an end and most players are now looking to sweat their land banks through brownfield
expansion. Over the next 5 years, overall quantum will fall to nearly half, thereby
improving asset turnover. As players look to sweat their infrastructure and focus on
business mix, the sector’s EBITDA margin will inch up steadily. The net result of
improved asset turnover and EBITDA margin will be a directional improvement in the
sector’s RoCE. Our analysis indicates ~700‐900bps RoCE expansion for all players over
the next 5 years.

Chart 6: EBITDA Margin and RoCE for the sector to increase over next 5 years
19.5 20.0
18.0 16.0
16.5 12.0
(%)
(%)
15.0 8.0
13.5 4.0
12.0 0.0
FY17E
FY18E
FY19E
FY20E
FY21E
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
FY21E
FY13
FY14
FY15
FY16
EBITDA Margin RoCE

Source: Company, Edelweiss research

Healthcare
Conclusion: Choosing right model key
We believe that with sector at the cusp of EBITDA margin and RoCE expansion, now is the
time for the sector to realise its true potential. Efficacious business models that can widen
access with quality whilst maintaining affordability will inevitably scale up rapidly and
deliver attractive returns for shareholders.

Single specialty hospitals preferred over multi‐specialty for faster scale up, breakeven
Over the past decade, growth capital has steadily flocked to more efficacious models that
Single specialty hospitals are able seek to breakeven sooner as well as provide better clinical outcomes for patients. Single
to scale up better and utilise specialty hospitals have trumped multi‐specialty hospitals due to numerous inherent
capital more efficiently due to advantages. These models are able to scale up better and utilise capital more efficiently due
lower capital requirement and to lower capital requirement and superior therapeutic focus. They avail advantage of
superior therapeutic focus. economies of scale. They are also able to offer best‐in‐class clinical tertiary/quaternary
protocols to patients due to the vast knowledge repository that they are able to create over
time on a specific specialty.

We like HCG’s single specialty model which focuses on addressing high potential therapies
like oncology and fertility. The company’s recent ventures have turned profitable within
~12‐18 months. We initiate coverage on HCG with ‘BUY’.

Long‐term structural story of multi‐specialty hospitals remains attractive
The multi‐specialty space offers a variety of themes which suit diverse investment criteria.
Most multi‐specialty hospitals in India are focused on top‐end of the pyramid. Instead of
targeting bottom of the pyramid or mass markets, these hospital chains target the top end
with prices that are high enough to avoid the mass market tag, while being low enough to
attract middle/higher middle class consumers, whose ranks are expected to swell as India
moves into accelerated growth trajectory of >8%.

Fig 1: Addressable markets for multispecialty hospitals
Fortis Globals & Strivers
15% of population
3 mn households, 16mn population
Apollo
>INR 1.7mn/ year
Max
HCG
Fortis Seekers
Apollo 31mn households, 160mn population
Max INR 340k ‐ 1.7mn/year
HCG
Aspirers
Narayana 71mn households, 360mn population
Government facilities INR 150k ‐ 340k/year
Deprived
135mn households, 680mn population
Government facilities <INR 150k/year

Source: Industry reports, Edelweiss research
1
Healthcare
Apollo, Fortis and Max are focused on the top end of the pyramid, whereas Narayana has
carved a niche at the mid level of the pyramid, leaving the bottom level space for
government hospitals.

Further, hospital chains in the top end also provide different flavours to suit diverse
investment tastes and styles. Within multi‐specialty hospitals we believe investors will need
to cherry pick according to their respective investment criteria.
(a) For growth conscious investors, Max provides best visibility in terms of EBITDA growth
with an aggressive, yet balanced growth plan. Its EBITDA is estimated to clock 25%
Apollo, Fortis and Max are focused CAGR over FY16‐21 compared to Apollo’s 20% and Fortis’ 13% (EBITDAC). We believe,
on the top end of the pyramid, Max is a compelling bet on the tertiary care opportunity in the NCR market, which
whereas Narayana has carved a could have upsides from investments in health insurance.
niche at the mid level of the
(b) For value conscious investors, Fortis is the best bet. It is on the cusp of unlocking
pyramid, leaving the bottom level
significant value by: (i) demerging its 56% subsidiary SRL which can unlock value of
space for government hospitals
~INR57/share; and (ii) partially unwinding its REIT capital structure, which we believe is
inefficient.
(c) For conservative and return‐on‐capital conscious investors, Apollo is the best bet. It is
equipping itself to successfully battle the anticipated disruption in the healthcare
sector. Going forward, it is targeting select tertiary care focused greenfield investments
and focus on improving operating metrics for the capacity it has rapidly created over
the past 5 years. Under AHLL, it is adding a number of new healthcare delivery formats
focused on primary and secondary care that are bound to bolster its patient
engagement early in the lifecycle.

Table 2: Operating metrics
Apollo Fortis Max HCG Narayana
Increase in number of beds over 5 years (FY16‐FY21E) 945 1,450 724 611 NA
Revenue growth CAGR (FY16‐FY21E) 15.6 11.4 16.3 19.2 NA
EBITDA growth CAGR (FY16‐FY21E) 20.4 12.8 24.6 22.3 NA
RoCE improvement (FY16‐FY21E) 955bps 837bps 730bps 882bps NA
RoCE (FY21E) 19.5 10.6 14.0 15.5 NA
Efficiency parameters (FY16)
ALOS 4.2 3.6 3.3 2.9 4.3
occupancy (%) 63.0 72.0 71.1 51.0 54.2
ARPOB (INR/day) 28,036 37,534 30,334 26,592 17,534
outpatient/in patient volume 3.5 9.0 27.8 NA 9.7
no of doctors/bed 1.3 0.7 1.3 0.6 0.5
no of support staff/doctor 1.7 NA 2.6 2.6 4.2

Healthcare
Diagnostics has advantage of scaling up faster with better RoCE
Investment case for diagnostics is that it is still a largely under‐consumed module of
treatment and demand has significant room to grow. As evidence‐based treatments gain
ground, growth drivers for diagnostics will remain upbeat. Even as India continues to
grapple with the burden of communicable diseases, a wave of non‐communicable diseases
has flooded the country with ailments like diabetes, obesity and cancer, among others.
Hence, preventive healthcare diagnosis (wellness) will continue to gain popularity. Also,
current market share of organised chains is fairly low, boosting their long‐term growth
visibility. The diagnostics industry also offers the best returns on capital within healthcare
services due to its asset‐light reagent rental model and low gestation period.

The diagnostics space has the The most significant risk with diagnostics is that it is a low‐entry barrier business, with low
advantage of faster scale up and capex requirement and fewer regulatory hurdles. Attracted by high growth rate and
better RoCE. While it has same lucrative returns, competitive intensity in the space could rise going ahead, be it among
growth drivers as hospitals, due to incumbents of the organised market or individually‐owned labs offering personalised
low entry barriers and stretched customer‐centric services or the new startup labs that are focusing on specific tests such as
valuations we prefer the hospitals new‐born screening or genomics. In fact, already a number of private equity backed regional
space. players have started aggressively expanding their operations. Another factor is the
reinvestment risk of business cash flow. While RoCE of the business is currently high, it
could dilute if incremental capital employed does not generate similar returns.

The diagnostics space has the advantage of faster scale up and better RoCE. While it has
same growth drivers as hospitals, due to low entry barriers and stretched valuations we
prefer the hospitals space. However, in the diagnostic space, we prefer Dr Lal over
Thyrocare for its strong brand and B2C model. We estimate Dr Lal and Thyrocare to post
25% profit CAGR over the next 5 years on account of rising prevalence of evidence‐based
treatment, shift in favour of unorganised players and expanding product portfolio. Both the
players are in a strong FCF generation phase owing to low capex requirements, which is
envisaged to sustain high valuations in the medium term. We initiate coverage on Dr Lal
and Thyrocare with ‘BUY’ recommendations.

1
Healthcare
Table 3: Indian healthcare services ‐ Valuation and recommendation snapshot
CMP Target Mcap P/E (x) EV/ EBITDA (x) RoCE (%)
INR Price Reco (USD bn) FY17E FY18E FY19E FY16E FY17E FY18E FY19E FY16 FY17E FY18E FY19E
Apollo Hospitals Enterprise 1,320 1,740 BUY 2.8 46.9 32.6 24.8 26.2 22.7 18.5 15.4 10.0 10.4 12.6 14.3
Fortis Healthcare 173 265 BUY 1.2 139.7 155.6 54.3 17.5 14.0 15.7 13.2 2.2 4.5 4.4 6.4
Max India (MHC network) 142 175 BUY 0.6 114.8 107.8 70.7 32.5 23.0 18.3 15.3 6.7 9.2 10.0 11.0
HCG 227 310 BUY 0.3 190.3 197.8 68.7 23.9 19.5 15.9 12.5 6.7 5.6 6.4 9.9
Narayana Hrudayalaya * 334 NC 1.0 89.0 63.4 45.2 40.5 28.6 23.1 18.8 2.3 7.8 10.5 12.8
Kovai Medical * 801 NC 0.1 17.1 14.6 9.6 8.1 7.1 25.8 22.5 21.2
Indraprastha Medical Corporation * 55 NC 0.1 10.5 10.3 5.6 4.9 4.6 14.2 21.9 19.6
Hospitals 59.6 45.4 30.5 20.3 16.5 15.0 12.5 5.9 7.2 8.3 10.6
Dr Lal Pathlabs 1,050 1,180 BUY 1.3 54.1 43.0 33.4 40.0 33.7 27.5 22.6 43.5 37.6 36.9 36.8
Thyrocare 616 700 BUY 0.5 47.1 36.6 29.1 34.3 27.5 21.8 17.9 23.8 26.9 31.2 34.7
Diagnostics 52.0 41.0 32.1 38.2 31.7 25.7 21.1 35.1 33.8 35.4 36.7
Overall 60.2 46.0 32.3 24.3 19.6 17.4 14.4 7.5 8.8 10.1 12.7
Source: Company, Bloomberg, Edelweiss research
Note: * Not covered
Note: RoE estimates for Narayana Hrudayalaya, Kovai Medical and Indraprastha Medical
Corporation as RoCEs are not available

Healthcare
Healthcare in India: Under‐Served, Under‐Consumed

India is at the crossroads of an exciting and challenging period in its history. While the
investment thesis for Indian healthcare delivery models does have a flawless appeal
from the vantage of demand, a number of affordability and supply constraints curb
enthusiasm. Nathealth’s 2025 Healthcare roadmap aptly infers that India’s healthcare
is under‐served because of suboptimal infrastructure and under‐consumed because of
lack of affordability.

India’s demographic, economic and cultural factors render it a perfect ecosystem for a large
Current healthcare standards in and quickly growing goldmine for healthcare producers and providers. It is the second most
India are way below global populous country in the world and predicted to become the most populous in the future.
standards in terms of: With bulk of the populace living in sub‐optimal sanitation conditions, without safe drinking
(i) capacity and geographic reach water and in a largely tropical climate, communicable diseases will keep driving demand.
(accessibility) Moreover, demand is expected to burgeon as high number of citizens age, income levels
(ii) quality rise, non‐communicable lifestyle ailments increase, healthcare awareness improves, health
(iii) affordability insurance penetration deepens, medical tourism increases and a number of drug‐resistant
diseases develop. Advocacy of healthcare as a basic human right is on the rise in India and a
potent consumption driver.

The current report card on all the 3 critical tenets in the healthcare sector is much below
global standards: not just (i) capacity & geographical access (accessibility); and (ii) quality;
but also (iii) affordability.

The overall low expenditure combined with disproportionate private contribution to capital
investment has led to an inherently weak healthcare system reflected in: (i) overall low bed
density; (ii) infra skew towards urban versus rural; and (iii) infra skew towards secondary/
tertiary versus primary. While healthcare in the country is under served (sub‐optimal
infrastructure), it is also under consumed because of several factors that make affordability
and access a challenge for the population, especially at the bottom of the pyramid. Demand
solely cannot drive healthcare commerce. Expenditure on healthcare is abysmally low at just
4.1% of GDP, primarily due to low government funding (1% of GDP).

Chart 7: Healthcare infrastructure is under‐served
Total healthcare expenditure as a % of GDP (2014)
US 17.1
Switzerland 11.7
Germany 11.3
Japan 10.2
World avg 9.9
Australia 9.4
UK 9.1
South Africa 8.8
Brazil 8.3
Russia 7.1
Thailand 6.5
Nepal 5.8
China 5.5
Philippines 4.7
India 4

Source: PFCE, WHO‐World Health Statistics 2013, Edelweiss research
1
Healthcare
Healthcare ecosystem in India
India’s healthcare market is experiencing a wave of accelerated growth currently with the
Total spending on healthcare
total spending on healthcare services expected to clock 13% CAGR over FY16‐21 to
services estimated to clock 13%
~USD160bn. Making healthcare affordable and accessible for all citizens is one of the key
CAGR over FY16‐21 to ~USD160bn
focus areas of the government. Never before has the healthcare industry offered so much
hope amidst so much uncertainty. Yes, we are living in a time of great economic and social
upheaval, with new healthcare models and formats exerting pressure on traditional delivery
models. This is a sector that is highly unorganised and lacks transparency.

In the US, the healthcare industry makes up an astonishing 17.3% of the nation’s economy,
whereas in India it contributes only 4.1%. As the country moves forward on the path of
development, healthcare is moving up the government’s priority list.

Investors have multiple options to invest in different segments of the healthcare value
chain, where overall growth drivers are the same, but models differ in terms of regulatory
and financial challenges. Before we deep dive into the hospital and diagnostic space, let’s
understand the overall healthcare space in India.

India’s healthcare ecosystem encompasses following industries: (a) hospitals; (b)
pharmaceuticals; (c) diagnostics; (d) medical insurance; (e) healthcare industrials; and (f)
medical devices & surgical supplies. Our report focuses primarily on hospitals and
diagnostics.

Fig 2: Hospitals make up ~75% of India’s overall healthcare market
Indian Healthcare market‐ USD 85bn
USD 63bn USD 15bn USD 4bn USD 3bn
100%
Govt
Private
80%
Group Insurance
Apollo
Fortis
Others
Max
60%
Narayana
Hrudayalaya
HCG
Sun Pharma
40% Abbott
Cipla Dr Lal Pathlabs
Thyrocare
Zydus Cadila
Metropolis
20% SRL
Individual
Public Lupin
0%
Hospitals Pharma Diagnostics Insurance
Source: Industry, Edelweiss research

Healthcare
Healthcare delivery market (USD bn) Healthcare delivery (hospitals): 75% of market, growing at 12%
Hospitals is the biggest segment and contributes ~75% to India’s healthcare market. The
segment clocked ~12% CAGR during 2012‐15 to ~USD63bn. Private healthcare system
comprises ~75% of total healthcare market, implying ~USD48bn opportunity for private
63 players who have put up ~185,000 beds across the country.
46

2012 2015
Source: Industry reports,
Edelweiss research

Indian pharmaceuticals market (USD bn)
Pharmaceuticals: 18% of overall market, growing at 13%
At ~USD15bn, pharmaceuticals is the next biggest opportunity within healthcare and has
grown at 13% during 2012‐15. Pharmaceutical consumables make up a significant ~25% of
15 end‐user expenditure in healthcare delivery.
10

2012 2015

Edelweiss research
Diagnostics market (USD bn) Diagnostics: 4% of overall market, growing at 14%
In the past, the style of treatment relied less on evidence‐based approaches. However, this
trend witnessed a quick turnaround in the previous decade. The diagnostics industry has
started playing a key role in the healthcare value chain and clocked ~14% CAGR during 2012‐
3.5 15 to ~USD4bn. Though there is much fragmentation with >100k labs in the country,
2.4 demand for institutionalised services has led to organised players becoming more relevant
in the system. Organised players in this sunrise sector have hence benefited from this trend.
SRL, Metropolis, Dr Lal, Thyrocare and Medall, among others, are major organised players in
2012 2015
the segment.
Edelweiss research

Health insurance market (USD bn) Medical insurance: 4% of overall market, growing at 16%
Affordability of healthcare services, especially secondary care and higher, increases
dramatically with improvement in insurance coverage. While the government needs to do
10.9 much more to boost consumer uptake of private insurance as well as lend higher support to
8.2
social health security, medical insurance premiums posted ~16% CAGR during 2012‐15 to
3.1 ~USD3bn as the number of policies clocked 10% CAGR over the same period. However,
2.0
penetration is still barely at ~25%, implying humungous headroom for growth.
2012 2015
Premium Policies (mn)
Source: CRISIL, IRDA Annual Reports

1
Healthcare
Healthcare Infrastructure: Under‐Served

India’s healthcare space is majorly under‐served due to absence of credible
infrastructure. The system has several inherent weaknesses: (1) funding allocated for
healthcare nationally is a paltry 4.1% of GDP primarily due to low government
contribution (~1% of GDP); and (2) domestic healthcare delivery infrastructure is
skewed with a substantial 75% catered to by the organised private sector, which is
primarily confined to state capitals or tier‐I cities and tilted in favour of
secondary/tertiary/quaternary care.

Deficient infrastructure
India is behind the global curve in providing healthcare access. Making healthcare
affordable and accessible to all citizens is one of the government’s key focus areas currently.
The challenge is huge, as nearly 67% of the population lives in rural areas and ~26% is below
Decades of under‐investment in the poverty line. Not only does the country lack strong healthcare infrastructure, it has
the health sector has led to several inherent weaknesses in the system as well. Even in terms of metrics, be it per capita
immense deficiency in number of beds or doctors, India lags developed as well as developing peers.
infrastructure. India is the poorest
performer on the health front Decades of under‐investment in the health sector has led to immense deficiency in
among the 5 BRICS (Brazil, Russia, infrastructure. India is the poorest performer on the health front among the 5 BRICS (Brazil,
India, China and South Africa) Russia, India, China and South Africa) nations. Despite higher income per head and 2
nations. decades of sustained economic growth, the country has fallen behind even several ASEAN
countries on many health indicators.

Chart 8: Healthcare infrastructure is under‐served
8,895
85
1,440
2.5
3.9
1.9
3.0
(USD)
(USD)
(x)
(%)
(x)
0.7
25
0.9
90
15
322
58
China
India
US
China
India
US
China
India
US
China
India
US
India
US
Per capita spending
on pharma products
Per capita healthcare and medical devices Hospital beds per Doctors per 1000
expenditure (2012) (2013) 1,000 people (2012) % insured (2012)

Source: WHO‐World Health Statistics 2013, Edelweiss research
Healthcare
Urban versus rural infrastructure Infrastructure skewed towards urban areas
The health care delivery segment is dominated by the private sector, with 75% of the total
34.0 market catered to by it. However, private investments have largely focused on urban areas
Beds per 10,000
that have comparably shorter gestation period compared to rural areas. As such, urban
infrastructure is still respectable versus global standards. Further, major part of the
organised private infrastructure is confined to state capitals or tier I cities, with tier II and III
cities left far behind. In fact, some metro territories are likely to be saddled with over
2.5 9.0 capacity going ahead.

Rural infrastructure has largely been supported by public investments, though fairly
urban
India
India
rural
India
inadequate. While majority of the country’s population lives in rural areas, access in these
areas trails access in urban areas significantly. If we dissect the infrastructure across
Source: Department of Health Services, geographies, it is clearly skewed towards urban areas. Though a major chunk (~67%) of
World Bank WDI
India’s population stays in rural areas, just ~30% of the ~55,000 hospitals are situated in
these areas; the share is even lower in terms of beds, as urban hospitals tend to have more
beds. In fact, bed density increases or decreases proportionally to affluence. For instance,
there are ~40 beds per 10,000 people in metros, but the number falls to ~25 beds per
Urban spread 10,000 people in a tier‐IV city (~10,000‐20,000 population).

52
50
47
Beds per 10,000
45
Key reasons for this disparity:
32
31
31
1. Per capita income and expenditure on healthcare are lower in rural than urban areas.
24
2. The ratio of doctors between urban and rural areas is ~2.5x.
3. Insurance penetration in rural is much lower than urban.

Chennai
Ahmedabad
Bengaluru
Hyderabad
Pune
Mumbai
NCR
Kolkata
Most rural practitioners are government employees sans specialisation. Doctors in urban
areas tend to be equipped with specific specialisation. More than 8% of primary healthcare
centres in India do not have doctors. Absenteeism is another issue.

Source: CRISIL, Apollo One of the most under‐served segment within the sector is primary care. Private
investments are not only skewed towards urban areas, they are also skewed towards
curative care (tertiary/quaternary) rather than preventive care (primary/ secondary).

Chart 9: Healthcare supply skewed towards urban areas
100.0
80.0
60.0
(%)
40.0
20.0
0.0
Population Hospitals Doctors Hospital beds
Rural Urban

Source: NatHealth, Bain Capital, Edelweiss research
1
Healthcare
This presents both a challenge and opportunity. Rising penetration of quality health services
in rural areas can not only boost healthcare access, but also be a growth driver.

Delivery highly unorganised across different formats
Healthcare infrastructure in India is also characterised by fragmentation. The unorganised
sector covers majority of the market and has created relatively fragmented capacity across
the country.

On an average, the number of beds in Indian hospitals is typically ~1/3rd of US and very few
hospitals have >200 beds. The share of organised sector within the multi‐specialty hospitals
segment is <20%. The largest of these organised players are Apollo, Fortis and Narayana.
The share of organised players is even smaller in single specialty segment, as a large number
of doctors in India have created standalone single specialty hospitals in their respective
The share of organised sector geographies.
within the multi‐specialty hospitals
segment is <20%. The largest of Across diagnostics, market share of organised players is even lower. While organised
these organised players are Apollo, pathology players make up ~15% of the market, in radiology they constitute <10%. The
Fortis and Narayana. pathology model is more conducive to an organised nation‐wide player. SRL is the biggest
player with ~40% share, followed by Dr Lal, Metropolis and Thyrocare.

This is already evident in the diagnostics space where the organised segment is growing at a
much faster clip than the overall market.

Chart 10: Delivery highly unorganised across different formats
USD23bn USD4.5bn USD3.5bn USD600mn USD2.2bn USD400mn USD1.8bn USD175mn
100.0
Medfort Thyrocare
Others Maxvision Others
Lotus
80.0 Eye Q Metropolis
Care Centre Mahajan
Global
for Sight Imagins
60.0 Dr Lal Arthi
Manipal
Dr Aggarwal Pathlabs Diagnostics
(%)
Narayana Vijaya
40.0 Diagnostic
Pvt Ltd
Fortis
20.0 Vasan SRL
Apollo Medall
0.0
Market Size # beds (%) Market Size # clinics (%) Market Size Organised Market Size Organised Market Size
Revenues
Revenues
Multispeciality Eye care Pathology Imaging Other formats
hospitals (<5%
organised)
Organised players Unorganised players

Source: NatHealth, Bain Capital, Edelweiss research

Healthcare
“India today possesses, as never
Income Inequalities Lead to Under‐Consumed Healthcare
before, a sophisticated arsenal of In India, the flip side of economic development has been rising income level
interventions, technologies and inequalities that have thus led to healthcare being under‐consumed in the country.
knowledge required for providing Ergo, the divergence between healthcare expenditure of the top and bottom quintile of
health care to her people. Yet, the population in urban and rural areas has widened ~10x. Moreover, during FY00‐15, the
gaps in health outcomes continue government’s real expenditure on healthcare, insurance policies and real per capita
to widen.” income clocked a mere ~10‐11% CAGR, leading to 11‐12% growth in per capita
healthcare expenditure.

National Draft Health Policy

35
Automobile penetration While India’s healthcare service infrastructure is under served, low affordability has also
(% of households) resulted in these services being under‐consumed. While the healthcare opportunity entails
immense potential due to sheer population size, it is pertinent to note that the addressable
population is much smaller as affordability is an issue at the bottom of the economic
pyramid. Vehicle penetration in India can give a sense in terms of spending power—only 9%
of the population or 35% of households owns one 2‐wheeler and only 2% of the population
7
or 7% of households owns a 4‐wheeler. Auto industry demand has been growing at 9‐10%
over the past 5 years.
Two wheeler 4 wheeler
penetration penetration Addressable market is small due to following factors: (1) low per capita incomes; (2) huge
income disparity; (3) low government spending; and (4) low insurance penetration.
Source: Edelweiss research

1. Low per capita income
India has emerged as the fourth largest economy globally with a high growth rate and
has also improved its global ranking in terms of per capita income. While the previous
decade saw healthy growth in India’s economy, its per capita income remains in low
tiers compared to global peers. US’ per capita income stands at ~USD55k/year and
China’s at ~USD8k/year. Comparatively, India’s per capita income is far lower at
~USD1.6k/year.

Chart 11: India’s per capita income low versus peers, but its growth is encouraging
Per capita income in India (USD) Per capita income in 2015
55,837
1,581
334
7,925
1,581
2000 2015 US China India

Source: World Bank data, Edelweiss research

1
Healthcare
2. Huge income disparity
Low per capita income is not the only issue, inequality makes the situation grimmer. It
is estimated that the top 1% in India own more than half of the country’s total wealth.
While the richest 5% own 68.6% of the country’s wealth, the share of top 10% stands at
It is estimated that the top 1% in
76.3%. At the other end of the pyramid, the poorer half jostles for 4.1% of the nation’s
India own more than half of the
wealth.
country’s total wealth. While the

richest 5% own 68.6% of the
country’s wealth, the share of top In a public lecture, Mr. Raghuram Rajan, former Governor, RBI, spoke about the number
10% stands at 76.3%. of billionaires per trillion dollars of GDP for major countries of the world. “Guess which
country tops the list? It is Russia, with 87 billionaires for the USD1.3tn of GDP it
generates. ‘Of course!’ you will say—these are the oligarchs who stole the country’s
mineral resources, who participated in the Loan for Votes scheme, etc. But guess which
country comes second? It is India with 55 billionaires for the USD1.1tn it generates.”

Mr. Rajan then went on to argue that given the size of India’s economy, the number of
billionaires it produced was extraordinary compared with emerging market peers such
as Brazil or with developed market peers such as Germany. Moreover, the fact that most
billionaires gained wealth because of their access to natural resources such as land or
government contracts raised disturbing questions about the nature of India’s growth
process. If Russia is an oligarchy, how long can we resist calling India one, quipped Mr.
Rajan.

Even the Gini coefficient measure indicates an increase in inequality in recent years. The
Gini coefficient is a measure of inequality of distribution. It is defined as a ratio with
values between 0 and 1: the numerator is the area between the Lorenz curve of the
distribution and the uniform distribution line; the denominator is the area under the
uniform distribution line. As per economists’ estimates based on NSSO data, the Gini
coefficient based on consumption data for India rose significantly from 0.298 in 1983 to
0.347 in 2004‐05 (Gini coefficient takes values between 0 and 1, with 0 indicating
perfect equality in income or consumption distribution and 1 indicating complete
inequality in such distribution). The coefficient rose further to 0.359 in 2011‐12.

Despite the increase in the official gauge of inequality in India, the level of inequality is
considered moderate given that the Gini coefficient for middle‐income developing
countries tends to range from 0.4‐0.5 and exceeds 0.5 in some of the most unequal
countries of the world, such as those in Latin America.

Reasons for increase in inequality in India include:

Highly unequal asset distribution: Income is derived from 2 sources—assets and labour.
As for rural areas, the ownership pattern of the most important asset, viz., land, is
highly unequal. Around 28% of the rural population owns 83% of the land.

Inadequate employment generation: Another way of gaining wealth is through
employment. But, there too the situation is not favourable. For long, the increase in
employment opportunities remained less than the rise in labour force.

Healthcare
Lack of government spending: Total spend on healthcare in India is only ~4% of GDP,
one‐third of which comes from the government. State and central governments
combined spend <1% of GDP on healthcare, which is amongst the lowest in the world.

What is worth noting is that total healthcare expenditure, as % of GDP, has been
declining over the past 15 years—from 4.3% to 4.1%. On an average, countries spend
~8% of GDP. While the US spends 17% of GDP on healthcare, European countries spend
>10%.

Chart 12: Healthcare expenditure per capita grew at 9%, Chart 13: …this resulted in decline in healthcare
lagging GDP per capita growth of 11%... expenditure, as a % of GDP
CAGR 11% Healthcare spend as a % of GDP‐India
CAGR 9% 4.5 4.5

CAGR 9% 4.4
4.3
4.1
(x)
4.1
3.9
(%)
3.8
2000 2005 2010 2012

normalised Urban healthcare expenditure per capita
2000
2002
2004
2006
2008
2010
2012
2014
normalised Rural healthcare expenditure per capita
normalised GDP per capita

Source: Source: Government of India (PFCE data),National Sample survey, Edelweiss research

India’s nominal GDP per capita clocked 11% CAGR during 2000‐12. The government’s
focus on energy, transport, education and rural development has been higher than on
healthcare. Currently, government spending on healthcare is half the total spending on
subsidies and even the growth rate of expense on healthcare is lower than that of
subsidies.

Chart 14: Low priority to healthcare
Low priority in central Healthcare spending as a % of Centres & State spending on
government budget GSDP across states (2013‐14) healthcare: USD 16bn (FY16)
Interest payments 24 Manipur 2.7
Arunachal Pradesh 2.4 2.4
Others 23 UP 1.0
Assam 1.0
Subsidies 16
Rajasthan 0.9
Defence 13 Kerala 0.8
Uttarakhand 0.8 13.7
Police 8 Bihar 0.7
Agriculture 6 Karnataka 0.7
Andhra Pradesh 0.6
Infrastructure 4 Tamil Nadu 0.6
Education West Bengal 0.6
3
Gujarat 0.6 Public Spending
Health 1.6 Maharashtra 0.5 Opex (USD bn) Capex (USD bn)

Source: RBI, CMIE, Edelweiss research,
1
Healthcare
Healthcare Insurance market 3. Low insurance penetration: In India, health insurance penetration (as a percentage of
GDP) is <0.2% compared to <4% for life insurance. Currently, <25% of the total
250
population in India is covered under health insurance compared to ~85% of the
201
200 population in US. Also, <5% of the population is covered under private health insurance
150
compared to 12% in UK, 13% in Spain and <45% in Australia. What is worth noting is
130
109 that insurance penetration is the worst (~5%) within the middle class of the country
100 82
that makes up ~60% of total population. While the BPL class (~30% of population) has
50 ~50% penetration owing to several state schemes, penetration within the upper class
(~10% of population) is >60% as a result of private insurance and ESIS. The low
‐
2011‐12 2014‐15 penetration within the middle class is also largely as ESIS and private insurance have
Number of policies (lakhs) Premium (INR bn) not penetrated this class well. This class can be the biggest contributor to insurance
growth in India.
Source: CRISIL, IRDA Annual Reports

The health insurance market in India, at USD3bn, has clocked CAGR of ~16% with the
government segment growing at mere 3%.

Out‐of‐the‐pocket health expenditure, as a % of total expenditure, at 63% is one of the
highest in the world and much higher than the world average of 18%.

Fig 3: Low health insurance penetration in India (2012)
100%
Uninsured
Uninsured “Missing middle”
80%
Uninsured
Yeshasvini (KN)
60% CGHS
Aarogyasri (KN)
Other government
ESIS
Kalainagar (TN)
40%
Aarogyasri (AP) Private/

Public
20%
RSBY Other government
ESIS
0%
Below the poverty line Middle class Upper and upper‐
middle class
(~30% of the population) (~60% of the population) (~10% of the

population)

Source: Nathealth, Edelweiss research
ESIS: Employees’ State Insurance Scheme of India, CGHS: Central Government Health Scheme, RSBY: Rashtriya Swasthya Bima Yojana
Healthcare
Sector Growth Levers: Insurance Penetration, Healthcare & REIT Policy

Sector potential, despite under investment and government apathy, was never in
doubt. Growth drivers seem to be perfectly aligned now more than ever, owing to
reforms and a promising healthcare policy. Going ahead, the sector will witness: (1)
increase in insurance penetration in the most promising middle income segment (~60%
of total population) from current <10%; (2) higher fund allocation by government
towards healthcare from current 1% of GDP. Every 100bps incremental spend (of GDP)
by government could boost healthcare spend growth 300bps; and (3) models like REIT
could help segregate real estate and healthcare management, thus lowering the cost of
capital.

India’s total healthcare expenditure, pegged at USD85bn, clocked 13% CAGR during FY00‐
15. While private expenditure jumped ~12%, government/ insurance expenditure increased
14%/12%. We have already established the fact that government expenditure on healthcare
has been low historically. Clearly, India is behind the global curve in providing healthcare
Recommendations of the High access. Decades of under‐investment in the health sector has caused a huge deficiency. As
Level Expert Group on Universal countries move forward on the development track, healthcare moves up in the priority of
Health Coverage with respect to governments. India is now heading in the same direction where policy making will focus on
health financing and financial inclusive healthcare for its citizens.
protection:
The following drivers can change the orbit of the healthcare sector growth in India from its
“The government should increase traditional 13% level:

public expenditure on health from
1. Increase in insurance penetration
the current level of less than 1% of
GDP to at least 2.5% by the end of In western countries, good health care is not a privilege, it is considered a fundamental
the Twelfth Plan and to at least 3% right. Government functions on the belief that society must be able to provide basic
of GDP by 2022. Expenditure on health to its citizen, irrespective of their paying capacity. Most countries have a public‐
primary healthcare should account funded healthcare which functions in 2 ways—one where the government takes up
for at least 70% of all healthcare charge of providing healthcare by directly administering clinics, hospitals and other
expenditure.” facilities; the other method is provision of healthcare via health insurance.

India has struggled since independence to provide healthcare to its citizens.
Government expenditure on healthcare including the Centre and states is <1% of GDP.
Whatever little infrastructure the government has created has delivered sub‐optimal
results. Ergo, public perception about government hospitals is also poor.

Now, the government has decided to opt for the second alternative, i.e. providing
universal healthcare insurance and leaving infrastructure to private players. Though
government‐sponsored health insurance schemes are not new to India, their evolution
has been slow. Employees State Insurance Scheme (ESIS) and Central Government
Health Scheme (CGHS) have been running for quite some time. Mediclaim was private
voluntary health scheme launched in 1986 by a government insurance company.

In the previous decade, few states successfully implemented health insurance schemes
like AarogyaSri (Andhra Pradesh), Vajpayee AarogyaSri (Karnataka) and Chief Minister’s
Comprehensive Health Insurance (Tamil Nadu). The government envisages health
insurance for all. The scheme will be launched soon. This scheme will initially primarily
target the poor and will hence be a bottom‐up approach for health for all.

1
Healthcare
As per the Insurance Regulatory and Development Authority (IRDA), nearly 288mn
people have health insurance coverage in India (as of 2014‐15), accounting for mere
23% of total population. Government or government‐sponsored schemes like the
CGHS, ESIS, Rashtriya Swasthya Bima Yojana (RSBY), Rajiv Arogyasri (Andhra Pradesh
government), Kalaignar (Tamil Nadu government), etc., account for ~80% of health
insurance coverage provided. Only 20% is through commercial insurance providers,
both government (Oriental Insurance, New India Assurance, etc.) and private (ICICI
Lombard, Bajaj Allianz, etc.). The total number of commercial health insurance policies
in India clocked nearly 10% CAGR during FY12‐15. Health insurance currently accounts
for ~28% market share in the non‐life insurance industry.

Universal health insurance: Bottom‐up approach
The Health Ministry is preparing to roll out an extended version of the RSBY, the
government’s flagship health insurance scheme, covering >100mn families or ~500mn
people. The Labour Ministry rolled out this scheme in 2008, which has now been shifted
If one were to assume that
to the Health Ministry. The scheme will be the first step towards universal health
Universal Health Coverage (UHC)
insurance. Beneficiaries will be chosen not only on the basis of income—as the criteria
will map all the currently
for BPL families, but also on deprivations as listed in the socio‐economic caste census.
uninsured ~188mn BPL individuals
Actual roll out will be by states, which will, therefore, have a say in the final basket of
and claim ratio is ~50% by FY22,
services to be covered and the ceiling for a particular procedure covered under the
the total healthcare expenditure
scheme. At the time of transfer, RSBY came with 37.2mn active smart cards which cover
would rise to ~USD190bn (17%
150mn from BPL families. Thus, there is an addressable market of 65mn families that still
CAGR).
need to be covered under insurance.

Going forward, assuming GDP growth of 8% over FY16‐22 and that government expenditure
will remain at current level of 1% of GDP while private/insurance expenditures increase at
15%/10% CAGR, indicates 13% CAGR for total healthcare expenditure to ~USD160bn by
FY21. Keeping similar assumptions for private and government expenditure as the base case,
if one were to assume that Universal Health Coverage (UHC) will map all the currently
uninsured ~188mn BPL individuals and claim ratio is ~50% by FY22, the total healthcare
expenditure would rise to ~USD190bn (17% CAGR).

Chart 15: Healthcare market growth can be boosted by Universal Health Coverage
20 18
18 If ~65mn
17 17
17 households
get added to
14 13 14 Universal
14 13
12 Health
(%)
11 11 Coverage and

11 12 13 13 claim ratio is
~50% over
8 next 5 years
5
FY17E
FY19E
FY21E
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15
Base Case Scenario Total HC Expenditure

Healthcare
2. Increase in government expenditure
Overall healthcare expenditure in India has grown at just ~8‐10% per annum in the
previous decade, despite low penetration. Low public spending (~30%) and limited
health insurance penetration (~25%) have led to out‐of‐pocket (OOP) expenditure
accounting for ~62% of total healthcare spend.

Government expenditure during FY00‐15 clocked 14% CAGR and India’s GDP posted
13% CAGR over the same period. Government’s expenditure on healthcare, as a % of
total GDP, remained flat during the mentioned period. On the contrary, entitlements
increased at 17% CAGR, with big‐ticket government schemes launched such as farm
loan waivers and employment guarantee programmes.

Chart 16: India—Government's aggregate expenditure on healthcare mere ~1% of GDP, ~30% of total
90
30% of Total 75
Per capita government expenditure
Healthcare 72
expenditure
54
on Healthcare (USD)
70%
(USD) 36
25% of
USD23 20
Total
Healthcare 18 73% 30%
expenditure
27%
0
USD5 2000 2014
Per capita government expenditure on health in India
2000 2014
Per capita private expenditure on health in India
Source: World Healthcare Statistics, 2015 (WHO)

Despite economic strides, India’s healthcare scenario has lagged global peers. In our
view, the government can be the real game changer for healthcare commerce in India.
The government needs to make way for higher allocation to healthcare, preferably by
playing the payer by enhancing insurance coverage or playing the provider through PPP
models.

Recommendations of High Level Expert Group on UHC with respect to Health
Financing and Financial Protection: “The government should increase public
expenditure on health from the current level of less than 1% of GDP to at least 2.5%
by the end of the Twelfth Plan and to at least 3% of GDP by 2022. Expenditure on
If one were to assume that
primary healthcare should account for at least 70% of all healthcare expenditure.”
government expenditure on
healthcare will gradually increase
from 1% to 3% of GDP, the total Enhancing access and quality of healthcare can benefit from the multiplier effect that
healthcare expenditure would rise healthcare offers to communities. This will be the opportune moment when healthcare
to ~USD200bn (19% CAGR). providers and producers in India will be able to leap to the next orbit of growth beyond
the current 11‐12%.

Keeping similar assumptions for private (15% CAGR) and insurance expenditure (10%
CAGR) as the base case, if one were to assume that government expenditure on
1
Healthcare
healthcare will gradually increase from 1% to 3% of GDP, the total healthcare
expenditure would rise to ~USD200bn (19% CAGR).

Chart 17: Government expenditure can boost healthcare market growth
25
21
21 19 If govt.
17 17 expenditure
changes from
17
14 1% to 3% of
14 13 13
(%)
12 GDP
13 10 10
12 13 13
9
FY17E
FY19E
FY21E
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15
Base Case Scenario Total HC Expenditure Growth


3. Real Estate Investment Trusts (REITs): A game changer
The main drawback in the healthcare space is that 60‐70% of investments go into real
estate & building, and therefore 30% of investment has to sweat itself to pay for the
entire investment. We believe REITs could solve this problem.

Healthcare REIT is an investment product where a trust buys an income‐producing
hospital and gives it back on operating lease to the same company from which it buys
the hospital, thus freeing capital for the healthcare company. It allows the healthcare
provider to focus its investments on patient care rather than high real estate costs. This
is particularly helpful in mature assets, which have reached optimum capacity
utilisation and will thereon grow in line with inflation. The healthcare company can
invest the same capital in a new hospital and expedite growth and penetration. In India,
REITs have been permitted by the government recently and going forward it will help
healthcare providers to offload mature assets to a trust and free capital, which in turn
can be invested in new assets. This will help lower the cost of capital, boost faster scale
up and improve efficiency in the system.

In Union Budget FY16, the finance minister announced key changes in tax laws
governing REITs in India. Key modifications include exemption from long‐term capital
gains tax on listing of REIT units by the sponsor and pass through status for rental
income accruing to the REIT from property directly held by it. While the above
provisions clear most hurdles for successful implementation of REITs, payment of
stamp duty on transfer of assets to REIT will result in tax leakages of 5‐13% at the time
of transfer of the asset to a REIT. We believe, while a successful REIT market can be
developed in India under the current regulations, cap rates will have to be compressed
by ~150‐200bps from current ~10% levels to attract developers to list their assets in
REITs as opposed to opting for a Commercial Mortgage‐Backed Security (CMBS). A 1%
compression could push up capital value of rental assets by ~10%.

Healthcare
4. Medical tourism
Apart from the steps taken by the government to ensure inclusive healthcare, medical
tourism too can step up the sector’s growth.

Given the state‐of‐the‐art private tertiary/quaternary facilities in India and the rising
credibility of India’s medical fraternity, people from the world over are travelling to
India to benefit from the cost arbitrage (~30‐70% cheaper). India hosted ~230,000
patients from all over the world in 2013 (KPMG). While western patients arrive
primarily due to the cost arbitrage, a number of patients from neighbouring countries
arrive due to lack of infrastructure and skilled manpower in their countries, and due to
similarity of culture, food and language. In terms of countries, patients travelling from
Bangladesh top the list, followed by Maldives and Afghanistan.

Chart 18: Medical tourists flocking to India Chart 19: Nationality‐wise break up (2014)
350
Others Bangladesh
25% 22%
280
(OOO's Medical Tourists)
US
210 2%
UAE
140 2%
Sri Lanka Maldives
3% 17%
70
Oman
3%
0 Russia Afghanista
Nigeria Iraq n
2009 2010 2011 2012 2013 2014 2015 3%
6% 8% 9%

Source: KPMG, CII, Edelweiss research

The global industry is pegged at ~USD12‐14bn and estimated to clock ~15‐20% CAGR over
period. Thailand is the biggest beneficiary of medical tourism within Asia‐Pacific region,
followed by India. Medical tourism is already a ~USD3bn market in India, having posted
~20% CAGR during 2009‐15. It is expected to post ~30% CAGR over next 5 years.

Apart from providing a distinct growth kicker to the healthcare industry, medical
tourism is an important engine also because of superior case realisations. When
patients travel to India, they are usually offered ‘packages’ which take care of all their
requirements including travel, meals, visa assistance, etc., essentially enhancing
realisations of healthcare companies. Tapping into the medical tourism opportunity is a
strategic objective for several organised Indian private healthcare providers, and many
Indian private healthcare facilities have already acquired international quality
accreditations like JCI and JCAHO (Joint Commission of Accreditation of Hospital
Organisations) to attract tourists.

To conclude, the growth headroom for healthcare delivery ecosystem in India is attractive.
Low penetration bodes well for a long cycle of investment, growth, improvement in
utilisation and subsequent improvement in return on capital. Over the next 5 years,
India’s healthcare delivery market’s can grow anywhere between ~13% to ~20%.
1
Healthcare
Outlook for Players: Pick Up in Margin and Expansion in RoCE

We believe that structural drivers and business models are now in place. Post
increasing ~2.5x in last 5 years, capex cycle is now coming to an end with overall
quantum to nearly halve over the next 5 years, leading to improving asset turnover. As
players look to sweat their infrastructure and focus on business mix, the sector’s
EBITDA margin will inch up steadily. The net result will be a directional improvement in
the sector’s RoCE. Our analysis indicates ~700‐900bps RoCE expansion for all players
over the next 5 years.

Key trends which will dominate the healthcare space going forward:
 Shift from unorganised to organised players: The healthcare sector has one of the
least penetration of organised players. As organised players become more customer‐
centric, outcomes‐driven and prevention‐focused and customers become more brand
conscious, organised players will gain market share steadily and grow 300‐400bps
faster than the overall sector (13% base case).
 Decline of cost of capital: Macro trends indicate that interest rates are on a downward
trajectory. Moreover, REIT and other models will help hospital players access markets
for cheaper capital. We believe, over the next 5 years, cost of capital for the sector will
plummet to 7‐8% from 13‐14% currently.

Chart 20: Healthcare market growth can be boosted by government initiatives (USD bn)
200
190
160
Government expenditure
increased to ~3% of GDP
Govt
Universal Healthcare
expenditure
launched
Insurance 85
Government
expenditure
remains at
~1% of GDP
Private (out
of pocket)
FY16 base FY21 FY21 FY21

base case UHC case 3% of GDP case

Source: Source: Government of India (PFCE data), Edelweiss research

 Capex intensity to wane: Capex has jumped to ~2.5x over the past 5 years. We believe
the aggressive investment phase in the healthcare sector is now coming to an end and
most players are now looking to sweat their land banks through brownfield expansion.
Though a few select greenfield projects like Apollo’s Proton therapy project in Chennai
or Dr Lal’s new regional reference laboratories are likely, overall quantum will fall to
nearly half, thereby improving asset turnover.

 Margin to increase: As players look to sweat their infrastructure and focus on business
mix, the sector’s EBITDA margin will inch up steadily over the next 5 years.
Healthcare
Chart 21: EBITDA Margin (~300bps) and RoCE (~1,000bps) for the sector to increase over next 5 years
19.5
25.1
23.7
18.0
18.6
16.5
(INR bn)
14.4 13.6 13.8
(%)
13.0 12.4
15.0 10.0 10.8
13.5
12.0
FY17E
FY18E
FY19E
FY20E
FY21E
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
FY21E
FY12
FY13
FY14
FY15
FY16
EBITDA Margin Capex


 RoCE to increase: The net result of improved asset turnover and EBITDA margin will be
a directional improvement in the sector’s RoCE.

Chart 22: Sector’s RoCE to increase over next 5 years
17.8
15.3
12.7
10.2
8.9
(%)
7.6
6.5
5.2 5.2
FY17E
FY18E
FY19E
FY20E
FY21E
FY13
FY14
FY15
FY16
RoCE

1
Healthcare
Conclusion: Choosing Right Model Key

We believe efficacious business models that can widen access with quality while
maintaining affordability will inevitably scale up rapidly and deliver attractive
returns to shareholders.

We prefer hospitals over diagnostic chains as both have the same growth drivers.
In hospitals, single specialty hospitals are preferred over multi‐specialty players for
faster scale up and breakeven. We like HCG’s model, which focuses on single
specialty to address high potential therapies like oncology and fertility.

Within multispecialty hospitals:
(a) For the growth conscious investors, Max provides best visibility in terms of
EBITDA growth with an aggressive, yet balanced growth plan.
(b) For value conscious investors, Fortis is the best bet as it is on the cusp of
significant value unlocking.
(c) For conservative and RoCE conscious investors, Apollo is the best bet. It is
present across the value chain from primary to secondary to tertiary and way
ahead in investing in new formats to track changing consumer preferences.

The diagnostics space has the advantage of faster scale up and better RoCE.
However, challenges here are low entry barriers and stretched valuations. In
diagnostics we prefer Dr Lal over Thyrocare for its strong brand and B2C model.

We initiate coverage on Fortis, Max, HCG, Dr Lal and Thyrocare with ‘BUY’, and
maintain ‘BUY’ on Apollo Hospitals.

Having established the microstructure of the Indian healthcare system, we address the
question of actionable ideas among listed companies.

Hospitals
In hospitals, we prefer single specialty hospitals over multi‐specialty players for faster
scale up, breakeven and better returns profile.

Single specialty: Faster scale up
Over the previous decade, growth capital has steadily flocked to more efficacious models
that seek to breakeven sooner as well as provide better clinical outcomes for patients. Single
specialty hospitals have trumped multi‐specialty players due to a number of inherent
advantages. These models are able to scale up faster and utilise capital more efficiently due
to lower capex requirement and better therapeutic focus. They are also able to avail
advantages of economies of scale. Moreover, they offer best‐in‐class clinical
tertiary/quaternary protocols to patients due to the vast knowledge repository that they are
able to create over time on a specific specialty.

Healthcare
Owing to the therapy focus, unit capital costs are generally lower in single specialty hospitals.
Due to the focus and unmet need within the geography, scale up is also faster and often
these models achieve monthly breakeven within first/second year of operation. This
essentially results in faster ramp up of RoCE as well.

Table 4: Single specialty entails lower capex, faster scale up and breakeven versus multi‐specialty
Ahmedabad Chennai Bangalore NCR
Multispecialty Single Specialty Multispecialty Single Specialty Multispecialty Multispecialty
(HCG) Oncology (HCG) (Apollo) Oncology (HCG) (Max ‐ MSSH Saket) (Fortis ‐ FMRI)
Maturity year Year ‐ 5 Year ‐ 5 >Year ‐ 10 Year‐10 Year‐10 Year‐3
Cost/bed (INR mn/bed) 6.5 5.7 10 6.8 15 15
Land cost (%) 30 30 30 30
Building cost (%) 30 25 30 25
Equipment cost (%) 40 45 40 45
Number of beds (avg) 118 78 1,526 317 211 300
Total Capital employed 767 448 15,260 2191.7 3,165 4,500
Revenue (INR mn) 595 800 13,856 2,550 2,853 4,130
ARPOB (INR mn/ year) 5 10 9 12 14 14
Number of registrations 8,000 10,000
Realization/ registration 100,000 195,000
Asset Turnover (x) 0.78 1.79 0.91 1.16 0.90 0.92
EBITDA 93 144 4,434 510 514 620
EBITDA Margin (%) 15.7 18.0 32.0 20.0 18.0 15.0
Depreciation 38 22 763 110 158 225
EBIT 55 122 3,671 400 355 395
EBIT margin (%) 9.2 15.2 26.5 15.7 12.5 9.6
ROCE (%) 7.2 27.1 24.1 18.3 11.2 8.8

We like HCG’s model which focuses on single specialty to address high potential therapies
like oncology and fertility. owing to strong therapy tailwind and EBITDA margin levers, HCG
is positioned for robust EBITDA growth. We initiate coverage on HCG with ‘BUY’
recommendation.

Table 5: HCG Financials
FY16 FY17E FY18E FY19E FY20E FY21E CAGR (FY16‐ FY21E)
Revenue (INR mn) 5,820 7,290 9,283 11,104 12,471 14,010 19.2
EBITDA (INR mn) 897 1,099 1,344 1,714 2,105 2,455 22.3
EBITDA Margin (%) 15.4 15.1 14.5 15.4 16.9 17.5 212bps
PAT (INR mn) 75 101 98 281 466 684 55.4
EPS (INR) 0.9 1.2 1.1 3.3 5.5 8.0 55.4
ROCE (%) 6.7 5.6 6.4 9.9 13.2 15.5 882bps
P/E (x) 255.5 190.3 197.8 68.7 41.3 28.2
EV/EBITDA (x) 23.9 19.5 15.9 12.5 10.2 8.7
Net Debt (INR bn) 1.8 4.0 4.0 3.2 3.1 2.4 5.5
Free cash flow (INR bn) (1.9) (2.5) 0.2 0.3 0.0 0.2
Market Cap (INR bn) 19 19 19 19 19 19

1
Healthcare
Multi‐specialty: Long‐term structural story remains attractive
Multi‐specialty hospitals provide a variety of themes suiting diverse investment criteria.
Most multi‐specialty hospitals in India are focused on top‐end of the pyramid. These
hospital chains refrain from targeting bottom of the pyramid or mass market, instead they
target the top end with prices prohibitive enough to avoid the mass market tag, while being
low enough to attract middle/higher middle class consumers, whose ranks are expected to
swell as India moves into accelerated growth trajectory of >8%.

Apollo, Fortis and Max are focused on top‐end of the pyramid, whereas Narayana has
created a niche for itself in middle part of the pyramid, leaving bottom of the pyramid space
for government hospitals.

Fig 4: Addressable markets for multispecialty hospitals
15% of population Fortis Globals & Strivers

3 mn households, 16mn population
Apollo
>INR 1.7mn/ year
Max
HCG
Fortis Seekers
Apollo 31mn households, 160mn population
Max INR 340k ‐ 1.7mn/year
HCG
Aspirers
Narayana 71mn households, 360mn population
Government facilities INR 150k ‐ 340k/year
Deprived
135mn households, 680mn population
Government facilities <INR 150k/year


Table 6: Operating metrics
Apollo Fortis Max HCG Narayana
Increase in number of beds over 5 years (FY16‐FY21E) 945 1,450 724 611 NA
Revenue growth CAGR (FY16‐FY21E) 15.6 11.4 16.3 19.2 NA
EBITDA growth CAGR (FY16‐FY21E) 20.4 12.8 24.6 22.3 NA
RoCE improvement (FY16‐FY21E) 955bps 837bps 730bps 882bps NA
RoCE (FY21E) 19.5 10.6 14.0 15.5 NA
Efficiency parameters (FY16)
ALOS 4.2 3.6 3.3 2.9 4.3
occupancy (%) 63.0 72.0 71.1 51.0 54.2
ARPOB (INR/day) 28,036 37,534 30,334 26,592 17,534
outpatient/in patient volume 3.5 9.0 27.8 NA 9.7
no of doctors/bed 1.3 0.7 1.3 0.6 0.5
no of support staff/doctor 1.7 NA 2.6 2.6 4.2
Healthcare
Within multi‐specialty hospitals, we believe investors will need to cherry pick according to
their investment criteria. While Max offers best growth visibility, Fortis is a value play and
Apollo offers stable growth with best‐in‐class RoCE.

Max
For growth conscious investors, Max provides best visibility in terms of EBITDA growth with
an aggressive, yet balanced growth plan. The company is estimated to clock 25% EBITDA
CAGR over FY16‐21 compared to Apollo’s 20% and Fortis’ 19% (hospital EBITDAC) in the
same time frame. Max is a compelling bet on the tertiary care opportunity in the NCR
market, which could have upsides from investments in health insurance.
MHC (Max’s hospital network) is planning to expand capacity, through Brownfield expansion,
from the current ~2,600 beds to ~3,800 by FY22 and to ~5,000 beyond FY23. The focus will
be on tertiary and quaternary care in North India, while largely retaining the current
mature/non‐mature beds mix, thereby not exerting pressure on margin.

Table 7: Max financials
FY16 FY17E FY18E FY19E FY20E FY21E CAGR (FY16‐ FY21E) CAGR (FY16‐ FY19E)
Revenue (INR mn) 20,982 24,241 28,646 32,455 36,663 44,732 16.3 15.6
EBITDA (INR mn) 2,147 3,030 3,810 4,560 5,283 6,441 24.6 28.5
EBITDA Margin (%) 10.2 12.5 13.3 14.1 14.4 14.4 417bps 382bps
PAT (INR mn) 98 719 766 1,167 1,430 1,965 82.1
EPS (Max India share‐ 46%) 0.2 1.2 1.3 2.0 2.5 3.4 82.1
ROCE (%) 6.7 9.2 10.0 11.0 11.9 14.0 730bps 430bps
P/E (x) 842.2 114.8 107.8 70.7 57.7 42.0
EV/EBITDA (x) 32.5 23.0 18.3 15.3 13.2 10.8
Net Debt (INR bn) 9.2 8.4 11.7 10.5 10.8 10.9 3.4
Free cash flow (INR bn) (9.5) 1.0 (3.3) 1.4 (0.1) (0.2)
Market Cap (INR bn) 38 38 38 38 38 38

Chart 23: For growth conscious investors, Max offers best visibility in EBITDA growth
350
Max
25% CAGR
300
Apollo
20% CAGR
250
(x)
Fortis
200 19% CAGR
150
100
FY16 FY17 FY18 FY19 FY20 FY21

(*EBITDAC CAGR for Fortis)
Only hospital business EBITDAC considered for Fortis, as SRL will de‐merge during FY18
1
Healthcare
Fortis
For value conscious investors, Fortis is on the cusp of unlocking significant value by: (i)
demerging its 56% subsidiary SRL which can unlock value of ~INR57/share; and (ii) partially
unwinding its REIT capital structure, on which Fortis pays an yield of 13‐14%, according to us.
Fortis is planning to ramp up bed capacity by ~40% through asset light brownfield expansion.
Accretion of beds and focus on sweating its assets will improve occupancy and mix of the
hospitals business, thereby boosting Fortis’ growth and profitability during FY17‐21. We
forecast Hospital EBITDAC to clock 19% CAGR over FY16‐21.

Table 8: Fortis financials
Revenue (INR mn) 42,651 49,318 47,616 55,282 63,596 73,074 11.4
EBITDAC (INR mn) 6,739 8,429 7,502 8,909 10,590 12,293 12.8
EBITDAC Margin (%) 15.8 17.1 15.8 16.1 16.7 16.8 102bps
PAT (INR mn) (8) 647 580 1,665 3,115 4,702
EPS (INR) (0.0) 1.4 1.1 3.2 6.0 9.0
ROCE (%) 2.2 4.5 4.4 6.4 8.5 10.6 837bps
P/E (x) NA 139.7 155.6 54.3 29.0 19.2
EV/EBITDA (x) 17.5 14.0 15.7 13.2 11.1 9.6
Net Debt (INR bn) 6.2 17.9 22.2 21.7 19.6 16.2 21.1
Free cash flow (INR bn) (1.4) (12.2) (1.8) 0.2 1.8 3.1
Market Cap (INR bn) 90 90 90 90 90 90
Market cap on fully diluted basis
SRL considered de‐merged in FY18

Chart 24: For value conscious investors, Fortis is the best bet
27.0
Max (MHC)
23.4
(EBITDA CAGR (FY16‐21)
19.8
16.2 Fortis Apollo
12.6
9.0
12.0 12.8 13.6 14.4 15.2 16.0
Implied Hospitals business FY19 EV/EBITDA

Healthcare
Apollo
For conservative and RoCE conscious investors, Apollo is the best bet. It is India’s largest
hospital chain. It is equipping itself to successfully battle the anticipated disruption in the
healthcare sector. Going forward, it is targeting select tertiary care focused greenfield
investments and focus on improving operating metrics for the capacity it has rapidly created
over the past 5 years. Under AHLL, it is adding a number of new healthcare delivery formats
focused on primary and secondary care that are bound to bolster its patient engagement
early in the lifecycle.
Apollo, by virtue of being the largest hospital network in India, is envisaged to be key
beneficiary of the sector’s growth and improving fundamentals. It is in the last stage of
tertiary care capacity addition. Going forward, it will make selective greenfield investments
like the super specialty hospital in Navi Mumbai and international cancer referral center in
Chennai, that may exert some near‐term pressure on margin. Its focus will be on improving
realisations across the network.

Table 9: Apollo financials
Revenue (INR mn) 60,856 72,419 85,932 98,750 111,185 125,602 15.6
EBITDA (INR mn) 7,823 9,031 11,055 13,320 16,504 19,798 20.4
PAT (INR mn) 3,089 3,911 5,627 7,404 9,933 12,828 32.9
EPS (INR) 22.2 28.1 40.4 53.2 71.4 92.2 32.9
ROCE (%) 10.0 10.4 12.6 14.3 17.1 19.5 955bps
P/E (x) 59.4 46.9 32.6 24.8 18.5 14.3
EV/EBITDA (x) 26.2 22.7 18.5 15.4 12.4 10.4
Net Debt (INR bn) 20.1 22.7 24.8 23.6 22.7 18.4 (1.7)
Free cash flow (INR bn) (5.8) (1.4) (0.4) 3.4 3.8 8.2
Market Cap (INR bn) 184 184 184 184 184 184

Chart 25: For conservative and RoCE conscious investors, Apollo is the best bet
Apollo 10.0% 19.5%
Max
6.7% 14.0%
(MHC)
Fortis 2.2% 10.6%


1
Healthcare
Middle of the pyramid: Advocacy of healthcare as a basic human right is on the rise in India
and is envisaged to drive consumption within the aspirers class in India (Fig. 4). Affordability
is a critical aspect in addressing this market. Narayana qualifies on this front and it entails
the potential to scale up and exploit the big opportunity in the lower‐end of the pyramid.
The company has effectively adopted a high‐volume approach to lower costs and pass on
the benefits to consumers. Having started as a 225‐beds hospital in 2000, it is currently a
6,700 bed multi‐specialty healthcare services chain providing superior tertiary healthcare at
affordable cost.

Table 10: Narayana financials
FY17E FY18E FY19E CAGR (FY16‐FY19E)
Revenue (INR mn) 18,984 22,473 25,610 17
EBITDA (INR mn) 2,473 3,051 3,765 29
EBITDA Margin (%) 13.0 13.6 14.7 372bps
PAT (INR mn) 767 1,077 1,509 93
EPS (INR) 3.8 5.3 7.4 93
ROCE (%) 7.8 10.5 12.8
P/E (x) 89.0 63.4 45.2
EV/EBITDA (x) 28.6 23.1 18.8
Debt (INR bn) N/A N/A N/A
Market Cap (INR bn) 68 68 68
Source: Bloomberg consensus, Edelweiss research

Healthcare
Diagnostics
Diagnostics has the advantage of faster scale up and better RoCE
Diagnostics makes a strong investment case as it is still a largely under‐consumed module of
treatment and demand has significant room to grow. As evidence‐based treatment gains
ground, growth drivers for diagnostics will remain upbeat. Even as India continues to
Hence, preventive healthcare diagnosis (wellness) will continue to gain popularity. Also,
current market share of organised chains is fairly low, boosting their long‐term growth
visibility. The space also offers best RoCE due to its asset‐light reagent rental model and low
gestation period.

Table 11: Comparison of diagnostics companies
FY16 numbers unless
Dr Lal Thyrocare SRL
mentioned, INR mn
Number of laboratories 172 7 314
Number of samples (mn) 26 12 15
Revenue CAGR (FY11‐16) 27 24 14
Revenue 7,913 2,312 8,980
EBITDA Margin (%) 27 39 20
ROCE (%) 44 24 12
Market Cap (INR bn) 87 33 N/A
Test profile <10% imaging <10% imaging < 10% imaging
~70% routine tests like CBC and Only Biochemistry tests offered <5% preventive healthcare
lipid profile ~20% thyroid rest are routine and
~30% specialized like molecular ~50% preventive healthcare specialized tests
diagnostics, genetics, thyroid, etc. ~30% non thyroid tests
Revenue mix ~40% walk‐ins (172 labs) All revenues derived from ~ 33% walk‐in (314 labs)
~ 35% from collection centers franchises across India (~ ~24% collection centers (7,200
(1,560 patient service centers) 1,200) centres)
~ 25% from pickup points (4,970 ~20% hospitals
centers) ~16% direct clients
FY18 P/E 43 37 N/A
FY18 EV/EBITDA 28 22 N/A
FY19 P/E 33 29 N/A

The most significant risk with diagnostics is that it is a low entry barrier business, with low
capex requirement and minimum regulatory hurdles. Attracted by the high growth rate and
lucrative returns, competitive intensity in the space could rise in the future be it among
incumbents in the organised market or individually‐owned labs offering personalised
customer‐centric services or new startup labs that are focusing on specific tests such as
new‐born screening or genomics. Already a number of private equity backed regional
players have started expanding their operations aggressively. Another factor is the
reinvestment risk of business cash flow. While RoCE of the business is currently high, it
could dilute if incremental capital employed does not generate similar returns.

1
Healthcare
We believe, investors need to bear in mind that current valuations of diagnostics companies
are already factoring in high growth rate for a long period. There are several factors central
to cherry picking stocks in the space including, but not limited to:
 Mix of radiology/pathology: While radiology mix for Dr Lal and SRL will decline, it will
increase for Thyrocare due to nueclear.
 Mix of B2B/B2C models: While Thyrocare is purely a B2B model, Dr Lal is a mix of B2B
and B2C models.
 Organic pathology growth initiatives: Thyrocare is setting up more regional labs to
improve its turnaround time in areas far from airport nodes. Dr Lal is looking to expand
geographically by setting up reference laboratories in Lucknow and Kolkata and
penetrating these markets deeper. It is also scaling up its business of hospital‐based
laboratories laboratory management.
 New business/inorganic initiatives: While Thyrocare is looking to add more testing
verticals like water/food, it is averse to inorganic ventures. Dr Lal may look for strategic
acquisitions.
The diagnostics space has the advantage of faster scale up and better RoCE. While it has
same growth drivers as hospitals, due to low entry barriers and stretched valuations we
prefer the hospitals space. However, in the diagnostic space, we prefer Dr Lal over
Thyrocare for its strong brand and B2C model. We estimate Dr Lal and Thyrocare to post
25% profit CAGR over the next 5 years on account of rising prevalence of evidence‐based
treatment, shift in favour of unorganised players and expanding product portfolio. Both the
players are in a strong FCF generation phase owing to low capex requirements, which is
envisaged to sustain high valuations in the medium term. We initiate coverage on Dr Lal
and Thyrocare with ‘BUY’ recommendations.

Table 12: Dr Lal financials
Revenue (INR mn) 7,913 9,721 11,943 14,146 17,378 21,349 22.0
EBITDA (INR mn) 2,097 2,489 3,045 3,706 4,553 5,594 21.7
EBITDA Margin (%) 26.5 25.6 25.5 26.2 26.2 26.2 ‐30bps
PAT (INR mn) 1,322 1,604 2,019 2,601 3,281 4,140 25.6
EPS (INR) 16.0 19.4 24.4 31.5 39.7 50.1 0.3
ROCE (%) 43.5 37.6 36.9 36.8 36.6 36.1 ‐743bps
P/E (x) 65.7 54.1 43.0 33.4 26.5 21.0
EV/EBITDA (x) 40.0 33.7 27.5 22.6 18.4 15.0
Net Cash (INR bn) 2.9 3.9 5.3 7.6 10.2 13.7 36.0
Free cash flow (INR bn) 1.0 1.3 1.7 2.7 3.2 4.2 32.1
Market Cap (INR bn) 87 87 87 87 87 87

Healthcare
Table 13: Thyrocare financials
Revenue (INR mn) 2,410 2,971 3,674 4,441 5,321 6,351 21.4
EBITDA (INR mn) 935 1,166 1,475 1,797 2,141 2,526 22.0
PAT (INR mn) 518 703 906 1,138 1,356 1,621 25.6
EPS (INR) 9.6 13.1 16.9 21.2 25.2 30.2 25.6
ROCE (%) 23.8 26.9 31.2 34.7 36.4 38.0 1420bps
P/E (x) 63.9 47.1 36.6 29.1 24.4 20.4
EV/EBITDA (x) 34.3 27.5 21.8 17.9 15.0 12.7
Net Cash (INR bn) 1.0 1.1 1.7 1.9 2.6 2.9 23.2
Free cash flow (INR bn) 0.7 0.6 1.0 0.9 1.2 1.2 10.8
Market Cap (INR bn) 33 33 33 33 33 33
1
Healthcare
Appendix I: The Diagnostics Industry

Within the healthcare system, diagnostics services play the role of an information
intermediary, providing useful information for correct diagnosis and treatment of diseases.
Diagnostic services have lower share in overall healthcare spends (~4% of total), but play a
vital role in identifying problem areas and major illnesses.

A number of factors are driving higher growth of diagnostic services versus overall
healthcare industry growth, including:
 While in the past, the style of treatment relied somewhat lower on evidence‐based
approaches, this trend has seen a quick turnaround in the previous decade.
 While focus on prevention was limited earlier, it is steadily inching up evident from the
faster growth rate in the wellness segment of the sector. Screening, early detection,
and monitoring reduce downstream costs.

Table 14: Diagnostics market segments
Ticket size (INR) Category Sub‐category Comment
250‐500 Clinical Pathology Biochemistry Tests the changes in the chemical composition of body fluids in
response to a particular disease or condition compared to results
from healthy people, eg. Blood sugar
Hematology Study of diseases which affect blood. Eg. number of blood cells,
clotting & bleeding studies
Immunochemistry Sudy of diseases caused by an abnormal immune response through
analysis of blood serum components. Eg. Allergies, auto‐immune &
immunodeficiency diseases.
Microbiology Study of diseases caused by bacteria, viruses, fungi, etc. done by
culturing organisms from specimens such as urine, faeces and
swabs to identify pathogens
Coagulation Amount of time required for coagulation of blood. point of care tests
popular
Urinalysis Detect and measure various properties of urine. point of care tests
popular
800‐1000 Anatomical Pathology Anatomical tests diagnose diseases through microscopic study of
organs and tissue samples
1000‐1500 Molecular Diagnostics Analyse DNA and RNA to detect heritable or acquired disease‐related
genotypes, mutations, phenotypes or karyotypes
Radiology Market Segmentation
INR 4000‐5000 MRI systems
Ultrasound systems
INR 2000‐3000 Computed Tomography (CT) Systems
Nuclear Imaging Systems
INR 150‐200 X‐ray systems

Healthcare
Chart 26: Break up of ~USD4bn Indian diagnostics market
Immunology
22% Rural
Hematology 33%
18%
Pathology Biochemistry
Radiology
56% 39%
44%
Others
21% Urban
67%

Source: CRISIL, Edelweiss research

There is much fragmentation with >100k labs in the country, but demand for
institutionalised services has led to organised players becoming more relevant in this sunrise
sector and have hence benefited from this trend. SRL, Metropolis, Dr Lal, Thyrocare, Vijaya
Diagnostics, Medall, among others, are major organised players in the segment.

Chart 27: Diagnostics ‐ Highly fragmented industry
Hospital based
37% Regional Chains
9%
Diagnostic
Chains
15%
Standalone Large Pan India
centres Chains
48% 6%


To understand the demand within the diagnostics market, we break it up across channels:
(a) Referrals are the biggest channel, making up ~50‐60% cases in the market. These
require commission payments to doctors of ~30‐40% by small/new labs and ~5‐10% by
established labs. While walk‐in patients make up ~30‐35% of cases, corporate clients
make up the balance.
(b) While a chunk comprises the sick‐care market, ~7% of overall value is derived from
wellness and preventive diagnostics.

1
Healthcare
Chart 28: Mix of ~USD4bn Indian diagnostics market
Corporate Wellness
clients 7%
10%
Walk‐ins Referrals
35% 55%
Sick care
93%

The best way to gauge size of the pathology market is reagent sales to this market. The
reagent market size in India is ~INR38‐48bn and pathology players clock ~75% gross margin.
Also, pathology makes up ~55% of the diagnostics market. On the basis of this, we believe
that diagnostics is a ~USD4bn market for players that grew ~14% CAGR during 2012‐15. We
believe the diagnostics industry will continue to post ~14% CAGR through 2020, slightly
faster than growth of the reagent market.

Chart 29: Strong diagnostics industry growth to sustain
6.7
3.5
2.4
2012 2015 2020


Healthcare
Appendix II: Health Insurance Sector in India

India’s non‐life Insurance market comprises 22 private and 4 public sector companies. Of
the 22 private sector companies, 5 are standalone health insurance companies (SAHI) – Max
Bupa Health Insurance Company, Star Health & Allied Insurance Company, Apollo Munich
Health Insurance Company, Religare Health Insurance Company and Cigna TTK Health
Insurance.

Health insurance has been the fastest growing segment in non‐life insurance industry in past
5 years. Total health insurance premium in FY15 reached INR201bn, growing at 16% CAGR
during the period.

Chart 30: Health insurance premium – GWP (INR bn) Chart 31: Health insurance segment
220 220
28 CAGR 17%
176 176 CAGR 23%
22
17 44 CAGR 11% 88
132 45 132 74
(INR bn)
16 59
(INR bn)
42 CAGR 18%
15 34 49 CAGR 16%
88 88 39
29
129 81 89
108 59 72
44 96 44 50
67 80
22 22 23 21 24 CAGR 2%
0 0
FY11 FY12 FY13 FY14 FY15 FY11 FY12 FY13 FY14 FY15
Public GI Private GI SAHI Government Group Insurance Individual

Source: General Insurance Council

In India, health insurance penetration (as a % of GDP) is <0.2% (as compared to ~4% for life
insurance). The segment has high potential with only ~5% of the population covered under
private health insurance versus 12% in UK, 13% in Spain and ~45% in Australia. It continues
to be one of the most rapidly growing sectors in the Indian insurance industry with an
expected CAGR of >15% over next 3‐5 years. Rising healthcare costs and high level of out‐of‐
pocket expenses in India bode well for industry growth.

Table 15: Salient features of health insurance sector
Key drivers for the sector Key challenges
Rising healthcare costs and high level of out of pocket expenses Increased regulatory activism
Low health insurance penetration & coverage Lack of unified data
Increase in proportion of individuals buying health insurance Fragmented provider market
New channels are increasing distribution reach and penetration High cost of activation for distribution channels
Customer friendly regulation and increased product offerings High incurred claims ratio
Government Initiatives and Tax Incentives
Source: Industry, Edelweiss research

1
Healthcare

Companies

COMPANY UPDATE

APOLLO HOSPITALS ENTERPRISE
Metamorphosing into new age healthcare behemoth
India Equity Research| Healthcare
Apollo Hospitals Enterprise (Apollo), India’s largest hospital chain, is EDELWEISS 4D RATINGS
equipping itself to successfully battle the anticipated disruption in the Absolute Rating BUY
healthcare sector. Going forward, it is targeting select tertiary care Rating Relative to Sector Outperformer
focused greenfield investments and focus on improving operating metrics Risk Rating Relative to Sector Low
for the capacity it has rapidly created over the past 5 years. Under AHLL, Sector Relative to Market Overweight
it is adding a number of new healthcare delivery formats focused on
primary and secondary care that are bound to bolster its patient
engagement early in the lifecycle. Maintain ’BUY’ with target price of MARKET DATA (R: APLH.BO, B: APHS IN)
CMP : INR 1,320
INR1,740.
Target Price : INR 1,740

52‐week range (INR) : 1,545 / 1,213
Eyeing selective tertiary care investments going forward Share in issue (mn) : 139.1
Apollo, by virtue of being the largest hospital network in India, is envisaged to be key M cap (INR bn/USD mn) : 186 / 2,791
beneficiary of the sector’s growth and improving fundamentals. It is in the last stage of Avg. Daily Vol.BSE/NSE(‘000) : 217.6
tertiary care capacity addition. Going forward, it will make selective greenfield
investments like the super specialty hospital in Navi Mumbai and international cancer SHARE HOLDING PATTERN (%)
referral center in Chennai, that may exert some near‐term pressure on margin. Its Current Q1FY17 Q4FY16
focus will be on improving realisations across the network. Promoters * 34.4 34.4 34.4
MF's, FI's & BK’s 1.3 1.1 1.0
Embracing newer formats FII's 44.8 45.1 45.3
Focus on margin improvement and calibrated expansion across its standalone Others 19.5 19.5 19.4
* Promoters pledged shares : NIL
pharmacies business will contribute ~21% to Apollo’s incremental EBITDA over
(% of share in issue)
FY16‐21. Additionally, investments in newer formats under AHLL will start maturing by
FY21 and contribute ~4% of incremental EBITDA over the same period.
PRICE PERFORMANCE (%)

BSE
RoCE to improve over medium to long term Stock Nifty
Healthcare
We believe, upfront investments—Navi Mumbai hospital (480 beds, INR6bn capex, 1 month (4.2) (2.5) (0.7)
breakeven in ~3‐4 years) and AHLL—will squeeze near‐term margin. However, over the 3 months (2.8) 4.3 1.7
medium to long term, Apollo will optimise asset utilisation and improve case mix, 12 months (10.4) 6.4 (11.4)
which is bound to drive margin and RoCE. New hospitals in the system have
~INR11.5bn capital employed and are yet to contribute to RoCE.

Outlook and valuations: Metamorphosing; maintain ‘BUY’
We estimate ~19% EBITDA CAGR and RoCE to jump 428bps to ~14% over FY16‐19. This
implies valuation of 15x FY19E EV/ EBITDA. We maintain ’BUY/SO’ with TP of INR1,740. Deepak Malik
+91 22 6620 3147
Financials (INR mn) deepak.malik@edelweissfin.com
Year to March FY16 FY17E FY18E FY19E
Rahul Solanki
Net Revenues (INR mn) 57,349 68,246 80,980 93,059 +91 22 6623 3317
EBITDA (INR mn) 7,823 9,031 11,055 13,320 rahul.solanki@edelweissfin.com

EBITDA margin (%) 12.9
12.5 12.9 13.5
Archana Menon
Adjusted Profit (INR mn) 3,089 3,911 5,627 7,404 +91 22 6620 3020

Diluted P/E (x) 59.4 46.9 32.6 24.8 archana.menon@edelweissfin.com
EV/EBITDA (x)
26.2 22.7 18.5 15.4
ROACE (%) 10.0 10.4 12.6 14.3 October 7, 2016
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Healthcare

A bird’s eye view

Eyeing selective tertiary care investments going forward
Largest hospital network in India
Apollo, with ~6,800 owned operational beds in 61 hospitals across India, is the country’s
largest hospital network. Ergo, we envisage it to be key beneficiary of the sector’s
anticipated growth and improving fundamentals.

Greenfield projects in select new markets
Apollo is in the last lap of capacity addition and aims to add more ~900 beds by FY21. This
comprises greenfield investments in key new facility in Navi Mumbai (480 beds, INR6bn
capex, to be commissioned in FY17) and South Chennai (200 beds + Proton beam therapy,
INR7.5bn capex, to be commissioned in FY19).

Chennai cluster: Muted bed addition; realisation to keep improving
The Chennai facility is its flagship hospital with the highest revenue and profitability across
all hospitals, and the cluster (1,500 beds) contributes ~57% to Apollo’s total EBITDA. Going
forward, while the bed addition in this cluster will be limited (100/50/50 during
FY19/20/21), the company’s focus is to decongest the main hospital and increase more
specialty cases, thereby improving share of high realisation treatments. This should drive
higher realisation per bed and we estimate ARPOB to clock CAGR of 8% over FY16‐21. We
expect EBITDA margin to remain steady through FY16‐21 and EBITDA to post 14% CAGR
during FY16‐21. Thus, Chennai cluster’s growth will be primarily driven by improvement in
realisation. It will contribute ~34% to Apollo’s incremental EBITDA during FY16‐21.

Proton beam therapy introduced for the first time in India at cost of USD50mn
In FY19, Apollo will commission South East Asia's first Proton Beam Therapy Centre in
Chennai and India will then be one amongst the few nations in the world offering this
advanced cancer care treatment. It is one of the most superior forms of radiation therapy in
the world and uses high‐energy proton beam for cancer treatment.

Hyderabad: No bed addition in overcrowded market; realisation to drive growth
The Hyderabad cluster (~930 beds) contributes ~15% to Apollo’s EBITDA currently. However,
this market is now saddled with overcapacity, leading to new challenges. To deal with this,
Apollo has consciously started rationalising low‐yield cases, which has affected occupancy
(60% in FY16 versus peak of 67% in FY14) and hence topline growth (9% during FY14‐16).
Going forward, we forecast steady occupancy levels and just ARPOB growth to drive 11%
revenue CAGR for the cluster. We expect margin to remain steady and EBITDA to clock 14%
CAGR. Hyderabad will contribute ~9% of incremental EBITDA during FY16‐21.

Other clusters: No material bed addition, operating metrics to improve and drive growth
Other older hospitals (~2,100 beds) contribute ~4% to Apollo’s EBITDA currently. ~1,000
beds have been added during the past 5 years. Thus, while revenue has clocked ~19% CAGR
in this cluster of hospitals, margin has remained depressed in single digit (4% currently). We
expect occupancy to move from ~57% to ~70% gradually, accompanied with a steady 9%
growth in ARPOB. Revenue will register ~14% CAGR, with margin estimated to improve to
Apollo Hospitals Enterprise

~20% by FY21, driving 39% EBITDA CAGR. This cluster will contribute ~25% of incremental
EBITDA over FY16‐21 and contribute ~13% to Apollo’s EBITDA by FY21.

Bengaluru
We forecast occupancy to drive ~9% CAGR at this 80‐bed hospital. Expect INR400mn EBITDA
loss during FY17E and then breakeven during FY18. We estimate EBITDA margin to improve
to ~17% by FY21.

Navi Mumbai: Muted bed addition; realisation to keep improving
Apollo is launching a super specialty 480‐beds hospital in Navi Mumbai by Q3FY17 end,
which entails ~INR6bn worth of capex. It will have specialties like trauma, transplant and
oncology. While the EBITDA loss for first year will be ~INR300mn, cash loss will be higher at
~INR500mn. Launch of this facility will exert pressure on Apollo’s margin during FY17/18.

Byculla, Mumbai
A 300‐bed hospital will be launched in Byculla in FY21, contributing INR200mn EBITDA loss
in the first year.

Chart 1: Chennai to contribute ~50% of incremental hospitals EBITDA during FY16‐21
EBITDA Standalone Hospitals EBITDA Navi Byculla ‐
margin 21% margin 25% Mumbai EBITDA
600 (200) 14,618 4% loss
2,035
Others
1,133
15% +200 beds
+480 beds
4,072 Others
24%
6,577
Chennai
+200 beds
Hyderabad
Chennai 58%
18% Hyderabad
67% 15%
EBITDA Chennai Hyderabad Others Navi Byculla EBITDA

(FY16) Mumbai (FY21E)
Source: Apollo hospitals, Edelweiss research

Embracing newer formats
Calibrated expansion in standalone pharmacies
While standalone pharmacies contribute ~40% to revenue, owing to low margin they
contribute only 11% to the company’s EBITDA currently. We estimate revenue to post CAGR
of 19% over FY16‐21, driven by same store sales growth as well as new pharmacies addition.
We forecast margin to improve from 3.6% to 6%, and drive ~22% CAGR over the same
period. Thus, this vertical will contribute ~18% of Apollo’s incremental EBITDA over FY16‐21,
and ~17% of Apollo’s EBITDA by FY21E.

Increase presence in Indian healthcare retail space through new formats under AHLL
AHLL is a subsidiary of Apollo. It provides primary healthcare facilities through a network of
owned/ franchised clinics across India, offering specialist consultations, diagnostics,
preventive health checks, telemedicine facilities and a 24‐hour pharmacy under one roof.
The AHLL vertical is yet to break even. During FY16, it incurred EBITDA loss of INR420mn.
We expect AHLL’s revenues to post CAGR of 10% over FY16‐21. We expect AHLL’s losses to
wane, but continue through to FY19, and the vertical to just about break even during FY20
Healthcare

and then earn marginal profit during FY21. This turnaround in AHLL will contribute ~4% of
incremental EBITDA over FY16‐21.

RoCE to improve over medium to long term
We believe, upfront investments—Mumbai hospital (480 beds, INR6bn capex, breakeven in
~3‐4 years) and AHLL—will squeeze near‐term margin. However, over the medium to long
term, Apollo will optimise asset utilisation and improve case mix, which is bound to drive
margin and RoCE. New hospitals in the system have ~ INR11.5bn capital employed and are
yet to contribute to RoCE.

Chart 2: Hospitals business will be main driver for Apollo (INR mn)
EBITDA EBITDA
margin ‐13% margin ‐16%
520 914 19,803

2,480 21
8,040
7,827
EBITDA Standalone Standalone Apollo AHLL Others EBITDA

(FY16) Hospitals Pharmacy Munich (FY21E)


Outlook and valuations: Metamorphosing; maintain ‘BUY’
We estimate ~19% EBITDA CAGR over FY16‐19 and RoCE to jump 428bps to ~14%. This
implies valuation of 15x FY19E EV/ EBITDA. We maintain ’BUY’ with target price of INR1,740.

Table 1: Valuation table
Valuation Mar‐18
Multiple 20x
EBITDA (FY19) 13,320
EV 266,399
Less: net debt 23,902
Market Cap 242,497
No of shares 139
Value per share 1,743


Eyeing selective tertiary care investments going forward
Apollo, by virtue of being the largest hospital network in India, is envisaged to be key
beneficiary of the sector’s growth and improving fundamentals. It is in the last stage of
tertiary care capacity addition. Going forward, it will make selective greenfield
investments like the super specialty hospital in Navi Mumbai and international cancer
referral center in Chennai that will exert some near‐term pressure on margin. Its focus
will be on improving realisations across the network.

Largest hospital network in India
With ~6,800 owned operational beds in 61 hospitals across India, Apollo is the largest
hospital network in the country. Ergo, we envisage it to be key beneficiary of the sector’s
growth and improving fundamentals. The company has established strong brand equity
among patients and doctors with sustained focus on better and consistent clinical outcomes
and investments in technology (e‐ICUs, robotic surgery, high‐end scanners—PET/CT and
PET/MRI). These soft, but critical, aspects of branding will enable it to sustain pricing
premium, superior ARPOBs, enhance market share in key specialties and reduce ALOS.

Focus on Centers of Excellence with 1 or 2 anchor specialties in each market
Apollo’s leadership in the organised hospitals chain bestows it the economies of scale to
invest in tertiary and quaternary care (~63% of in‐patient revenue) and remain at the
frontier of clinical excellence. For instance, it was the first player to bring PET‐CT and
Cyberknife to India, it has successfully performed robotic surgeries on over 3,000 adults &
80 children using Da Vinci Robotic system and to further its oncology offerings it now plans
to set up South Asia’s and Africa’s first Proton beam therapy in 2018. Each of Apollo’s key
clusters has been built around a quaternary care hospital (Center of Excellence) with 1 or 2
key specialties. The company aims to set benchmark standards in clinical outcomes for
therapies like cardiology, oncology, neurosciences, critical care, orthopedics and
transplants.

Precision oncology: Key specialty focus going forward
Precision oncology is a personalised approach to treat cancer based on a patient’s individual
genetic blueprint. Unlike traditional methods that treat cancer by disease type, precision
medicine uses genomic sequencing, a process used to determine the genetic blueprint of a
patient’s cancer to target the “achilles’ heel” of the tumour.

Apollo aims to expand its oncology presence through clinical excellence as well as exclusive
oncology referral hospitals. It is currently constructing a 200‐bed international cancer
referral center in Chennai. It will start in FY19 and become fully operational by FY21. This
facility will be established with a capex of INR7.5bn, including the USD50mn Proton beam
therapy—a state‐of‐the‐art tool that will be brought to India for the first time. Apollo will
charge ticket size of ~INR1.5mn/ therapy for this.

Greenfield projects in select new markets
Within the 6,800 owned beds, 62% are >5 years more old. 8%, 19% and 11% of the beds are
<1 year old, 1‐3 years old and 3‐5 years old, respectively. Apollo is in the last lap of capacity
addition and aims to add ~900 beds more by FY21. This comprises greenfield investments in
key new facility in Navi Mumbai (480 beds, INR6bn capex, to be commissioned in FY17) and
Healthcare

South Chennai (200 beds + Proton beam therapy, INR7.5bn capex, to be commissioned in
FY19).

Table 2: Maturity profile of Apollo’s beds
Maturity share of beds (%)
>5 years 62
3‐5 years 11
1‐3 years 19
<1 year 8

Table 3: Defined expansion plan for owned bed capacity
Location Commisioning date Beds Total project cost (INR bn) Comments

Navi Mumbai FY17 480 6.0 Super specialty hospital
South Chennai FY19 200 7.5 Includes Proton Beam Therapy (USD 50mn)
Byculla, Mumbai FY21 300 1.4 Only 200 beds will be operational by FY21

Chart 3: Calibrated bed addition ahead (standalone beds)
5,500 5,423
250
5,200 130
200
(no of beds)
4,900 100
200
4,600 4,543
4,300
4,000
FY16 FY17E FY18E FY19E FY20E FY21E Total


Chennai cluster: Muted bed addition; realisation to keep improving
Apollo’s main facility in Chennai is a multi‐disciplinary facility bustling with critical care
cases. It has one of the largest transplant centres including kidney, liver, pancreatic and
multi‐organ transplants. The facility boasts of a strong doctor fraternity. The company has a
well balanced case mix with focus on key specialties (Centers of Excellence) that contribute
>60% to total cases at Apollo.

The Chennai facility is its flagship hospital with the highest revenue and profitability across
all hospitals, and the cluster (1,500 beds) contributes ~57% to total EBITDA. Going forward,
while the bed addition in this cluster will be limited (100/50/50 during FY19/20/21), the
company’s focus is to decongest the main hospital and increase more specialty cases,
thereby improving share of high realisation treatments. This should drive higher realisation
per bed and we estimate ARPOB CAGR of 8% over FY16‐21. We forecast EBITDA margin to

remain steady through FY16‐21 and EBITDA to post 14% CAGR during FY16‐21. Thus,
Chennai cluster’s growth will be primarily driven by improvement in realisation. The Chennai
cluster will contribute ~34% of Apollo’s incremental EBITDA during FY16‐21E.

Proton beam therapy introduced for first time in India at a cost of USD50mn
In FY19, Apollo will commission South East Asia's first Proton Beam Therapy Centre in
Chennai and India will then be one amongst the few nations in the world offering this
advanced cancer care treatment. It is one of the most superior forms of radiation therapy in
the world and uses high‐energy proton beam for cancer treatment.

The therapy has transformed the treatment of numerous cancers such as pediatric cancers,
skull base tumors, brain tumors, breast cancer, prostate cancer and lung cancer, to name a
few. It becomes a feasible option, predominantly in cases where treatment options are
limited and conventional radiotherapy entails a higher risk to patients.

Hyderabad: No bed addition in overcrowded market; realisation to drive growth
The Hyderabad cluster (~930 beds) contributes ~15% to Apollo’s EBITDA currently. However,
this market is now saddled with overcapacity that has led to new challenges. To deal with
them, the company has consciously started rationalising low‐yield cases, which has affected
occupancy (60% in FY16 versus peak of 67% in FY14) and hence topline growth (9% during
FY14‐16). Going forward, we forecast steady occupancy levels and only ARPOB growth to
drive 11% revenue CAGR for the cluster. We expect margin to remain steady and EBITDA to
post 14% CAGR. Hyderabad will contribute ~9% of incremental EBITDA over FY16‐21.

Other clusters: No material bed addition; operating metrics to improve and drive growth
Other older hospitals (~2,100 beds) contribute ~4% to Apollo’s EBITDA currently. ~1,000
beds have been added during the past 5 years. Thus, while revenue has posted ~19% CAGR
in this cluster of hospitals, margin has remained depressed in single digit (4% currently).
During FY16, new hospitals like Vanagaram and Jayangar have started breaking even. Going
forward, there will be no bed additions in the cluster. We expect occupancy to move from
~57% to ~70% gradually, accompanied with a steady 9% growth in ARPOB. We expect
hospitals like Trichy, Nashik, Women & Child ‐ OMR, Nellore, Perungudi, Women & Child –
SMR, Vizag and Malleswaram to start breaking even as well. These new hospitals have
~INR11.5bn capital employed and are yet to contribute to RoCE. Revenue will register ~14%
CAGR with margin to improve to ~20% by FY21E, driving 39% EBITDA CAGR. This cluster will
contribute ~25% of incremental EBITDA over FY16‐21E and contribute ~13% to Apollo’s
EBITDA by FY21E.

Bengaluru
We forecast occupancy to drive ~9% CAGR at this 80‐bed hospital. We estimate INR400mn
EBITDA loss during FY17 and then breakeven during FY18. Expect EBITDA margin to improve
to ~17% by FY21E.

Navi Mumbai: Muted bed addition; realisation to keep improving
Apollo is launching a super specialty 480‐beds hospital in Navi Mumbai by end Q3FY17,
which entails ~INR6bn worth of capex. It will have specialties like trauma, transplant and
oncology. The company will operationalise 200 beds in FY17, followed by 100/100/80 more
beds to be operationalised during FY18/19/20, respectively. However, most of the capex is
upfronted due to technical reasons pertaining to the land. Thus, while the EBITDA loss for
Healthcare

first year will be ~INR300mn, cash loss will be higher at ~INR500mn. Launch of this facility
will exert pressure on Apollo’s margin during FY17/18.

Apollo believes the geography presents an under‐served market and it can garner >50%
occupancy to begin with and gradually raise it to ~70% by FY20 despite adding beds. Our
forecasted EBITDA trajectory is—loss of INR300mn during FY17 to improve to INR600mn
profit by FY21.

Byculla, Mumbai
A 300‐bed hospital will be launched in Byculla in FY21, contributing INR200mn EBITDA loss
in the first year.

Chart 4: Steady growth ahead in hospitals business
15,000 27
60,000
25
12,000 25
48,000
23
9,000 23
(INR mn)
36,000
(INR mn)
21
(%)
21
21
24,000 6,000 21
20
12,000 3,000 19
0 0 17
FY16 FY17E FY18E FY19E FY20E FY21E FY16 FY17E FY18E FY19E FY20E FY21E
Healthcare revenue
EBITDA EBITDA margin (%)


Chart 5: Chennai to contribute ~50% of incremental hospitals EBITDA during FY16‐21E
EBITDA Standalone Hospitals EBITDA Navi Byculla ‐
margin 21% margin 25% Mumbai EBITDA
600 (200) 14,618 4% loss
2,035
Others
1,133
+200 beds
15%
+480 beds
4,072 Others
24%
6,577
Chennai
+200 beds
Hyderabad
Chennai 58%
18% Hyderabad
67% 15%
EBITDA Chennai Hyderabad Others Navi Byculla EBITDA

(FY16) Mumbai (FY21E)


Embracing newer formats
Focus on margin improvement and calibrated expansion across its standalone
pharmacies business will contribute ~20% of Apollo’s incremental EBITDA over FY16‐
21E. Additionally, its investments in newer formats under AHLL will start maturing by
FY21 and contribute ~4% of its incremental EBITDA over the same period.

Calibrated expansion in standalone pharmacies
While standalone pharmacies contribute ~40% to revenue, owing to low margin they
contribute only 11% to the company’s EBITDA currently. We estimate revenue to post CAGR
of 19% over FY16‐21, driven by same store sales growth as well as new pharmacies
addition. We estimate margin to improve from 3.6% to 6% and drive ~22% CAGR over the
same period. Thus, this vertical will contribute ~18% of Apollo’s incremental EBITDA during
FY16‐21E and contribute ~17% to Apollo’s EBITDA by FY21E.

Apollo is planning calibrated expansion of the standalone pharmacies business.
Management estimates 100‐150 additions each year with sharpening focus on improving
profitability and RoCE. Ergo, it has introduced a variety of private label (OTC) products which
offer higher gross margins (40% versus 20‐30% for medicines) and also boost same store
sales. While currently private labels contribute ~6‐7% to turnover, Apollo is eyeing 20% over
the long term.

Chart 6: Increased asset turnover to boost RoCE of pharmacies
3,500 65,000 12.5
(Number of Pharmacies)
3,000 53,000 10.0
2,500 41,000 7.5

(INR mn)
6.0 6.0
(%)
5.0
2,000 29,000 4.5 4.5
5.0
3.3 3.3 3.6
2.7
1,500 17,000 1.9
2.5
1,000 5,000
0.0
FY17E
FY18E
FY19E
FY20E
FY21E
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
FY21E
FY12
FY13
FY14
FY15
FY16
Number of Pharmacies Revenues EBITDA Margin (%) ROCE


Increase presence in Indian healthcare retail space through new formats under AHLL
AHLL is a subsidiary of Apollo. It provides primary healthcare facilities through a network of
owned/ franchised clinics across India, offering specialist consultations, diagnostics,
preventive health checks, telemedicine facilities and a 24‐hour pharmacy under one roof.
These models have proved effective in increasing efficiencies via higher volumes, resulting
in reduced costs and simultaneously delivering comparable quality standards and success
rates. The increase in patient touch points will strengthen Apollo’s ability to be the premier
healthcare provider for the community. New formats require lower investments as they are
asset‐light (leased infrastructure) and peak margin could be in the 20‐25% range.

Healthcare

The AHLL vertical is yet to break even. During FY16, it posted EBITDA loss of INR420mn. We
estimate its revenue to register CAGR of 10% over FY16‐21. We expect AHLL’s losses to
wane, but continue through to FY19, and the vertical to just about break even during FY20
and then earn marginal profit during FY21. This turnaround in AHLL will contribute ~4% of
incremental EBITDA over FY16‐21E.

Dental and dialysis clinics: Apollo has created state‐of‐the‐art dental clinics‐cum‐spas
which provide comprehensive portfolio of dental services at competitive prices. Each dental
clinic has dedicated consultants, quality infrastructure and offer superior service.

Cradle (birthing centers): The concept of birthing centers as a specialty healthcare service
is novel. These address specialised women and child care needs, including high risk
pregnancy care, infertility cases, neonatal care and new born intensive care.

Day surgery centers: These are specialised 20‐30 bed facilities wherein the patient can be
admitted for surgery and return home the same day. Target patient groups include higher
income individuals, who are offered differentiated patient care. The average revenue per
surgery ranges between INR25,000 and INR100,000.

Battle ready to fight disruptive headwinds: As emerging trends unleash disruption in the
healthcare sector, Apollo’s strategy is to leverage technology to enhance customer
experience & loyalty, analytics, patients outreach and access, tele‐medicine and e‐consults.
Such models are gaining wider acceptance in India due to shortage of doctors and medical
practitioners which constrains quality of outcomes.

Chart 7: AHLL to breakeven and start contributing FY21 onwards
2,500 500
2,000 300
100
(INR mn)
1,500
(INR mn)
1,000 (100)
500 (300)
0 (500)
Revenue EBITDA


RoCE to improve in medium to long term
We believe, upfront investments—Mumbai hospital (480 beds, INR6bn capex,
breakeven in ~3‐4 years) and AHLL—will squeeze near‐term margin. However, over the
medium to long term, Apollo will optimise asset utilisation and improve case mix,
which is bound to drive margin and RoCE. New hospitals in the system have

Upfront investments to suppress near‐term margin
Apollo has added 11 hospitals and created additional capacity of >1,700 beds over the past
3 years. It has also acquired a 210‐bed hospital in Guwahati. Further, over the next 3 years,
it is planning to add another 565 beds across 3 new hospitals, including the greenfield
project in Mumbai (480 beds, INR6bn capex, breakeven to take ~3‐4 years). This expansion,
along with its investments in the retail format (AHLL losses), will squeeze near‐term margin.

Focus on improving key operating metrics
Apollo is optimising its asset utilisation in flagship facilities and improving its case mix. Its
efforts have already started bearing fruits—ARPOB has improved and ALOS has reduced.
This will aid margin and RoCE improvement over the medium to long term. We expect
hospitals like Trichy, Nashik, Women & Child ‐ OMR, Nellore, Perungudi, Women & Child –
SMR, Vizag and Malleswaram to start breaking even as well. These new hospitals have

Chart 8: Hospitals business will be main driver for Apollo (INR mn)
EBITDA EBITDA
margin ‐13% margin ‐16%
520 914 19,803

2,480 21
8,040
7,827
EBITDA Standalone Standalone Apollo AHLL Others EBITDA

(FY16) Hospitals Pharmacy Munich (FY21E)


Healthcare

Valuations

We forecast revenue CAGR of 18% with ~65bps EBITDA margin improvement and ~19%
EBITDA CAGR over FY16‐19; RoCE is estimated to jump 428bps to ~14%. This implies
valuation of 15x FY19E EV/ EBITDA. We maintain ’BUY/SO’ with target price of INR1,740.

Valuation Mar‐18
Multiple 20x
EBITDA (FY19) 13,320
EV 266,399
Market Cap 242,497
No of shares 139

Key Risks

Success of business depends on expansion of network
Historically, the company’s business growth has been primarily driven by establishing new
centres and hospitals through various partnership arrangements and acquisitions; and it is
expect that these will continue to be key drivers for its future growth.

Subsidiaries may be unable to sustain profitability in the future
Some of company’s subsidiaries have reported net losses in the recent years and may be
unable to achieve or sustain profitability in the future, which may materially and adversely
impact their business and prospects.

Specialist physicians could dis‐associate
The success of this business is dependent on the ability to attract and retain leading
specialist physicians. Company’s ability to attract and retain these specialist physicians and
other healthcare professionals, including physicians and nurses depends, among other
things, on the commercial terms that it offers them, the reputation of its centres and
hospitals and the exposure to technology and research opportunities that it offers them.

Rising infrastructure costs could restrict investment
Near term upfront investments could suppress margin if infrastructure costs continue to
rise.

Healthcare

Financial Outlook

Chart 9: Steady revenue growth… Chart 10: ….with consistent improvement in EBITDA margin
150,000 20.0
120,000 18.0
15.8
90,000 16.0
(INR mn)
14.8
(%)
60,000 13.5
14.0
12.9 12.9
12.5
30,000 12.0
0 10.0


Chart 11: … will drive strong EBITDA growth Chart 12: …and ramp up RoCE
20,000 19.5
20.0
17.1
16,000 17.0
14.3
12,000
(INR mn)
14.0 12.6
(%)
8,000 10.0 10.4

11.0
4,000 8.0
0 5.0



Company Description
Apollo is widely recognised as the pioneer of private healthcare in India, and was the
country’s first corporate hospital. The Apollo Hospitals Group, which started as a 150‐bed
hospital in Chennai in 1983 and today, operates 6,800 beds across 61 hospitals. The Group
has emerged as the foremost integrated healthcare provider in Asia, with mature group
companies that specialize in insurance, pharmacy, consultancy, clinics and many such key
touch points of the ecosystem.

The group includes Hospitals, pharmacies, primary care and diagnostic clinics, telemedicine
centres and Apollo Munich Insurance branches panning the length and breadth of India. As
an integrated healthcare service provider with health insurance services, global projects
consultancy capability, medical education centres and a research foundation with a focus on
global clinical trials, epidemiological studies, stem cell & genetic research, Apollo has been
at the forefront of new medical breakthroughs with the most recent investment being that
of commissioning the first Proton Therapy Center across Asia, Africa and Australia in
Chennai, India.

Investment Theme
Apollo Hospitals Enterprise (Apollo), India’s largest hospital chain, is equipping itself to
successfully battle the anticipated disruption in the healthcare sector. Going forward, it is
targeting select tertiary care focused greenfield investments and focus on improving
operating metrics for the capacity it has rapidly created over the past 5 years. Under Apollo
Health and Lifestyle (AHLL), it is adding a number of new healthcare delivery formats
focused on primary and secondary care that are bound to bolster its patient engagement
early in the lifecycle. We estimate ~19% EBITDA CAGR and RoCE to jump 428bps to ~14%
over FY16‐19. Maintain ’BUY’ with target price of INR1,740.

Key Risks
 Success of business depends on expansion of network
 Subsidiaries may be unable to sustain profitability in the future
 Specialist physicians could dis‐associate
 Rising infrastructure costs could restrict investment

Healthcare
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY16 FY17E FY18E FY19E Year to March FY16 FY17E FY18E FY19E
Macro Net revenue 57,349 68,246 80,980 93,059
GDP(Y‐o‐Y %) 7.4 7.9 8.3 8.3 Other Operating Income 3,507 4,173 4,952 5,691
Inflation (Avg) 4.8 5.0 5.2 5.2 Income from operations 60,856 72,419 85,932 98,750
Repo rate (exit rate) 6.8 6.0 6.0 6.0 Materials costs 30,558 36,210 42,966 48,733
USD/INR (Avg) 65.0 67.5 67.0 67.0 Employee costs 10,242 13,110 15,732 18,092
Company EBITDA 7,823 9,031 11,055 13,320
Bed capacity 6,454 6,724 6,989 7,089 Operating profit 7,823 9,031 11,055 13,320
Pharmacy additions (YoY) 2,326 2,476 2,626 2,776 EBIT 5,290 6,302 8,254 10,393
Tax rate (%) 24.1 20.0 20.0 20.0 Add: Other income 267 110 106 181
Less: Interest Expense 1,685 1,712 1,832 1,832
Add: Exceptional items 292 ‐ ‐ ‐
Profit Before Tax 4,164 4,700 6,528 8,742
Less: Provision for Tax 1,002 940 1,306 1,748
Less: Minority Interest (73) (75) (104) (110)
Associate profit share 75 75 300 300
Reported Profit 3,310 3,911 5,627 7,404
Exceptional Items 221 ‐ ‐ ‐
Adjusted Profit 3,089 3,911 5,627 7,404
Shares o /s (mn) 139 139 139 139
Adjusted Basic EPS 22.2 28.1 40.4 53.2
Diluted shares o/s (mn) 139 139 139 139
Adjusted Diluted EPS 22.2 28.1 40.4 53.2
Adjusted Cash EPS 40.4 47.7 60.6 74.3
Dividend per share (DPS) 6.0 7.1 10.2 13.4
Dividend Payout Ratio(%) 25.2 25.2 25.2 25.2

Common size metrics
Operating expenses 87.1 87.5 87.1 86.5
Materials costs 50.2 50.0 50.0 49.4
Staff costs 16.8 18.1 18.3 18.3
Depreciation 4.2 3.8 3.3 3.0
Interest Expense 2.8 2.4 2.1 1.9
EBITDA margins 12.9 12.5 12.9 13.5
Net Profit margins 5.0 5.3 6.4 7.4

Growth ratios (%)
Revenues 17.7 19.0 18.7 14.9
EBITDA 6.5 15.4 22.4 20.5
PBT (8.6) 12.9 38.9 33.9
Adjusted Profit (6.5) 26.6 43.9 31.6
EPS (6.5) 26.6 43.9 31.6

Balance sheet (INR mn) Cash flow metrics
As on 31st March FY16 FY17E FY18E FY19E Year to March FY16 FY17E FY18E FY19E
Share capital 696 696 696 696 Operating cash flow 4,232 6,296 5,459 10,265
Reserves & Surplus 33,841 36,568 40,492 45,656 Investing cash flow (6,840) (6,000) (4,000) (5,000)
Shareholders' funds 34,537 37,264 41,188 46,351 Financing cash flow 2,725 (2,895) (1,534) (4,072)
Net cash Flow 116 (2,599) (76) 1,193
Minority Interest 1,303 1,228 1,124 1,013
Capex (8,306) (6,000) (4,000) (5,000)
Short term borrowings 1,820 1,820 1,820 1,820

Long term borrowings 22,956 22,956 24,956 24,956
Profitability and efficiency ratios
Total Borrowings 24,776 24,776 26,776 26,776
Long Term Liabilities 45 45 45 45
ROAE (%) 8.8 10.3 13.7 16.3
Def. Tax Liability (net) 4,843 4,843 4,843 4,843
ROACE (%) 10.0 10.4 12.6 14.3
Sources of funds 65,504 68,156 73,975 79,029
Inventory Days 47 47 47 47
Depreciation 2,533 2,730 2,802 2,927
Debtors Days 42 42 42 42
Net Block 34,443 37,714 38,912 40,985
Payable Days 55 51 48 46
Capital work in progress 5,956 5,956 5,956 5,956
Cash Conversion Cycle 34 38 41 43
Intangible Assets 3,803 3,803 3,803 3,803
Current Ratio 2.7 2.6 2.6 2.8
Total Fixed Assets 44,203 47,473 48,671 50,745
Gross Debt/EBITDA 3.2 2.7 2.4 2.0
Non current investments 1,980 1,980 1,980 1,980
Gross Debt/Equity 0.7 0.6 0.6 0.6
Cash and Equivalents 4,693 2,094 2,018 3,211
Adjusted Debt/Equity 0.7 0.6 0.6 0.6
Inventories 4,433 4,970 6,187 6,468
Net Debt/Equity 0.6 0.6 0.6 0.5
Sundry Debtors 7,020 8,584 9,931 11,346
Interest Coverage Ratio 3.1 3.7 4.5 5.7
Loans & Advances 13,923 14,527 19,231 19,563

Other Current Assets 487 526 675 705
Operating ratios
Current Assets (ex cash) 25,862 28,608 36,025 38,082
Trade payable 5,037 5,090 6,306 5,978
Total Asset Turnover 1.0 1.0 1.1 1.2
Other Current Liab 6,196 6,909 8,413 9,012
Fixed Asset Turnover 1.6 1.7 1.9 2.1
Total Current Liab 11,234 11,999 14,719 14,989
Equity Turnover 1.7 1.8 2.0 2.1
Net Curr Assets‐ex cash 14,628 16,609 21,306 23,093

Uses of funds 65,504 68,156 73,975 79,029
Valuation parameters
BVPS (INR) 248.2 267.8 296.0 333.2

Adj. Diluted EPS (INR) 22.2 28.1 40.4 53.2
Free cash flow (INR mn)
Y‐o‐Y growth (%) (6.5) 26.6 43.9 31.6
Adjusted Cash EPS (INR) 40.4 47.7 60.6 74.3
Reported Profit 3,310 3,911 5,627 7,404
Diluted P/E (x) 59.4 46.9 32.6 24.8
Add: Depreciation 2,533 2,730 2,802 2,927
P/B (x) 5.3 4.9 4.5 4.0
Interest (Net of Tax) 1,279 1,369 1,465 1,465
EV / Sales (x) 3.6 3.0 2.5 2.2
Others (5,208) (3,253) (6,523) (3,033)
EV / EBITDA (x) 26.2 22.7 18.5 15.4
Less: Changes in WC (2,317) (1,539) (2,088) (1,502)
Dividend Yield (%) 0.5 0.5 0.8 1.0
Operating cash flow 4,232 6,296 5,459 10,265
Less: Capex 8,306 6,000 4,000 5,000
Free Cash Flow (5,759) (1,416) (373) 3,434

Healthcare
Additional Data
Directors Data
Prathap C Reddy Founder, Chairman Preetha Reddy Executive Vice Chairperson
Suneeta Reddy Director Sangita Reddy Director
Rajkumar Menon Director Rafeeque Ahamed Director
N Vaghul Director G Venkatraman Director

Shobana Kamineni Executive Vice Chairperson Deepak Vaidya Director

Auditors ‐ S Viswanathan
*as per last annual report

Holding – Top10
Perc. Holding Perc. Holding
Pcr investments ltd 19.57 Integrated healthcar 10.85
Massachusetts mutual 8.38 Schroders plc 4.64
Reddy prathap c 3.91 Reddy suneeta 2.43
Vanguard group 2.21 Reddy sangita 1.75
Munchener ruckversic 1.72 Blackrock 1.69
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded

No Data Available
*in last one year
Dr Lal PathLabs
INITIATING COVERAGE

DR LAL PATHLABS
Going strong
Dr Lal Pathlabs (Dr Lal) is one of India’s premier diagnostic players that EDELWEISS 4D RATINGS
has a B2C heavy business and is positioned to benefit from favourable Absolute Rating BUY
sector dynamics. Having established a strong presence in North India, it is Rating Relative to Sector Performer
now gearing to drive next phase of growth by expanding footprint in East Risk Rating Relative to Sector Low
and Central India by opening 2 additional regional reference labs. Owing Sector Relative to Market Overweight
to low capex requirements, strong FCF generation phase will continue,
sustaining high valuations in the medium term. Initiate coverage
MARKET DATA (R: NA, B: DLPL IN)
with ’BUY’ and target price of INR1,180.
CMP : INR 1,050
Target Price : INR 1,180
Tailwinds spurring diagnostics growth to sustain 52‐week range (INR) : 1,275 / 696
As evidence‐based treatment gains ground, growth drivers for diagnostics will remain Share in issue (mn) : 82.7
upbeat. Other than having the same drivers as the healthcare sector in general, M cap (INR bn/USD mn) : 88 / 1,322
preventive healthcare diagnosis (wellness) will continue to gain popularity. Current Avg. Daily Vol.BSE/NSE(‘000) : 4,20.4
market share of organised players is fairly low, boosting long‐term growth visibility.
SHARE HOLDING PATTERN (%)
B2C heavy business penetrating deeper in new markets Current Q1FY17 Q4FY16
Dr Lal is one of the strongest B2C + B2B brands with one of the best walk‐in ratios. Promoters * 58.6 58.7 58.7
Having established strong presence in North India, it is now gearing to drive next phase MF's, FI's & BK’s 5.8 7.7 8.0
of growth by expanding footprint in East and Central India by opening 2 additional FII's 7.2 7.2 6.1
regional reference labs in Kolkata and Lucknow. It is also planning to spread wings in Others 28.3 26.4 27.2
* Promoters pledged shares : 0.2
South and West India by acquiring regional players with strong brand recognition. (% of share in issue)

Strong free cash flow generation renders high yield RELATIVE PERFORMANCE (%)
Owing to the favourable rental reagent model and thereby low capex requirement, Dr BSE
Stock Nifty
Lal’s free cash flow will continue to be strong. CMP implies ~3.2% FCF yield to market Healthcare
cap for FY19, twice of the hospital sector. The space also offers best RoCE due to its 1 month (7.6) (2.5) (0.7)
asset‐light reagent rental model and low gestation period. 3 months 13.4 4.3 (1.7)
12 months NA 6.4 (11.4)
Outlook and valuations: Best in class; initiate with ‘BUY’

We forecast revenue and EBITDA to grow at CAGR of 21% each, over FY16‐19 and RoCE
to stabilise around 38% to 40% post launching new regional labs. We initiate coverage
with ’BUY/SP’ and target price of INR1,180 (25x FY19E EV/EBITDA).

Financials Deepak Malik
(INR mn)
+91 22 6620 3147
Year to March FY16 FY17E FY18E FY19E deepak.malik@edelweissfin.com
Net revenues (INR mn) 7,913 9,721 11,943 14,146
Rahul Solanki
EBITDA (INR mn) 2,097 2,489 3,045 3,706 +91 22 6623 3317
EBITDA Margin (%) 26.5 25.6 25.5 26.2 rahul.solanki@edelweissfin.com

Reported profit (INR mn) 1,322
1,604 2,019 2,601
Archana Menon
Diluted P/E (x) 65.7 54.1 43.0 33.4 +91 22 6620 3020

EV/EBITDA (x) 40.0 33.7 27.5 22.6 archana.menon@edelweissfin.com

ROACE (%) 43.5 37.6 36.9 36.8
October 07, 2016
63
Healthcare
A bird’s eye view

Tailwinds spurring diagnostics growth to sustain
Diagnostics Market (USD bn) Diagnostics makes a strong investment case as it is still a largely under‐consumed module of
Diagnostic market 6.7 ground, growth drivers for diagnostics will remain upbeat. Even as India continues to
3.5 Hence, preventive healthcare diagnosis (wellness) will continue to gain popularity. Also,
2.4 current market share of organised chains is fairly low, boosting their long‐term growth
gestation period.

2012 2015 2020
B2C heavy business penetrating deeper into new markets
Source: Industry reports, Numero uno brand positioned to benefit from favourable sector dynamics
Edelweiss research
The company is one of the most recognised brands among patients as well as physicians.
With a large and diverse customer pool, its walk‐in patients account for highest share
(~40%) of revenue.

Expanding presence in North India
Dr Lal will continue to focus on its core market ‐ North India. It intends to further strengthen
its position by opening new franchised patient service centers to deepen its network reach.
We expect North India to contribute ~36% of incremental revenue growth during FY16‐21E,
and the region to post CAGR of 18%.

Focus on penetrating deeper in East and Central India
To drive next phase of growth in East and Central India, the company intends to expand
presence through construction of regional reference laboratories in Lucknow (December
2018) and Kolkata (September 2017). We estimate East India to contribute 16% of
incremental revenue growth during FY16‐21 and the region to post CAGR of 25% and
contribute 15% to total revenue versus 13% currently. We expect Central India to contribute
27% of incremental revenue growth during FY16‐21 and the region to post CAGR of 23% and
contribute 26% to the company’s total revenue versus 25% currently.

Eyeing new geographies via strategic acquisitions and partnerships
On a combined basis, South and West contribute 15% to total revenue currently. We
estimate it to post 28% CAGR and contribute 22% to incremental revenue during FY16‐21
and thereby increase its revenue contribution to 19% of total by FY21E.

Dr Lal PathLabs

Chart 1: Expansion across Central and East India to boost revenue
2,903 21,349
Others Others
2,111
15% 3,614 19% Delhi
4,808 40%
East
India Delhi 7,913
13% 47% East
India
15%
Revenue Delhi Central East India Others Revenue Central India

Central India (FY16) India (rest (FY21E) (rest of North
(rest of North of North India) 26%
India) 25% India)


Operating metrics to remain steady
Its scalable model is well equipped to manage seamless integration of new reference labs.
Over FY16‐21, we expect the number of samples to register CAGR of 17%, while realisation/
sample to improve at 5% CAGR. We estimate EBITDA margin to remain steady at ~26%
versus 27% as of FY16. ~69% of incremental EBITDA will thus be contributed by growth in
samples versus ~31% due to improvement in realisation.

Chart 2: Volume as well as realisation to drive EBITDA growth
EBITDA margin EBITDA margin
27% 26%
1,074 5,594
2,422
2,097
EBITDA (FY16) Number of Realizations/ EBITDA (FY21E)

samples sample


Strong FCF generation renders high FCF yield
Owing to the favorable rental reagent model and thereby low capex requirement, Dr Lal’s
free cash flow will continue to be strong. CMP implies ~3.2% FCF yield to market cap for
FY19, twice of the hospital sector.

Healthcare
Outlook and valuations: Best in class; initiate with ‘BUY’
We forecast revenue and EBITDA to grow at CAGR of 21% each, over FY16‐19 and RoCE to
stabilise around 38% to 40% post launching new regional labs. We initiate coverage with
’BUY/SP’ and target price of INR1,180 (25x FY19E EV/EBITDA).

While Dr Lal’s FY19E FCF yield is ~2x of the average for the hospital sector, RoCE is ~3x. We
assign a target price multiple of 25x EV/ EBITDA, a 25% premium over the hospital sector.
We believe this premium will continue in the medium term.

Valuation Mar‐18
Multiple 25x
EBITDA (FY19) 3,706
EV 92,657
Less: net debt (5,258)
Market Cap 97,914
No of shares 83
Dr Lal PathLabs


Diagnostics makes a strong investment case as it is still a largely under‐consumed
module of treatment and demand has significant room to grow. As evidence‐based
treatment gains ground, growth drivers for diagnostics will remain upbeat. Even as
India continues to grapple with the burden of communicable diseases, a wave of non‐
communicable diseases has flooded the country with ailments like diabetes, obesity
and cancer, among others. Hence, preventive healthcare diagnosis (wellness) will
continue to gain popularity. Also, current market share of organised chains is fairly
low, boosting their long‐term growth visibility. The space also offers best RoCE due to
its asset‐light reagent rental model and low gestation period.


approaches, this trend has gained ground in the previous decade.
faster growth rate in the wellness segment. Screening, early detection and monitoring
reduce downstream costs.

We believe that diagnostics is a ~USD4bn market for players that clocked ~14% CAGR during
FY12‐15. The industry will continue to post ~14% CAGR through 2020, slightly faster than
growth of the reagent market.

Chart 3: Diagnostics industry ‐ Robust growth to sustain
6.7
3.5
2.4
2012 2015 2020


Healthcare
To understand demand within the diagnostics market, we break it up across channels:
(b) While a chunk comprises the sick‐care market, ~7% of overall value is derived from

Corporate Wellness
clients 7%
10%
35% 55%
Sick care
93%

There is much fragmentation with >100k labs in India, but demand for institutionalised
services has led to organised players becoming more relevant in this sunrise sector and have
hence benefited from this trend. SRL, Metropolis, Dr Lal, Thyrocare, Vijaya Diagnostics,
Medall, among others, are major organised players in the segment.

Chart 5: Diagnostics ‐ Highly fragmented industry
Hospital based
37% Regional Chains
9%
Diagnostic
Chains
15%
centres Chains
48% 6%


Dr Lal PathLabs

Immunology
22% Rural
Hematology 33%
18%
Radiology
56% 39%
44%
Others
21% Urban
67%


FY16 numbers unless
mentioned, INR mn
Revenue 7,913 2,312 8,980
ROCE (%) 44 24 12
FY18 P/E 43 37 N/A
FY19 P/E 33 29 N/A
Healthcare
B2C heavy business penetrating deeper into new markets
Dr Lal is one of the strongest B2C + B2B brands with one of the best walk‐in ratios.
Patients are primary decision makers in India and this plays to Dr Lal’s advantage due
to a strong front‐end. Having established a strong presence in North India, it is now
gearing to drive next phase of growth by expanding its footprint in East and Central
India by opening 2 additional regional reference labs in Kolkata (September 2017)
and Lucknow (December 2018). It also targets to spread its wings in South and West
India, by acquiring regional players that enjoy strong brand recognition.

Numero uno brand positioned to benefit from favourable sector dynamics
Dr Lal has established itself as one of the country’s leading pathology brands having worked
intently on the 2 most important aspects of quality and service. The company is one of the
most recognised brands among patients as well as physicians. With a large and diverse
customer pool, its walk‐in patients account for highest share (~40%) of revenue. It has one
of the widest offerings of diagnostic tests among organised players in the market.

The Company has set up a highly scalable model. It’s national level hub‐and‐spoke network
includes its National Reference Laboratory in New Delhi, 172 other clinical laboratories,
1,559 Patient Service Centres (PSCs) and ~5,000 Pick‐up‐Points (PUPs). The company’s
integrated centralised IT platform enables rapid network expansion. The centralised
diagnostic testing provides greater economies of scale. PSCs and PUPs facilitate penetration
within the region and expand Dr Lal’s reach. Its dedicated logistics team ensures a fast
turnaround time with facilities like online access and home collections.

Patients are the primary decision makers in India, and this plays to the advantage of a brand
centric model like Dr Lal with a strong front‐end. Thus, Dr Lal has one of the best walk‐in
ratios in the space. But, its quality/reliability proposition has ensured good growth in the
B2B category as well.

Chart 7: Steady network expansion…
Clinical Laboratories Patient Service Centers Pick‐up Points
5,668
172
1,559
4,967
164
146
1,340
4,225
131
1,064
2,879
824
FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16


Dr Lal PathLabs

Chart 8: … translated into strong volume growth
Number of patients Number of samples
15 60
57
12 48
12.0 48
36 41
9 9.9
(nos)
36
(nos)
9.0
31
7.7 24
6 26
22
19
12 16
3
FY17E
FY18E
FY19E
FY20E
FY21E
FY13
FY14
FY15
FY16
0
FY13 FY14 FY15 FY16

Chart 9: Strong volume growth translated into robust revenue growth
Revenue (INR mn) West India International
7,913 South India 7% 1%
7%
6,596
5,579
4,517 East India
13%
North India
72%
FY13 FY14 FY15 FY16

Chart 10: Revenue growth balanced across regions
North India East India South India West India International
7,000 1,200 600 600 200
1,000 480
5,600 480 160
800
(INR mn)
4,200 360 360 120

(INR mn)
(INR mn)
(INR mn)
(INR mn)
600
2,800 240 240 80
400
1,400 120 120 40
200
0 0 0 0 0
FY13 FY16 FY13 FY16 FY13 FY16 FY13 FY16 FY13 FY16

Healthcare
Expanding presence in North India
Dr Lal will continue to focus on its core market ‐ North India. It intends to further strengthen
its position by opening new franchised patient service centers to expand its network reach.
We expect North India to contribute ~36% of incremental revenue growth during FY16‐21
and the region to post CAGR of 18%. Currently, the region contributes 47% to Dr Lal’s total
revenue. However, as other regions grow at a faster clip, North’s contribution will dip
marginally to 40% by FY21E.

Focus on penetrating deeper in East and Central India
To drive next phase of growth in East and Central India, Dr Lal intends to expand presence
through construction of regional reference laboratories in Lucknow (December 2018) and
Kolkata (September 2017) at a capex of ~INR400‐450mn over and above the land cost. The
company believes its overall penetration is low in these regions and perceives immense
potential to grow by opening additional smaller clinical laboratories and new
complementary PSCs.

According to the company, the NCR market is growing at ~13‐15% and the East at ~17‐18%
with potential to grow at >25%. Dr Lal expects to penetrate deeper into the promising
markets of Bengal, Bihar and North East using the Kolkata reference lab. We estimate East
India to contribute 16% to incremental revenue growth during FY16‐21 and the region to
post CAGR of 25% and contribute 15% to the company’s total revenue versus 13% currently.

Similarly, it expects the new reference lab in Lucknow to help it penetrate UP and MP
markets. It expects Lucknow to become a major medical hub with Medanta’s Medicity
launch there. We expect Central India to contribute 27% of incremental revenue growth
during FY16‐21 and the region to post CAGR of 23% and 26% to the company’s total revenue
versus 25% currently.

Bolstering services
Dr Lal will continue to increase the breadth of its diagnostic healthcare testing and services
platform through adoption of new and cutting‐edge diagnostic healthcare testing
technology as it believes this will expand its revenue sources and further enhance its brand’s
reputation. The company intends to offer more preventive healthcare screening and chronic
and lifestyle disease management services, given increasing health awareness and
concomitant increase in chronic and lifestyle ailments in India. This includes further
development in genetics, molecular and oncology testing and further sprucing up of its
current chronic disease management and wellness programmes. It also intends to further
beef up its corporate customer base by continuing to market its healthcare proposition to
human resource departments and other corporate decision makers.

Eyeing new geographies via strategic acquisitions and partnerships
Since FY08, Dr Lal has made several strategic acquisitions in India of smaller‐scale diagnostic
healthcare service providers that currently contribute ~10‐12% of overall revenues. The
company last made a small INR40mn acquisition in FY15. Strong cash flows from business
could be utilised for further strategic acquisitions. Dr Lal proposes to continue exploring
expansion opportunities in India, including strategic acquisitions of regional diagnostic
healthcare service providers who have brand recall among its existing patient base and
Dr Lal PathLabs

healthcare providers. Dr Lal believes future acquisitions will provide it operating synergies
and aid organic growth in these new regions through introduction of specialised testing in
addition to those already offered by the acquired company. It will also enjoy additional
purchasing power with its suppliers and increased economies of scale.

Plans are also afoot to expand presence in South and West India by opening additional
clinical laboratories and PSCs. It is also continuously enhancing breadth of its diagnostic
tests. On a combined basis, South and West contribute 15% to total revenue currently. We
estimate it to clock 28% CAGR and contribute 22% of incremental revenue during FY16‐21
and thereby increase its revenue contribution to 19% of total by FY21.

Expanding lab management venture
Dr Lal is looking at scaling up the offshoot model whereby it undertakes management of
laboratories which are functioning within a hospital. Every hospital has a routine lab. This
far, the company has only been tapping part of the business which is being outsourced to
Reference Labs. Having realised that with its scale, size and productivity, it can manage
these labs operationally with co‐branding of Dr Lal, thereby protecting margins for these
hospital‐based laboratories and still be able to make margin gains (~18‐20%). While this
margin may not be to the extent it makes in its existing business, it could secure a very large
captive high volume business. Initial response has been encouraging (~18‐20 labs) and it is
looking at adding more such contracts going forward.

Chart 11: Expansion to drive robust volume growth translating into revenue and EBITDA growth
Samples (mn) Revenue (INR mn) EBITDA and EBITDA
21,349 6,000 Margin 30
4,800 28
14,146
(INR mn)
3,600 26
(%)
7,913 2,400 24
4,517 1,200 22
0 20
FY17E
FY19E
FY21E
FY13
FY15
FY17E
FY18E
FY19E
FY20E
FY21E
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
FY21E
FY13
FY14
FY15
FY16
EBITDA EBITDA Margin


Healthcare
Chart 12: Expansion across Central and East India to boost revenue
2,903 21,349
Others Others
2,111
15% 3,614 19% Delhi
4,808 40%
East
India Delhi 7,913
13% 47% East
India
15%
Revenue Delhi Central East India Others Revenue Central India

Central India (FY16) India (rest (FY21E) (rest of North
(rest of North of North India) 26%
India) 25% India)


Operating metrics to remain steady
We expect Dr Lal’s operating metrics to remain steady through this rapid expansion and
growth phase during FY16‐21. Its scalable model is well equipped to manage seamless
integration of new reference labs. Over FY16‐21, we expect the number of samples to post
CAGR of 17%, while realisation/ sample to improve at CAGR of 5%. We estimate EBITDA
margin to remain steady at ~26% versus 27% as of FY16. ~69% of incremental EBITDA will
thus be contributed by growth in samples versus ~31% due to improvement in realisation.

Chart 13: Volume as well as realisation to drive EBITDA growth
27% 26%
1,074 5,594
2,422
2,097
EBITDA (FY16) Number of Realizations/ EBITDA (FY21E)

samples sample


Dr Lal PathLabs

Owing to the favourable rental reagent model and thereby low capex requirement,
Dr Lal’s free cash flow will continue to be strong. CMP implies ~3.2% FCF yield to
market cap for FY19, twice of the hospital sector.

Rental reagent model will continue to maintain asset‐light model
Dr Lal’s test volumes and long‐standing relationships with vendors have enabled it to
develop an equipment leasing model, leading to minimal capital expenditure for diagnostic
equipment. Through this model, equipment and instruments used are generally leased from
vendors in exchange of a commitment to purchase reagents and consumables from them
for a specified period. Its reagent and consumable costs are then expensed as cost of
materials consumed. The company benefits financially from this model as it minimizes
capital costs typically associated with diagnostic equipment as it is not required to expend
capital immediately to procure the necessary instruments and equipment.

As its network the number of tests it performs continue to grow, Dr Lal will improve its
economies of scale and further optimise the cost of samples and test it processes. It will
keep passing some of these cost efficiencies to customers and offer tests at affordable rates.
Offering tests at competitive prices is conducive to the expansion of its customer base,
which may in turn increase the number of samples and tests it processes.

Chart 14: Capex to remain low post lumpy investments Chart 15: Free cash flow
750 4,171
600 600
600
3,189
432 2,722
450
(INR mn)
1,684
300
1,313
200 200 200 1,037
150
0


Healthcare
Valuations

We forecast revenue and EBITDA to grow at CAGR of 21% each, over FY16‐19 and RoCE to
stabilise around 38% to 40% post launching new regional labs. We initiate coverage with
’BUY/SP’ and target price of INR1,180 (25x FY19E EV/EBITDA).

While Dr Lal’s FY19E FCF yield is ~2x of the average for the hospital sector, RoCE is ~3x. We
assign a target price multiple of 25x EV/ EBITDA, a 25% premium over the hospital sector.
We believe this premium will continue in the medium term.

Valuation Mar‐18
Multiple 25x
EBITDA (FY19) 3,706
EV 92,657
Market Cap 97,914
No of shares 83

Dr Lal PathLabs

Key Risks

Historically, Dr Lal’s business growth has primarily been driven by expansion of network and
various partnership arrangements and acquisitions. Wider network will continue to be the
key driver for future growth.

Near‐term upfront investments could suppress margins if infrastructure costs continue to
rise.

Intensifying competition
A number of new PE‐backed players have entered the market. Rsising competition, could
suppress growth going ahead.

Healthcare
Company Description

Started in 1949, Dr Lal is a provider of diagnostic and related healthcare tests and services in
India. Through its integrated and nation‐wide network, the company offers patients and
healthcare providers a broad range of diagnostic and related healthcare tests and services
for use in core testing, patients’ diagnosis and prevention, monitoring and treatment of
disease and other health conditions. Its customers include individual patients, hospitals and
other healthcare providers and corporate customers.

Dr Lal’s country‐wide network comprises a national reference laboratory in New Delhi,
supported by 172 clinical laboratories, 1,559 patient service centres and over 4,967 pickup
points. The company has an exhaustive catalogue of tests which includes over 1,110 test
panels, 1,934 pathology tests and 1,561 radiology and cardiology tests and it keeps adding
newer and more effective tests over time. The company employs over 3,000 personnel work
with >55% of the staff engaged in laboratory functions. It has a qualified team of 147
pathologists, 8 radiologists, 13 microbiologists, 5 biochemists and 11 specialists with
doctorate degrees.

Dr Lal PathLabs

Table 4: Management Overview
Name Designation Particulars
Dr. Om Manchanda Cheif Executive Officer Dr. Om Manchanda is the Chief Executive Officer of Dr Lal PathLabs.
Before joining Dr Lal PathLabs in 2005, Manchanda led the International &
Innovation group of the Consumer Healthcare Division at Ranbaxy. Prior to
Ranbaxy, he worked for Monsanto as the head of Sales and Marketing.
Earlier, during his tenure with Hindustan Unilever for about 10 years, Manchanda
received in‐depth exposure in consumer product sales, distribution and
marketing. An MBA from the Indian Institute of Management, Ahmedabad;
Manchanda is also a Doctor in Veterinary Sciences from HAU, Hisar.
Mr. Dilip Bidani Chief Financial Officer Dilip has over 25 years of professional experience. He started his career with ICI
(now Akzo Nobel) where he spent over 5 years and moved to Hindustan Unilever.
After nearly 9 years in Unilever, Dilip moved as Group CFO to Mother Dairy
followed by Manpower Group (a Fortune 500 company), Orbis Financial
Corporation ‐ a SEBI regulated Custodian Services company, and thereafter spent
over 3 years with Avon Beauty Products as Director Finance. Dilip is a Chartered
Accountant, PGDM (IIM Ahmedabad) and a B Com (Hons) from Calcutta University.
Mr. Manoj Garg Chief Human Resources Officer Manoj Garg has over 21 years of professional experience with a variety of
organizations across multiple industries including Paints , Semiconductors and
Telecom. Manoj is a MBA HR (Gold Medal) from XLRI Jamshedpur , and B Tech
from NIT Kozhikode.
Dr. Neelum Tripathi National Director ‐ Lab Dr Neelum Tripathi is a Pathologist from MGM medical college Indore MP. She
Operations joined at Dr Lal PathLabs as Head Lab Operations in 2006. She has experience of
more than 20 yrs as a Pathologist and running operations of hospital based and
stand‐alone Labs. Prior to joining Dr Lal PathLabs she worked as a pathologist
with SRL Ranbaxy, Fortis Hospital Noida, Noida Medical Center, Gokuldas
Hospital and Research Center Indore, Apollo Diagnostic Center Indore.
Mr. Shankha Banerjee Chief Operating Officer ‐ Mr. Shankha Banerjee is an alumnus of Delhi College of Engineering and SP Jain
Region II Institute of Management & Research, Mumbai. He has also done ‘BP Sales and
Marketing Leadership Development Course’ at Kellogs, USA. He worked for Castrol
India Limited & BP Lubricants for 14 years and went on to become Global Market
Space Manager. Later he joined Pidilite Industry Limited as President – Sales &
Marketing:Middle East & Africa. He joined Dr Lal PathLabs in July 2014 as Chief
Operating Officer‐Region II.
Mr. Munender Soperna Cheif Information Officer Mr. Munender Soperna has experience of directing business and technology
operations for Healthcare‐Pathology, Auto Ancillary, and Power & Consultancy
industries to optimize bottom line productivity. Mr. Munender Soperna is a post
graduate in Computer Application from Delhi University with Master in Business
Administration in Systems.
Ved Prakash Goel Financial Controller CA Ved Prakash Goel is a finance professional with more than 17 years of
professional experience in different industries including Manufacturing, Mines,
Engineering, Infrastructure and Healthcare Services.


Healthcare
Financial Outlook

Chart 16: Strong revenue growth… Chart 17: …. With steady EBITDA margin
25,000 28
20,000 27
‐30bps
15,000 26
(INR mn)
(%)
10,000 25
5,000 24
0 23


Chart 18: …to drive strong EBITDA growth Chart 19: RoCE to stabilize post FY17
6,000 50
4,800 46
3,600 42
(INR mn)
(%)
2,400 38
1,200 34
0 30

Dr Lal PathLabs

Appendix: Diagnostic market segments

popular
popular
Ultrasound systems

Healthcare
Key assumptions Income statement (INR mn)
Macro Income from operations 7,913 9,721 11,943 14,146
GDP (Y‐o‐Y %) 7.4 7.9 8.3 8.3 Total operating expenses 5,816 7,233 8,897 10,440
Inflation (Avg) 4.8 5.0 5.2 5.2 Medical consumables 1,729 2,139 2,627 3,112
Repo rate (exit rate) 6.75 6.00 6.00 6.00 Staff costs 1,368 1,750 2,174 2,546
USD/INR (Avg) 65.0 67.5 67.0 67.0 SG&A expenses 2,718 3,344 4,096 4,781
Company Depreciation 283 344 385 345
Number of samples (mn) 26 31 36 41 EBITDA 2,097 2,489 3,045 3,706
Realisation/ Sample 301 316 332 342 Operating Profit 2,097 2,489 3,045 3,706
EBITDA margin (%) 27 26 26 26 EBIT 1,814 2,145 2,660 3,361
tax rate (%) 34 34 34 34 Less: Interest Expense (142) (270) (366) (524)
Add: Other income 50 50 58 66
Profit before tax 2,007 2,465 3,084 3,951
Less: Provision for Tax 675 848 1,048 1,324
Less: Minority Interest 10 13 16 26
Reported Profit 1,322 1,604 2,019 2,601
Adjusted Profit 1,322 1,604 2,019 2,601
No. of Shares outstanding 83 83 83 83
Adjusted Basic EPS 16 19 24 31
No. of Diluted shares outstanding 83 83 83 83
Adjusted Diluted EPS 16 19 24 31
Dividend per share (DPS) 2 3 4 5
Dividend Payout Ratio (%) 15.3 15.0 15.0 15.0
Common size metrics‐ as % of net revenues
Medical consumables 21.9 22.0 22.0 22.0
Staff costs 17.3 18.0 18.2 18.0
EBITDA margins 26.5 25.6 25.5 26.2
Net profit margins 16.8 16.6 17.0 18.6
Growth metrics (%)
Net Revenues 20.0 22.9 22.9 18.5
EBITDA 34.5 18.7 22.4 21.7
PBT 44 23 25 28
Adjusted Profit 40.3 21.4 25.9 28.8
EPS (4.1) 21.4 25.9 28.8
Dr Lal PathLabs

Share capital 826.8 826.8 826.8 826.8 Operating cash flow 1,469 1,913 2,284 2,922
Reserves & Surplus 4,247 5,553 7,205 9,334 Financing cash flow 4 (286) (351) (446)
Shareholders' funds 5,074 6,379 8,032 10,161 Investing cash flow (1,518) (621) (564) (221)
Minority interest 29 42 57 84 Net cash flow (46) 1,006 1,369 2,255
Long Term Liabilities & Provisions 242 302 366 425 Capex (432) (600) (600) (200)
Deferred tax liability (net) (121) (121) (121) (121) Dividend paid (156) (291) (367) (472)
Sources of funds 5,224 6,603 8,335 10,549
Net Block 1,239 1,495 1,710 1,565 Profitability & liquidity ratios
Capital work in progress 41 41 41 41 Year to March FY16 FY17E FY18E FY19E
Total Fixed assets 1,280 1,536 1,751 1,606 Return on Average Equity (ROAE) (%) 31.2 28.1 28.1 28.7
Goodwill on consolidation 417 417 417 417 Pre‐tax Return on Capital Employed 43.5 37.6 36.9 36.8
Other non‐current assets 38 49 58 69 Inventory days 30 30 30 30
Long term loans and advances 159 230 248 318 Debtors days 16 16 16 16
Cash and cash equivalents 2,940 3,946 5,315 7,570 Payble days 81 81 81 81
Inventories 145 211 227 292 Cash Conversion Cycle (35) (35) (35) (35)
Sundry debtors 363 463 552 651 Current Ratio 5 5 5 6
Loans & advances 723 727 1,054 1,055 Net Debt/Equity (1) (1) (1) (1)
Other Current Assets 67 67 67 67 Interest Coverage Ratio (12.74) (7.94) (7.27) (6.42)
Total current assets (ex cash) 1,298 1,468 1,899 2,064
Trade payable 423 522 639 737 Operating ratios
Other Current Liabilities & Short Ter 485 520 715 757 Year to March FY16 FY17E FY18E FY19E
Total current liabilities & provisions 908 1,042 1,354 1,494 Total asset turnover 1.8 1.6 1.6 1.5
Net current assets (ex cash) 390 425 546 570 Fixed asset turnover 6.8 7.1 7.5 8.6
Uses of funds 5,224 6,603 8,335 10,549 Equity turnover 1.9 1.7 1.6 1.5
Book Value per share (INR) 61 77 97 123
Valuation parameters
Free cash flow Year to March FY16 FY17E FY18E FY19E
Year to March FY16 FY17E FY18E FY19E Adjusted Diluted EPS (INR) 16.0 19.4 24.4 31.5
Reported Profit 1,322 1,604 2,019 2,601 Y‐o‐Y growth (%) (4) 21 26 29
Add: Depreciation 283 344 385 345 Adjusted Cash EPS (INR) 19.4 23.6 29.1 35.6
Interest (Net of Tax) (95) (177) (242) (348) Diluted Price to Earnings Ratio (P/E) 66 54 43 33
Others (110) 177 242 348 Price to Book Ratio (P/B) (x) 17.1 13.6 10.8 8.5
Less: Changes in WC (69) 35 121 24 Enterprise Value / Sales (x) 11 9 7 6
Operating cash flow 1,469 1,913 2,284 2,922 Enterprise Value / EBITDA (x) 40.0 33.7 27.5 22.6
Less: Capex 432 600 600 200 Dividend Yield (%) 0.2 0.3 0.3 0.4
Free cash flow 1,037 1,313 1,684 2,722
Healthcare
Additional Data
Directors Data
(Hony) Brig. Dr. Arvind Lal Chairman & Managing Director Dr. Vandana Lal Executive Director
Dr. Om Prakash Manchanda CEO & Whole‐time Director Mr. Rahul Sharma Non‐Executive Director
Mr. Naveen Wadhera Non‐Executive Nominee Director Mr. Sandeep Singhal Non‐Executive Nominee Director
Mr. Arun Duggal Independent Director Mr. Anoop Mahendra Singh Independent Director

Mr. Sunil Varma Independent Director Mr. Harneet Singh Chandhoke Independent Director

Auditors ‐ S.R. Batliboi & Co. LLP

Holding – Top10
West Bridge Crossover Fund 12.86 Wagner Ltd 9.2
SBI Fund Management 4.96 House Eskay 2.03
Wasatch Advisors Inc 1.56 Sanjeevani Investment Holdings 1.08
FMR LLC 1.06 Vanguard group 0.43
Goldman Sachs 0.3 DSP Blackrock 0.25
*in last one year
Bulk Deals

No Data Available
*in last one year
Insider Trades

No Data Available
*in last one year
INITIATING COVERAGE
Fortis Healthcare

FORTIS HEALTHCARE
On the cusp of value unlocking
Fortis Healthcare (Fortis) is a high quality tertiary player levered to the EDELWEISS 4D RATINGS
high‐potential of the NCR/ North India market. Its focus is on asset‐light Absolute Rating BUY
brownfield expansion and sweating its assets to improve operating Rating Relative to Sector Outperformer
metrics. Fortis is on the cusp of unlocking significant value by: (i) Risk Rating Relative to Sector Low
demerging its 56% subsidiary SRL which can unlock value of Sector Relative to Market Overweight
~INR57/share; and (ii) partially unwinding its REIT capital structure, on
which Fortis pays an yield of 13‐14%, according to us. Hospital business
MARKET DATA (R: FOHE.BO, B: FORH IN)
EBITDAC margin will improve ~170bps over FY16‐19 and RoCE will expand
CMP : INR 173
by ~420bps. Initiate with ’BUY’ and target price of INR265. Target Price : INR 265
52‐week range (INR) : 199 / 141
High quality tertiary care infrastructure network Share in issue (mn) : 463.2
Delhi has the highest per capita income level in India and is growing at higher rate than M cap (INR bn/USD mn) : 79 / 1,192
rest of the country. ~50% of Fortis’ bed capacity is in North India of which ~70% is in Avg. Daily Vol.BSE/NSE(‘000) : 1,025.4
NCR, that has high potential owing to a large, affluent, but under‐served population.
Focus on asset‐light expansion, improvement in operating metrics Current Q1FY17 Q4FY16
Promoters * 71.3 64.5 64.5
Fortis is planning to ramp up bed capacity by ~40% through asset light brownfield
expansion. Accretion of beds and focus on sweating its assets will improve occupancy MF's, FI's & BK’s 5.3 12.1 12.2
and mix of the hospitals business, thereby boosting Fortis’ growth and profitability FII's 13.6 12.8 10.7
during FY17‐21. We forecast Hospital EBITDAC to clock 19% CAGR over FY16‐21. Others 9.8 10.6 12.7

On cusp of significant value unlocking in medium term
The company has multiple levers to unlock significant value: (i) it is partially unwinding RELATIVE PERFORMANCE (%)
the capital structure of RHT, which we believe is inefficient, that will result in saving BT Stock Nifty
BSE
fees of ~INR2bn; (ii) it is demerging SRL, its 56% subsidiary which is India’s biggest Healthcare
organised diagnostics player which can unlock ~INR 57/share value. 1 month (2.2) (2.5) (0.7)

3 months 8.3 4.3 1.7
Outlook and valuations: Unlocking value; initiate with ‘BUY’ 12 months 0.6 6.4 (11.4)
We forecast hospital revenue CAGR of 16% with EBITDAC margin improving ~170bps to
drive ~21% EBITDAC CAGR over FY16‐19. We envisage free cash flow generation FY19
onwards to lead to re‐rating. We initiate coverage with ’BUY/SO’ and target price of
INR265 (SOTP value of INR 208/share for Fortis + INR57/share for SRL).
Deepak Malik
+91 22 6620 3147
deepak.malik@edelweissfin.com
Financials (INR mn)
Year to March FY16 FY17E FY18E FY19E Rahul Solanki
+91 22 6623 3317
Net Revenues (INR mn) 42,015 48,618 46,846 54,435 rahul.solanki@edelweissfin.com
EBITDAC (INR mn) 6,739 8,429 7,502 8,909
Archana Menon
EBITDAC margin (%) 15.8 17.1 15.8 16.1
+91 22 6620 3020
Adjusted Profit (INR mn) (8)
647 580 1,665 archana.menon@edelweissfin.com
Diluted P/E (x) NM 139.7 155.6 54.3

EV/EBITDA (x) 17.5 14.0 15.7 13.2
October 07, 2016
ROACE (%) 2.2 4.5 4.4 6.4
85
Healthcare
A bird’s eye view

High quality tertiary care infrastructure network
~35% bed capacity in high‐potential NCR market
Delhi has the highest per capita income level in the country and is growing at higher rate
than rest of India. Thus, owing to a large under‐served population and its affluence, NCR
market has high potential.

~50% of Fortis’ bed capacity is in North India. Of this, ~70% is in NCR. Its renowned hospitals
like Fortis Escorts Heart Institute, Delhi (FEHI), Fortis Memorial Research Institute, Gurgaon
(FMRI), Fortis Hospital, Noida, Fortis Rajan Dhall Hospital, Vasant Kunj, among others are
present in NCR.

Focus on asset‐light expansion and improvement in operating metrics
Calibrated, bolt‐on brownfield expansion can potentially double bed capacity
Fortis, post investing significantly in growing its business over the past several years, has
now sharpened focus on optimising the performance of its assets. While the current plan
entails increasing capacity by 40% to 5,065 beds by FY22 versus 3,615 owned beds currently,
Fortis could potentially double it to ~9,000 via brownfield expansion.

The company has shifted to the medical services model, which has enabled it to hive off the
capital intensity of the business to Religare Health Trust (RHT)—a REIT listed in Singapore—
and unlock value of its core competence—medical services.

Chart 1: Plans to increase bed capacity by 40% over next 6 years
Number of owned beds Shalimar Bagh ‐370
beds (FY21E) and
210 5065 FMRI ‐ 493 beds
Leased 290
Owned 365 Leased (FY21) to be owned
11% 14% 445
140 9%
3615
Owned
30%
RHT
61%
RHT
75%
FY16 FY17E FY18E FY19E FY20E FY21E FY22E


Sharpening focus on margin expansion
Fortis’ focus is to sweat its assets by optimising occupancy and mix to improve the margin
trajectory from low single digits currently to mid teens over the next 2 years. Hospital
EBITDAC to register CAGR of 19% during FY16‐21E. Established hospitals, FMRI, FEHI and
start up hospitals will contribute 56%, 30%, 10% and 3% of the incremental hospital
EBITDAC in this period.

Fortis Healthcare

Chart 2: Hospital EBITDAC to post CAGR of 19% during FY16‐21E
EBITDAC EBITDAC
EBITDAC movement‐ Hospitals (India)
margin 15% margin 17%
250 12,293
FMRI FEHI 2,174 741 FMRI
12% 8% 23%
+200 beds
+580bps margin
4,050
+50 beds
+400bps margin
Startups‐
+500bps margin
+210 beds
Ludhiana, FEHI Startups‐
5,078
Bangalore ‐ Established 9% Ludhiana,
Bangalore
+990
66%
beds
Established EBITDA loss
2%
81%
EBITDAC Established FMRI FEHI Startups‐ EBITDAC

(FY16) Ludhiana, (FY21E)
Bangalore

Partial unwinding of capital structure, which we believe is inefficient
In February 2016, Fortis announced that it will acquire 51% economic interests of Fortis
Hospotel (FHTL). BT fees have increased over the years and Fortis currently pays an yield in
excess of 13‐14% on the capital it has conserved by switching to this model. This has
rendered the structure inefficient as rather than paying such a high yield, it could source
capital at <10‐12% in the Indian market.

Unlocking value of diagnostics business (SRL)
Fortis owns 56% stake in SRL, India’s largest organised diagnostic player with ~6‐7% share of
the overall market and one of the best walk‐in ratios. Fortis is unlocking SRL’s inherent value
by demerging the business into a separate listed entity. This will unlock significant value for
shareholders—~INR57/share in our estimate.

While we do not envisage significant free cash generation for the hospital business in the
near term, it will kick start FY19 onwards.

Chart 3: Free cash flow to kick start FY19 onwards
Free cash flow (INR mn) 3,074
1,756
229
(1,407) (1,764)
(3,166) (3,328)
(5,389)
(7,471)
(12,192)
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E

Note:*FY18 onwards Free cash flow only pertains to the Hospital business (excluding SRL)
Healthcare
Outlook and valuations: Unlocking value; initiate with ‘BUY’
onwards to lead to re‐rating. We initiate coverage with ’BUY/SO’ and target price of INR265
(SOTP value of INR 208/share for Fortis + INR57/share for SRL).

Table 1: SOTP valuation
Valuation Mar‐18
Hospitals
Multiple 18
EBITDAC (FY19E) 8,909
EV 160,371
Less: net debt (Mar '18E) 22,185
Market Cap (Mar '18E) (A) 138,186
SRL
Multiple 20
EBITDA (FY19E) 2,678
EV 53,551
Less: net debt (Mar '18E) ‐
Market Cap (Mar '18E) 53,551
Fortis Share (56%) (B) 29,989
RHT (28% stake)
Market cap 40,965
External shareholder's stake (72%) (C) 29,495
Total
Market cap (A)+(B)‐(C) 138,679
no of shares 523
Target Price 265
Fortis Healthcare


High quality tertiary care infrastructure network
Delhi has the highest per capita income level in India and is growing at higher rate than
rest of the country. ~50% of Fortis’ bed capacity is in North India of which ~70% is in
NCR, that has high potential owing to a large, affluent, but under‐served population.
~50% of Fortis’ bed capacity is in North India. Of this, ~70% is in NCR. Its renowned
hospitals like Fortis Escorts Heart Institute, Delhi (FEHI), Fortis Memorial Research
Institute, Gurgaon (FMRI), Fortis Hospital, Noida, Fortis Rajan Dhall Hospital, Vasant
Kunj, among others are present in NCR.

~30% bed capacity in high‐potential NCR market
~30% of Fortis’ operational bed capacity is in NCR across 9 hospitals. Of the company’s top
10 hospitals, 4 in NCR contribute ~45% to revenue. Its renowned hospitals like Fortis Escorts
Heart Institute, Delhi (FEHI), Fortis Memorial Research Institute, Gurgaon (FMRI), Fortis
Hospital, Noida, Fortis Rajan Dhall Hospital, Vasant Kunj, among others are present in NCR.
FMRI is the company’s flagship facility with one of the highest ARPOBs in the country and
has ~300 operational beds with a potential to go to approximately 1,000 beds.

The NCR has some of the most affluent neighbourhoods in India with considerable spending
power. The region has one of the densest populated areas in the country with a large
unaccounted floating population as well. However, the region’s bed density is considerably
low compared to global standards. Hence, there is a vast untapped market within NCR,
which offers significant potential for healthcare providers.

Chart 4: NCR—One of the most affluent territories in India, but under‐served despite capacity addition
Per capita income (2014) Rate of growth of per capita income in
250,000 Delhi and in India
22
200,000 Average growth rate
19 (2008‐2015)
(INR)
150,000 Delhi‐ 14%

India‐ 12%
16
100,000
(%)
50,000 12
0 9
Odisha
Gujarat
Maharashtra
Punjab
West Bengal
Delhi
Assam
India
Bihar
6
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Delhi India

Source: Source: Press Information Bureau, Government, Economic survey of Delhi, Department of
Health Services, World Bank WDI, Edelweiss research

Healthcare
Focus on asset‐light expansion, improvement in operating metrics
Fortis is planning to ramp up its bed capacity by ~40% through brownfield expansion
and this will be done via asset light route because of the REIT structure adopted by the
company. Accretion of beds and focus on sweating assets will improve occupancy and
mix of the hospitals business, thereby boosting Fortis’ growth and profitability during
FY17‐21. We forecast Hospital EBITDAC to clock 19% CAGR during FY16‐21.

Calibrated, bolt‐on brownfield expansion can potentially double bed capacity
Fortis, post investing significantly in growing its business over the past several years, has
now sharpened focus on optimising the performance of its assets. Incremental capacity
addition planned will be only through brownfield expansion by adding new blocks, floors,
medical programmes and beds to existing hospitals. These could comprise specific units as it
bolsters its medical programmes focusing on oncology, mother & child health and organ
transplantation, besides introduction of precision technologies and treatment options,
including minimal invasive techniques and robotics. Beds will be added at high occupancy
hospitals. While the current plan entails increasing capacity by 40% to 5,065 beds by FY22
versus 3,615 owned beds currently, Fortis could be potentially double it to ~9,000 via
brownfield expansion.

The company has shifted to the medical services model, which has enabled it to hive off the
capital intensity of the business to Religare Health Trust (RHT)—a REIT listed in Singapore—
and unlock value of its core competence—medical services. This asset light model leverages
the company’s core competence in clinical excellence while providing a perpetual source of
long‐term capital. It brings knowledge and core strengths in hospital operations &
management, clinical talent, brand recognition and brand salience to the table. Under the
O&M arrangement, while the partner will make capital investments, Fortis will operate and
run the facility.

Chart 5: ~74% of capex during FY17‐21 to be done at established units
+990 beds Total Capex (FY17E‐FY21E)
9,513
Owing to RHT, Fortis will have to
spend only about INR3mn/ bed
for capacity expansion, balance
will done by RHT.
+210 beds +200 beds
+50 beds
1,457 1,125
754
Established FMRI FEHI Startups‐ Ludhiana,
Bangalore

Fortis Healthcare

Chart 6: Plans to increase bed capacity by 40% over next 6 years
Number of owned beds Shalimar Bagh ‐370
beds (FY21E) and
210 5065 FMRI ‐ 493 beds
Leased 290
Owned 365 Leased (FY21) to be owned
11% 14% 445
140 9%
3615
Owned
30%
RHT
61%
RHT
75%
FY16 FY17E FY18E FY19E FY20E FY21E FY22E


Established facilities
Keeping FMRI, FEHI and the start up hospitals like Ludhiana and Bangalore Sacred Heart
aside, Fortis has a number of established facilities like its major facilities in Noida and Jaipur.
Over FY16‐21, Fortis will add 990 beds across these facilities, increasing capacity at CAGR of
6% while keeping steady occupancy of ~75‐76%. We estimate ARPOB to post CAGR of 5%
and combination of this with bed addition to drive revenue CAGR of 12%. These established
facilities will contribute ~62% of FY21 revenue versus 73% as of FY16.

Startups: Ludhiana, Bangalore Sacred Heart
Fortis has a couple of new facilities at Ludhiana and Bengaluru that have combined 113 beds.
These facilities will have ~200 beds addition during FY16‐21, with steady occupancy
between 52% and 55% and ARPOB CAGR of 3%. We estimate revenue CAGR of 29% at these
startup hospitals to contribute ~9% to Fortis’ hospitals revenue by FY21 versus 5% as of FY16.

Fortis’ Super Specialty facilities in NCR hold significant potential
Fortis Memorial Research Institute, Gurgaon (FMRI)
FMRI, the flagship hospital of Fortis, was launched in May 2013. This is a multi‐super
specialty, quaternary care hospital with international faculty, reputed clinicians, including
super‐sub‐specialists and specialty nurses, supported by cutting‐edge technology. In a short
span, it has turned into the largest revenue contributor and superior ARPOB generating
hospital across the Fortis network, clocking 18% revenue surge to INR4.13bn during FY16.
While this hospital has ~300 operational beds currently, it has the capacity to be scaled up
to ~1,000 beds.

Over FY16‐21, we estimate Fortis to add 210 beds across this facility, increasing capacity at
CAGR of 12% while improving occupancy from ~61‐62% currently to >80%. We estimate
ARPOB to post CAGR of 7%, and combination of this with bed addition to drive revenue
CAGR of 28%. FMRI will contribute ~19% to FY21E revenue versus 12% as of FY16.

Fortis Escorts Heart Institute (FEHI), New Delhi
FEHI is a reputed facility for cardiac care with the distinction of having done some path
breaking work over the past 25 years. It is globally recognised as a world‐class centre,
providing latest technology in cardiac bypass surgery, interventional cardiology, non‐
Healthcare
invasive cardiology and pediatric cardiology & cardiac surgery. The hospital is also backed by
the most advanced laboratories performing a complete range of investigative tests in
Nuclear Medicine, Radiology, Biochemistry, Haematology, Transfusion Medicine and
Microbiology. It has recently hired one of the most renowned specialist surgeons in
orthopedics and added Neurology and Gastrology specialties. Fortis believes that this
development will drive significant revenue growth and margin improvement over the next
2‐3 years.

Over FY16‐21, we estimate Fortis to add just 50 beds across this facility, increasing capacity
at CAGR of 3% while improving occupancy from ~67‐68% currently to ~80%. We estimate
ARPOB to post CAGR of 7% and a combination of this with bed addition to drive revenue
CAGR of 16%. FEHI will contribute ~10% to FY21E revenue, same as FY16.

Chart 7: Revenue, ARPOB and occupancy trend across FMRI and FEHI
15,000 FMRI 82 90 7,500 FEHI 100
89
75 82 80
68 70 67
72 75
12,000 62 61 63 72 6,000 80
67 68 68
50
9,000 54 4,500 60
(INR mn)
(INR mn)
38 35
30 32
6,000 25 27 28 36 3,000 40
18 21 23 25
16 18 19 20 22
14
3,000 6 18 1,500 13 20
0 0 0 0
FY17E
FY18E
FY19E
FY20E
FY21E
FY17E
FY18E
FY19E
FY20E
FY21E
FY13
FY14
FY15
FY16
FY13
FY14
FY15
FY16
Revenue ARPOB (mn/year) Occupancy (%) Revenue ARPOB (mn/year) Occupancy (%)


Sharpening focus on margin expansion
Fortis’ focus is to sweat its assets by optimising occupancy and mix to improve the margin
trajectory from low single digits currently to mid teens over the next 2 years. The company’s
beds are on the cusp of maturity. Management believes, the current overall occupancy level
of ~72% could jump to ~76% over the next 3 years driven by market share gains. It is also
focusing on increasing ARPOB by focusing on high‐end healthcare services, reducing
inpatients’ ALOS and improving utilisation rates. Fortis is optimising various mid‐line costs,
for instance by centralising some of the services.

Established facilities
Across established facilities, we expect EBITDAC margin to remain flat at ~16%. Calibrated
bed expansion in these established facilities will drive 15% CAGR over FY16‐21E and
contribute ~56% of incremental EBITDAC for the hospitals business in the same period.
While these facilities contributed ~81% to Fortis’ hospitals EBITDAC as of FY16, we estimate
them to contribute ~66% by FY21.

Fortis Healthcare

Fortis Memorial Research Institute, Gurgaon (FMRI)
At FMRI, we expect EBITDAC margin to improve from ~15% to ~20% (up 500bps). Bed
expansion combined with margin improvement will drive 35% CAGR over FY16‐21E and
While FMRI contributed ~12% to Fortis’ hospitals EBITDAC as of FY16, we estimate it to
contribute ~23% by FY21.

Fortis Escorts Heart Institute (FEHI), New Delhi
We estimate FEHI’s EBITDAC margin to improve from ~12% to ~16% (up 400bps). Marginal
bed expansion combined with margin improvement will drive 23% CAGR over FY16‐21E and
FEHI’s contribution to hospital business EBITDAC will remain flat at ~8‐9%.

Startups: Ludhiana, Bangalore Sacred Heart
At startup hospitals, we estimate EBITDAC margin of ~580bps to ~3%. Bed expansion
combined with margin improvement will drive turnaround of these hospitals over FY16‐21.
We estimate them to contribute ~3% of incremental EBITDAC for hospitals business during
FY16‐21. FEHI’s contribution to hospital business EBITDAC will remain minuscule at just ~2%.

Chart 8: Hospital EBITDAC to post CAGR of 19% during FY16‐21E
EBITDAC EBITDAC
EBITDAC movement‐ Hospitals (India)
margin 15% margin 17%
FEHI 250 12,293

FMRI 2,174 741 FMRI
12% 8% 23%
+200 beds
+580bps margin
4,050
+50 beds
+400bps margin
Startups‐
+500bps margin
+210 beds
Ludhiana, FEHI Startups‐

5,078
Bangalore ‐ Established 9% Ludhiana,
Bangalore
+990
66%
beds
Established EBITDA loss
2%
81%
EBITDAC Established FMRI FEHI Startups‐ EBITDAC

(FY16) Ludhiana, (FY21E)
Bangalore

Table 2: Faster turnaround of recent greenfield facilities
Launch EBITDAC Breakeven Current EBITDAC Age of the
Facility Year (months) Margin (%) facility (years)
Jaipur 2007 16 25 9
Shalimar Bagh 2010 10 25 6
FMRI, Gurgaon 2013 5 15 3
Ludhiana 2014 8 0 2
Note: EBITDAC refers to EBITDA before net business trust costs & Corporate Costs

Healthcare
Chart 9: India hospitals business
90,000 20.0
72,000 18.0
54,000 16.0
(INR mn)
(%)
36,000 14.0
18,000 12.0
0 10.0
FY17E
FY18E
FY19E
FY20E
FY21E
FY12
FY13
FY14
FY15
FY16
Revenue EBIDTAC EBITDAC margin


Table 3: Maturity profile
Net Revenue EBITDAC EBITDAC
Contribution Operational ARPOB Occupancy Contribution Margin
Age Profile (%) Beds (INR mn) (%) (%) (%)
10 Years above* 43.0 44.0 11.8 74.0 46.0 23.1
5‐10 Years 31.0 30.0 12.1 77.0 35.0 24.7
3‐5 Years 11.0 13.0 11.1 73.0 10.0 19.4
0‐3 years 15.0 13.0 17.8 56.0 9.0 12.4
Total 100.0 100.0 12.4 72.0 100.0 21.6
Note: *Excludes FEHI and the facilities that have been exited during the year Above data basis
YTD Dec 2014
Fortis Healthcare


Fortis has multiple levers to unlock significant value: (i) it is partially unwinding the

inefficient capital structure of RHT, that will result in saving BT fees of ~INR2bn; (ii) it is

demerging SRL, which can unlock ~INR 57/share value.

Partial unwinding of capital structure, which we believe is inefficient
In May 2012, Fortis switched from the conventional model of owning capital assets to the
more contemporary REIT model. The rationale was to focus on its core competence of
medical services. It transferred a number of its facilities, including capital assets to Religare
Health Trust (RHT). The aim was to shift towards a more asset‐light, cost‐effective business
model to strengthen operations and enable the company to focus on its core business of
medical healthcare services, besides deleveraging its balance sheet. Fortis listed RHT in
October 2012 on Singapore bourses acting as its primary sponsor and diluted its stake from
100% to ~28%, raising SGD510mn. In lieu of using RHT’s capital assets, Fortis pays fees to
the former (~11% of total sales during FY16), which is a combination of fixed and variable
components. Owing to RHT, Fortis will have to spend only about INR3mn/ bed for capex.

However, BT fees have increased over the years and Fortis currently pays an yield in excess
of 13‐14% on the capital it has conserved by switching to this model. This has rendered the
structure inefficient as rather than paying such a high yield, it could source capital at <10‐
12% in the Indian market.

FHTL acquisition reduces BT fees, thereby boosting EBITDA
In February 2016, Fortis announced that it will acquire 51% economic interest of Fortis
Hospotel (FHTL), a subsidiary of RHT, for INR9.7bn. FHTL comprises Fortis Memorial
Research Institute (FMRI) and Fortis Hospital Shalimar Bagh. Of the current ~INR4.7bn BT
cost to Fortis, ~INR2bn was owing to FHTL. RHT’s profitability will hence reduce, implying
the share of associate to Fortis will fall by ~INR200mn. However, as a result of 100%
consolidation of FHTL, minority interest for Fortis will also marginally increase. As a net
impact of this transaction, INR2bn will be added to EBITDA and EPS will increase marginally.

Chart 10: Reduction of BT service fee will boost EBITDA
15,000
12,000
9,000
(INR mn)
6,000
3,000
0
FY16 FY17E FY18E FY19E FY20E FY21E
EBITDAC BT Service Fee EBITDA

Healthcare
Unlocking value of diagnostics business (SRL)
Fortis owns 56% stake in SRL, India’s largest organised diagnostic player with ~6‐7% share of
the overall market and one of the best walk‐in ratios. Fortis is unlocking SRL’s inherent value
by demerging the business into a separate listed entity. This will unlock significant value for
shareholders—~INR57/share in our estimate. Organised diagnostics players have created
significant value for shareholders recently. Given the macro fundamental of the healthcare
industry in India, management envisages robust growth opportunity for SRL in the
foreseeable future. Ergo, the company believes, for the next phase of growth it would be
strategically apt to restructure SRL into a separate entity to enable it to move forward
independently with greater focus.

SRL has a network of 330 labs with a pan‐India footprint (4 reference labs and 108 labs in
hospitals and over 7,300 collection points that feed its satellite and reference labs).

Chart 11: SRL—Largest organised player Chart 12: Continuously rationalising imaging business
8,000 30.0 100.0
6,400 25.0 80.0
60.0
4,800 20.0
(INR mn)
(%)
(%)
40.0
3,200 15.0
20.0
1,600 10.0
0.0
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
0 5.0
FY12 FY13 FY14 FY15 FY16
Revenue EBITDA EBITDA margin (%) Imaging Lab medicine

Chart 13: Customer revenue mix Chart 14: Geographical revenue mix
International
International
3%
Wellness 2%
4% South
Walk‐in 17% North
Direct client 33% 31%
16%
Hospitals West
20% 31%
Collection East
centers 19%
24%
Fortis Healthcare

FY16 numbers unless
mentioned, INR mn
Revenue 7,913 2,312 8,980
ROCE (%) 44 24 12
FY18 P/E 43 37 N/A
FY19 P/E 33 29 N/A

Table 5: SRL key financials (Standalone)
P&L FY16 FY17E FY18E FY19E FY20E FY21E
Revenue 8,980 9,878 10,965 12,171 13,631 15,403
EBITDA 1,820 2,143 2,412 2,678 3,363 3,800
EBITDA margin (%) 20 22 22 22 25 25
Dep 500 600 600 600 600 600
EBIT 1,320 1,543 1,812 2,078 2,763 3,200
PBT 1,320 1,543 1,812 2,078 2,763 3,200
tax (33%) 436 509 598 686 912 1,056
PAT 884 1,034 1,214 1,392 1,851 2,144
Exiting non‐core assets
Fortis is evaluating and rationalising its underperforming operations. The company has
already exited all international assets with the divestment of Singapore hospitals in 2015. It
has also exited low‐margin facilities like Moradabad, Mysore and Agra, which were
contributing mere ~2% to revenue with ~5% of beds. Going forward, the company aims to
exit non‐core assets worth almost INR5bn and prune debt that is likely to escalate due to
the FHTL transaction. The company has land parcels in Ahmedabad and Delhi which it
intends to sell, in addition to its 29% stake in the Lanka hospital (worth ~INR2.25bn).
Healthcare
Valuations

While we do not envisage significant free cash generation for the hospital business in the
near term, it will kick start FY19 onwards. Owing to the FHTL transaction, Fortis’ debt will
spike temporarily by ~INR11bn for a year or so, until it hives off non‐core assets. Though
conversion of INR5.6bn FCCBs during FY18 will lead to a fully diluted base of 523mn shares,
it will reduce interest cost.

Chart 15: Free cash flow to kick start FY19 onwards
Free cash flow (INR mn) 3,074
1,756
229
(1,407) (1,764)
(3,166) (3,328)
(5,389)
(7,471)
(12,192)
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E
Note:*FY18 onwards Free cash flow only pertains to the Hospital business (excluding SRL)

Fortis is a collective of: (i) Hospitals business: with ~4,650 operational beds (of which 3,615
are own beds) across India, Fortis is the 3rd largest hospital chain in the country after Apollo
and Narayana; (ii) 56% stake in SRL, India’s largest diagnostics chain; and (iii) 28% stake in
RHT (Religare Health Trust), a REIT listed in Singapore. It has traded at inferior valuations
versus peers owing to suboptimal operating metrics across parts of the business. The
company is now, we believe, on the cusp of significant value unlocking for shareholders.

onwards to lead to re‐rating. We initiate coverage with ’BUY/SO’ and target price of INR265
(SOTP value of INR 208/share for Fortis + INR57/share for SRL).

Fortis Healthcare

Table 6: SOTP valuation
Valuation Mar‐18
Hospitals
Multiple 18
EBITDAC (FY19E) 8,909
EV 160,371
Market Cap (Mar '18E) (A) 138,186
SRL
Multiple 20
EV 53,551
Less: net debt (Mar '18E) ‐
Fortis Share (56%) (B) 29,989
RHT (28% stake)
Market cap 40,965
External shareholder's stake (72%) (C) 29,495
Total
Market cap (A)+(B)‐(C) 138,679
no of shares 523
Target Price 265
Healthcare
Key Risks

Success of business depends on network expansion
Historically, Fortis’ business growth has been primarily driven by establishing new centres
and hospitals through various partnership arrangements and acquisitions. It expects these
to continue to be key drivers of future growth. Any hiccups in expansion of network will
have adverse impact on growth.

Subsidiaries may be unable to sustain profitability
Some of the company’s subsidiaries have reported net losses in recent years and may be
unable to achieve or sustain profitability in the future. This may materially and adversely
impact their business and prospects.

The success of Fortis’ business hinges on its ability to attract and retain leading specialist
physicians. The company’s ability to attract and retain these specialist physicians and nurses
depends, among other things, on the commercial terms that it offers them, reputation of its
centres & hospitals and exposure to technology and research opportunities that it offers.

Near‐term upfront investments could suppress margin if infrastructure costs continue to
rise.
Fortis Healthcare

Company Description
Fortis started its journey with first hospital in 2001 in North India and during the course of
15 years has grown to become a leading healthcare service provider with presence in day
care specialty, diagnostics and tertiary & quaternary care. These include the world
renowned Escorts Heart Institute and the erstwhile Wockhardt facilities. Its flagship, the
Fortis Memorial Research Institute (FMRI), Gurgaon, has become a landmark in the region
for its exceptional clinical services and patient care.

As of FY16, the company has a network of 45 healthcare facilities (including projects under
development), with approximately 4,600 operational beds (of which ~3,600 are own beds
excluding associates and O&M) and the potential to reach over 9,000 beds. In India, the
company is one of the largest private healthcare chains comprising a network of 42
healthcare facilities, including 30 operating facilities, 6 satellite & command centres located
in public & private hospitals and 6 healthcare facility projects which are under development
or are greenfield land sites. Fortis’ diagnostics business SRL has a presence in over 600 cities
& towns, with an established strength of 314 laboratories including 161 self‐operated
laboratories, 108 laboratories inside hospitals including 27 labs located in Fortis’ healthcare
facilities, 18 wellness centres and 3 international laboratories. It also has over 7,200
collection points, which include 98 collection centers that are owned and 61 collection
centres at international locations.

Table 7: Specialty mix improving
Specialty Revenue (%) FY12 FY13 FY14 FY15 FY16
Cardiac Sciences 35.0 35.0 31.0 28.0
25.0
Ortho 8.0 8.0 8.0 9.0
9.0
Renal 4.0 4.0 6.0 7.0
7.0
Neuro 7.0 6.0 8.0 8.0
8.0
Gastro 3.0 4.0 4.0 4.0
4.0
Onco 4.0 4.0 4.0 5.0
5.0
Pulmo 1.0 2.0 2.0 2.0
2.0
Gynae 4.0 4.0 4.0 5.0
5.0
IPD others 18.0 17.0 17.0 16.5
18.0
OPD others 16.0 16.0 16.0 15.5
17.0

Healthcare
Table 8: Fortis—Network of hospitals and healthcare facilities
Hospital Model FY16
No of beds (excluding O&M arrangements)
FEHI‐ Escorts Heart Institute and Research Centre ‐ Delhi Owned 310
Seshadripuram, Bangalore Owned 53
Rashbehari Road, Kolkata (FHKI) Owned 53
Ludhiana 1, Punjab Owned 75
Gurgaon, Haryana‐ FMRI Operated ‐RHT 283
Fortis Hospital, NOIDA Operated‐RHT 191
Fortis Escorts Hospital, Jaipur Operated‐RHT 245
BG Road, Begaluru Operated‐RHT 255
Mulund, Mumbai Operated‐RHT 261
Shalimar Bagh, New Delhi Operated‐RHT 200
Anandpur, Kolkata Operated‐RHT 190
Fortis Hospital, Mohali Operated‐RHT 344
Fortis Escorts Hospital, Faridabad Operated‐RHT 210
Fortis Escorts Hospital, Amritsar Operated‐RHT 153
Fortis Malar Hospital, Chennai Operated‐RHT 167
Kalyan, Mumbai Operated‐RHT 49
Escorts Hospital, Raipur Operated 40
Ashlok Hospital Operated 27
Fortis La Femme, GK ‐ II, New Delhi Leased 38
Cunningham Road, Bengaluru Leased 118
Kangra, Himachal Pradesh Leased 62
RENKARE,Greater Kailash, Part‐I, New Delhi Leased ‐
Chirag Enclave,New Delhi Leased 22
Hiranandani Hospital, Vashi, Mumbai Leased 138
Rajajinagar RHT Owns the Hospital as well as its operations 48
Nagarbhavi RHT Owns the Hospital as well as its operations 45
Sacred Heart, Richmond Road, Bangalore Leased 38
Total no of beds (excluding O&M arrangements) 3,615
Total no of beds (under O&M arrangements) 683
Total 4,298
Associates 350
Total no of beds 4,648

Fortis Healthcare

Table 9: Management overview
Malvinder Mohan Executive Chairman Mr. Malvinder Singh incubated and established Fortis Healthcare Limited
Singh (Fortis) and SRL, in the late 1990’s. Previously, Malvinder was Chairman, MD
and CEO of Ranbaxy Laboratories. He is an Alumnus of the Doon School and
graduated in Economics Honours from St Stephens College, Delhi University. He
went on to earn his MBA from the prestigious Fuqua School of Business, Duke
University, USA.
Dr. Shivinder Mohan Non Executive Vice Dr. Shivinder Singh incubated and established Fortis Healthcare Limited
Singh Chairman (Fortis) and SRL. He has now relinquished his executive responsibilities at
Fortis in order to pursue his inner calling, to offer Sewa at Beas. Previously, he
was executive Vice Chairman at Fortis.
Bhavdeep Singh CEO Mr Bhavdeep Singh has over 25 years of experience. He has held senior
executive roles in HR, Retail and Healthcare. Mr Singh attended Pace University
and completed several certified courses in Leadership and Executive
Management from premier institutions such as the Harvard Business School,
Cornell University, University of Hartford, Dial Institute of Management and St.
Joe’s University in the United States.
Daljit Singh President Daljit Singh has led the Company’s strategy and organizational development
functions and has held the office of CEO. He has over 39 yrs of management
experience. He is on the Steering Boards constituted by the World Economic
Forum to guide two major Global projects: “Scenarios for Sustainable Health
Systems” and “The Healthy Living Charter”. He is also on the Forum’s Advisory
Board on “The Economic Burden of Non Communicable Diseases in India”. A
graduate from the Indian Institute of Technology, Delhi, and Mr. Singh was a
Commonwealth Scholar to the Senior Management Programme at the
Manchester Business School in 1995.
Gagandeep Singh Bedi Group Chief Financial Mr. Gagandeep Singh Bedi holds a Bachelor’s degree in Commerce from Delhi
Officer University and is a Chartered Accountant from the Institute of Chartered
Accountants of India. He has over 18 years of wide experience in the areas of
Finance, Total Quality Management, leading a business and a global
transformation program. Mr. Bedi joined Fortis Healthcare in 2011 from
Philips Healthcare, Netherlands.


RHT is the first business trust listed on Singapore Exchange Securities Trading with India
based healthcare assets. It has a large portfolio of strategically located clinical
establishments and operating hospitals across India—12 clinical establishments, 4 greenfield
clinical establishments and 2 operating hospitals. Fortis has granted RHT a Right of First
Refusal over the clinical establishments that it owns. RHT’s policy is to distribute at least
90% of its distributable income. Currently, it distributes 100% of the distributable income.
For FY17, RHT intends to distribute 95% of its distributable income and retain 5% to fund
future capital expenditure for expansion or other growth initiatives.

Healthcare
Chart 16: Yield of 8% over past 4 years Chart 17: Consistent growth in operating beds since listing
7,500 4,000
6,000
3,200
3,200
(INR mn)
4,500 2,908
2,607 2,629
(Number of beds)
3,000
2,400 2,252
1,500
1,706
0
1,600
(annualized)
(annualized)
FY14
FY15
FY16
FY13
FY17
800
Base fee Variable fee Hospital income Other income 0

IPO FY14 FY15 FY16 FY17E FY18E
Chart 18: FHTL’s contribution to RHT portfolio (post FHTL disposal)
% Valuation % Revenue
Shalimar Shalimar
Bagh Bagh
9% 9%
Gurgaon
Gurgaon 15%
19%
Others
72% Others
76%
Chart 19: Yield of 8% over past 4 years Chart 20: Distributable income (SGD mn)
11.0 80
10.0 64 6% (2%)
25%
9.0 8.4 48 4%
8.1
(%)
(SGD mn)
7.9
8.0 7.5 32
7.3
7.0 16
6.0 0
(annualized)
(annualized)
(annualized)
(annualized)
FY14
FY15
FY16
FY14
FY15
FY16
FY13
FY17
FY13
FY17

Fortis Healthcare

Through the dividends distributed by RHT, INR2.3bn will flow back to Fortis by virtue of its
28% holding in RHT. This implies net cash outflow of INR7.4bn for 51% economic interest in
FHTL. RHT will continue to own 49% equity and economic interests in FHTL. The latter’s
standalone ‘other income’ will dip from ~INR800mn to ~INR 400mn on consolidated level
owing to the intra‐company transaction. This is owing to an INR9bn NCD asset that earns 9%
interest, partly from RHT and partly from Fortis. Fortis will also consolidate 100% of FHTL’s
INR4.3bn compulsory convertible debenture and Fortis’ depreciation will rise by INR350mn.

Fig 1: Change of structure in RHT/ FHTL
Pre‐transaction structure Post‐transaction structure

Source: RHT

Fig 2: SRL’s history


Healthcare
Table 10: Composite scheme of arrangement for demerger of SRL
Step Rationale Consideration
Transfer of the hospital business of To house the hospital business under Fortis Healthcare to pay a cash
Fortis Malar to Fortis Healthcare by way one entity, that is, Fortis Healthcare consideration to Fortis Malar of INR
of slump sale. Fortis Malar to retain its 430mn
existing diagnostic business
Demerger of business undertaking To house the Diagnostic business under Fortis Malar to allot its shares to
comprising the diagnostic business in one entity, that is, Fortis Malar shareholder of Fortis Healthcare in the
Fortis Healthcare to Fortis Malar share entitlement ratio of 0.98:1
Merger of SRL into Fortis Malar. Name of To house the entire diagnostic business Fortis Malar to allot its shares to
Fortis Malar to be changed to SRL Ltd. directly under Fortis Malar shareholders of SRL (excluding itself) in
the exchange ratio of 10.8:1


Fig 3: Change of structure
Pre‐transaction structure Post‐transaction structure

Note: *Fully diluted shareholding assuming full FCCB conversion
^Fully diluted shareholding assuming all CCPS conversion
^^Non‐promoter shareholders of SRL include Private Equity
shareholders of SRL, Other Financial institution/ corporate entity shareholders of SRL
Note: *Fully diluted shareholding assuming full FCCB conversion
^Public shareholders of SRL include Private Equity shareholders of SRL, Other Financial institution/ corporate entity shareholders of SRL and
public shareholders of FMHL
Fortis Healthcare

Financial Snapshot

Chart 21: Steady revenue growth… Chart 22: ….with some improvement in EBITDAC margin
17.5
80,000
17.1
17.0 16.8
64,000
16.7
48,000 16.5
(INR mn)
(%)
32,000 16.0 15.8 16.1
15.8
16,000 15.5
0 15.0


Chart 23: … will drive EBITDAC CAGR of ~13% Chart 24: Ramp up in RoCE
14,000
12.0
10.6
11,200
10.0
8.5
8,400
(INR mn)
8.0
6.4
(%)
5,600
6.0
4.4
4.5
2,800
4.0
2.2
0 2.0


Healthcare
GDP (Y‐o‐Y %) 7.4 7.9 8.3 8.3 Gross Revenues 42,015 48,618 46,846 54,435
Inflation (Avg) 4.8 5.0 5.2 5.20 Net revenues 42,015 48,618 46,846 54,435
Repo rate (exit rate) 6.75 6.00 6.00 6.0 Other operating income 636 700 770 847
USD/INR (Avg) 65.0 67.5 67.0 67 Total operating expenses 40,482 44,589 43,113 49,472
Company Materials cost 9,572 9,864 9,285 11,056
Number of beds (own) 3,615 3,755 4,200 4,565 Employee cost 8,260 9,499 10,449 11,494
ARPOB (in mn/year) 13.7 14.9 16.0 17.1 Other expenses 22,650 25,226 23,379 26,922
Occupancy rate 72 73 72 72 Depreciation 2,295 2,865 2,428 2,460
EBITDAC margin (%) 16 17 16 16 EBITDA 2,169 4,729 4,502 5,809
tax rate (%) 484 20 20 20 EBITDAC 6,739 8,429 7,502 8,909
EBIT (125) 1,864 2,074 3,349
Add: Other income 1,470 1,184 1,094 1,174
Profit before tax (236) 771 531 1,886
Less: Provision for Tax 466 154 106 377
Less: Minority Interest 213 500 300 300
Add: Share of profit from assoc. 656 456 456 456
Reported Profit (248) 572 580 1,665
Adjusted Profit (8) 647 580 1,665
Adjusted Basic EPS (0.0) 1.4 1.1 3.2
No. of Dil. shares outstanding 523 523 523 523
Adjusted Diluted EPS (0.0) 1.2 1.1 3.2
Staff costs 19.4 19.3 21.9 20.8
EBITDA margins 5.1 9.6 9.5 10.5
EBITDAC margins 15.8 17.1 15.8 16.1
Growth metrics (%)
Net Revenues 7.3 15.7 (3.6) 16.2
EBITDA 66.1 118.0 (4.8) 29.0
EBITDAC 17.1 25.1 (11.0) 18.8
PBT (85.2) (427.0) (31.1) 255.3
Adjusted Profit NA NA (10.2) 186.8
EPS NA NA (20.6) 186.8
Fortis Healthcare

Share capital 4,631 4,631 4,882 4,882 Operating cash flow 1,674 3,705 3,708 5,660
Reserves & Surplus 35,342 35,914 33,443 35,108 Financing cash flow (4,438) 9,923 (8,637) (2,337)
Shareholders' funds 39,973 40,545 38,325 39,990 Investing cash flow 2,210 (13,620) 1,165 (2,795)
Comp. convertible pref. shares 6,700 6,700 0 0 Net cash flow (554) 8 (3,764) 529
Minority interest 1,431 1,931 1,431 1,731 Capex (1,832) (13,620) (2,835) (2,795)
Long term borrowings 8,411 20,111 24,111 24,111 Dividend paid 6 0 0 0
Short term borrowings 5,187 5,187 5,187 5,187
Total Borrowings 13,598 25,298 29,298 29,298 Profitability & liquidity ratios
Long Term Liabilities & Provisions 1,043 1,205 1,164 1,351 Year to March FY16 FY17E FY18E FY19E
Deferred tax liability (net) (506) (506) (506) (506) Return on Avg. Equity (ROAE) (%) 0.5 2.7 2.1 4.8
Sources of funds 62,239 75,174 69,712 71,864 Pre‐tax ROACE (%) 2.2 4.5 4.4 6.4
Gross Block 17,900 28,655 25,561 25,896 Inventory days 24 23 25 22
Net Block 17,900 28,655 25,561 25,896 Debtors days 37 35 41 40
Intangible assets 21,866 21,866 17,866 17,866 Payble days 210 211 216 193
Total Fixed assets 39,766 50,521 43,428 43,763 Cash Conversion Cycle (149) (153) (151) (131)
Non current investments 10,784 10,784 10,784 10,784 Current Ratio 1.5 1.6 1.8 1.7
Other non‐current assets 6,927 7,829 8,094 9,476 Gross Debt/EBITDA 6.3 5.3 6.5 5.0
Cash and cash equivalents 7,369 7,377 7,113 7,642 Gross Debt/Equity 0.3 0.6 0.7 0.7
Inventories 619 649 610 727 Adjusted Debt/Equity 0.3 0.6 0.7 0.7
Sundry debtors 4,438 4,933 5,479 6,361 Net Debt/Equity 0.2 0.4 0.6 0.5
Short term Loans & advances 1,119 2,202 2,381 2,764 Interest Coverage Ratio (0.1) 0.8 0.8 1.3
Other Current Assets 792 970 1,428 1,658
Total current assets (ex cash) 6,968 8,753 9,899 11,511 Operating ratios
Trade payable 5,753 5,669 5,337 6,355 Year to March FY16 FY17E FY18E FY19E
Other Current Liab. & ST Prov. 3,823 4,421 4,268 4,956 Total asset turnover 0.7 0.7 0.6 0.8
Total current liabilities & prov. 9,576 10,090 9,605 11,310 Fixed asset turnover 1.0 1.1 1.0 1.2
Net current assets (ex cash) (2,609) (1,337) 294 200 Equity turnover 1.0 1.2 1.1 1.3
Uses of funds 62,239 75,174 69,712 71,864
Book Value per share (INR) 76 78 73 76 Valuation parameters
Free cash flow Adjusted Diluted EPS (INR) (0.0) 1.2 1.1 3.2
Year to March FY16 FY17E FY18E FY19E Y‐o‐Y growth (%) NA NA (20.6) 186.8
Reported Profit (248) 572 580 1,665 Adjusted Cash EPS (INR) 4.9 7.6 5.8 7.9
Add: Depreciation 2,295 2,865 2,428 2,460 Dil.Price to Earnings Ratio (P/E) (x) NA 139.7 155.6 54.3
Interest (Net of Tax) 3,716 1,821 2,109 2,109 Price to Book Ratio (P/B) (x) 2.3 2.2 2.4 2.3
Others (5,359) (3,185) (1,316) (604) Enterprise Value / Sales (x) 2.1 2.1 2.4 2.1
Less: Changes in WC (1,271) (1,631) 93 (30) Enterprise Value / EBITDA (x) 17.5 14.0 15.7 13.2
Less: Capex 1,832 13,620 2,835 2,795
Free cash flow (1,407) (12,192) (1,764) 229
Healthcare
Additional Data
Directors Data
Mr Malvinder Mohan Singh Executive Chairman Dr Brian William Tempest Non‐Executive director
Mr Harpal Singh Non‐Executive director Ms Joji Sekhon Gill Non‐Executive director
Ms Lynette Joy Hepburn Brown Non‐Executive director Mr Pradeep Ratilal Raniga Non‐Executive director
Dr Preetinder Singh Joshi Non‐Executive Director Mr Ravi Umesh Mehrotra Non‐Executive Director

Mr Shivinder Mohan Singh Non‐Executive Director

Auditors ‐ Deloitte,Haskins and Sells

Holding – Top10
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*in last one year
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INITIATING COVERAGE
Healthcare Global

HEALTHCARE GLOBAL
Singular bet on the promise of oncology tertiary care
Healthcare Global (HCG), a focused oncology player, is poised to benefit EDELWEISS 4D RATINGS
from strong growth in the therapy. Also, HCG’s hub and spoke model is at Absolute Rating BUY
the cusp of rapid EBITDA scale up as: (i) several of its comprehensive Rating Relative to Sector Outperformer
cancer centers are set to mature; and (ii) it has one of the best specialty Risk Rating Relative to Sector Low
mixes and is looking at enhancing its channel mix. Ergo, owing to strong Sector Relative to Market Overweight
therapy tailwind and EBITDA margin levers, HCG is positioned for robust
EBITDA growth. We initiate with ’BUY’ and TP of INR310.
MARKET DATA (R: NA, B: HCG IN)

CMP : INR 227
Leading oncology player with a unique Hub and Spoke model Target Price : INR 310
HCG is a concentrated bet on oncology, one of the most promising therapies that rely 52‐week range (INR) : 239 / 167
on institutionalised approach that boosts clinical outcomes for patients. It is the Share in issue (mn) : 85.1
leading Oncology player in India. The company has built a strong ‘Hub and spoke’ M cap (INR bn/USD mn) : 20 / 294
wherein it leverages its Bengaluru center of excellence hub for providing seamless Avg. Daily Vol.BSE/NSE(‘000) : 286.8
cancer care across the comprehensive cancer care center spokes across India. It has a
unique partnership approach that facilitates faster ROCE‐effective expansion. SHARE HOLDING PATTERN (%)
Current Q1FY17 Q4FY16
At the cusp of steady margin expansion Promoters * 24.6 24.6 24.6
HCG’s specialty mix is already rich versus others, and the company now seeks to MF's, FI's & BK’s 50.1 34.9 32.5
enhance its channel mix to both bolster growth (more international patients and FII's ‐ 15.2 15.8
growing daycare centres across Africa) and improve margins (less government Others 25.3 25.3 27.2
business). While EBITDA margin of existing facilities in FY16 stood at ~18% and is (% of share in issue)
improving, EBITDA break‐even for newer hospitals is now happening at relatively faster
pace than multispecialty hospitals (<12‐18 months). RELATIVE PERFORMANCE (%)
BSE
Stock Nifty
Milann, a tuck‐in bet on the high growth fertility therapy Healthcare
Fertility treatment is an emerging segment with high growth potential (IVF cycles could 1 month 6.7 (2.5) (0.7)
grow 9‐12x). HCG will partake in the upside from this therapy through Milann (holds 3 months 19.3 4.3 (1.7)
~50% stake), which operates a network of fertility centers. 12 months NA 6.4 (11.4)

Outlook and valuations: Soon maturing; initiate with ‘BUY’
We estimate revenue CAGR of 24% over FY16‐19 and EBITDA margin to remain flat,
translating into ~24% EBITDA CAGR. RoCE will improve by 320bps to 10%. We initiate
Deepak Malik
coverage with ’BUY/SO’ and TP of INR310 (18x FY19E EV/ EBITDA, 20% discount to 1‐ +91 22 6620 3147
year forward sector multiple). deepak.malik@edelweissfin.com

Financials Matrix (INR mn) Rahul Solanki
+91 22 6623 3317
Year to March FY16 FY17E FY18E FY19E rahul.solanki@edelweissfin.com
Net Revenues (INR mn) 5,759 7,214 9,186 10,988
EBITDA (INR mn) 897 1,099 1,344 1,714 Archana Menon
+91 22 6620 3020
EBITDA Margin (%) 15.4 15.1 14.5 15.4 archana.menon@edelweissfin.com
Adjusted Profit (INR mn) 75 101 98 281
Diluted P/E (x) 255.5 190.3 197.8 68.7

EV/EBITDA (x) 23.9 19.5 15.9 12.5 October 07, 2016
ROACE (%) 6.7 5.6 6.4 9.9
111
Healthcare
A bird’s eye view

Oncology is an under‐diagnosed, under‐served market with big
potential
There is a large gap between reported and real cancer incidence in India, as evident by
benchmarking against global figures. Lack of awareness and participation in screening
programs in India are significant contributory current factors for the relatively late stage of
the disease presentation and consequently low reported cancer incidences. The prevalence
of cancer in India is expected to increase from an estimated 3.9mn in 2015 to an estimated
7.1mn people by 2020. Reported cancer incidences in India are expected to jump from an
estimated 1.1mn in 2015 to 2.1mn by 2020.

HCG is a leading oncology player with a unique Hub and Spoke model
HCG is a unique Cancer specialist with a ‘Hub and Spoke’ model that provides
comprehensive services at the spoke and also leverages Bengaluru hub for higher end
procedures
HCG is a concentrated bet on oncology, one of the most promising therapies that rely on
institutionalized approach that boosts clinical outcomes for patients. It is the leading
Oncology player in India. The company has built a strong ‘Hub and spoke’ wherein it
leverages its Bengaluru center of excellence (COE) hub for providing seamless cancer care
across the comprehensive cancer care center spokes across India.

A unique partnership approach facilitates faster ROCE‐effective expansion
HCG enters into various types of partnership arrangements, mostly with other specialist
physicians and hospitals, to expand its network. These arrangements include setting up joint
venture (JV) companies or limited liability partnerships with partners, wherein partners have
minority ownership interest to establish new centers; and revenue or profit‐sharing
arrangements, wherein HCG shares a portion of the revenue or profit from the centre with
and/or pay a fixed fee to the partner. These arrangements contribute in reducing the time
taken to establish and ramp up its centers as it is able to benefit from the established clinical
practice and patient base of partners.

Aggressive leg of expansion between FY16‐19
During FY17/18, HCG has an aggressive plan to establish 8 new CCCs in India, and upgrade
its Bhavnagar multi‐specialty hospital into a CCC through addition of radiation and
chemotherapy. With these, HCG will have 26 CCCs across India, covering a mix of metros,
tier‐I towns and tier‐2 towns. HCG will employ incremental capital of INR 3.3bn for these
centers, out of the total INR4.2bn capex during FY17‐19. In terms of the clusters, ~51% of
the incremental capital employed will be in the West cluster, ~44% of it will be employed in
the Others cluster and ~5% will be employed in the East cluster. Amongst various clusters,
while the biggest cluster Karnataka will grow at revenue CAGR of 12%, while the fastest
growing cluster would be Maharashtra that will grow at 52% revenue CAGR.

Healthcare Global

Chart 1: Number of beds to increase at steady pace, Chart 2: Oncology revenue growth driven by smart
with rising maturity growth at both existing and new centers
Nagpur: 115 Jaipur: 69 15,000
Bhavnagar: 33
Vizag: 88 Borivali: 105 Kolkata: 50
Baroda: 69 Kanpur: 90 South 12,000
Mumbai: 32
2,983
2,400 3.5
2,631
9,000
2,317
(INR mn)
1,920 2.8
(Number of beds)
1,581
589
1,440 2.1 6,000
(INR bn)
4,529 24
960 1.4
3,000
5,248
6,030
6,868
7,640
8,501
480 57% 0.7
72% 60% 55% 57% 65%
0 0.0 0
>5 years <5 years Capex (INR bn) Existing centres New centres


At cusp of steady margin expansion
HCG’s specialty mix is already rich versus others, and the company now seeks to enhance its
channel mix to both bolster growth (more international patients and growing daycare
centres across Africa) and improve margins (less government business). It is at the cusp of
delivering strong EBITDA margins as its model achieves maturity, which implies only
calibrated investments would be needed to grow. While EBITDA margin of existing facilities
in FY16 stood at ~18% and is improving, EBITDA break‐even for newer hospitals is now
happening at relatively faster pace than multispecialty hospitals (<12‐18 months).

Chart 3: EBITDA bridge
EBITDA EBITDA Milann
CAGR 16% CAGR 18% Multispeciality 11%
hospitals 4%
Milann 177 2,455
1,340 42
Multispeciality 12%
hospitals 12%
897
Cancer Cancer
centres 81% EBITDA (FY16) Cancer Multispeciality Milann EBITDA (FY21E) centres 85%
centres hospitals


Milann, a tuck‐in bet on the high growth fertility therapy
Fertility, an emerging high growth area
Fertility treatment is yet another emerging segment in the Indian healthcare industry,
though currently relatively underdeveloped and fragmented. The number of couples going
for infertility treatment and evaluation in India is expected to increase from 270k in 2015 to
Healthcare
around 650‐700k annually in 2020. The number of IVF cycles performed in India is forecast
to increase from 100k in 2015 to an estimated 260k in 2020.

Milann, a network model in fertility therapy, attracts equity investment
HCG acquired 50% equity interest in BACC Health Care (BACC) in 2013, which has a network
of fertility centres under the Milann brand and helmed by a team of qualified and
experienced fertility specialists. Market fragmentation presents HCG the opportunity to
leverage its expertise to build Milann and establish it as a recognised speciality healthcare
brand across India. We expect Milann to grow revenue/ EBITDA at CAGR of 20% during
FY16‐21.

Outlook and valuations: Soon maturing; initiate with ‘BUY’
coverage with ’BUY’ and TP of INR310 (18x FY19E EV/ EBITDA, 20% discount to 1‐year
forward sector multiple).

Table 1: Valuation on FY19 financials
Valuation Mar‐18
Multiple 18x
EBITDA 1,714
EV 30,851
Market Cap 26,508
No of shares 85
Value per share 312

Healthcare Global


Oncology is an under‐diagnosed, under‐served market with large
potential
There is a large gap between reported and real cancer incidence in India, as evident by
benchmarking against global figures. Lack of awareness and participation in screening
programs in India are significant contributory current factors for the relatively late
stage of the disease presentation and consequently low reported cancer incidences.
The prevalence of cancer in India is expected to increase from an estimated 3.9mn in
2015 to an estimated 7.1mn people by 2020. Reported cancer incidences in India are
expected to jump from an estimated 1.1mn in 2015 to 2.1mn by 2020.

Oncology is an under‐diagnosed market
While Cancer is estimated to have affected 3.9mn people in India in 2015, with 1.1mn
reported new cases during the year, the real incidence of cancer is believed to be
significantly higher than this reported figure. Data from large random screening trials
undertaken in the country indicate that the real incidence of cancer could be 1.5‐2.0x higher
than reported. Even at this level, the age adjusted cancer incidence per 100k people in India
is significantly lower than that in the US and China. The reported incidence of cancer in India
is based on data collected from cancer registries, which cover less than 10% of the
population, resulting in a significant margin of error in estimation. The gap between
reported and real cancer incidence can primarily be attributed to under‐diagnosis of cancer
in the country.

The under‐diagnosis of cancer is evident from the reported incidence of cancer cases in India
relative to other countries. Lack of awareness and participation in screening programs in India
are significant contributory current factors for the relatively late stage of the disease
presentation and consequently low reported cancer incidences. For instance, fewer than 1% of
women in India aged between 40 and 69 years participate in recommended breast screening
mammograms once in 24 months compared to 30% in China and 65% in the US in 2014.

Chart 4: Number of PET‐CT scanners per million people Chart 5: Estimated incidence and per million new cases
1,300 1238 4.0 3.4
3.2
1,040
2.4
(Mn)
1.6‐2.2 1.7
780 1.6 1.1
(Nos.)
0.9
520 0.8
0.0
Africa
(Reported)
200
China
India(Real)
US
260 110 137

77
India
0
Africa India China UK US
0.0 0.1 0.3 0.9 6.2 123 94 150‐200 174 318
Per Million Incidence Per million population Cancer incidence 2015 (mn) Age specific incidence rate ('000)

Source: E&Y, Edelweiss research
Healthcare
Oncology is an under‐served therapy in India
 Limited penetration of CCCs: A CCC offers, at a single location, comprehensive cancer
diagnosis and treatment services (including radiation, medical oncology and surgical
treatments). While India has just one per 6mn people, United States has one per 0.3mn in
the United States. Almost 40% of these centres in India are located in eight metropolitan
cities and ~15% of these centers are government operated, which limits access to
advanced and multimodal treatment options available to cancer patients. India needs at
least 450‐550 CCCs by 2020 versus 200‐250 today.
 Significant shortage of oncologists in India: India has only one oncologist per 1,600 cancer
patients in India, as against one per 100 cancer patients in the US.
 Timely diagnosis hampered by several impediments: There are just ~120‐130 PET‐CT
scanners in India, and majority are in the metropolitan cities.
 Radiation therapy: A scarce key requirement: A key requirement for successfully

providing radiation therapy is the availability of the Linear Accelerator (LINAC). Only 15‐
20% of cancer patients in India receive radiation treatment with LINAC, compared to an
international standard of 50‐60%, as of 2015. Of the 350 LINAC installations operational
in India as of 2015, one‐third are concentrated in the 7 metropolitan cities. India needs
at least an estimated 750‐900 LINAC installations by 2020

Table 2: Availability of LINAC
LINACs per Cancer Cancer
Number of million prevalance per incidence per
Region/ Country LINACs (2015) population LINAC LINAC
United States 3,818 11.9 1,572 419
United Kingdom 323 5.0 3,096 929
China 986 0.7 6,288 3,144
India 342 0.3 7,310 3,216

Oncology market has large potential
According to E&Y, the prevalence of cancer in India is expected to increase from an
estimated 3.9mn in 2015 to an estimated 7.1mn people by 2020. Reported cancer
incidences in India are expected to jump from an estimated 1.1mn in 2015 to 2.1mn by
2020. As of 2015, cancer patients underwent ~1.4‐2.0mn chemotherapy cycles/ 0.3‐0.4
cancer surgeries each year in India. This is expected to increase to 2.3‐3.5mn chemotherapy
cycles/ 0.6‐0.75 surgeries by 2020.
 Demographic changes: Cancer incidence rates increase with age, and particularly so after
the age of 50 years. India’s population is ageing, and in particular the population over the
age of 50 years is expected to increase from 228mn in 2015 to 262mn by 2020.
 Exposure to Risk Factors: Factors that have been associated with increased risk of cancer
including as tobacco use, rising alcohol consumption, increasing use of processed food &
meat, reduced fiber content in diet, rising incidence of obesity and increasing levels of air
pollution are anticipated to result in increasing cancer cases in India.
 Narrowing diagnosis gap: Growing cancer awareness, a greater public emphasis on
screening and improvement in diagnosis of cancer are resulting in earlier and increased
diagnosis of cancer.
Healthcare Global

HCG is a leading oncology player with a unique Hub and Spoke model
HCG is a concentrated bet on oncology, one of the most promising therapies that rely
on institutionalized approach that boosts clinical outcomes for patients. It is the leading
Oncology player in India. The company has built a strong ‘Hub and spoke’ wherein it
leverages its Bengaluru center of excellence hub for providing seamless cancer care
across the comprehensive cancer care center spokes across India. It has a unique
partnership approach that facilitates faster ROCE‐effective expansion.

HCG is a unique Cancer specialist with a ‘Hub and Spoke’ model that provides
comprehensive services at the spoke and also leverages Bengaluru hub for higher end
procedures
HCG is poised to benefit from strong growth in oncology as a therapy. As cancer is an
extensive, capital‐intensive speciality in health care, HCG follows a ‘Hub and Spoke’ model
where the secondary centres in tier II cities are linked with the Bengaluru Centre of
Excellence (COE) and thus, provide same treatment to all across the country at an affordable
price. Under the HCG brand, the company operates the largest cancer care network in India
in terms of total number of cancer centers in operation. We believe that within the
organized hospital chains in India, HCG has the highest revenue from Oncology.

Table 3: One of the Leading Oncology player in India (INR mn)
Tata
HCG Apollo Max Fortis
Memorial
Oncology Revenue 4,553 2,782 2,728 1,724 5,959
Contribution to total revenue(%) 78 5 13 4 100

HCG started expanding its network in 2006 and has since added 17 CCCs, 3 free standing
diagnostic centres and 1 day care chemotherapy centre across India. Several of these are
located in tier 2 towns, thereby broadening access to cancer patients.

A unique partnership approach facilitates faster ROCE‐effective expansion
HCG enters into various types of partnership arrangements, mostly with other specialist
physicians and hospitals, to expand its network. These arrangements include setting up joint
venture (JV) companies or limited liability partnerships with partners, wherein partners have
minority ownership interest to establish new centers; and revenue or profit‐sharing
arrangements, wherein HCG shares a portion of the revenue or profit from the centre with
and/or pay a fixed fee to the partner. The company assesses its partners based on a number
of factors, including their expertise and reputation in the market, existing patient base,
ethical and value system, access to land or buildings to establish a cancer centre and
financial and technical capability. Partnership arrangements enable the company leverage
the position and reputation of its partners in local communities. These arrangements
contribute in reducing the time taken to establish and ramp up its centers as it is able to
benefit from the established clinical practice and patient base of partners. These
arrangements also facilitate stronger presence in each market that HCG serves. The partners
also benefit from HCG’s experience and expertise in cancer care, its brand strength,
technological capabilities and network across India. Existing partners also enhance HCG’s
brand image and contribute to the expansion of its network by making recommendations to
other specialist physicians to join the network.
Healthcare
Its successful track record in identifying right partners, evaluating target markets for its cancer
centres and managing project execution to set up and operate a cancer centre, have enabled
the company to expand its network, reduce the time taken to stabilise new centers and
contribute to growth of new patient registrations. All these factors help it create efficiency,
manage costs for itself & its patients and put the company at an advantage over competitors.

Fig.1: Cluster wise mix of business and investment plans
EBITDA Capital employed New Capex
Revenue (FY16)
(FY16) (FY16) Centres (FY17‐FY21)
Total ‐ 2,557 471 2,848

Owned Bangalore‐ KR‐DR 2,095
Partnership MS Ramaiah 191

Karnataka
Partnership Hubli 139
JV MHIO ‐ Shimoga 42
Owned Gulbarga 24
Owned Curie‐ Day care 66
Total ‐ 839 151 526 Borivali 1,680

South Mumbai
West
India
Owned Ahmedabad 646 Nagpur

Bhavnagar
Partnership Nasik 193 Baroda
Total ‐ 424 101 469 Kolkata 160
East India
Partnership Cuttack 298

Partnership
Ranchi 126
Total ‐ 733 88 834 Kanpur 1,430

Jaipur
Owned Ongole 31
Vizag
Owned Vijayawada 148
Owned Chennai‐ Kamakshi 86

Others
Partnership Tiruchirappali 35
Partnership Chennai 138
JV Delhi‐ DCA 50
Partnership SMH‐ Delhi 244


Healthcare Global

Aggressive leg of expansion between FY16‐19
During FY17/18, HCG has an aggressive plan to establish 8 new CCCs in India, and upgrade its
Bhavnagar multi‐specialty hospital into a CCC through addition of radiation and chemotherapy.
With these, HCG will have 26 CCCs across India, covering a mix of metros, tier‐I towns and tier‐
2 towns. HCG will employ incremental capital of INR 3.3bn for these centers, out of the total
INR4.2bn capex during FY17‐19.

Chart 6: Number of cancer centers
Capex 2,100 3,300 500 400

(INR mn) 26
5
4
1 Nagpur (115)
16
South Mumbai (32)
Vizag (88) Kolkata (50)
Baroda (60) Jaipur (60)
Gulbarga (85) Borivali (105) Bhavnagar (33) *
Kanpur (90)
FY15 FY16 FY17E FY18E FY19E

* Bhavnagar multispecialty is being upgraded into a comprehensive cancer center

In terms of the clusters, ~51% of the incremental capital employed will be in the West cluster,
~44% of it will be employed in the Others cluster and ~5% will be employed in the East cluster.
Amongst various clusters, while the biggest cluster Karnataka will grow at revenue CAGR of
12%, while the fastest growing cluster would be Maharashtra that will grow at 52% revenue
CAGR.

The new centers will contribute ~26% of total cancer revenue by FY21. Between FY16‐21, we
expect the existing centers to grow at CAGR of 13%, and new centers to push overall cancer
revenue CAGR to 20%.

Karnataka cluster
The Karnataka cluster includes HCG’s COE and is the most important cluster for the company
which ~55% of the total capital employed here. It contributes ~44%/53% of company’s
Revenue/EBITDA at present. Expansion plans in Karnataka are muted for now, with just an 85
bed center opened at Gulbarga during Q4FY16 which has already broken even. Thus, by FY21,
Karnataka will comprise a lower share of total capital employed at ~33%. We estimate cluster’s
revenue to grow at ~12% CAGR between FY16‐21, but EBITDA to grow at ~18% as margin at
both existing facilities improves from ~19% to ~24% and the new Gulbarga center improves
margin to ~19%.

Healthcare
West India cluster
The next leg of expansion will essentially occur primarily within the West India cluster, that is
Gujarat and Maharashtra. ~51% of incremental capital will be employed in this cluster
between FY16‐21. New centers will be opened in Borivali (Mumbai), South Mumbai, Nagpur
and Baroda, and its Bhavnagar multi‐specialty hospital will be upgraded into a CCC through
addition of radiation and chemotherapy. Revenue will grow at CAGR of 34% during FY16‐21,
but EBITDA will grow at a slightly lower CAGR of 29% as rapid capacity addition happens. While
existing centers EBITDA margin will improve from ~ 18% to 28%, new centers will marginally
weigh on the margin.

East India
Between FY16‐21, ~5% of the incremental capital employed will be towards East India cluster
as it opens a new center in Kolkata. Revenue will grow at CAGR of 22%, and EBITDA will grow
at CAGR of 16% as Kolkata weighs on the margin.

Others
~44% of the incremental capital employed will be towards the new centers will also be opened
in Kanpur, Jaipur and Vizag. While revenue will grow at CAGR of 26%, EBITDA will grow at
CAGR of 23%.

Chart 7: Oncology revenue
Gujarat Oncology revenue
Others 14% Gujarat
11,484 17%
21% Others
34%
4,553
East
9%
East
10% Karnataka
Karnataka FY16 FY21 39%
56%


Healthcare Global

Chart 8: Number of beds to steadily increase, Chart 9: Oncology revenue growth led by both growth at
with rising maturity existing centers as well as addition of new centers
Nagpur: 115 Jaipur: 69 15,000
Bhavnagar: 33
Vizag: 88 Borivali: 105 Kolkata: 50
Baroda: 69 Kanpur: 90 South 12,000
Mumbai: 32
2,983
2,400 3.5
2,631
9,000
2,317
(INR mn)
1,920 2.8
(Number of beds)
1,581
589
1,440 2.1 6,000
(INR bn)
4,529 24
960 1.4
3,000
5,248
6,030
6,868
7,640
8,501
480 57% 0.7
72% 60% 55% 57% 65%
0 0.0 0
>5 years <5 years Capex (INR bn) Existing centres New centres

Healthcare
At cusp of steady margin expansion
HCG’s specialty mix is already rich versus others, and the company now seeks to
enhance its channel mix to both bolster growth (more international patients and
growing daycare centres across Africa) and improve margins (less government
business). It is at the cusp of delivering strong EBITDA margins as its model achieves
maturity, which implies only calibrated investments would be needed to grow. While
EBITDA margin of existing facilities in FY16 stood at ~18% and is improving, EBITDA
break‐even for newer hospitals is now happening at relatively faster pace than
multispecialty hospitals (<12‐18 months).

Model hitting maturity stage
HCG’s business model is hitting the critical stage for EBITDA margin expansion. COE is now
running at ~19% margin. While EBITDA margin of existing facilities in FY16 stood at ~18%
and is improving, EBITDA break‐even for newer hospitals is now happening at relatively
faster pace than multispecialty hospitals (<12‐18 months). During FY17/18, HCG has an
aggressive plan to establish 8 new CCCs in India, and upgrade its Bhavnagar multi‐specialty
hospital into a CCC through addition of radiation and chemotherapy.

The company seeks to maximise utilisation of equipment and technologies used across its
network via optimal scheduling of patients undergoing treatment, in particular, radiation
therapy. It has also implemented a centralised drugs and medical consumables formulary,
allowing it to maximise the utilisation of generic drugs and lower the overall cost of drugs
and medical consumables. The scale of HCG’s operations and relationships it enjoys with
vendors of specialised medical equipment lends it a competitive advantage in terms of
favourable economic terms of purchase and financing of medical equipment.

Chart 10: Margin expansion at existing centers, turn‐around at new centers
FY16 FY21E
374 2245
116 Others Karnataka
359
Others 23% 47%
17% 584
East
India 812 East
12% India
10%
Gujarat
13%
Karnataka EBITDA Karnataka Gujarat East India Others EBITDA Gujarat
58% (FY16) (FY21E) 20%

Figures among the best in terms of therapeutic mix, improving channel mix
As established, cancer is a high potential therapy in India with a long growth curve ahead. It
is also a high realization therapy with higher barriers to entry compared to other therapies.
HCG’s concentrated bet on oncology makes its therapeutic mix among the best in industry.
Government schemes are an important source of new patient registrations and revenue for
HCG, but they tend to create doubtful debt and result in typically low realisations. Indeed,
Healthcare Global

the company had to take provision of ~INR211mn in FY15 due to failure by government
payers to meet payment commitments. In recent times, HCG has started rationalising this
business which will improve its channel mix. The company has also steadily enhanced the
mix of its mix business from international patients.

Table 4: Cost of cancer diagnosis and treatment in India and the US (INR)
United Sates
Type of treatment India United States (purchasing power
Increasing proportion of parity adjusted)
revenue from international Chemotherapy 150,000 ‐ 240,000 1.3 ‐ 1.8 million 510,000 ‐ 720,000
patients at COE Surgery 60,000 ‐ 100,000 1.5 ‐ 1.8 million 600,000 ‐ 720,000
20.0 Radiation Therapy 60,000 ‐ 100,000 1.1 ‐ 1.4 million 420,000 ‐ 540,000
Source: Call for Action: Expanding cancer care in India dated July 2015, published by Ernst & Young
16.0

12.0 In the past, HCG experienced an increase in the number of international patients travelling
(%)
8.0 to its Bengaluru COE and other CCCs in India for treatment. Also, government business, as a
proportion of total business, decreased from 15% in FY15 to 9% in FY16, while revenue from
4.0
international patients increased by 29% YoY in FY16. This trend is likely to continue, in turn
0.0 leading to better realisations in future.
FY13 FY14 FY15 FY16

Expanding wings in the under‐served African market
HCG believes its specialty healthcare model can be replicated in other under‐served
healthcare markets as well. Accordingly, the company intends to establish a network of
specialty cancer centers in East Africa, similar to its cancer care network in India, to cater to
the rising unmet demand for cancer care in Africa. It has entered into a definitive agreement
with CDC, pursuant to which the latter will invest in the former’s subsidiary, HCG Africa,
which will set up a network of CCCs in East Africa.

Healthcare
HCG network includes a couple of multispecialty hospitals in Gujarat
HCG also runs 2 multispecialty hospitals, at Bhavnagar and Ahmedabad. This is not by
design, but rather due to the unwillingness of local authorities to allow shutting down non‐
Oncology divisions post take over by the HCG management. They make up ~12%/7% of
revenue/EBITDA of the consolidated entity. Revenue/EBITDA grew at 15%/8% during FY11‐
16 and currently clocks ~17% RoCE, but will reduce to ~12% by FY21 as a cancer unit will be
added to Bhavnagar in FY18. We estimate revenue/EBITDA growth of ~10%/10% for these
multispecialty hospitals over FY16‐21.

Chart 11: Multispecialty hospitals ‐ Revenue and EBITDA (INR mn)
Multi‐speciality hospitals‐ Revenue Multi‐speciality hospitals‐ EBITDA 111
1,091 101
992 92
902 84
820 76
745 69
677


Healthcare Global

Milann, A Tuck‐in Bet On The High Growth Fertility Therapy
Fertility treatment is an emerging segment with high growth potential (IVF cycles could
grow 9‐12x). HCG will partake in the upside from this therapy through Milann (holds
~50% stake), which operates a network of fertility centers.

Fertility treatment, an emerging high growth area
Fertility treatment is yet another emerging segment of the Indian healthcare industry, which
is currently relatively underdeveloped and fragmented. An estimated 220mn couples in
India are of reproductive age (between 20‐44 years) and ~27.5mn couples in this group are
estimated to be suffering from infertility. By 2020, the number of infertile couples in India is
expected to increase to 29‐32mn from 27.5mn in 2015. The total fertility rate (defined as
the average number of children born to a woman during her lifetime) in India has declined
rapidly in past few decades from 3.9 in 1990 to 2.3 in 2013. Several Indian states, including
Karnataka, Tamil Nadu and Kerala have total fertility rates <2.0, which is considered to be
the rate below which population will decline.

The number of couples coming forth for infertility treatment and evaluation in India is
expected to increase from 270k in 2015 to 650‐700k annually in 2020. Similarly, the number of
IVF cycles performed in India is also forecast to rise from 100k in 2015 to an estimated 260k in
2020.

Fig. 2: Fertility rates across India have fallen steadily Fig. 3: Rise in IVF treatments


HCG holds equity stake in Milann
HCG acquired 50.10% equity interest in BACC Health Care (BACC) in 2013, a fertility centre
founded by Dr. Kamini Rao, who had a successful 25‐years track record of providing fertility
treatments. Led by a team of qualified and experienced fertility specialists, BACC operated
fertility centres under the Milann brand. These fertility centres provide comprehensive
reproductive medicinal services, including assisted reproduction, gynaecological endoscopy
and fertility preservation and follow a multidisciplinary and technology‐focused approach to
diagnosis and treatment. HCG currently operates 4 Milann fertility centres in Bengaluru.

Milann, a network model in fertility therapy
Market fragmentation presents HCG with an opportunity to leverage its expertise in building
a nationally recognised speciality healthcare brand and establish the Milann brand across
India. The company would draw from its experience of setting up its own network via
Healthcare
partnerships with specialist physicians and hospitals, and standardising clinical protocols &
quality standards. It would seek to replicate the same in expansion of the Milann network.
We expect Milann to grow revenue/ EBITDA at CAGR of 20% during FY16‐21.

Chart 12: Milann expected to grow at above‐industry growth rate (INR mn)
Multi‐speciality hospitals‐ Revenue Multi‐speciality hospitals‐ EBITDA
111
1,091
101
992 92
902 84
820 76
745 69
677


Healthcare Global

Oncology business to drive robust EBITDA growth for HCG
While HCG’s oncology business will be the contributor of its ~86% of its incremental revenue
between FY16‐21, it will contribute ~90% of the incremental EBITDA in the same period.

Chart 13: Revenue mix
Revenue Milann
Milann 13,864 9%
9%
Multispeciality Multispeciality
hospitals 12% hospitals 8%
5,759
Existing New Existing

centres centres centres
79% 22% 61%
FY16 FY21E


Chart 14: EBITDA bridge
EBITDA EBITDA Milann
CAGR 16% CAGR 18% Multispeciality 11%
hospitals 4%
Milann 177 2,455
1,340 42
Multispeciality 12%
hospitals 12%
897
Cancer Cancer
centres 81% EBITDA (FY16) Cancer Multispeciality Milann EBITDA (FY21E) centres 85%
centres hospitals


Healthcare
Valuations

coverage with ’BUY’ and TP of INR310 (18x FY19E EV/ EBITDA, 20% discount to 1‐year
forward sector multiple).

Table 5: Valuation on FY19 financials
Valuation Mar‐18
Multiple 18x
EBITDA 1,714
EV 30,851
Market Cap 26,508
No of shares 85
Value per share 312

Healthcare Global

Key Risks

Success of business hinges on network expansion
Historically, HCG’s business growth has been primarily driven by new centres and hospitals
set up through various partnership arrangements and acquisitions. It is expected that these
will continue to be the key drivers of future growth.

Subsidiaries may dither on profitability
Some subsidiaries reported net losses in recent years. Going ahead, they may continue to
drag and may not sustain profitability, which could materially and adversely impact business
and prospects.

Success of this business is dependent on HCG’s ability to attract and retain leading specialist
physicians. The company’s ability to attract and retain these specialist physicians and other
healthcare professionals, including physicians and nurses depends, among other things, on
the commercial terms that it offers them, reputation of its centres and hospitals and
exposure to technology and research opportunities that it offers them.

Near term upfront investments could suppress margins if infrastructure costs continue to
increase.
Healthcare
Company Description

HealthCare Global Enterprises (HCG) is a provider of speciality healthcare in India with 4
broad verticals:
 Cancer: Operates India’s largest cancer care network with 17 comprehensive cancer
centers (CCCs) under the HCG brand, 3 free‐standing diagnostic centers and 1
chemotherapy center
 Infertility: Operates 5 fertility centres under the Milann brand
 Runs 2 multi‐specialty hospitals
 Under the Triesta brand, runs a cancer‐focused diagnostic and clinical trial management
centre
Each of its CCCs offer, at a single location, comprehensive cancer diagnosis and treatment
services (including radiation, medical oncology and surgical treatments). The freestanding
diagnostic centres and daycare chemotherapy centres offer diagnosis and medical oncology
services, respectively.
HCG is well equipped to deliver quality cancer care to patients across India in a seamless
manner. It relies on a network of physicians across the country specialising in medical,
radiation and surgical oncology, and its integrated multi‐disciplinary and technology‐focused
approach relies on close collaboration among oncologists, nuclear medicine physicians,
pathologists and radiologists.

Fig. 4: Evolution of HCG


Healthcare Global

Table 6: Comprehensive cancer care centres, facilities and service offerings
Facilities and Services
Location of the comprehensive Commencement of Nos. of Nos. of RT‐ Nos. Of operation Number of PET‐
cancer centre Operation Beds LINACs theatres CT scanners Laboratory
Existing HCG cancer centres in India
Karnataka Cluster
Bengaluru ‐ Double Road 1989 92 1 4 0 kYes
Shimoga 2003 52 1 3 0 kYes
Bengaluru ‐ Kalinga Rao Road 2006 225 k3 7 2 kYes
Bengaluru ‐ MS Ramaiah Nagar 2007 22 1 1 1 kYes
Hubli 2008 70 1 1 1 kYes
Gulbarga Q4FY16 85 1 3 0 kYes
Gujarat Cluster
Ahmedabad 2012 78 1 5 0 kYes
Baroda Q1FY17 60 1 4 1 kYes
East India Cluster
Ranchi 2008 49 1 2 0 kYes
Cuttack 2008 116 2 2 1 kYes
Others
Nasik 2007 k0 1 k0 1 kYes
Delhi 2007 70 1 2 k1 kYes
Vijaywada 2009 k30 2 1 0 kYes
Chennai 2012 35 1 k0 0 kYes
Ongole 2012 k19 1 2 0 kYes
Tiruchirappalli 2014 35 1 0 0 kYes
Vishakhapatnam Q1FY17 88 1 k0 1 kYes
HCG cancer centres under development in India
Nagpur Q4FY17 115 1 4 1 kYes
Mumbai ‐ Borivali Q4FY17 105 1 5 1 kYes
Kochi FY18 100 1 3 1 kYes
Delhi FY18 95 1 1 k0 kYes
Kanpur Q3FY17 90 1 3 1 kYes
Jaipur FY18 60 1 2 1 kYes
Kolkata FY18 50 1 2 k0 kYes
Mumbai‐Cooperage FY18 32 1 2 1 kYes
Bhavnagar Q2FY18 35 1 3 0 kYes

Table 7: Milann fertility centres, their facilities and service offerings
Facilities and Services
Commencemen Number Endoscopy Embryology
Location of the Milann fertility centre t of Operation of Beds IVF opearation theatre laboratory Neonatal ICU
Bengaluru ‐ Shivananda Circle 1989 38    
Bengaluru ‐ Jayanagar 2010 26    
Bengaluru ‐ Indiranagar 2012 6    
Bengaluru ‐ MS Ramaiah Nagar 2015 6    
Delhi ‐ Greater Kailash Q4FY16 4    
Note: HCG utilises the neonatal facilities of its partner
Healthcare
Table 8: Management
Dr. BS Ajai Kumar Chairman and Chief Dr. Ajai Kumar has served as the CEO since 2005.Dr. Ajai Kumar has been a practicing
Executive Officer oncologist in the US and India for over three decades. He completed his residency training in
Radiotherapy from the MD Anderson Hospital and Tumor Institute of the University of Texas,
and his residency training in Oncology from the University of Virginia Hospital,
Charlottesville. He received his MBBS from the St. Johns Medical College, Bangalore.
Anant Kittur Director of Projects Anant Kittur is the director of projects in HCG. He is responsible for overseeing and initiating
new projects of HCG and managing all business development initiatives. Previously, he was
the director (Imaging) of Wipro GE Healthcare for South Asia and has held several leadership
positions at GE Healthcare from 2000 to 2015. He is a member of the Institute of Chartered
Accountants of India and is a B.Com from Bangalore University.
Dr. Kamini Rao Medical Director, Milann Dr. Kamini Rao is the medical director of Milann since its inception. She is a practicing
consultant in gynaecology and obstetrics and a specialist in fertility medicine, and a past
president of the Federation of Obstetrics and Gynaecology Societies of India. Dr. Kamini Rao
was awarded the Padma Shri Award by the President of India in 2014. She has completed her
post graduate diploma in medical law and ethics from the National Law School of India
University, Bengaluru, a diploma in obstetrics from the Royal College of Physicians of Ireland,
a diploma in child health from the Royal College of Physicians of Ireland and the Royal
College of Surgeons in Ireland. She holds a master’s degree in obstetrics and gynaecology
from the University of Liverpool and an MBBS from Bangalore University.
Dinesh Madhavan Director of Healthcare Dinesh Madhavan is responsible for the corporate function of brand management of HCG, as
Services well as international business of HCG, including HCG’s Africa projects. In addition, he is also
responsible for managing the operations of certain cancer centres in the HCG network. He has
over 20 years of experience in sales, marketing, business development and general
management of healthcare services. Prior to joining HCG, he worked as head of marketing for
Wockhardt Hospitals Group and as the vice president of marketing at Hosmat Hospitals. He
has also previously worked at Breach Candy Hospital and Apollo Hospitals.
Dr. Bharat Gadhavi Chief Operating Officer, Dr. Bharat Gadhavi has over 13 years of experience in the field of hospital management and
Gujarat administration. Previously, he was the medical director at Sterling Addlife India Private
Limited from 2001 to 2007. He holds a Master’s degree in surgery from Maharaja Sagajirao
University of Baroda and has done his MBBS from Maharaja Sagajirao University of Baroda.
Sunu Manuel Company Secretary She has been with HCG since 2006. She is a member of the Institute of the Company
Secretaries of India and holds a B. Com from Calicut University.
Dr. Ramachandran Chief Medical and Dr. Ramachandran Balaji is responsible for planning and executing all aspects of our
Balaji Information Officer information management strategy. He has over 15 years of experience in the field of IT
Management.
Dr. Naveen Nagar VP, Medical Services Dr. Naveen Nagar has been with HCG since 2006. He is experienced in the field of
establishment and management of hospitals. Prior to joining HCG, he worked as a resident at
Nepean Hospital, Sydney, Australia from 2005 to 2006, as a surgical registrar, Head of
Medical Services at Bangalore Institute of Oncology from 2003 to 2005 and as senior resident
ENT at Manipal Hospital from 1999 to 2002.


Healthcare Global

Financial Outlook

Chart 15: Strong revenue CAGR… Chart 16 ….with marginal improvement in EBITDA margin
18,000 18.0 17.5
16.9
14,400 17.0
(INR mn)
10,800 16.0 15.4

15.4
(%)
15.1
7,200 15.0 14.5
3,600 14.0
0 13.0


Chart 17: …to drive strong EBITDA CAGR Chart 18: …and improvement in ROCE
3,000 16.0 15.5
13.2
2,400 13.6
1,800 11.2 9.9

(INR mn)
(%)
1,200 8.8
6.7 6.4
600 6.4 5.6
0 4.0


Healthcare
GDP (Y‐o‐Y %) 7.4 7.9 8.3 8.3 Net revenues 5,759 7,214 9,186 10,988
Inflation (Avg) 4.8 5.0 5.2 5.2 Other operating income 61 76 97 116
Repo rate (exit rate) 6.8 6.0 6.0 6.0 Total operating expenses 4,923 6,191 7,938 9,390
USD/INR (Avg) 65.0 67.5 67.0 67.0 Materials cost 1,496 1,932 2,543 2,887
Company Employee cost 990 1,139 1,366 1,640
Number of beds 1,146 1,604 1,757 1,757 Other Expenses 2,437 3,120 4,029 4,864
No. of new registrations‐ HCG centres
37,242
47,233
59,933
69,520 Depreciation 444 598 692 674
EBITDA margin (%) 16 15 15 16 EBITDA 897 1,099 1,344 1,714
tax rate (%) (4) 34 34 34 EBIT 452 502 652 1,040
Less: Interest Expense 376 395 515 505
Profit before tax 50 138 170 577
Less: Provision for Tax (4) 47 58 196
Less: Minority Interest 42 (10) 15 100
Reported Profit 12 101 98 281
Adjusted Profit 75 101 98 281
Employee expenses 17.0 15.6 14.7 14.8
Other expenses 41.9 42.8 43.4 43.8
EBITDA margins 15.4 15.1 14.5 15.4
Growth metrics (%)
Net Revenues 11.6 25.3 27.3 19.6
EBITDA 17.6 22.6 22.3 27.5
PBT 105.4 175.6 23.2 238.4
Adjusted Profit 21.7 34.3 (3.8) 187.9
EPS 0.1 34.3 (3.8) 187.9
Healthcare Global

Share capital 851 851 851 851 Operating cash flow 690 1,056 1,051 1,020
Reserves & Surplus 4,511 4,612 4,710 4,991 Financing cash flow 1,899 2,190 115 (200)
Shareholders' funds 5,362 5,463 5,561 5,841 Investing cash flow (2,022) (3,265) (1,040) (322)
Minority interest 332 322 337 437 Net cash flow 567 (20) 126 498
Long term borrowings 2,652 4,852 4,952 4,652 Capex (2,133) (3,300) (500) (400)
Short term borrowings 8 8 8 8 Dividend paid 0 0 0 0
Total Borrowings 2,660 4,860 4,960 4,660
Long Term Liabilities & Provisions 39 55 65 79 Profitability & liquidity ratios
Deferred tax liability (net) (86) (86) (86) (86) Year to March FY16 FY17E FY18E FY19E
Sources of funds 8,307 10,614 10,836 10,931 Return on Average Equity (ROAE) (%) 2.7 1.6 1.9 6.3
Net Block 5,040 7,742 7,551 7,276 Pre‐tax Return on Capital Employed ( 6.7 5.6 6.4 9.9
Capital work in progress 1,551 1,551 1,551 1,551 Inventory days 34 32 32 32
Intangible assets 27 27 27 27 Debtors days 45 43 43 43
Total Fixed assets 6,618 9,320 9,128 8,854 Payble days 234 234 234 234
Goodwill 609 609 609 609 Cash Conversion Cycle (155) (159) (159) (159)
Non current investments 36 36 36 36 Current Ratio 1.0 0.9 0.9 1.0
Long term loans and advances 901 848 1,380 1,285 Gross Debt/EBITDA 3.0 4.4 3.7 2.7
other non current assets 79 114 131 162 Gross Debt/Equity 0.5 0.8 0.8 0.7
Cash and cash equivalents 847 828 954 1,452 Adjusted Debt/Equity 0.5 0.8 0.8 0.7
Inventories 134 205 241 266 Net Debt/Equity 0.3 0.7 0.7 0.5
Sundry debtors 789 928 1,259 1,358 Interest Coverage Ratio 1.2 1.3 1.3 2.1
Loans & advances 118 131 186 193
Other Currrent Assets 117 137 186 201 Operating ratios
Total current assets (ex cash) 1,157 1,401 1,871 2,016 Year to March FY16 FY17E FY18E FY19E
Trade payable 1,084 1,393 1,868 1,834 Total asset turnover 0.8 0.8 0.9 1.0
Others current liabilities 819 1,096 1,343 1,575 Fixed asset turnover 1.2 1.1 1.2 1.5
Short term provisions 38 53 63 76 Equity turnover 1.3 1.3 1.6 1.8
Total current liabilities & provisions 1,941 2,542 3,274 3,484
Net current assets (ex cash) (784) (1,141) (1,403) (1,468) Valuation parameters
Uses of funds 8,307 10,614 10,836 10,931 Year to March FY16 FY17E FY18E FY19E
Book Value per share 63 64 65 69 Adjusted Diluted EPS (INR) 0.9 1.2 1.1 3.3
Y‐o‐Y growth (%) 0.1 34.3 (3.8) 187.9
Free cash flow Adjusted Cash EPS (INR) 6.1 8.2 9.3 11.2
Year to March FY16 FY17E FY18E FY19E Diluted Price to Earnings Ratio (P/E) ( 255.5 190.3 197.8 68.7
Reported Profit 12 101 98 281 Price to Book Ratio (P/B) (x) 3.6 3.5 3.5 3.3
Add: Depreciation 444 598 692 674 Enterprise Value / Sales (x) 3.7 3.3 2.6 2.1
Interest (Net of Tax) 408 261 340 333 Enterprise Value / EBITDA (x) 23.9 19.5 15.9 12.5
Others (247) 453 184 (203) Dividend Yield (%) 0.0 0.0 0.0 0.0
Less: Changes in WC (72) 357 262 65
Operating cash flow 690 1,056 1,051 1,020
Less: Capex 2,133 3,300 500 400
Less: interest 408 261 340 333
Free cash flow (1,851) (2,505) 211 287
Healthcare
Additional Data
Directors Data
Dr. B.S. Ajai Kumar Chairman & CEO Gangadhara Ganapati Non‐ Executive Director
Prakash Parthasarathy Non‐ Executive Director Dr. Jennifer Gek Choo Lee Non‐ Executive Director
Rajesh Singhal Non‐ Executive Director Dr. Sudhakar Rao Non‐Executive Independent Director
Shanker Annaswamy Non‐Executive Independent Director Sampath Thattai Ramesh Non‐Executive Independent Director

Suresh Chandra Senapaty Non‐Executive Independent Director Bhushani Kumar Non‐Executive Independent Director

Auditors ‐ Deloitte,Haskins and Sells

Holding – Top10
PI Opputunities Fund 14.02 V‐Sciences Inv Pte Ltd 9.78
IL&FS Trust Co 5.28 Reliance Capital Trustee 5.22
Reliance Life Insurance 5.22 International Finance Corp 5.12
Sundaram Asset Mgmt Co 4.47 HDFC Life Insurance 3.15
Reliance Life Insurance Co 1.75 Edelweiss Commodities 1.36
*in last one year
Bulk Deals

No Data Available
*in last one year
Insider Trades

No Data Available
*in last one year
INITIATING COVERAGE
Max India

MAX INDIA
Strong growth visibility
Max India (Max) is well poised to clock strongest growth among India’s EDELWEISS 4D RATINGS
hospitals peers. We expect earnings spurt to be fuelled by: (i) ~50% jump
Absolute Rating BUY
in capacity over FY16‐22 in high‐potential NCR market via brownfield
Rating Relative to Sector Outperformer
expansion (with improving mix of maturity); (ii) channel (international Risk Rating Relative to Sector Low
patients) and service (lucrative tertiary care therapies) mix; and (iii) cost Sector Relative to Market Overweight
efficiency initiatives driving EBITDA margin surge. We believe, Max is a
compelling bet on the tertiary care opportunity in the NCR market, which
could have upsides from investments in health insurance. Initiate MARKET DATA (R: MAXI.NS, B: MAXI IN)
coverage with ’BUY’ and target price of INR175. CMP : INR 142
Target Price : INR 175
52‐week range (INR) : 180 /119
Aggressive, but balanced, growth plans
Share in issue (mn) : 267
MHC (Max’s hospital network) is planning to expand capacity, through Brownfield M cap (INR bn/USD mn) : 37.9 / 600
expansion, from the current ~2,600 beds to ~3,800 by FY22 and to ~5,000 beyond Avg. Daily Vol.BSE/NSE(‘000) : 391.8
FY23. The focus will be on tertiary and quaternary care in North India, while largely
retaining the current mature/non‐mature beds mix, thereby not exerting pressure on SHARE HOLDING PATTERN (%)
margin.
Current Q1FY17 Q4FY16

Promoters * 40.4 NA NA
Channel and service mix to fuel margin expansion MF's, FI's & BK’s 35.6 NA NA
The company’s strategy is to focus on improving margin by sprucing up: (i) channel mix FII's 13.7 NA NA
(priority to international over government patients); (ii) service mix (focus on oncology, Others 10.3 NA NA
neurology, cardiology and transplants); and (iii) cost efficiency initiatives. Ergo, we * Promoters pledged shares : 7.94
estimate Max’s EBITDA to jump ~3x over FY16‐21.

RELATIVE PERFORMANCE (%)
Health insurance can unlock significant value
BSE
Max can unlock significant value from its Max Bupa Health Insurance business wherein Stock Nifty
Healthcare
it has 51% stake. Its gross written premium is estimated to clock 20‐22% CAGR going
1 month (2.3) (2.5) (0.7)
forward and breakeven by FY20. 3 months NA 4.3 1.7
12 months NA 6.4 (11.4)
Outlook and valuations: Strong growth ahead; initiate with ‘BUY’
We forecast revenue CAGR of 16% with EBITDA margin improving ~380bps and driving
~29% EBITDA CAGR over FY16‐19; RoCE is estimated to jump 430bps to 11%. In our
SOTP valuation, we assume 20x FY19E EV/ EBITDA for MHC and 1x P/BV for Max Bupa
& Antara to arrive at target price of INR175. We initiate coverage with ’BUY/SO’.
Deepak Malik
Financials ‐ Max India share (46%) (INR mn) +91 22 6620 3147

Net revenues (INR mn) 20,982 24,241 28,646 32,455 Rahul Solanki
EBITDA (INR mn) 2,147 3,030 3,810 4,560 +91 22 6623 3317
EBITDA margin (%) 10.2 12.5 13.3 14.1 rahul.solanki@edelweissfin.com

Adjusted profit (INR mn) 98 719 766 1,167 Archana Menon
Diluted P/E (x) 842
115 108 71 +91 22 6620 3020
archana.menon@edelweissfin.com
EV/EBITDA (x) 33 23 18 15

ROACE (%) 6.7 9.2 10.0 11.0
October 7, 2016
137
Healthcare
A bird’s eye view

Betting big on high‐potential NCR market
Owing to a large under‐served population and its affluence, the NCR tertiary healthcare
market entails huge potential. Delhi has not only the highest per capita income but it is also
growing at highest rate in India. Max is betting big on this market with ~80% of its total
2,600 beds across NCR, among which ~30% are in South Delhi—most affluent part of Delhi.

Chart 1: NCR—One of the most affluent territories
250,000
Delhi and in India
22.0
18.8 (2008‐2015)
150,000
(INR)
Delhi‐ 14%
India‐ 12%
100,000 15.6
(%)
50,000 12.4
0 9.2
Odisha
Gujarat
Maharashtra
Punjab
West Bengal
Assam
Delhi
India
Bihar
6.0
Delhi India

Source: Press Information Bureau, Government of India, Economic Survey of Delhi, Edelweiss research

50% capacity expansion over FY16‐22 without diluting mature beds mix
MHC (Max’s hospital network) is planning to expand capacity, without incremental land
bank, from the current ~2,600 beds to ~3,800 by FY22 and eventually to ~5,000 beyond
FY23 with focus on tertiary and quaternary care in North India., while largely retaining the
current mature/non‐mature beds mix, thereby not exerting pressure on the margin.

Chart 2: MHC—Expansion to ramp up growth through healthy mix of mature/new units
1,230 4,999 5,000
5,000
4,000 600
4,000
(No. of beds)
300 2,440
104
3,000 2,445 125 160 35
(No. of beds)
3,000
2,000 1,246
1,114
1,000 2,000 1,453
0 2,559
1,000 1,923
1,651
FY23 and beyond
FY16
FY17
FY18
FY19
FY20
FY21
FY22
Total
1,117
0
FY23 and
FY16
FY17
FY18
FY19
FY20
FY21
FY22
beyond
mature beds (> 5 years) new beds (< 5 years)

Max India

Channel and service mix to fuel margin expansion
The strategy is to focus on improving margin by sprucing up:
 Channel mix (priority to international over government patients); and
 Service mix (focus on oncology, neurology, cardiology and transplants). Max is also
investing in a sound digital platform to drive operational and cost efficiencies.

Chart 3: Focus on tertiary/quaternary care Chart 4: Increasing share of preferred channels to improve
profitability
60.0 100.0
19.4 16.2
25.6
48.0 14 13 80.0
14
15
14
36.0 13 13 60.0
12
(%)
(%)
9 11
24.0 10 10 40.0
9 10 10
12.0 8 10 10
7 7 20.0
4 4 5 6 6
4 3 3 3 9.1 12.9
0.0 2 0.0 1.6
FY12 FY13 FY14 FY15 FY16 MHC Mature units New units
MAMBS Renal Ortho Neuro Onco Cardiac International Walk‐in


Max lab, health insurance, senior living can unlock significant value
Max has created a separate SBU to help it leverage its strengths and grow externally.
Currently, its captive business is worth ~INR2.5bn. The company has invested in a few other
pockets of health chain as well—health insurance through 51% stake in Max Bupa and
senior living through Antara with an equity investment of INR2bn. Though nascent currently,
these investments could deliver significant upsides over the long term. Max Bupa’s gross
written premium is estimated to clock 20‐22% CAGR going forward and breakeven by FY20.

Chart 5: EBITDA to jump ~3x over FY16‐21E, ~45% to come from Saket cluster
FY16 EBITDA EBITDA FY21E
margin‐ 10% margin‐ 14%
1,419 6,434
Others
Vaishali 558 18%
843
9% Saket
1,467 Vaishali
45%
+149
12%
beds
+200
Patparganj 2,147
beds
37% Saket
+375
68%
beds
Patparganj
25%
Others
EBITDA (FY16) Saket Patparganj Vaishali Others EBITDA (FY21E)
loss ‐13%


Healthcare
Outlook and valuations: Strong growth ahead; initiate with ‘BUY’
We forecast revenue CAGR of 16% with EBITDA margin improving ~380bps and driving ~29%
EBITDA CAGR over FY16‐19; RoCE is estimated to jump 430bps to 11%. In our SOTP
valuation, we assume 20x FY19E EV/ EBITDA for MHC and 1x P/BV for Max Bupa & Antara to
arrive at target price of INR175. We initiate coverage with ’BUY/SO’.

Table 1: SOTP valuation on FY19 financials
Valuation Mar‐18
Hospitals
Multiple 20x
EV 91,197
MIL's stake@46% 35,725
Max Bupa (investment) (@51% stake) 4,580
Antara (investment) 2,000
Cash (FY16) 4,115
Total 46,420
No of shares 267
Target Price 174

Max India


Betting big on high‐potential NCR market
Owing to a large under‐served population and its affluence, NCR’s tertiary healthcare
market entails high potential. Delhi has the highest per capita income level in the
country and is growing at higher rate than rest of India. Max is betting big on this
market with ~80% of its total 2,600 beds across NCR, among which ~30% are in South
Delhi—most affluent part of Delhi.

The NCR has some of the most affluent neighbourhoods in India with considerable spending
power. The region has one of the densest populated areas in the country with a large
unaccounted floating population as well. However, the region’s bed density is considerably
low compared to global standards. Hence, there is a vast untapped market within NCR,
which offers significant potential for healthcare providers.

Chart 6: NCR—One of the most affluent territories in India
250,000
Delhi and in India
22.0
18.8 (2008‐2015)
150,000
(INR)
Delhi‐ 14%
India‐ 12%
100,000 15.6
(%)
50,000 12.4
0 9.2
Odisha
Gujarat
Maharashtra
Punjab
West Bengal
Assam
Delhi
India
Bihar
6.0
Delhi India

Source: Press Information Bureau, Government of India, Economic Survey of Delhi, Edelweiss research

Chart 7: NCR—Under‐served market despite addition of capacity
50,000 2.7 3.0 Beds per 1,000
2.5 2.5
2.3 2.2 2.3
40,000 2.4
3.4
30,000 1.8
(Nos.)
(Nos.)
2.71
2.5
20,000 1.2
10,000 0.6
0.9
0 0.0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Delhi India‐urban India‐rural India

Beds Beds per 1000
Source: Economic survey of Delhi, 2014‐15, Department of Health Services, World bank WDI, Edelweiss research
Healthcare
80% of bed capacity in NCR, predominantly in Delhi
Average. occupancy at MHC’s Through MHC, Max runs a network of 14 hospitals (~2,600 beds, largely tertiary and
network at >70% despite quaternary care) across North India. The network comprises 9 quaternary/ tertiary care
capacity addition and reduction hospitals, 4 secondary hospitals and 1 primary care centre. While ~1,500 beds are owned,
in ALOS ~1,100 beds are serviced through agreements.

The network derives ~70% MHC is one of the fastest growing players in the listed space, with a healthy set of operating
revenue from tertiary care and metrics—revenue and EBITDA clocked CAGR of 26% and 34%, respectively, over FY11‐16.
surgical procedures During FY08‐13, the network capacity almost doubled from 662 beds to 1,311 beds. FY13‐15
was a period of consolidation. MHC focused on steady improvement in the financial
performance of new capacities and improving profitability of established ones. In FY16,
MHC turned profitable despite 2 large acquisitions.

In July 2015, MHC completed acquisition of ~78% equity shareholding in Crosslay Remedies,
which owns and operates a 260 beds Max Super Specialty Hospital, Vaishali, located in the
East Delhi‐Ghaziabad‐Noida corridor. Its capacity is expandable to 460 beds. Max has a call
option right to acquire balance stake, which it intends to do in FY20 for a cash consideration
of ~INR1.5bn.

In November 2015, MHC completed acquisition of 51% equity shareholding in Saket City
Hospitals, which provides services to Max Smart Super Specialty Hospital. It has ~225 beds,
which are currently being expanded to ~300, further expandable to 1,200 beds. Max has a
call option right to acquire the balance stake, which it intends to do in FY18 for a cash
consideration of ~INR4.4bn (INR3.75bn + 12% compounded interest).

Table 2: MHC’s network of hospitals and healthcare facilities
Ownership/Service Commencement Existing bed Peak bed
Hospital Location
agreements of operations capacity capacity
Existing Hospitals and Medical Centers
Max Super Speciality Hospital West Block, Saket, New Delhi Owned May 2006 211 311
Max Super Speciality Hospital Shalimar Bagh, New Delhi Owned Nov 2011 275 379
Max Super Speciality Hospital Mohali, Punjab Owned Sept 2011 218 253
Max Super Speciality Hospital Bhathinda, Punjab Owned Sept 2011 186 186
Max Super Speciality Hospital Dehradun, Uttarakhand Owned May 2012 168 168
Max Super Speciality Hospital Ghaziabad, Uttar Pradesh Owned July 2015 260 460
Max Hospital Pitampura, New Delhi Leased Feb 2002 70 70
Max Hospital Noida, Uttar Pradesh Leased Aug 2002 46 46
Max Hospital Gurgaon, Haryana Owned July 2007 64 64
Max Multi Speciality centre Panchsheel Park (North), New Delhi Leased Jan 2001
Max Super Speciality Hospital (Unit of Devki East Block, Saket, New Delhi Medical Service Dec 2004 324 474
Devi Foundation) Agreement
Max Super Speciality Hospital (Unit of Balaji Patparganj, New Delhi Medical Service May 2005 402 602
Medical and Diagnostic Research Centre) Agreement
Max Smart Super Speciality Hospital (Unit of Saket, New Delhi Medical Service Nov 2015 225 1,210
GMHRC) Agreement
Max Multispeciality Hospital Greater Noida, Uttar Pradesh Service Agreement July 2014 114 120
Proposed Hospitals
Max Super Speciality Hospital Greater Noida, Uttar Pradesh Owned To be decided ‐ 380
Max Super Speciality Hospital Mullanpur Owned To be decided ‐ 400
2,563 5,123

Max India

MHC (Max’s hospital network) is planning to expand capacity, through brownfield
expansion, from the current ~2,600 beds to ~3,800 by FY22 and to ~5,000 beyond FY23.
The focus will be on tertiary and quaternary care in North India, while largely retaining
the current mature/non‐mature beds mix, thereby not exerting pressure on margin.

Currently, MHC’s employed To expand capacity 50% over FY16‐22 through brownfield expansion...
capital includes ~INR10.8bn debt
MHC is planning to enhance capacity from current ~2,600 beds to ~3,800 by FY22 by
and ~INR10.7bn equity
expanding capacity at its existing network. It plans to eventually increase capacity to ~5,000

beds beyond FY23. The company already has land available for these expansions and will
Importantly, Max currently holds
not require incremental land bank and thus the cost is already saddled in the balance sheet.
78% stake in Max Vaishali
MHC is also seamlessly integrating its recently acquired high‐growth hospitals (Saket City/
Hospital and 51% in Saket City
Vaishali).
Hospital. It has agreements in

place to increase stake to 100%
The company will also beef up its existing advantages in identified specialties around which
in Saket (FY18, payment of
centers of excellence have been built (oncology and neurology). It will also invest in select
~INR4.4bn) and Vaishali (FY20,
complex clinical capabilities like organ transplants.
payment of INR1.5bn)

… and without diluting mix of mature beds
Over the next 5 years, MHC will
employ ~INR18bn capital Standout feature of MHC’s expansion plan is the projected mix of maturity of its beds (>55%
beds with age of at least 5 years post FY18), which will remain healthy through the rapid
expansion. Hence, due to the mix, EBITDA margin will not be under pressure during the
expansion phase.

Chart 8: MHC to bolster growth via expansion… Chart 9: …via healthy mix of mature/new units
1,230 4,999 5,000
5,000
4,000 600
4,000
(No. of beds)
300 2,440
104
3,000 2,445 125 160 35
(No. of beds)
3,000
2,000 1,246
1,114
1,000 2,000 1,453
0 2,559
1,000 1,923
1,651
FY23 and beyond
FY16
FY17
FY18
FY19
FY20
FY21
FY22
Total
1,117
0 FY23 and
FY16
FY17
FY18
FY19
FY20
FY21
FY22
beyond
mature beds (> 5 years) new beds (< 5 years)

Saket cluster, Patparganj, Vaishali: Pivotal growth drivers
MHC has 3 hospitals in Saket (New Delhi), which contribute ~35% and 70% to the company’s
Saket City will have a specialised
revenue and EBITDA, respectively. The Saket cluster will remain important to the company’s
oncology centre with a dedicated
growth and contributes ~70% to current EBITDA, i.e., ~INR1.45bn, which we believe will
tower with 300‐500 beds. This
double by FY21.
facility will, thus, be an important

contributor to the company’s

aspiration to become the biggest

oncology care provider in India
Healthcare
 Max Super Specialty, East Block, Saket (Devki Devi Foundation)
This is a 324 bed super specialty hospital offering the highest standards of care for
heart and vascular diseases. It specializes in high‐risk patients and has introduced
innovative techniques for minimally invasive surgeries. MHC operates this hospital
under a 30‐year service agreement with Devki Devi Foundation that began in 2004. The
hospital’s peak bed capacity is 474.

Over FY13‐16, revenue and EBITDA posted CAGR of 8% and 13%, respectively. FY16
EBITDA margin was 22.7%.

 Max Super Specialty Hospital, Saket (West Block)
This 211 beds hospital offers various super‐specialty facilities in addition to a wide
range of tertiary and secondary healthcare facilities. It houses specialty units for
therapies like orthopedics & joint replacement, neurosciences, obstetrics & gynecology
and pediatrics. It offers one of the highest standards of neuroscience related
procedures in Asia, including the state‐of‐the‐art BRAIN‐SUITE IMRI. Between FY13 and
FY16, this hospital’s revenue and EBITDA posted CAGR of 9% and 12%, respectively.
FY16 EBITDA margin was 18.3%. The hospital’s peak bed capacity is 311.

 Max Smart Super Specialty, Saket City (Gujarmal Modi Hospital & Research Centre for
Medical Sciences)
In November 2015, MHC completed acquisition of 51% equity shareholding in Saket
City Hospitals that provides services to Max Smart Super Specialty Hospital. For the
acquisition, agreed enterprise value was INR10.25bn (INR3.25bn equity value for 51%
stake and INR3.25bn debt). This hospital has ~225 beds, currently being expanded to
~300, and further expandable to 1,200 beds. Max has a call option right to acquire the
balance stake, which it intends to do in FY18 for a ~INR4.4bn cash (INR3.75bn + 12%
compounded interest).

Saket City Hospital is a 215 bed hospital which will be one of India’s largest private
facilities with ~1,200 beds once expansion is completed and one of Asia’s largest
Medicity within Saket. In an integrated complex with Max Saket, this will have a
dedicated outpatient department tower, cluster of operation theatres & intensive care
units, centralised labs and emergency rooms. The facility design is based on
comprehensive demand mapping, which includes demand not only from NCR, but also
from catchment areas in North India and international markets. It will have 7 centers of
excellence, viz., oncology, neurosciences, transplants, cardiac sciences, orthopedics,
metabolic & bariatric surgery and mother & child. It will also have a specialised
oncology centre with a dedicated tower with 300‐500 beds. This facility will, thus, be an
important contributor to Max’s aspiration to become the biggest oncology care
provider in India. It will also have a state‐of‐the‐art centre for all transplants including
heart, liver, kidney and bone marrow.

Max India

 Patparganj
This is a super‐specialty hospital and has a dedicated super‐specialty oncology, cardiac,
orthopedic & joint replacement and neurosciences departments. MHC operates this
hospital under a 30‐year service agreement with the Balaji Medical & Diagnostic
Research Centre that commenced in 2005.

Over FY13‐16, this hospital clocked revenue and EBITDA CAGR of 17% and16%,
respectively. FY16 EBITDA margin was 19.7%. It contributed ~37% to FY16 EBITDA and is
estimated to contribute ~20% of incremental EBITDA between FY16 and FY21.

 Vaishali
In July 2015, MHC completed acquisition of ~78% equity shareholding in Crosslay
Remedies, which owns and operates a 260 beds establishment (Max Super Specialty
Hospital, Vaishali) located in the East Delhi‐Ghaziabad‐Noida corridor. Its capacity is
expandable to 540 beds. Max has a call option right to acquire the balance stake, which
it intends to do in FY20 for ~INR1.5bn cash.

This hospital has established centers of excellence in orthopedics & joint replacement,
nephrology & kidney transplant, cardiology & cardiac surgery, IVF & infertility and
plastic & aesthetic surgery that provide care at par with international benchmarks. It is
strategically situated on NH24 and has the potential to dominate the Eastern Delhi and
Western UP market. This facility is already clocking ~16% EBITDA margin versus ~1%
before acquisition, primarily driven by ARPOB which has catapulted ~80%.

Significant capital expenditure and investments over FY16‐21
Over the next 5 years, MHC will employ ~INR18bn capital. Of this, it will invest ~INR4.4bn to
acquire the balance 49% stake in Saket City in FY18 and ~INR1.5bn to acquire balance stake
in Vaishali in FY20. Further, it will also add 375 beds at Saket and 200 beds at Vaishali. There
will be significant investments in adding a dedicated 300‐500 bed oncology tower at Saket
City hospital. Thus, with this additional ~INR9bn of capex, total capital employed at Saket by
FY21 will touch ~36% (31% currently) of the total capital employed by MHC. Currently, Saket
hospitals contribute ~70% to EBITDA, i.e., INR1.45bn, which is estimated to double by FY21.

Chart 10: ~50% of investments will be in Saket cluster over next 5 years
Capital employed (FY16) Balance 49% stake Total capex (FY16‐FY21E) Capital employed (FY21E)
in Saket city will be
acquired in FY18
Saket (INR 4400mn)
Others Saket
31% Balance stake in
9,658 37% 36%
Others Vaishali will be
42% acquired in FY20
+375 (INR 1500mn)
beds
3,971 3,772
+200 +149
936 beds beds
Patparganj Patparganj
Vaishali
Vaishali 16% 13%
Saket Patparganj Vaishali Others 14%
11%

Healthcare
Channel and service mix to fuel margin expansion
The strategy is to focus on improving margin by sprucing up:
 Channel mix (priority to international over government patients); and
 Service mix (focus on oncology, neurology, cardiology and transplants).
 Max is also investing in a sound digital platform to drive operational and cost
efficiencies.

Ergo, we estimate EBITDA to jump ~3x over FY16‐21.

Focusing on improving service mix
Max’s existing service mix leans on tertiary/ quaternary care. However, going ahead, the
company is planning to scale up high‐realisation specialty therapies like oncology and
neurology, among others. In fact, the company aims to become one of the largest oncology
players in India and its brownfield expansion in Saket will consist of a dedicated oncology
unit, the biggest in the country. Max is also investing in state‐of‐the‐art digital platforms
(DigiCare) and patient concierge front‐ends (to take care of insurance, visa, etc.) to improve
patient experience.

It is also driving comprehensive efforts to achieve operational and cost efficiencies. For
instance, it made ~INR400mn cost savings in FY16 and is eyeing ~INR400mn cost efficiency
in FY17.

Multiple levers to improve channel mix
One of the most significant growth drivers for Indian healthcare over the next decade will be
medical tourism. Currently, ~9% of Max’s total revenue is contributed by international
patients and it endeavors to further enhance this mix. The company enjoys premium pricing
on these cases. Additionally, it will de‐prioritise the low‐margin institutional business across
new units to bring the mix closer to its mature units.

Chart 11: Focus on tertiary/quaternary care Chart 12: Improving channel mix to improve profitability
60.0 100.0
19.4 16.2
25.6
48.0 14 13 80.0
14
15
14
36.0 13 13 60.0
12
(%)
(%)
9 11
24.0 10 10 40.0
9 10 10
12.0 8 10 10
7 7 20.0
4 4 5 6 6
4 3 3 3 9.1 12.9
0.0 2 0.0 1.6
FY12 FY13 FY14 FY15 FY16 MHC Mature units New units
MAMBS Renal Ortho Neuro Onco Cardiac International Walk‐in


Max India

Chart 13: Occupancy levels to remain healthy, despite expansion Chart 14: Expect steady growth in ARPOB
3,500 76 3,169 76.8 50.0
2,765 2,869
2,800 2,570 2,730
(in 000 per operating bed day)
75.2 40.0
75
73
(no of beds)
2,100 73 73.6

72 30.0
(%)
1,400 72.0
20.0
700 70.4
0 68.8 10.0
FY17E FY18E FY19E FY20E FY21E
0.0
avg unoccupied beds avg occupied beds
occupancy (%)

Diagnostics business (Max Lab) another value accretive opportunity
Max has created a separate SBU to help it leverage its strengths and grow externally. The
diagnostics business currently accrues ~INR2.5bn in revenue from in‐house pathology
services. The strategy is to build on B2C business model that can help Max achieve EBITDA
margin in excess of 35% on incremental revenue.

EBITDA to jump ~3x over FY16‐21E, ~45% to come from Saket cluster
We estimate MHC’s EBITDA margin to improve from current ~10% to ~14% by FY21, despite
adding ~30% incremental beds. Saket hospitals, Patparganj hospital and Vaishali hospital
will contribute 34%, 20% and 13% of the incremental EBITDA, respectively. The Saket
hospitals cluster has the best EBITDA margin of 19% versus MHC’s overall margin of 10%.
Others contribute ‐3% EBITDA margin and contribute to ~13% EBITDA bleed currently. This
is estimated to change going forward to ~ 8% margin and contribute ~18% to the company’s
overall EBITDA.

Chart 15: EBITDA to jump ~3x over FY16‐21E, ~45% to come from Saket cluster
FY16 EBITDA EBITDA FY21E
margin‐ 10% margin‐ 14%
1,419 6,434
Others
Vaishali 558 18%
843
9% Saket
1,467 Vaishali
45%
+149
12%
beds
+200
Patparganj 2,147
beds
37% Saket
+375
68%
beds
Patparganj
25%
Others
EBITDA (FY16) Saket Patparganj Vaishali Others EBITDA (FY21E)
loss ‐13%

Note: HO cost of INR1.15bn not apportioned in EBITDA shares of respective hospitals

Healthcare
Chart 16: MHC—Annual gross revenue by hospital age Chart 17: MHC—Annual EBITDA by hospital age
50,000 44,828 7,000 6,434 18.0
40,000 36,758 5,600 5,285 16.0

32,550 4,565
28,741 4,200 3,811 14.0
(INR mn)
30,000 24,336
(INR mn)
3,031
(%)
21,676
2,800 12.0
20,000 2,147
1,400 10.0
10,000
0 8.0
0 FY16 FY17E FY18E FY19E FY20E FY21E
Mature units (>5yrs) New units (<5yrs)
Mature units (> 5 years) New units (< 5 years) EBITDA margin (Total)


Max India

Health insurance, senior living: Significant value unlocking potential
Max has presence in a few other pockets of the healthcare chain as well: (i) health
insurance through 51% stake in Max Bupa; and (ii) senior living through Antara. Max
Bupa’s gross written premium is estimated to post 20‐22% CAGR going forward and will
breakeven by FY19.

Max Bupa Health Insurance
Health insurance has been the fastest growing segment in the non‐life insurance industry
over the past 5 years. It continues to be one of the most rapidly growing sectors in the
Indian insurance industry with an expected CAGR of >15% over the next 3‐5 years as just
~5% of the population is currently covered under private health insurance versus 12% in UK,
13% in Spain and ~45% in Australia.

Max Bupa is the fourth largest private health insurance player in India in terms of gross
written premium (GWP). It is a JV with Max India, which holds 51% of equity share capital,
and Bupa, which holds the balance 49%. As of FY16, Max Bupa had ~1mn urban lives in force
under various policies (under different product propositions).

Chart 18: Max Bupa ‐ Healthy premium growth with consistent improvement in combined ratio
Gross written premium 600 553 Combined ratio (%)
5,700
4,760
4,600 480
3,730
3,500 3,150 360
(INR mn)
(%)
2,060 240 212

2,400
151 142 127 115
1,300 990 120
250
200 0
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
FY11 FY12 FY13 FY14 FY15 FY16 FY11 FY12 FY13 FY14 FY15 FY16


Max Bupa is focused on the urban B2C of health insurance market with limited play in B2B
and B2G segments. During FY16, its B2C market share amongst private health insurers fell to
7.6% from 9.3% in FY15. Share of B2C segment in Max Bupa’s GWP rose to 98% from 95% in
the previous year with sharpened focus on the segment.

Recently, the company ventured into a new bancassurance channel. Such distribution
channels generally result in cash burn for the next ~3‐4 years and cash generation begins
only fifth year onwards. Max Bupa’s premium is estimated to post CAGR of 20‐22% via
policy CAGR of ~15% and price hike of 4‐5%.

Healthcare
Table 3: Max Bupa—Performance dashboard
Key Business driver FY15 FY16 YoY growth
Gross written premium income
First year premium INR mn 1,450 1,800 24.1
Renewal premium INR mn 2,280 2,960 29.8
Total INR mn 3,730 4,760 27.6
Net earned premium INR mn 3,150 3,930 24.8
Net loss INR mn (930) (680) (26.9)
Claim ratio (B2C segment, normalised) % 50 56 ‐600 bps
Avg premium realization per life (B2C) INR 6,364 6,800 6.9
Conservation ratio (B2C segment) % 81 83 200 bps
Number of agents No 8,909 12,581 41.2
Paid up capital INR mn 7,910 8,980 13.5

Max Bupa offers health insurance and personal accident insurance products to 4 segments:

1. Urban retail B2C
With focus on the urban retail B2C segment, the company’s products are largely
positioned in the premium sector for high net worth, affluent and mass affluent
population in the top 20‐25 towns and cities of India.
 Heartbeat: Heartbeat is Max Bupa’s flagship product for retail customers, offering
comprehensive health insurance cover ranging from INR0.2‐10mn for individuals
and families.
 Health Companion: It is an affordable health plan which offers features like no
room rent capping, refill benefit, pre‐ and post‐hospitalisation expenses, Ayush
Treatment and all‐day care treatments with guaranteed renewability for lifetime,
among other features.
 Health Assurance (fixed benefit): Health Assurance is a unique fixed benefit plan
that provides flexibilities to cover sudden eventualities like accidents, critical
illnesses and incidences of hospitalisation.

2. Urban group B2B
 Group Health Insurance: This is a comprehensive suite of health insurance that
includes hospitalisation, OPD treatment, critical illness, health check up, hospital
cash cover and named illnesses.
 Employee First: This product is offered under 2 variants: (a) Employee First is a
comprehensive health scheme suited for small and large corporate and institutions
for high sum insured (ranging from INR0.1‐5mn) and quality coverage with added
maternity benefits and wellness initiatives; and (b) Employee First Classic
accommodates small and medium enterprises with an insured sum of INR0.05‐
0.5mn.
 Group Personal Accident (fixed benefit): The product is a comprehensive personal
accident cover for large as well as small‐size groups, which provides flexibility to
design a cover suited to requirements of group members with a choice of basic
benefits and optional benefits.

Max India

3. Rural retail B2C
 Swasth Parivar: A health indemnity plan designed to meet the healthcare financing
needs of the Indian rural population. It offers an affordable cover with sum insured
options of INR0.05‐0.1mn and provides basic coverage like hospitalisation
expenses, medicine & drugs, IVF, blood transfusion, operation theatre charges,
diagnostic tests & procedures and surface ambulance.

4. Rural group B2B
 Swasthya Pratham: A group health micro insurance cover intended to cater to the
group healthcare needs of non‐governmental organisations (NGOs) and self‐help
groups (SHGs).
 Group Personal Accident (fixed benefit): This product offers cover for basic
benefits like accidental death, permanent total disability, permanent/partial
disability and temporary total disability plus and flexibility for additional benefits
and for extending coverage to dependents.

Table 4: GWP by segment (INR mn) Table 5: GWP by business acquisition channel (INR mn)
FY13 FY14 FY15 FY13 FY14 FY15
Urban retail (B2C) Individual Agents 871 1,365 1,891
Growth in urban retail (B2C) 110 52 45 Direct Business 564 675 864
% of urban retail (B2C) in Total GWP 78.0 79.0 95.0 Corporate Agents‐ Banks 0 31 273
Brokers 227 364 400
Urban group (B2B) Corporate Agents‐ Others 0 0 110
Growth in urban group (B2B) 77 45 (69) Others 410 654 190
% of Urban Group (B2B) in Total GWP 18.5 18.0 5.0 Total 2,072 3,088 3,727
Other‐ Rural & Social
Growth in Rural & Social 1,287 8 (84)
% of Rural & Social in Total GWP 4.0 3.0 0.0

Post a detailed strategic review in 2014, Max Bupa decided to focus largely on its core area
of expertise—the B2C segment—and limit its exposure to the B2B segment.

Healthcare
Antara: Senior living
With a growing number of seniors who are well travelled and accustomed to a certain
quality of life and infrastructure, the demand for senior living facilities is on the rise. Senior
living is a relatively new, but promising and rapidly growing, sector in India. The sector has
seen significant and increasing levels of activity over the past few years with entry of several
specialised real estate and corporate players, and launch, progression and completion of
senior living projects. Compared to developed markets like US, UK and Canada where senior
living has a long history and a sizeable, well‐developed infrastructure, several aspects of the
industry in India are still evolving.

Antara, a wholly owned subsidiary of Max, develops, manages and operates senior living
communities. Crafted by internationally renowned architects and constructed by renowned
partners, it is being created with a unique design philosophy to encourage utmost quality of
life. The Dehradun project is spread over 13.6 acres comprising 200 apartments between
1,400 and 6,600 square feet and a 50,000 square feet clubhouse. The apartments are priced
between INR15mn and INR66mn.

Max’s current equity investment in this project is ~INR2bn, while its total equity investment
will be INR2.5bn. The Dehradun project’s total project cost will be INR6bn. As of FY16,
Antara had completed signing long‐term lease contracts for 83 (42%) of its senior living units
at its Dehradun project and collected advance payment of ~INR1bn.

Max India

Valuations

We forecast revenue CAGR of 16% with EBITDA margin improving ~380bps and driving ~29%
EBITDA CAGR over FY16‐19; RoCE is estimated to jump 430bps to 11%. In our SOTP
valuation, we assume 20x FY19E EV/ EBITDA for MHC and 1x P/BV for Max Bupa & Antara to
arrive at target price of INR175. We initiate coverage with ’BUY/SO’.

Table 6: SOTP valuation on FY19 valuations
Valuation Mar‐18
Hospitals
Multiple 20x
EV 91,197
MIL's stake@46% 35,725
Max Bupa (investment) (@51% stake) 4,580
Antara (investment) 2,000
Cash (FY16) 4,115
Total 46,420
No of shares 267
Target Price 174

Table 7: Summary financials (INR mn)
Max India
MHC Max Bupa Antara
(Consolidated)
FY16 FY17E FY18E FY19E FY17E FY18E FY15 FY16
P&L
Revenue (excluding other income) 12,119 24,241 28,646 32,455 4,796 5,851 58 57
EBITDA (75) 3,030 3,810 4,560 (634) (369) (1,714) (2,104)
EBITDA margin NA 13 13 14 NA NA NA NA
PAT (807) 719 766 1,167 (511) (240) (727) (685)
Balance sheet
Net worth 11,524 11,334 12,008 13,035 1,575 1,335 1,352 1,284
Net Debt 988 8,363 11,738 10,468 (186) (261) (2) (66)
Capital employed 17,234 21,216 25,541 25,537 1,575 1,335 1,353 1,284

Healthcare
Key Risks

Historically, Max’s business growth has been primarily driven by establishing new centres
and hospitals through various partnership arrangements and acquisitions. The company
expects these will continue to be key drivers for future growth as well. Any hiccups in
expansion of network will have adverse impact on growth.

Subsidiaries may not sustain profitability in future
Some subsidiaries had reported net losses in recent years and may not be able to achieve or
sustain profitability in future, which may materially and adversely impact business prospects.

Success of business is dependent on Max’s ability to attract and retain leading specialist
physicians and other healthcare professionals including physicians and nurses. Much
depends, among other things, on the commercial terms that it offers, reputation of its
centres & hospitals and exposure to technology and research opportunities that it offers to
these professionals.

Rising infrastructure costs could restrict investments
Near‐term upfront investments could suppress margin, if infrastructure costs continue to
spiral.

Max India

Company Description

Max India (Max) is a holding company with 3 lines of business: (i) healthcare, through Max
Healthcare Institute (MHC); (ii) health insurance, through Max Bupa; and (iii) senior living,
through Antara.

MHC, along with its operating subsidiaries, comprises the healthcare business. MHC is
currently a joint venture wherein Max holds 46% equity. Life Healthcare, the JV partner, also
hold 46% equity in MHC, while the balance is held by financial investors and a few
employees. The network comprises 2,570 beds served by over 2,858 physicians, 4,151
paramedics and 2,565 support staff across 14 hospitals.

MHC provides services to 4 of the hospitals in this network:
(i) Max Super Specialty Hospital, Saket, owned by Devki Devi Foundation.
(ii) Max Super Specialty Hospital, Patparganj, owned by Balaji Medical & Diagnostic
Research Centre.
(iii) Max Smart Super Specialty Hospital, South Delhi, owned by Gujarmal Modi Hospital &
Research Centre for Medical Sciences.
(iv) Max Multi Specialty Hospital, Greater Noida, owned by Four Seasons Foundation.

Max Bupa is one of the leading standalone private health insurance companies in India. It is
a JV between Max (51% holding) and Bupa (holds balance 49% equity share capital).

Antara develops, manages and operates senior living communities. Its ~14 acre project is
currently underway in Dehradun.

Fig 1: Company structure
Max India Cash: INR4.1bn
(holding company)
46% stake 51% stake 100% stake
Max Healthcare Max Bupa Antara

(MHC) (Health insurance) (Senior Living)
Medical Services
O&M Fee
Own Hospitals
Devki Devi Foundation
Balaji Medical &
Diagnostic Research Healthcare Trusts
Centre
Gujarmal Modi
Hospital and Research
Centre for Medical
Sciences
Healthcare
Table 8: Management (MHC)
Mr. Rajit Mehta Managing Director & CEO‐ Max Mr Rajit Mehta has over 20 years of experience in financial
Healthcare services. Previously he was the Chief Operating Officer at Max
Life Insurance.
Mr. Yogesh Sareen Senior Director & Chief Financial Mr Yogesh Sareen has over 20 years of experience in across all
Officer facets of finance. Previously he was the CFO of Fortis
Healthcare.
Mr. Rohit Kapoor Senior Director & Chief Growth He has 18 years of diverse experience across industry and
Officer management consulting with McKinsey & Company.
Mr. Rohit Varma Director‐ Human Resources & Mr Rohit Varma has over 25 years of HR industry experience in
Chief People Officer organisations like NIIT, Headstrong, Genpact.
Mr. Anil Vinayak Director & Zonal Head – NCR 1 Mr Anil Vinayak has over 23 years of experience in Business
Management and Sales & Marketing; previously with Amex.
Mr. Anas Wajid Director‐ Sales & Marketing Mr Anas Wajid has more than 17 years of experience in diverse
fields such as advertising, retail , healthcare and media.
Previously he was Head, Sales and Marketing at Fortis
Healthcare.
Dr. Sandeep Buddhiraja Director‐ Clinical Directorate & Dr Sandeep Buddhiraja has over 23 years of experience in the
Institute of Internal Med. field of Internal Medicine.
Mr. Rakesh Prusti Director ‐ Legal, Compliance and Mr Rakesh Prusti has over 19 years of experience in diverse
Regulatory Affairs sectors such as Trading, IT, Export and Manufacturing;
previously with Carrefour and NIIT.
Mrs. Vinita Bhasin Senior Vice President & Head of Mrs Vinita Bhasin has more than 19 years of in‐depth
Service Excellence experience across the Financial Services sector. Previously she
was with Max Life Insurance.
Mr. Sumit Puri Chief Information Officer Mr Sumit Puri has over 21 years of experience in varied
industries such as Health/ Life Insurance, IT/ITES, and
Consulting. Previously he was the CIO of Prudential Life
Assurance.


Max India

Financial Outlook

Chart 19: Steady revenue growth… Chart 20:….with consistent improvement in EBITDA margin
50,000 15.0
14.4 14.4
14.1
40,000 14.0
13.3
30,000 13.0
(INR mn)
12.5
(%)
20,000 12.0
10,000 11.0
10.2
0 10.0


Chart 21: … will drive strong EBITDA growth Chart 22: …and ramp up RoCE
6,000 15.0 14.0
12.6 11.9
4,800
11.0
10.0
3,600 10.2 9.2
(INR mn)
(%)
2,400 7.8 6.7
1,200 5.4
0 3.0

Healthcare
Income statement (INR mn)
Key assumptions
FY16 FY17E FY18E FY19E
Income from operations 20,982 24,241 28,646 32,455
GDP(Y‐o‐Y %) 7.4 7.9 8.3 8.3 Gross Revenues 21,814 24,241 28,646 32,455
Inflation (Avg) 4.8 5.0 5.2 5.2 Net revenues 20,982 24,241 28,646 32,455
Total operating expenses 18,835 21,211 24,836 27,895
Repo rate (exit rate) 6.8 6.0 6.0 6.00
Materials cost 5,581 6,424 7,448 8,438
USD/INR (Avg) 65.00 67.50 67.00 67.0 clincian payout 1,685 1,818 2,148 2,434
No of beds 1,095 1,802 1,970 7,089 Employee cost 6,778 7,757 9,081 10,223
Other indirect overheads 3,644 4,000 4,727 5,193
Mature hospitals ‐ ARPOB 33,653
33,500
36,850
40,535
HO cost 1,147 1,212 1,432 1,606
Mature hospitals ‐ occupancy ra 75 75 76 77 Depreciation 1,054 1,144 1,525 1,798
New hospitals ‐ Bed capacity 690 384 380 398 EBITDA 2,147 3,030 3,810 4,560
Operating Profit 2,147 3,030 3,810 4,560
New hospitals ‐ ARPOB
27,356
26,206
25,829
28,214
EBIT 1,093 1,886 2,285 2,762
New hospitals ‐ occupancy (%) 67 65 61 66 Less: Interest Expense 995 987 1,327 1,304
Profit before tax 98 899 957 1,459
Less: Provision for Tax ‐ 180 191 292
Reported Profit 98 719 766 1,167
Adjusted Profit 98 719 766 1,167
Max India share in MHC network (46%)
EBITDA 988 1,394 1,753 2,098
Adjusted Profit 45 331 352 537
Dividend per share (DPS) ‐ 0.1 0.1 0.2
Dividend Payout Ratio (%) ‐ 10.0 10.0 10.0
clincian payout 8.0 7.5 7.5 7.5
Other indirect overheads 17.4 16.5 16.5 16.0
HO cost 5.5 5.0 5.0 5.0
Staff costs 32.3 32.0 31.7 31.5
Employee cost 5.5 5.0 5.0 5.0
EBITDA margins 10.2 12.5 13.3 14.1
Growth metrics (%)
Net Revenues 24.3 15.5 18.2 13.3
EBITDA 25.9 41.1 25.7 19.7
PBT (269.0) 817.1 6.5 52.3
Adjusted Profit (269.0) 633.7 6.5 52.3
EPS (269.0) 633.7 6.5 52.3
Max India

Balance sheet (INR mn) Profitability & liquidity ratios
Shareholders' funds 10,701 11,334 12,008 13,035 Return on Avg. Equity (ROAE) (%) 1.1 6.5 6.6 9.3
Total Borrowings 9,452 9,452 12,952 12,452 Pre‐tax ROACE (%) 6.7 9.2 10.0 11.0
cash credit limits 1,315 1,519 1,795 2,034 Inventory days 23 23 23 23
Sources of funds 21,468 22,305 26,755 27,521 Debtors days 33 33 28 25
Net Block 20,525 20,800 25,421 25,680 Payble days 11 11 11 11
Cash and cash equivalents 208 1,089 1,214 1,984 Cash Conversion Cycle 46 46 40 37
Inventories 392 420 521 545 Current Ratio 1.2 1.3 1.2 1.3
Sundry debtors 2,273 2,174 2,221 2,225 Gross Debt/EBITDA 4.4 3.1 3.4 2.7
Loans & advances 2,219 2,564 3,030 3,432 Gross Debt/Equity 0.9 0.8 1.1 1.0
Total current assets (ex cash) 4,884 5,158 5,772 6,202 Adjusted Debt/Equity 0.9 0.8 1.1 1.0
Capex creditors 198 176 258 234 Net Debt/Equity 0.9 0.7 1.0 0.8
Total current liabilities & prov. 3,951 4,565 5,394 6,111 Interest Coverage Ratio 1.1 1.9 1.7 2.1
Total current liabilities & prov. 4,149 4,741 5,652 6,345
Net current assets (ex cash) 735 417 120 (143) Operating ratios
Uses of funds 21,468 22,305 26,755 27,521 Year to March FY16 FY17E FY18E FY19E
Book Value per share (INR) 18 20 21 22 Total asset turnover 1.2 1.1 1.2 1.2
Fixed asset turnover 1.3 1.2 1.2 1.3
Free cash flow Equity turnover 2.3 2.2 2.5 2.6
Reported Profit 98 719 766 1,167 Valuation parameters
Add: Depreciation 1,054 1,144 1,525 1,798 Year to March FY16 FY17E FY18E FY19E
Interest (Net of Tax) 995 790 1,062 1,043 Adjusted Diluted EPS (INR) 0.2 1.2 1.3 2.0
Others 0 197 265 261 Y‐o‐Y growth (%) (269.0) 633.7 6.5 52.3
Less: Changes in WC (210) (318) (297) (263) Adjusted Cash EPS (INR) 2.0 3.2 3.9 5.1
Operating cash flow 2,357 3,168 3,915 4,531 Dil. Price to Earnings Ratio (P/E) (x) 842.2 114.8 107.8 70.7
Less: Capex 10,834 1,419 6,147 2,056 Price to Book Ratio (P/B) (x) 7.7 7.3 6.9 6.3
Less: interest 995 790 1,062 1,043 Enterprise Value / Sales (x) 3.3 2.9 2.4 2.2
Free cash flow (9,472) 960 (3,293) 1,432 Enterprise Value / EBITDA (x) 32.5 23.0 18.3 15.3
Dividend Yield (%) 0.0 0.1 0.1 0.1
Cash flow metrics
Financing cash flow 6,926 (869) 2,357 (1,705)
Investing cash flow (9,404) (1,419) (6,147) (2,056)
Net cash flow (121) 881 125 770
Capex 10,834 1,419 6,147 2,056
Dividend paid 0 0 0 86
Healthcare
Additional Data
Directors Data
Analjit Singh Founder and Chairman Emeritus Rahul Khosla Chairman
Mohit Talwar Managing Director Ashok Kacker Director
Mr Ashwani Windlass Director Dipankar Gupta Director
N.C. Singhal Director Sanjeev Mehra Director

Tara Singh Vachani Director

Auditors ‐ S.R. Batliboi & Co. LLP

Holding – Top10
Xenok Ltd 9.02 Liquid Investment & Trading 8.92
GS Mace Holdings 6.44 Reliance Capital Asset mgmt 5.08
Mohair Invst 3.03 Boom Invst 2.2
ICICI Prudential 1.48 DSP Blackrock 1.26
Mirae Asset Global 1.09 FIL Ltd 0.97
*in last one year
Bulk Deals

No data Available
*in last one year
Insider Trades

No data Available
*in last one year
Thyrocare Technologies
INITIATING COVERAGE

THYROCARE TECHNOLOGIES
Thoroughbred efficiencies champion
Thyrocare Technologies (Thyrocare) is one of India’s largest diagnostics EDELWEISS 4D RATINGS
players specialising in cost‐effective pathological biochemical testing. Its Absolute Rating BUY
strategy is to marry high volumes with low costs by drawing best yields Rating Relative to Sector Performer
from infrastructure. Moreover, rising prevalence of evidence‐based Risk Rating Relative to Sector Low
treatment, shift in favour of unorganised players and expanding product Sector Relative to Market Overweight
portfolio add growth heft. Owing to low capex requirements, strong FCF
generation phase will continue, sustaining high valuations in the medium
MARKET DATA (R: NA, B: THYROCAR IN)
term. Initiate with ’BUY’ and target price of INR700.
CMP : INR 616
Target Price : INR 700
Tailwinds spurring diagnostics growth to sustain 52‐week range (INR) : 668 / 523
As evidence‐based treatment gains ground, growth drivers for diagnostics will remain Share in issue (mn) : 53.7
upbeat. Other than having the same drivers as the healthcare sector in general, M cap (INR bn/USD mn) : 33 / 497
preventive healthcare diagnosis (wellness) will continue to gain popularity. Current Avg. Daily Vol.BSE/NSE(‘000) : 423.3
market share of organised players is fairly low, boosting long‐term growth visibility.
B2B pathology business riding wellness tide Current Q1FY17 Q4FY16
Thyrocare specialises in cost‐effective pathological biochemistry testing as a B2B Promoters * 64.0 64.0 NA
player. Its growth hinges on its strategy of marrying high volumes with low costs. The MF's, FI's & BK’s 11.5 11.8 NA
wellness segment’s contribution is estimated to jump from 50% to 60% of revenue by FII's 3.3 3.3 NA
FY21. Volume growth will drive ~ 72% EBITDA growth in pathology vertical, driven by Others 21.2 21.0 NA
increase in the number of regional labs and franchisees. (% of share in issue)

Strong free cash flow generation renders high yield RELATIVE PERFORMANCE (%)
Owing to the favourable rental reagent model and thereby low capex requirement, BSE
Stock Nifty
Thyrocare’s free cash flow will continue to be strong. CMP implies ~2.7% FCF yield to Healthcare
market cap for FY19, which is almost twice than the hospital sector. The space also 1 month 0.4 (2.5) (0.7)
offers best RoCE due to its asset‐light reagent rental model and low gestation period. 3 months 10.0 4.3 (1.7)
12 months NA 6.4 (11.4)
Outlook and valuations: Robust model; initiate with ‘BUY’

We forecast revenue and EBITDA CAGR of 23% and 24%, respectively, and RoCE to
improve from 24% to 35% over FY16‐19. We initiate coverage with ’BUY/SP’ and TP of
INR700 (20x FY19E EV/EBITDA).
Deepak Malik
Financials (INR mn) +91 22 6620 3147

Net revenues (INR mn) 2,312 2,857 3,532 4,270 Rahul Solanki
EBITDA (INR mn) 935 1,166 1,475 1,797 +91 22 6623 3317
rahul.solanki@edelweissfin.com
EBITDA Margin (%) 38.8 39.2
40.1 40.5

Adjusted profit (INR mn) 518 703 906 1,138 Archana Menon
Diluted P/E (x) 63.9 47.1 36.6 29.1 +91 22 6620 3020
EV/EBITDA (x) 34.3 27.5 21.8 17.9 archana.menon@edelweissfin.com

ROACE (%) 23.8 26.9 31.2 34.7
October 07, 2016
161
Healthcare
A bird’s eye view

Diagnostics Market (USD bn) Diagnostics makes a strong investment case as it is still a largely under‐consumed module of
Diagnostic market 6.7 ground, growth drivers for diagnostics will remain upbeat. Even as India continues to
3.5 Hence, preventive healthcare diagnosis (wellness) will continue to gain popularity. Also,
2.4 current market share of organised chains is fairly low, boosting their long‐term growth
gestation period.

2012 2015 2020 B2B pathology business riding wellness tide
Source: Industry reports, B2B pathology business focused on tapping best yields
Edelweiss research
Focused on back‐ended business model for overnight processing of biochemistry tests
Factors that set Thyrocare apart from other major organised players are: (1) lacks front‐end
laboratories and sources samples through or from its authorised service providers; (2)
performs only biochemistry pathology tests; and (3) only delivers results overnight.

Focus on expanding scale and riding wellness segment
Multi‐lab model driving volume growth
Thyrocare is planning to strengthen and expand its regional coverage across India via its
network of RPL and authorised service providers. By expanding this network, it will
simultaneously widen its customer base, generate higher volumes of samples for
processing, improve turnaround time and optimise logistics costs.

Emphasis on wellness and preventive healthcare
Under its Aarogyam brand, Thyrocare offers a suite of wellness (preventive health care)
tests. The wellness segment contributes ~50% to the company’s business. This segment
(~8% of total market) is clocking 27% CAGR, riding which Thyrocare’s pathology revenue is
estimated to post 20% CAGR over FY16‐21. We expect the wellness segment to contribute
67% of revenue growth over FY16‐21 and ~ 60% to total revenue by FY21.


Chart 1: Preventive & wellness segment to contribute 67% to revenue growth
1,266 6,107
2,543
40% of revenue
(FY21E)
2,298
60% of
revenue
(FY21E)
Revenue (FY16) Wellness/ preventive Sickness revenue Revenue (FY21E)
revenue

Economies of scale lead to best‐in‐class operating metrics
Its endeavour to tap best yields driven by high volume throughput over its infrastructure has
enabled Thyrocare’s pathology business consistently post >40% EBITDA margin and >30%
RoCE. One key thing to note is that unlike other diagnostic chains, Thyrocare only recognizes
revenue net of franchisee fee, thereby its EBITDA margin is not comparable to other players.

Chart 2: Volume growth to drive ~ 72% of EBITDA growth in pathology vertical
EBITDA margin EBITDA CAGR ‐20% EBITDA margin
40% 38%
144 (439)
1,515
2,068
848
EBITDA (FY16) No of samples Tests/ sample Realization/ EBITDA (FY21E)

test

PET‐CT scan business added to the fold
Thyrocare is developing a network of molecular imaging centers (radiology) for cancer
diagnosis through its subsidiary Nueclear Healthcare (NHL). The aim is to replicate its ‘low
cost + high volume’ efficiencies driven model to drive ~40% standalone EBITDA margin in
the PET‐CT scan segment—a highly underpenetrated diagnostic tool in India. We estimate
Nueclear to post revenue CAGR of 35% over FY16‐21 with improvement in margin.

Healthcare
Chart 3: Pathology to contribute bulk of EBITDA growth (77%) during FY16‐21
39% 40%
371 2,526
1,220
935
EBITDA (FY16) Pathology Imaging and others EBITDA (FY21E)


Strong free cash flow generation renders high FCF yield
Owing to the favourable rental reagent model and thereby low capex requirement, free
cash flow will continue to be strong. CMP implies ~2.7% FCF yield to market cap for FY19,
which is almost twice than the hospital sector.

Outlook and valuations: Robust model; initiate with ‘BUY’
We forecast revenue and EBITDA CAGR of 23% and 24%, respectively, and RoCE to improve
from 24% to 35% over FY16‐19 as PET‐CT scan business starts contributing. We initiate
coverage with ’BUY/SP’ and TP of INR700 (20x FY19E EV/EBITDA).

Diagnostics sector’s FY19E FCF yield is 3.1%, which is ~2x of the average for the hospital
sector. Sector’s RoCE is ~3x that of hospital sector. Thus, we value diagnostic sector at 25x,
25% premium over the hospital sector. However, we believe 20% discount to this is
warranted due to Thyrocare’s B2B model versus Dr Lal’s B2C model. We assign a TP multiple
of 20x EV/EBITDA.

Valuation Mar‐18
Multiple 20x
EBITDA (FY19) 1,797
EV 35,946
Market Cap 37,661
No of shares 54
Value per share 701



Tailwind pushing strong sector growth for diagnostics to continue
Diagnostics makes a strong investment case as it is still a largely under‐consumed
module of treatment and demand has significant room to grow. As evidence‐based
treatment gains ground, growth drivers for diagnostics will remain upbeat. Even as
India continues to grapple with the burden of communicable diseases, a wave of non‐
communicable diseases has flooded the country with ailments like diabetes, obesity
and cancer, among others. Hence, preventive healthcare diagnosis (wellness) will
continue to gain popularity. Also, current market share of organised chains is fairly
low, boosting their long‐term growth visibility. The space also offers best RoCE due to
its asset‐light reagent rental model and low gestation period.


approaches, this trend has gained ground in the previous decade.
faster growth rate in the wellness segment of the sector. Screening, early detection,
and monitoring reduce downstream costs.

We believe diagnostics is a ~USD4bn market for players that clocked ~14% CAGR during
FY12‐15. We believe the diagnostics industry will continue to post ~14% CAGR through 2020,
slightly faster than growth of the reagent market.

Chart 4: Strong diagnostics industry growth to sustain
6.7
3.5
2.4
2012 2015 2020


Healthcare
To understand the demand within the diagnostics market, we break it up across channels:
(b) While a chunk comprises sick‐care market, ~7% of overall value is derived from

Corporate Wellness
clients 7%
10%
35% 55%
Sick care
93%

There is much fragmentation with >100k labs in India, but demand for institutionalised
services has led to organised players becoming more relevant in this sunrise sector and have
hence benefited from this trend. SRL, Metropolis, Dr Lal, Thyrocare, Vijaya Diagnostics,
Medall, among others, are major organised players in the segment.

Chart 6: Highly fragmented industry
Hospital based
37% Regional Chains
9%
Diagnostic
Chains
15%
centres Chains
48% 6%



Immunology
22% Rural
Hematology 33%
18%
Radiology
56% 39%
44%
Others
21% Urban
67%


FY16 numbers unless
mentioned, INR mn
Revenue 7,913 2,312 8,980
ROCE (%) 44 24 12
FY18 P/E 43 37 N/A
FY19 P/E 33 29 N/A

Healthcare
B2B pathology business riding wellness tide
Thyrocare specialises in cost‐effective pathological biochemistry testing as a B2B
player. Its growth hinges on its strategy of marrying high volumes with low costs by
drawing best yields from its infrastructure. The wellness segment contributes ~50%
to company’s business and is estimated to contribute 67% to revenue growth by
FY21. In order to spur volume growth, it is planning to penetrate deeper in markets
by increasing the number of regional labs to ~25 (6 currently) and franchisees to
1,500 (1,200 currently). Volume growth will drive ~72% EBITDA growth in pathology
vertical that will drive 77% of overall company EBITDA. It is also aiming to replicate
its ‘low cost + high volume’ efficiencies driven model in the PET‐CT scan business
through via subsidiary Nueclear which we estimate to contribute 15% to EBITDA
growth by FY21.

Central Lab (CPL) in Navi Mumbai B2B pathology business focused on tapping best yields
Focused on back‐ended business model for overnight processing of biochemistry tests
6 Regional labs (RPL) in New Delhi,
Bhopal, Kolkata, Hyderabad, Factors that set it apart from other major organised players are: (1) lacks front‐end
Coimbatore and Bengaluru laboratories and sources samples through or from its authorised service providers; (2)
performs only biochemistry pathology tests; and (3) delivers results overnight. The company
Thyrocare has the distinction of has built a differentiated, highly efficient model wherein it procures only biochemistry
being the sole player among the samples from its country‐wide network of franchisees without putting up its front end and
large organised pack to have transports them to either its centralised processing laboratory (CPL) or one of its 6 regional
grown entirely organically. processing laboratories (RPLs) through 27 airport hubs. It then runs its sample testing
process overnight to deliver tests results online by the next morning.

Thyrocare collects samples via its pan‐India network of authorised service providers
comprising Thyrocare Aggregators (TAG) and Thyrocare Service Providers (TSP), which
operate under franchise agreements with the company. The group’s authorised service
providers collect samples from local hospitals, laboratories, diagnostic centers, nursing
homes, clinics and doctors. Its TSP are also authorised to draw samples directly from
patients referred by doctors, from patients procured by them or referred to by the group or
its direct sales associates and from patients’ homes as part of the home collection service.
Authorised service providers also receive samples through the group’s online client system
(OLC), which allows persons or organizations with sample collection capabilities to
outsource the processing of samples by placing an order on the wellness section on
Thyrocare’s website and deliver samples to the nearest authorised service provider. The
latter either deliver samples directly to one of the RPLs or, if the sample is to be processed
at CPL, to one of TTL’s 27 hub locations, where samples are aggregated and transported
directly to CPL.

Focus on expanding scale and riding wellness segment
Multi‐lab model driving volume growth
Its multi‐lab model consists of a fully automated CPL supported by its network of RPL that
conduct routine high‐volume testing. Where logistically feasible, authorised service
providers direct samples requiring such tests to RPLs. By doing so, the CPL’s resources are
utilised to process and test additional samples generated by the company’s pan‐India
network of authorised service providers that are closest to a RPL.

Thyrocare is planning to strengthen and expand its regional coverage across India via its
network of RPL and authorised service providers. By expanding this network, it will
simultaneously widen its customer base, generate higher volumes of samples for
processing, improve turnaround time and optimise logistics costs. It has developed long‐
term relationships with authorised service providers with the goal to maintain consistency
in quality of services across its network and prune churn.

Expand service platform by developing new channels
Moreover, on the anvil are plans to widen breadth of its testing and services platform via
new channels that leverage its brand, multi‐lab model and pan‐India network of service
providers. Thyrocare will use the expanded network of RPL and authorised service providers
to bolster brand visibility and enhance accessibility of its services.

Thyrocare has introduced Online Client System through which people and organisations
with sample collection capabilities (laboratories, diagnostic centers, doctors, clinics, nursing
homes, hospitals, medical representatives) can outsource the processing of samples to the
company. It is in the process of establishing Thyrocare Metabolic Clinic (TMC), a chain of
nation‐wide branded metabolic clinics for individuals with chronic illnesses or plans to
undergo a healthcare procedure. It will provide doctors and other healthcare professionals a
platform to deliver their expertise to potential patients. Over the next 3 years, Thyrocare
intends to develop clinics across India and is currently planning to open TMCs in Mumbai
and New Delhi. As another example, through the brand Sugar Scan, it offers a sugar scan
blood glucose monitor, one of the simplest ways for patients to instantly determine their
blood glucose levels at an affordable cost. The company is also forging corporate
relationships with insurance providers, helping patients streamline hospitalisation expense
claims to such insurance providers.

Emphasis on wellness and preventive healthcare
Under its Aarogyam brand, Thyrocare offers a suite of wellness (preventive health care)
tests. The wellness segment contributes ~50% to the company’s business. This segment
(~8% of total market) is clocking 27% CAGR, riding which Thyrocare’s pathology revenue is
estimated to post 20% CAGR over FY16‐21. The strategy is to continue to grow its wellness
and preventive offerings and expand product offerings of diagnostic and other tests. As
Thyrocare recognizes the growth opportunity in this segment and is well positioned to
leverage its expertise and brand, it is focusing a significant proportion of its marketing
efforts on preventive diagnostic and wellness offerings. It has set up an in‐house marketing
team and a network development team and is expanding its call center operations to
directly market its wellness and preventive offerings to referring doctors and individual
customers. Thyrocare also routinely sets up health camps to spread awareness of lifestyle
disease and benefits of undergoing preventive health checks. This has enhanced equity of
the Aarogyam brand among customers.

We expect the wellness segment to contribute 67% to revenue growth over FY16‐21 and
become ~ 60% to total revenue by FY21.

Healthcare
Chart 8: Preventive & wellness segment to contribute 67% to revenue growth
1,266 6,107
2,543
40% of revenue
(FY21E)
2,298
60% of
revenue
(FY21E)
Revenue (FY16) Wellness/ preventive Sickness revenue Revenue (FY21E)
revenue

Economies of scale lead to best‐in‐class operating metrics
As RPL conducts relatively routine tests, they do not require complex equipment. Ergo,
capital outlay to purchase equipment is minimal in comparison to that required to purchase
CPL equipment. To further minimise capital costs associated with establishment of the RPL
network, rather than expend capital on purchasing premises, Thyrocare leases them. Due to
the minimal capital outlay associated with RPLs, it has been able to expand its business
without incurring substantial capital costs. While the company has incurred ~INR600mn on
its CPL, it takes just ~INR30mn to open an additional RPL.

Thyrocare’s test volumes and long‐standing relationships with vendors have enabled it to

As the network of authorised service providers, RPL and the number of tests it performs
continue to grow, Thyrocare will improve its economies of scale and further optimise the
cost of samples and test it processes. It will keep passing on these cost efficiencies to
customers and offer tests at affordable rates. Offering tests at competitive prices is
conducive to the expansion of its customer base, which may in turn increase the number of
samples and tests it processes.

Its endeavour to tap the best yields driven by high volume throughput over its infrastructure
has enabled Thyrocare’s pathology business consistently post >40% EBITDA margin and
>30% RoCE. One key thing to note is that unlike other diagnostic chains, Thyrocare only
recognizes revenue net of franchisee fee, thereby its EBITDA margin is not comparable to
other players.

In our forecast, we build ~20% CAGR for the pathology business revenue, along with
conservative margin trajectory (~130bps contraction during FY17‐21). EBITDA is estimated
to post CAGR of 20%. Pathology will remain the most important contributor to EBITDA (90%
by FY21). It will drive ~77% of the EBITDA growth over FY16‐21.

Chart 9: Robust volume growth
35
Samples Processed (mn) Tests/ Sample 250 Tests (mn)
10
32
28 8 200
200
27
21 6 150
162
22
6
(Nos.)
6
6
(mn)
(mn)
6
6
5
5
129
18
5
14 4 100
14
103
4
12
80
7 2
9
50
62
7
48
6
FY14 35
FY13 25
0 0 0
FY17E
FY18E
FY19E
FY20E
FY21E
FY17E
FY18E
FY19E
FY20E
FY21E
FY13
FY14
FY15
FY16
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
FY21E
FY15
FY16


Chart 10: Volume growth and focus on Wellness to drive revenue and EBITDA growth
6,000 2,500 43.0
4,800 2,000 42.0
3,600
(INR mn)
1,500 41.0
(INR mn)
(%)
2,400 39.8 39.8
1,000 39.6 40.0
39.4
1,200 38.9
500 39.0
38.3
0
FY17E
FY18E
FY19E
FY20E
FY21E
FY13
FY14
FY15
FY16
0 38.0


Healthcare
Chart 11: Volume surge to drive ~ 72% EBITDA growth in pathology vertical
EBITDA margin EBITDA CAGR ‐20% EBITDA margin
40% 38%
144 (439)
1,515
2,068
848
EBITDA (FY16) No of samples Tests/ sample Realization/ EBITDA (FY21E)

test

PET‐CT scan business added to the fold
Thyrocare is developing a network of molecular imaging centers (radiology) for cancer
diagnosis through its subsidiary Nueclear Healthcare (NHL). The aim is to replicate its ‘low
cost + high volume’ efficiencies driven model to drive ~40% standalone EBITDA margin in
the PET‐CT scan segment—a highly underpenetrated diagnostic tool in India. We estimate it
to achieve ~30% margin by FY21. However, the business has a dilutive return profile versus
the pathology business and is fraught with a unique set of risks. While a PET‐CT costs
~USD1mn, a cyclotron costs ~USD2mn. This renders the business much more capital
intensive compared to the pathology business.

Thyrocare currently has 3 imaging centers operating 5 PET‐CT scanners—2 in Navi Mumbai,
2 in New Delhi and 1 in Hyderabad—and is planning to expand the scanning operation to
other major cities in India. For example, it intends to open molecular imaging centers in
Kolkata and Raipur. It believes, backward integration with its own cyclotron lends it with
greater flexibility, reliability and cost effectiveness as it expand operations. While PET‐CT
scanners are currently owned by NHL, in order to further expand the business and improve
capital efficiencies, it intends to deploy a franchisee model, whereby PET‐CT scanners will be
owned by the franchisee and revenue will be shared between NHL and the franchisee.
Thyrocare is currently setting up such an arrangement with a party in Raipur.

PET‐CT scanning is becoming increasingly relevant in India as instances of cancer have
burgeoned over the past decade. According to a CRISIL Research Report, cancer comprised
approximately 5% of disability‐adjusted life years (DALYs) of the Indian population in 2012
compared to ~3% in 2000. The use of accurate diagnosis technology such as PET‐CT scans
will help improve early detection of cancer. The company’s imaging revenue grew to
INR156mn with it performing ~16,000 scans during FY16. We estimate Nueclear to grow
revenue at CAGR of 35% over FY16‐21, with improvement in EBITDA margin.

A major factor discouraging the use of these diagnostic procedures is the high cost.
Therefore, the ability of diagnostic service providers to offer procedures at competitive
rates will be a key determinant of the segment’s growth. Accordingly, to take advantage of

the expected spurt in PET‐CT scanning services demand, Thyrocare is planning to offer such
services at competitive prices, thereby growing its referring doctor and hospital customer
base, which is bound to drive scanning volumes.

Chart 12: Radiology EBITDA margin to improve as revenue grows, driven by operating leverage
750 240 30 36.0
29
25
600 180 24.0
15
120 12.0
(INR mn)
(INR mn)
450
(%)
(0)
300 60 0.0
0 (15) (12.0)
150
(60) (24.0)
0
FY17E
FY18E
FY19E
FY20E
FY21E
FY16


We forecast 21% revenue CAGR for Thyrocare, with steady EBITDA margin driving 22%
EBITDA CAGR over the same period.

Chart 13: Pathology to contribute bulk of EBITDA growth (77%) during FY16‐21E
39% 40%
371 2,526
1,220
935
EBITDA (FY16) Pathology Imaging and others EBITDA (FY21E)

Healthcare
Owing to the favourable rental reagent model and thereby low capex requirement,
Thyrocare’s free cash flow will continue to be strong. CMP implies ~2.7% FCF yield to
market cap for FY19, which is almost twice than the hospital sector. The space also
offers best RoCE due to its asset‐light reagent rental model and low gestation period.

Rental reagent model will continue to maintain asset‐light model
Thyrocare’s test volumes and long‐standing relationships with vendors have enabled it to

As the number of tests it performs continues to grow, Thyrocare will improve its economies
of scale and further optimise the cost of samples and test it processes. It will keep passing
some of these cost efficiencies to customers and offer tests at affordable rates. Offering
tests at competitive prices is conducive to the expansion of its customer base, which may in
turn increase the number of samples and tests it processes.

Chart 14: Capex to remain low post lumpy investments Chart 15: Free cash flow
1,235
500 500 1,178
979
872
300 300 704
592
143 160




Valuations

We forecast revenue/EBITDA CAGR of 23%/24% and RoCE to improve from 24% to 35% over
FY16‐19. We assign 20x FY19E EV/EBITDA, which corresponds to 2.7% FCF yield, inline with
the hospital business. We initiate coverage with ’BUY/SP’ and TP of INR700.

Diagnostics sector’s FY19E FCF yield is 3.1%, which is ~2x of the average for the hospital
sector. Sector’s RoCE is ~3x that of hospital sector. Thus, we value diagnostic sector at 25x,
25% premium over the hospital sector. However, we believe 20% discount to this is
warranted due to Thyrocare’s B2B model versus Dr Lal’s B2C model. We assign a TP multiple
of 20x EV/EBITDA.

Valuation Mar‐18
Multiple 20x
EBITDA (FY19) 1,797
EV 35,946
Market Cap 37,661
No of shares 54
Value per share 701

Healthcare
Key Risks

Success of business hinges on network expansion
Historically, Thyrocare’s business growth has been primarily driven by expansion of network
and through various partnership arrangements and acquisitions. It expects these to
continue to be key drivers of future growth.

Near‐term upfront investments could suppress margin if infrastructure costs continue to
rise.

Rising competitive intensity
In addition to established players in the market a number of new PE‐backed players have
entered the fray. This could suppress the company’s growth in the future.


Company Description

Thyrocare, set up in 1995 and incorporated in 2000, is a leading pan‐India diagnostic chain
conducting an array of medical diagnostic investigations that center on early detection and
management of disorders. The company focuses on clinical chemistry. It has a CPL in Navi
Mumbai and 6 RPL. It is planning to set up RPLs in a few more places. Thyrocare has a
nation‐wide presence with over 30,000 source points for sample collection managed by its
pan‐India network of authorised service providers spread over more than 2,000 towns
across more than 450 cities in 29 states.

Thyrocare has a wholly owned subsidiary Nueclear HealThyrocareare (NHL). NHL is engaged
in imaging diagnostic services, viz. PET‐CT scans, nuclear scanning, etc. Its scanning centres
are in Navi Mumbai, New Delhi and Hyderabad. NHL is planning to set up scanning centres
in more places.

Fig. 1: Thyrocare’s delivery cycle
Authorised service
providers collect samples
for the entire day
Authorized service providers collect
Online and offline delivery
of reports to customers and forward samples to the RPLs
or to a hub to be sent to the CPL
Data (by web‐server) and
Samples are tested and samples (by aircargo, road or rail)
results uploaded both move to the relevant lab
Overnight processing
at CPL or RPL


Healthcare
Table 4: Brands and tests
Type of Services
Brand Name Examples of Tests Offered Brand Logo
Offered
Thyrocare Diagnostic testing Thyroid testing and non‐thyroid tests based on
twelve different types of technologies
Aarogyam Wellness and Liver, cholesterol, kidney, thyroid, iron deficiency,

preventive care testosterone, cardiac, pancreas, electrolytes,
arthritis, serum ferritin, folic acid and toxic
elements tests and profiles of tests.
Diabetic screens
Complete hemogram
Vitamin profile
NHL Cancer monitoring Full body and brain scans
WHATERS Water testing Physical and chemical, elements, microbiology,

pesticide and volatile organic compounds testing.
Sugar Scan Testing of blood Sugar scan blood glucose monitor
glucose levels


Table 5: Overview of tests performed and laboratory
Types of Thyroid Tests Performed at CPL Performed at RPL
Thyroid Stimulating Hormone  
Total Triiodothyronine  
Total Thyroxine  

Non‐Thyroid Tests Based on the Technologies
Performed at CPL Performed at RPL
Employed by the Company
CLIA  
ELISA 
HPLC  
Electrophoresis 
Flow cytometry 
Fluorescence Flowcytometry  
Nephelometry 
Photometry  
Liquid Chromatography Mass Spectrometry 
ICP‐MS 


Table 6 : Overview of tests performed and laboratory
Performed at Performed at
Wellness and Preventative Tests
CPL RPL
Aarogyam 1.1  
Liver, cholesterol, kidney, thyroid and iron deficiency
All of Aarogyam 1.1 profiles and complete hemogram
and diabetes
All of Aarogyam 1.2 profiles and
vitamin and testosterone
Aarogyam 1.4 
All of Aarogyam 1.3 profiles and
Cardiac risk profile, pancreas, electrolyte
Aarogyam 1.5 
All of Aarogyam 1.4 profiles and folic acid, blood
element analysis profile, testosterone and
homocysteine
Aarogyam 1.6 
All of Aarogyam 1.4 profiles and arthritis, serum
ferritin, folic acid
Aarogyam 1.7 
All of Aarogyam 1.6 profiles and a toxic elements
profile

Fig 2: Nueclear’s history
History
Jan
Incorporated
2011
May Agalia transferred 3,500,000 equity shares to Thyrocare; Thyrocare

2014 shareholding in NHL increased to 49.50%
Nov
Thyrocare increased its shareholding in NHL to 58.50%
2014
Dec
NHL became wholly owned subsidiary of Thyrocare
2015


Healthcare
Table 7: Management Overview
Dr. A. Velumani Promoter, Chairman, He is a graduate in science from the University of Madras and has a post graduate
Managing Director and degree in science from the University of Bombay and a doctorate in philosophy
Chief Executive Officer (science) from the University of Bombay. He has over 19 years of experience in the
diagnostics business. He set up TBPL and TDPL in 1996 which were subsequently
acquired by our Company in 2000. He has been heading the business of the Company
for over 15 years. Prior to that, he worked for over 12 years as a scientific officer
specialising in immunodiagnostics in general and radioimmunoarrays in particular,
at the Bhabha Atomic Research Centre.
Mr. A. Sundararaju Director and Chief He is a graduate in law from the University of Bombay. He has over 18 years of
Financial Officer experience in finance, legal and administrative activities. He has been in charge of the
finance, legal, administrative and franchisee departments of the Company since 1996.
He has been a Director on the Board since incorporation.
Mr. Sohil Chand Director He holds a post graduate degree in International Accounting and Finance from the
University of London and a holds a masters degree in business administration from
the University of Chicago. He has 14 years of experience in the financial services
industry, including private equity, venture capital and investment banking. He joined
NVP Venture Capital India Private Limited (“NVP India”) in October, 2008. He has been
associated with NVP India for over seven years. He has been a Nominee Director since
his appointment on September 29, 2012


Financial Outlook

Chart 16: Strong revenue growth… Chart 17: ….with steady EBITDA Margin
10,000 40.8
8,000 40.2
6,000 39.6
(INR mn)
(%)
4,000 39.0
2,000 38.4
0 37.8


Chart 18: …to drive strong EBITDA growth Chart 19: …and improvement in ROCE
3,000 42.0
2,400 38.0
1,800 34.0
(INR mn)
(%)
1,200 30.0
600 26.0
0 22.0


Healthcare
Appendix: Diagnostic market segments

popular
popular
Ultrasound systems

GDP (Y‐o‐Y %) 7.4 7.9 8.3 8.3 Net revenues 2,312 2,857 3,532 4,270
Inflation (Avg) 4.8 5.0 5.2 5.2 Other operating income 97 114 141 171
Repo rate (exit rate) 6.8 6.0 6.0 6.0 Total operating expenses 1,475 1,806 2,199 2,644
USD/INR (Avg) 65.0 67.5 67.0 67.0 Materials cost 704 867 1,055 1,265
Company Employee cost 257 284 314 346
Number of samples (mn) 12 14 18 22 Other expenses 514 655 830 1,032
Realisation/ Sample 198 199 199 197 Depreciation 182 182 194 206
EBITDA margin (%) 39 39 40 40 EBITDA 935 1,166 1,475 1,797
tax rate (%) 37 33 33 33 Operating Profit 935 1,166 1,475 1,797
EBIT 753 984 1,281 1,592
Profit before tax 818 1,049 1,352 1,698
Less: Provision for Tax 300 346 446 560
Less: Minority Interest ‐ ‐ ‐ ‐
Reported Profit 518 703 906 1,138
Adjusted Profit 518 703 906 1,138
Adjusted Basic EPS 10 13 17 21
Adjusted Diluted EPS 10 13 17 21
Dividend per share (DPS) 10 5 7 8
Dividend Payout Ratio (%) 99.1 40.0 40.0 40.0
Staff costs 10.7 9.6 8.5 7.8
Interest Expense 0 0 0 0
EBITDA margins 38.8 39.2 40.1 40.5
Growth metrics (%)
Net Revenues 26.4 23.6 23.6 20.9
EBITDA 30.2 24.7 26.5 21.9
PBT 23 28 29 26
Adjusted Profit 16.6 35.7 28.9 25.6
EPS 9.7 35.7 28.9 25.6
Healthcare

Share capital 537.2 537.2 537.2 537.2 Operating cash flow 848 752 1,279 1,172
Reserves & Surplus 3,119 3,484 3,955 4,547 Financing cash flow (177) (302) (260) (411)
Shareholders' funds 3,656 4,022 4,493 5,084 Investing cash flow (450) (337) (435) (546)
Long Term Liabilities & Provisions 127 178 199 257 Net cash flow 221 113 584 214
Deferred tax liability (net) (26) (26) (26) (26) Capex (143) (160) (300) (300)
Sources of funds 3,757 4,174 4,666 5,316 Dividend paid 619 337 435 546
Gross Block 1,986 2,146 2,446 2,746
Net Block 1,536 1,515 1,620 1,714 Profitability & liquidity ratios
Total Fixed assets 1,536 1,515 1,620 1,714 Year to March FY16 FY17E FY18E FY19E
Goodwill on consolidation 1,069 1,069 1,069 1,069 ROAE (%) 15.3 18.3 21.3 23.8
Non current investments 16 16 16 16 Pre‐tax ROACE (%) 23.8 26.9 31.2 34.7
Long term loans and advances 106 202 179 282 Inventory days 47 47 47 47
Cash and cash equivalents 1,019 1,132 1,716 1,930 Debtors days 10 10 10 10
Inventories 107 116 155 170 Payble days 7 7 7 7
Sundry debtors 75 78 111 118 Cash Conversion Cycle 49 49 49 49
Loans & advances 77 129 126 182 Current Ratio 4.3 9.4 5.2 8.8
Other Current Assets 66 81 100 121
Total current assets (ex cash) 325 404 492 590 Operating ratios
Trade payable 20 15 28 24 Year to March FY16 FY17E FY18E FY19E
Other CL & Short Term Provisions 294 148 398 262 Total asset turnover 0.7 0.7 0.8 0.9
Total CL & provisions 314 163 426 285 Fixed asset turnover 1.5 1.9 2.3 2.6
Net current assets (ex cash) 11 241 66 305 Equity turnover 0.7 0.7 0.8 0.9
Uses of funds 3,757 4,174 4,666 5,316
Book Value per share (INR) 68 75 84 95 Valuation parameters
Free cash flow Adjusted Diluted EPS (INR) 9.6 13.1 16.9 21.2
Year to March FY16 FY17E FY18E FY19E Y‐o‐Y growth (%) 10 36 29 26
Reported Profit 518 703 906 1,138 Adjusted Cash EPS (INR) 13.0 16.5 20.5 25.0
Add: Depreciation 182 182 194 206 Diluted P/ E ratio (P/E) (x) 64 47 37 29
Others 156 (159) 166 (203) Price to Book Ratio (P/B) (x) 9.1 8.2 7.4 6.5
Less: Changes in WC 9 (26) (13) (31) Enterprise Value / Sales (x) 14 11 9 8
Operating cash flow 848 752 1,279 1,172 Enterprise Value / EBITDA (x) 34.3 27.5 21.8 17.9
Less: Capex 143 160 300 300 Dividend Yield (%) 1.6 0.8 1.1 1.4
Free cash flow 704 592 979 872

Additional Data
Directors Data
Dr A Velumani Chairman & Managing Director Mr A Sundararaju Executive Director & CFO
Mr Sohi Chand Non‐Executive Nominee Director Mr Gopalkrishna Hegde Independent Director
Mr Vishwas Kulkarni Independent Director Dr Neetin Desai Independent Director

Mr N Palanisamy Independent Director Ms Amruta Velumani Non‐Executive Director

Auditors ‐ BSR & Co LLP

Holding – Top10
Norwest Venture Partners 9.43 Reliance Capital Trustee 3.41
SBI Funds Mgmt 3.34 DSP Blackrock 2.94
Sumathi Infra 2.93 Mahima advertising 2.35
Samara Capital Partners 2.03 Agalia Pvt Ltd 2.02
FID Funds Maurtius 1.35 Nomura 0.96
*in last one year
Bulk Deals

No data available
*in last one year
Insider Trades

No data available
*in last one year
RATING & INTERPRETATION
Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
Apollo Hospitals Enterprise BUY SO L Aurobindo Pharma HOLD SP H
Cadila Healthcare HOLD SP M Cipla HOLD SP L
Divi's Laboratories BUY SO M Dr.Reddys Laboratories HOLD SP M
Glenmark Pharmaceuticals HOLD SP M Ipca Laboratories REDUCE SU M
Lupin HOLD SP M Natco Pharma BUY SO M
Sun Pharmaceuticals Industries BUY SO M Torrent Pharmaceuticals BUY SO H
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
Healthcare
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91‐22) 4009 4400, Email: research@edelweissfin.com
Manoj Bahety
Deputy Head Research
manoj.bahety@edelweissfin.com

Coverage group(s) of stocks by primary analyst(s): Pharmaceuticals
Apollo Hospitals Enterprise, Aurobindo Pharma, Cadila Healthcare, Cipla, Divi's Laboratories, Dr.Reddys Laboratories, Glenmark Pharmaceuticals, Ipca
Laboratories, Lupin, Natco Pharma, Sun Pharmaceuticals Industries, Torrent Pharmaceuticals

Recent Research
Recent Research
Date Company Title Price (INR) Recos
Date Company Title Price (INR) Recos
02‐Jan‐14 IPCA The growth prescription; 729 Buy
05‐Sep‐16 Laboratories
Pharma Visit Note
Muted performance to
continue;
23‐Dec‐13 Torrent Aggressive M&A valuations to
Q2FY17 Result Preview 480 Hold
Pharma strain ROCE; Event Update
02‐Sep‐16 Apollo Weak organic performance; 1,374 Buy
17‐Dec‐13 Ranbaxy
Hospitals Receives approval for generic
Result Update 418 Hold
Laboratories Felodipine ;
02‐Sep‐16 Sun Pharma EdelFlash
Annual report shows Specialty 782 Buy
investments pace picking up;
Result Update
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 158 59 12 229 Buy appreciate more than 15% over a 12‐month period
* ‐ stocks under review
Hold appreciate up to 15% over a 12‐month period
> 50bn Between 10bn and 50 bn < 10bn

Reduce depreciate more than 5% over a 12‐month period
Market Cap (INR) 156 62 11
(INR) (INR) (INR)
120
140
160
180
200
220
0
40
80
120
160
200
1,100
1,200
1,300
1,400
1,500
1,600
Jul 16 Nov 15
Oct‐15
Dec 15
Nov‐15
Healthcare
Jan 16 Dec‐15
One year price charts
Feb 16 Jan‐16
Aug 16
Mar 16 Feb‐16
Apr 16 Mar‐16
Apr‐16
May 16
Max India
May‐16
188
Fortis Healthcare
Sep 16 Jun 16
Jun‐16
Jul 16
Jul‐16
Aug 16
Aug‐16
Sep 16 Sep‐16
Oct 16
Oct 16 Oct‐16
(INR) (INR)
(INR)
0
50
1,000
1,200
1,400
100
150
200
250
400
600
800
0
160
320
480
640
800
Apr 16 Jan 16
May 16
Feb 16
May 16
Jun 16 Mar 16
Jun 16 Apr 16
Jul 16 May 16
Jul 16
Jun 16
Dr Lal Pathlabs
Aug 16
Aug 16 Jul 16
Healthcare Global Enterprises
Aug 16
Sep 16 Sep 16
Sep 16
Oct 16 Oct 16
Oct 16
Healthcare

NOTES:
Healthcare
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Healthcare

Time to realise true potential

Deepak Malik Rahul Solanki Archana Menon

CMP Target Mcap EBITDA (INR mn) P/E (x) EV/ EBITDA (x) ROACE (%)* Net Debt

CAGR 9% 4.5 4.5

2000 2005 2010 2012

2000 2015 US China India

CAGR 9% 4.5 4.5

2000 2005 2010 2012

Aarogyasri (AP) Private/

(~30% of the population) (~60% of the population) (~10% of the

11 11 Coverage and

FY16 base FY21 FY21 FY21

15% of population Fortis Globals & Strivers

16.2 Fortis Apollo

Apollo 10.0% 19.5%

Fortis 2.2% 10.6%

2012 2015 2020

Public GI Private GI SAHI Government Group Insurance Individual

EBITDA Chennai Hyderabad Others Navi Byculla EBITDA

520 914 19,803

EBITDA Standalone Standalone Apollo AHLL Others EBITDA

Location Commisioning date Beds Total project cost (INR bn) Comments

12,000 3,000 19

EBITDA Chennai Hyderabad Others Navi Byculla EBITDA

3,000 53,000 10.0

2,500 41,000 7.5

Number of Pharmacies Revenues EBITDA Margin (%) ROCE

520 914 19,803

EBITDA Standalone Standalone Apollo AHLL Others EBITDA

8,000 10.0 10.4

Revenue Delhi Central East India Others Revenue Central India

EBITDA (FY16) Number of Realizations/ EBITDA (FY21E)

2012 2015 2020

4,200 360 360 120

4,517 1,200 22

Revenue Delhi Central East India Others Revenue Central India

EBITDA (FY16) Number of Realizations/ EBITDA (FY21E)

during FY17‐21. We forecast Hospital EBITDAC to clock 19% CAGR over FY16‐21. Others 9.8 10.6 12.7

organised diagnostics player which can unlock ~INR 57/share value. 1 month (2.2) (2.5) (0.7)

EBITDAC Established FMRI FEHI Startups‐ EBITDAC

150,000 Delhi‐ 14%

Revenue ARPOB (mn/year) Occupancy (%) Revenue ARPOB (mn/year) Occupancy (%)

FEHI 250 12,293

Ludhiana, FEHI Startups‐

EBITDAC Established FMRI FEHI Startups‐ EBITDAC

EBITDAC BT Service Fee EBITDA

6,400 25.0 80.0

Base fee Variable fee Hospital income Other income 0

Diluted P/E (x) 255.5 190.3 197.8 68.7

260 110 137

0.0 0.1 0.3 0.9 6.2 123 94 150‐200 174 318

Per Million Incidence Per million population Cancer incidence 2015 (mn) Age specific incidence rate ('000)

 Radiation therapy: A scarce key requirement: A key requirement for successfully

Total ‐ 2,557 471 2,848

Partnership MS Ramaiah 191

Partnership Hubli 139

JV MHIO ‐ Shimoga 42

Owned Gulbarga 24

Owned Curie‐ Day care 66

Total ‐ 839 151 526 Borivali 1,680

Owned Ahmedabad 646 Nagpur

Partnership Cuttack 298