VISIT NOTE

FORTIS HEALTHCARE
Rising from the abyss
India Equity Research| Healthcare
COMPANYNAME
After two turbulent years, which ended with the ousting of Singh EDELWEISS 4D RATINGS
brothers from Fortis Healthcare (Fortis), IHH is in control of the
Absolute Rating BUY
board. Recently appointed MD & CEO Dr. Ashutosh Raghuvanshi has Rating Relative to Sector Performer
his task clearly cut out—to revive past peak performance and achieve Risk Rating Relative to Sector Low
industry-leading profitability. Management’s first goal is to achieve Sector Relative to Market None
73-75% occupancy, from the slide to 65% over the past two years, by:
i) adding new specialties like interventional radiology and oncology; MARKET DATA (R: FOHE.BO, B: FORH IN)
ii) upgrading existing infrastructure; and iii) improving market share CMP : INR 122
in the cash market. The company also intends to save upwards of Target Price : INR 162
INR1bn in operational efficiencies and lift EBITDA margin by about 52-week range (INR) : 154 / 121

600bps to 16% by FY22. Additionally, the upcoming open offer at Share in issue (mn) : 755.0
M cap (INR bn/USD mn) : 92 / 1,331
INR170 implies an upside potential of 30% to CMP and 75% to our Avg. Daily Vol.BSE/NSE(‘000) : 1,821.9
INR162 TP. Maintain ‘BUY’.
SHARE HOLDING PATTERN (%)
Margin expansion aided by operational levers Current Q3FY19 Q2FY19
Despite the best in class contribution margins of 79%, as per our estimates, Fortis is Promoters * 31.3 31.3 0.2
amongst the lowest in terms of manpower productivity. This is primarily due to personnel
MF's, FI's & BK’s 12.1 12.1 19.5
costs, which include clinicians’ cost, and other expenses, mainly promotional costs, which
FII's 38.6 38.6 54.5
are also the highest among peers. Hence, the foremost task for management is to instill Others 18.0 18.0 25.8
cost discipline, which is the focus area for the new CEO, who is targeting INR1bn+ in * Promoters pledged shares : NIL
savings over the next 18–24 months. Escorts and Jaipur are the hospitals where (% of share in issue)

maximum improvement can be achieved, in our view, as they generate single-digit

margins. Cost savings coupled with improvement in occupancy would drive up margins by PRICE PERFORMANCE (%)

about 600bps over next the three years. EW Pharma

Stock Nifty
Index

Value unlocking via open offer implies 75% upside potential 1 month (3.1) (2.6) (4.4)
3 months (2.6) 3.1 (1.3)
Going forward, IHH expects to launch an open offer at INR170 per share after the
Supreme Court hearing, which is expected in July 2019. An open offer at INR170/share 12 months (14.0) 5.2 2.5

assuming 38% acceptance and a market price of INR122 per share implies effective cost
of INR93/share for an investor buying the share around current levels. This implies 31%
upside potential to current market price and 75% to our target price. (Refer Table 1)

Outlook and valuation: Unlocking value; maintain ‘BUY’

We believe Fortis can unlock significant value and remains a re-rating candidate as it is Deepak Malik
trading at 12.7x FY21E EBITDA. We maintain ’BUY/SP’ with SoTP-based target price of +91 22 6620 3147
deepak.malik@edelweissfin.com
INR162 (September 2020E EBITDA).
Financials (INR mn) Ankit Hatalkar
+91 22 2286 3097
Year to March FY18 FY19 FY20E FY21E
ankit.hatalkar@edelweissfin.com
Net Revenues (INR mn) 44,739 43,781 47,539 53,684
EBITDA (INR mn) 2,731 4,408 6,040 7,769 Aashita Jain
aashita.jain@edelweissfin.com
EBITDA margin (%) 6.0 9.9 12.5 14.2
EV/EBITDA (x) 19.5 24.1 16.8 12.7
ROACE (%) 2.3 1.1 4.7 6.4 June 7, 2019
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
 Healthcare

Clear goals cut out for new MD & CEO

“In FY20, we will consolidate operations”
-Dr. Ashutosh Raghuvanshi

Over the past two years, the hospital industry had been impacted by extraneous factors like
demonetisation, pricing cap on stents and knee caps, implementation of the GST and an
overall decline in public faith in the private healthcare system. During this period, Fortis
faced its own set of challenges, as a result of which occupancy declined from 75% to 65%
and EBITDA margin from mid-teens to less than 10%. The new IHH-appointed MD & CEO, Dr.
Ashutosh Raghuvanshi, has his task cut out:

1) Improving occupancy: From the current 68% to the previous best-in-class levels of 73-
Dr. Ashutosh Raghuvanshi
75%. Management plans to achieve this by adding new specialties like interventional
MD & CEO
radiology and oncology, upgrading the existing infrastructure and improving market
share in the cash market.

2) Disciplined cost control: A recent peer comparison analysis suggests that Fortis has an
inefficient cost structure, with high advertising, personnel and corporate costs.
Management has narrowed in on potential initiatives and has already achieved
contribution margin expansion of 100bps in FY19 to industry-leading 80%. Besides,
since January 2019, the company has achieved INR250mn in cost savings and is on track
to save INR1bn+ over the next two–three years.

3) Commissioning WIP capacity: Facilities at Bannerghatta Road in Bangalore and in Noida

have extra capacity that can be commissioned. On Bannerghatta Road, Fortis expects to
start its oncology facility over the coming months while in Noida it expects to
commission the liver transplant programme by the end of CY19. Meantime,
management does not expect to expand beds anymore.

4) Turning around lagging facilities: Centres such as Escorts and Jaipur are low-occupancy
and low-EBITDA, and they can be the relatively easy turnaround candidates for Fortis.

Chart 1: Operating performance to revive to past peak performance

60 80.0 20.0

48 76.0 17.5

36 72.0 15.0
(INR bn)

(%)

(%)

24 68.0 12.5
300bps
annual
12 64.0 10.0
margin
improvement
0 60.0 7.5
FY20E
FY21E
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20E

FY21E
FY13

FY14

FY15

FY16

FY17

FY18

FY19

Revenue EBITDA Occupany EBITDA margin (LHS)

Source: Company, Edelweiss research

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 Fortis Healthcare

From an earlier analysis based on FY18 financials, Fortis had one of the highest other
expenses and personnel costs, which includes Clinician expenses. Management intends to
drive procurement, supply-chain efficiencies and manpower productivity, unlocking about
INR1bn+ in cost savings over two–three years. We feel maximum improvement can be
achieved at Escorts (FEHI) and Jaipur, which are currently low occupancy, low EBITDA
margin centres.

“EBITDA margins to achieve high teens run -rate over the next
three years”
-Dr. Ashutosh Raghuvanshi

We forecast EBITDA margin would grow by ~600bps over FY19-22E. Simultaneously, with
capex moderating to just maintenance spend, i.e. INR2bn, which equals depreciation, will
drive RoCE from 1.1% to 8.1% over FY19–22E.

Chart 2: EBITDA margin set to improve by ~600bps over FY19–22E

20.0
15.9%
16.0
+350bps
12.0
9.9% +250bps
(%)

8.0

4.0

0.0

Occupancy
control
EBITDA

EBITDA
margin

margin
(FY19)

(FY22)
Cost

Source: Company, Edelweiss research

Free cash flow to improve in FY21

With bulk of investments done, Fortis’ capex is expected to decline to INR2bn, of which
majority will be towards maintenance. Margin expansion coupled with calibrated capex is
expected to generate significant free cash flow in FY21. Working capital requirements in
FY20 will likely be higher due to accrued payables. However, management expects to this to
normalise in FY21. This will precipitate ~500bps of RoCE expansion over FY19-21. Other free
cash flow levers include: i) INR2.5-3bn from sale of non-core assets, which include
investments in Mauritius, the proposed sale of RHT Health Trust Managers (RHTTM),
trustee manager of RHT and other select non-core assets; ii) INR2.7bn savings from non-
recurrence of clinical establishment fees.

3 Edelweiss Securities Limited

Healthcare

Open offer implies an attractive entry point

Last month, IHH announced that it would proceed with an open offer to minority
shareholders once the Supreme Court lifts the stay order imposed pursuant to the contempt
case by Daiichi Sankyo. The hearing is expected after the courts re-open in July 2019.

Currently, IHH holds a 31.17% stake in Fortis and plans to acquire an additional 26% from
public shareholders via the open offer. An open offer price of INR170/share implies effective
cost of INR93/share. This implies effective upside potential of about 75% on our target price
of INR162. Refer to table 1 for the calculation.

Table 1: Open offer implies cost basis of INR93 per share

Current Price (INR) 122

Open offer (INR) 170

Stake to Buy (A) 26.00%

IHH stake (B) 31.17%
Open market (C = 100%-(B)) 68.83%
Tender acceptance ratio (D = C / A) 37.77%

Cost of 1 share @ Market purchase (E) 122

Permissable tender of 38% @ 170 (F) 64
Remaining shares (G = 1-(D)) 62.23%
Cost per share ((E-F)/G) 93

Target price 162

Implied upside potential 74.45%
Source: Company, Edelweiss research

Table 2: Fortis SoTP valuation

Valuation Sep-20
Hospitals
Multiple 18x
EBITDA (September 2020E) 5,552
EV 99,941
Less: net debt (Mar '20E) 4,928
Market Cap 95,013
No. of shares (Fortis) 755
Value per share 126
SRL
Multiple 20x
EBITDA (September 2020) 2,426
EV 48,528
Less: net debt (Mar '20E) -
Market Cap 48,528
No. of shares (SRL) 755
Value for SRL shareholder 64
Value for Fortis shareholder 36
Target Price 162
Source: Company, Edelweiss research

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 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.

Investment Theme
Fortis Healthcare (Fortis) is a high quality tertiary player levered to the high-potential of the
NCR/ North India market. Its focus is on asset-light brownfield expansion and sweating its
assets to improve operating metrics. Fortis is on the cusp of unlocking significant value by:
(i) demerging its 56% subsidiary SRL which can unlock value of ~INR50/share; and (ii)
partially unwinding its REIT capital structure, on which Fortis pays an yield of 13-14%,
according to us.

Key Risks
Success of business depends on network expansion

Subsidiaries may be unable to sustain profitability

Specialist physicians could dis-associate

Rising infrastructure costs could restrict investment

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 Healthcare

Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E
Macro Gross revenues 44,739 43,781 47,539 53,684
GDP(Y-o-Y %) 6.7 7.1 7.1 7.3 Net revenue 44,739 43,781 47,539 53,684
Inflation (Avg) 3.6 3.7 4.0 4.5 Other Operating Income 869 913 959 1,007
Repo rate (exit rate) 6.0 6.3 5.8 5.8 Income from operations 45,608 44,694 48,498 54,691
USD/INR (Avg) 64.5 70.0 72.0 72.0 Materials costs 9,990 9,282 10,184 11,485
Employee costs 9,057 9,136 9,867 10,607
Other Expenses 23,830 24,023 22,406 24,830
EBITDA 2,731 4,408 6,040 7,769
Operating profit 2,731 2,252 6,040 7,769
EBIT 342 (77) 3,608 5,088
Less: Interest Expense 2,578 3,368 1,305 1,005
Add: Other income 1,397.26 924.00 584.67 594.57
Profit Before Tax (9,649) (4,745) 2,887 4,677
Less: Provision for Tax 227 1,136 577 935
Less: Minority Interest 748 752 850 850
Add: Exceptional items (8,810) (2,224) - -
Associate profit share 532 3,644 300 320
Reported Profit (10,092) (2,989) 1,760 3,212
Exceptional Items (6,608) (1,668) - -
Adjusted Profit (3,485) (1,321) 1,760 3,212
Shares o /s (mn) 519 755 755 755
Adjusted Basic EPS (6.7) (1.8) 2.3 4.3
Diluted shares o/s (mn) 519 755 755 755
Adjusted Diluted EPS (6.7) (1.8) 2.3 4.3
Adjusted Cash EPS (2.1) 1.3 5.6 7.8

Common size metrics

Year to March FY18 FY19 FY20E FY21E
Materials costs 21.9 20.8 21.0 21.0
Staff costs 19.9 20.4 20.3 19.4
Operating expenses 94.0 95.0 87.5 85.8
Depreciation 5.2 5.2 5.0 4.9
Interest Expense 5.7 7.5 2.7 1.8
EBITDA margins 6.0 9.9 12.5 14.2
Net Profit margins (6.0) (1.3) 5.4 7.4

Growth ratios (%)

Year to March FY18 FY19 FY20E FY21E
Revenues 0.3 (2.1) 8.6 12.9
EBITDA (22.6) 61.4 37.0 28.6
PBT (1,570.7) (50.8) (160.8) 62.0
Adjusted Profit (182.6) (62.1) (233.2) 82.5
EPS (182.5) (73.9) (233.2) 82.5

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 Fortis Healthcare
Balance sheet (INR mn) Cash flow metrics
As on 31st March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E
Share capital 5,187 7,550 7,550 7,550 Operating cash flow 5,536 20,591 3,919 3,575
Reserves & Surplus 35,431 58,459 60,218 63,430 Financing cash flow (7,330) 22,626 (6,455) (3,155)
Shareholders' funds 40,617 66,008 67,768 70,980 Investing cash flow (3,331) (39,413) (2,000) (2,000)
Minority Interest 12,552 5,117 5,967 6,817 Net cash Flow (5,126) 3,804 (4,537) (1,581)
Long term borrowings 9,481 6,746 3,746 746 Capex (556) (22,694) (2,000) (2,000)
Short term borrowings 4,523 12,307 9,307 9,307
Total Borrowings 14,004 19,054 13,054 10,054 Profitability and efficiency ratios
Long Term Liabilities 787 924 1,002 1,130 Year to March FY18 FY19 FY20E FY21E
Def. Tax Liability (net) (1,520) 155 1,085 1,458 ROAE (%) (4.7) (0.9) 3.6 5.4
Sources of funds 66,441 91,257 88,876 90,438 ROACE (%) 2.3 1.1 4.7 6.4
Gross Block 31,693 52,057 51,625 50,944 Inventory Days 23 24 22 23
Depreciation 2,390 2,329 2,433 2,681 Debtors Days 38 42 42 40
Net Block 31,693 52,057 51,625 50,944 Payable Days 251 302 286 285
Intangible Assets 20,488 37,208 37,208 37,208 Cash Conversion Cycle (189) (236) (222) (222)
Total Fixed Assets 52,181 89,265 88,832 88,151 Current Ratio 0.8 0.7 0.6 0.6
Non current investments 13,969 1,903 3,880 4,375 Gross Debt/EBITDA 5.1 4.3 2.2 1.3
Other non current assets 4,301 7,025 5,981 8,386 Gross Debt/Equity 0.3 0.3 0.2 0.1
Cash and Equivalents 5,547 9,351 8,126 8,393 Adjusted Debt/Equity 0.3 0.3 0.2 0.1
Inventories 666 565 676 762 Net Debt/Equity 0.2 0.1 0.1 -
Sundry Debtors 4,702 5,424 5,494 6,196 Interest Coverage Ratio 0.1 - 2.8 5.1
Loans & Advances 165 211 204 230
Other Current Assets 1,735 1,114 727 820 Operating ratios
Current Assets (ex cash) 7,268 7,315 7,101 8,008 Year to March FY18 FY19 FY20E FY21E
Trade payable 7,830 7,535 8,429 9,505 Total Asset Turnover 0.6 0.6 0.5 0.6
Other Current Liab 8,996 16,067 16,615 17,370 Fixed Asset Turnover 0.8 0.6 0.5 0.6
Total Current Liab 16,825 23,603 25,044 26,875 Equity Turnover 0.8 0.7 0.7 0.7
Net Curr Assets-ex cash (9,557) (16,288) (17,943) (18,867)
Uses of funds 66,441 91,257 88,876 90,438 Valuation parameters
BVPS (INR) 78.3 87.4 89.8 94.0 Year to March FY18 FY19 FY20E FY21E
Adj. Diluted EPS (INR) (6.7) (1.8) 2.3 4.3
Free cash flow (INR mn) Y-o-Y growth (%) (182.5) (73.9) (233.2) 82.5
Year to March FY18 FY19 FY20E FY21E Adjusted Cash EPS (INR) (2.1) 1.3 5.6 7.8
Reported Profit (10,092) (2,989) 1,760 3,212 Diluted P/E (x) (18.2) (70.0) 52.5 28.8
Add: Depreciation 2,390 2,329 2,433 2,681 P/B (x) 1.6 1.4 1.4 1.3
Interest (Net of Tax) 2,638 4,175 1,044 804 EV / Sales (x) 2.0 2.5 2.3 2.0
Others 16,064 23,807 338 (2,199) EV / EBITDA (x) 30.9 24.3 17.1 13.0
Less: Changes in WC 5,464 6,731 1,655 924
Operating cash flow 5,536 20,591 3,919 3,575
Less: Capex 556 22,694 2,000 2,000
Free Cash Flow 2,436 (5,470) 613 569

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 Healthcare

Additional Data
Directors Data
Ravi Rajagopal Chairman Indrajit Banerjee Independent Director
Suvalaxmi Chakraborty Independent Director Bhagat Chintamani Aniruddha Non-executive Director
Dr. Chan Boon Kheng Non-executive Director Low Soon Teck Non-executive Director
Dr. Tan See Leng Non-executive Director Ms. Suvalaxmi Chakraborty Independent Director
Rohit Bhasin Independent Director

Auditors - Deloitte,Haskins and Sells

*as per last annual report

Holding – Top10
Perc. Holding Perc. Holding
Yes Bank 8.41 Goldman Sachs 2.69
York Asia Pacific 5.68 Vanguard 2.09
BlackRock 4.81 Rakesh Jhunjhunwala 1.66
UBS 3.45 Reliance Capital Trustee 1.59
East Bridge Capital 2.84 Jupiter Investment Management 1.36
*in last one year

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
28 Nov 2018 YORK ASIAN STRATEGIC METRIC MASTER L.P SELL 12700000 146.00
28 Nov 2018 UBS PRINCIPAL CAPITAL ASIA LIMITED BUY 15200000 146.00
20 Nov 2018 UBS PRINCIPAL CAPITAL ASIA LIMITED BUY 10001281 147.05
20 Nov 2018 YORK ASIAN OPPORTUNITIES INVESTMENTS MASTER FUND LP SELL 10000000 147.05
14 Sep 2018 GOLDMAN SACHS SINGAPORE PTE BUY 2597080 144.73
*in last one year

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
27 Jul 2018 Rhc Holding Pvt Liimited Sell 218250.00
27 Jul 2018 Malav Holdings Pvt Limited Sell 240750.00

*in last one year

8 Edelweiss Securities Limited

 RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
Apollo Hospitals Enterprise BUY SO L Dr. Lal Pathlabs Ltd BUY SO L
FORTIS HEALTHCARE LTD BUY SP L HealthCare Global Enterprises BUY SP M
Limited
Max India Limited BUY SP M Thyrocare Technologies Ltd HOLD SU 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

9 Edelweiss Securities Limited

 Healthcare

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=SERVICE,
2.5.4.20=3dc92af943d52d778c99d69c48a8e0
c89e548e5001b4f8141cf423fd58c07b02,
Head of Research
NARAIN
postalCode=400011, st=MAHARASHTRA,
serialNumber=e0576796072ad1a3266c27990
f20bf0213f69235fc3f1bcd0fa1c30092792c20,
aditya.narain@edelweissfin.com cn=ADITYA NARAIN
Date: 2019.06.07 20:25:04 +05'30'

Coverage group(s) of stocks by primary analyst(s): Healthcare

Apollo Hospitals Enterprise, Dr. Lal Pathlabs Ltd, FORTIS HEALTHCARE LTD, HealthCare Global Enterprises Limited, Max India Limited, Thyrocare
Technologies Ltd

Recent Research

Date Company Title Price (INR) Recos

31-May-19 Apollo Rising through the challenges; 1,203 Buy

Hospitals Result Update
30-May-19 Max India On track to deliver targets; 66 Buy
Result Update
27-May-19 Fortis Operationally strong quarter; 128 Buy
Healthcare back on track;
Result Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594

One year price chart

446
180
(INR)

297 165

149 150
(INR)

- 135
Apr-14

Sep-14
Feb-14

Mar-14

Jun-14

Dec-14
Jul-14

Aug-14

Oct-14

Nov-14
May-14
Jan-14

120

105
Dec-18
Aug-18

Oct-18

Apr-19
Nov-18

May-19
Sep-18

Feb-19
Jan-19

Mar-19
Jun-18

Jun-19
Jul-18

Fortis Healthcare

10 Edelweiss Securities Limited

 Fortis Healthcare
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Healthcare

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12 Edelweiss Securities Limited

 Fortis Healthcare

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