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Health is Wealth!
November 2010 Nitin Agarwal ● Ritesh Shah
cardiac care hub & spoke MAX orthopedics franchisee
multi specialty medical tourism asset light, india shining ALOS medicities, long gestation t lifestyle tertiary care capital intensive diseases exponential economic boom healthcare spends private sectorFortisARPOB opportunity corporate hospitals REITS rauma Apollo insurance ce radiology, super-specialty Vaatsalya regulation inorganic
real Narayana estate Hrudayalaya
daycare sugery telemedicine
15 November 2010 BSE Sensex: 20157
Health is Wealth!
Reason for report: Initiating coverage
Indian healthcare industry is poised to double to US$125bn by 2015E, driven by a combination of ageing population, growing lifestyle diseases, increasing ability to afford quality healthcare and growing medical insurance penetration. With public spend likely to be limited to ~20% of the annual healthcare spend, organized private hospital players will be the primary beneficiaries of this expected boom. However, high upfront investments and long gestation periods, as also burgeoning real estate costs and growing manpower shortages, will compel the hitherto tertiary-/ metro-focused private sector to innovate with business models. While the competitive landscape in this relatively nascent sector is still evolving, we believe entry barriers are rising – which strongly favours the leading incumbents. Being the only two listed players in the healthcare space, Apollo and Fortis (cumulative market cap of <$5bn) are the best proxies on the rapidly growing Indian healthcare opportunity. We believe the stocks deserve to trade at a premium not just to the broader market but also to global peers as they are in the high growth phase of their life cycle. Indian healthcare – organized private hospitals join the party: At ~5.5% of GDP (according to OESC), Indian private healthcare spend is among the highest globally and accounts for ~80% of the total US$62bn spend in 2009. Hospitals account for ~50% of the healthcare spend in India. Organized hospital chains (>100 beds), ~10% of private sector capacity currently, are steadily increasing their presence as public spending would remain limited. Thus, we see interesting times ahead for private sector healthcare players. Attractive business but the road ahead is not easy: While successful tertiary hospitals can potentially generate 25%+ EBITDA margins with return ratios > 30% from the seventh year of operations, private sector hospital chains need deep pockets to grow given the significant upfront capex requirement (~Rs2bn for a 200-bed tertiary hospital) and long gestation periods. Shooting real estate costs, growing shortage of skilled medical personnel leading to wage inflation, and emergence of pockets of overcapacity add to the challenges. This should spur innovation in business models. The stress on innovation is already visible in Apollo’s launch of newer formats like Apollo Reach as also Fortis’s increased use of an asset-light strategy involving leasing of land/ building. Advantage Incumbents: As the going gets difficult, we believe the leading incumbents are favorably placed with their sizeable assets, significant geographical footprint and strong brand identities. As new entrants would find it increasingly difficult to scale up unless they innovate significantly, the two listed leaders – Apollo and Fortis (19% and 41% revenue CAGR respectively over FY10-13E) – will continue to dominate the market and command significant premium for being the only relevant proxies to the Indian healthcare market. Key valuation metrics for FY13E
Apollo Hospitals Fortis Healthcare * CAGR FY10-13E
Earnings growth* (%)
Target price (Rs)
Nitin Agarwal firstname.lastname@example.org 91-22-6622 2568
IDFC Securities Ltd.
Ritesh Shah email@example.com 91-22-6622 2571
Naman Chambers, C-32, G- Block, Bandra-Kurla Complex, Bandra (East), Mumbai 400 051 Tel: 91-22-6622 2600 Fax: 91-22-6622 2501
“For Private Circulation only”
“Important disclosures appear at the back of this report
Investment Argument.................................................................................................... 3 Indian healthcare: In a sweet spot............................................................................. 4 Healthcare models: Expect increased innovation ................................................... 7 Indian healthcare: A snapshot.................................................................................... 10 Private healthcare providers gaining relevance.................................................... 14 The Best is Ahead ......................................................................................................... 19 Indian healthcare: In a sweet spot........................................................................... 19 Drivers for Indian healthcare................................................................................... 21 Tertiary Hospitals: Attractive, but… ................................................................................. 28 Brace for long gestation; the wait is worth it... ...................................................... 29 Operating indicators for a successful tertiary hospital........................................... 32 Real estate costs: Key to commercial viability ....................................................... 33 Medical equipment: High obsolescence costs ....................................................... 36 Right People: A challenging proposition ............................................................... 38 An evolving regulatory scenario… ......................................................................... 43 Business Models: Innovation ahead ......................................................................... 46 Healthcare models: Expect increased innovation ................................................. 46 Advantage Incumbents................................................................................................ 56 Competitive landscape still evolving...................................................................... 56 Rising entry barriers…advantage incumbents...................................................... 57 Apollo and Fortis: Leaders today…and of future................................................. 58 APPENDIX..................................................................................................................... 59 Annexure 1: Regulatory landscape ......................................................................... 59 Annexure 2: Key takeaways from FY09-10 budget.............................................. 60 Annexure 3: NABH-accredited hospitals............................................................... 61 Annexure 4: Comparaitve healthcare spend – India and global......................... 62 Annexure 5: Corporate hospitals – strategies to target primary markets.......... 62 Companies ..................................................................................................................... 66 Apollo Hospitals........................................................................................................ 67 Fortis Healthcare........................................................................................................ 93 Other companies...............................................................................................119-122
almost 80% of India’s overall spending on healthcare is accounted for by the private sector. NOVEMBER 2010 3 . government spending on healthcare at only ~1% of GDP With national healthcare spending at 5. with ~10% of capacity currently.9% for China).0 0 4 8 12 16 Source: Industry. underway With increasing entry barriers. which is among the highest globally. expected to capitalize on the boom in healthcare spend (estimated to double to US$125bn by 2015) However.5% of GDP in 2009 (as per OESC). innovation in business models. NSSO. as compared to 3. IDFC Securities Research Unorganized sector dominates but organized sector inching up Organized healthcare gradually gaining relevance in India In India. the healthcare sector is highly fragmented with the unorganized component accounting for ~90% of the private market. conventional models increasingly inhibiting players’ ability to fully tap into the opportunity. of ~1.05m beds in the country (Crisil estimates). With the government’s healthcare spends not keeping pace. Apollo Hospitals (Apollo) – the largest organized healthcare player in India – has only ~8000 beds under management including owned (by itself and associates) and managed beds. the Indian healthcare industry is dominated by the private sector (government spending at only ~1% of GDP.IDFC Securities INVESTMENT ARGUMENT Low levels of spend and structural inefficiencies in public healthcare system leading to woeful healthcare standards. hitherto focused on tertiary care / metros. but organized hospitals.0 India Lower middle income High income Low income Upper middle income Per capita spend on health (US$) (2007) 4405 488 6.0 China Brazil India 2. healthcare is one of the largest industries in India with hospitals contributing ~50% of the pie. we favour incumbents with critical mass to pursue accelerated growth We believe Indian players should command growth premium over global peer valuations.0 40 India Public sectro spend Private sector spend 80 27 Low income Lower middle income Upper middle income High income 0. (as % of GDP) Global USA UK Russia (% of GDP) 8. Interestingly. private players have been steadily increasing their dominance in tertiary as well as secondary care. growing capex intensity and resource crunch.g. Exhibit 1: Public health – lowest on the government’s focus list Health expd.0 4. e. While globally healthcare is typically provided through a largely government-funded public system. initiating coverage with Outperformer on Apollo Hospitals and Fortis Healthcare (28% upside in each) Indian healthcare – private hospital players coming to the fore In India.5% for Brazil and 1. driving Indians to private sector Unorganized sector dominates private healthcare space. To put this into perspective.
Indian healthcare: In a sweet spot A confluence of multiple positive drivers will drive high growth in the US$62bn Indian healthcare industry over the next several years. Manipal Hospitals. Max Healthcare. the largest component of healthcare spend in India. Exhibit 3: Key enablers to growing Indian healthcare Increasing life Increasing life expectancy & expectancy & ageing ageing population population Growing Growing affordability affordability A confluence of drivers will drive high growth in Indian healthcare Indian Healthcare Rise of medical Rise of medical tourism tourism Increasing Increasing awareness awareness Growing Growing population population Rising Health Rising Health Insurance Insurance penetration penetration Source: IDFC Securities Research NOVEMBER 2010 4 . Fortis Healthcare (Fortis). and we expect the trend to accelerate. will be the key beneficiary of the trend.IDFC Securities Exhibit 2: Private players enjoy a dominant position Private Government Nursing Homes Primarily nursing homes and recovery rooms with adequate infrastructure <30 beds Govt. in realization of the huge demand-supply gap in tertiary care segment. IDFC Securities Research However. based on type Private sector 2005 > 100 beds 0 25 50 75 100 Source: Mckinsey-2007. organized healthcare (corporate hospitals) has been slowly gaining relevance with the emergence of corporate healthcare hospitals like Apollo. Hospitals. Hospitals Mid-tier Top-tier Nursing homes Mid-tier Corporate hospitals with in-house staff and consulting physicians 30-100 beds Top-tier Major corporate hospital chains and specialty hospitals 2015 Healthcare centres. Wockhardt. etc. district hospitals and general hospitals Variable.
return ratios steadily expand from the fifth year of operations. However. This implies an overall capital expenditure of ~$40bn over the next 10 years for setting up the incremental 632.IDFC Securities Indian healthcare – likely to be a $125bn opportunity in five years Sector expected to grow at 13% per annum Indian healthcare sector is currently valued at $62bn and is estimated to be growing at 13% per annum.000 additional beds over the next 10 years. In our view. Based on our estimates. hospitals is a high gestation business entailing significant upfront investments but long payback periods.1 53 62 2010 1189 2 58 10 70 2011 1213 2 64 10 78 2012 1237 2 71 10 88 2013 1262 2 78 10 98 2014 1287 2 86 10 111 2015 1313 2 95 10 125 Private healthcare segment to be the biggest beneficiary Limited public sector funding and high costs put private healthcare players at an advantage Crisil estimates that India requires 632.05m beds. NOVEMBER 2010 5 . brace for long gestations Though a tertiary hospital can make operating margins of 25-30%. Of these.5-3 years assuming steady patient inflow and no mishandled cases. Construction of a new hospital bed costs Rs2. We estimate tertiary hospital can potentially generate > 25% operating margins from 5th year of operation with margins stabilizing at 30-35% in a matured state. We estimate population to grow at 2% annually and factor in a 10% annual increase in healthcare spend on the back of changing demographics and rising income levels. ~20% will be required for complex medical procedures in cardiac and oncology segments. This leads to long gestation periods – besides 2-3 years for project conceptualization to commissioning. We expect the healthcare opportunity to double to $125bn in the next five years. As hospitals stabilize operations and utilize free cash to repay debt. The initial capital cost of setting up a tertiary hospital bed is Rs7m-10m in larger cities with real estate and medical equipment accounting for 60-65% of the total project cost. achieving cash breakeven for a healthcare facility could take up to another 2.5m. it takes ~5 years to hit these levels While the tertiary corporate hospital segment presents a lucrative opportunity for private players.5m-3m on an average with a high-end tertiary hospital bed costing Rs5m-5. As the government is hardly in a position to fund this growth. ~60% higher than the current base of 1. (US$/pp) Assumed Growth (%) Health Expenditure (US$bn) Source: IDFC Securities Research 2009 1166. a well run tertiary hospital can begin to generate return ratios > 25% from 6th -7th year of operation. the rewards are attractive enough for the successful hospitals. Attractive but not an easy business.000 beds required. it presents an attractive opportunity for private sector players. it is a relatively complex business due to high upfront costs and challenges embedded in the day to day running of hospitals. Exhibit 4: Indian healthcare – a US$125bn opportunity by 2015E Particulars Population (m) Assumed Growth (%) Per capita health expd.
Based on our analysis. Exhibit 6: RoCE sensitivity to real estate costs (in the fifth year of operations) Land & Bldg.0 18. That leads to redundancy of expensive medical equipment every 5-7 years. We expect players to increasingly pursue asset light strategies e. resort to higher treatment pricing.1 30. etc.000 YR1 YR2 YR3 YR4 YR5 YR6 YR7 -8 YR1 YR2 YR3 YR4 YR5 YR6 YR7 -8 Source: IDFC Securities Research Rising real estate costs to spur innovation in business models Real estate cost is a key factor that determines the viability of a hospital project.1 13.2 EBITDA margins (%) 20. return ratios for a hospital enjoying 30% margins would be impacted only to the extent of 20bps on 20% increase/decline in land & bldg. especially due to high import component Industry estimates indicate that medical equipment accounts for the largest chunk of capital costs (up to 30-40%) towards setting up a tertiary care unit. compared with a depreciable life of up to 14 years (based on accounting periods). which necessitates purchase of significantly expensive imported equipment.5 14.3 22.6 9.RHS) 32 19 22 IDC 8% Pre operative expenses 12% 10 12 1 -1. an increase/decrease in land and building costs by 20% results to contraction/expansion in return ratios by nearly 40-50bps.LHS) Operating margins (% . transferring assets to REIT structures. NOVEMBER 2010 6 .6 18. Land and building together account for 37-40% of the total project cost and are among the key measures to gauge its financial viability. which dents profitability due to negative operating leverage.IDFC Securities Exhibit 5: Sweet returns post stabilization Capital Costs breakup Capital Cost Cash flows Operating cashflow Free Cash Flow Others 15% Land 8% Construction 19% (Rs m) 500 0 -500 -1. Medical equipment – high obsolescence costs Equipment account for a major chunk of capital costs. Build. costs.0 20% decline Base 20% increase Source: IDFC Securities Research 10. That often leads to a vicious cycle of lower utilization rate. The impact of land & building costs is relatively lower for well-run hospitals.e. we find for a hospital operating at 15% margins in the fifth year of operations.8 25. Lease and Transfer. The problem is compounded by the fact that there is practically very limited indigenous medical device manufacturing industry in India.0 9. to recover the cost of expensive imported medical equipment over its short life cycles. i.5 22. costs assumptions 15.1 We expect newer operating models to evolve as the private sector seeks ways to tackle high real estate costs and aggressively expand footprint.500 Machinery 38% 2 -2.3 18.0 22. Hospitals.000 28 RoCE (% .0 14.g. The healthcare industry is characterized by frequent product innovations and evolving technology.
Nova Day Care Centre Hospital chains solely focused on primary/ secondary care in Tier II/ III towns. This will logically lead to aggressive wage inflation which will further stress the economics of successfully running tertiary care hospitals. while there are clear indications of shortage in the overall pool of doctors required going forward. Healthcare Global Day care surgery centers. nurses and paramedics are the key enablers of the success of any hospital.792 26. and retention of key personnel is an imperative – especially for tertiary care hospitals.IDFC Securities Right people – an increasingly challenging proposition Managing people issues – i. Doctors. Exhibit 7: Healthcare infrastructure shortfall from 13-41% As per 2001 consensus Sub -Centres PHCs CHCs Source: NSSO Required 158. we see a strong case for exploring new and innovative business models to tap into less-penetrated geographies as well as patient segments. organized private sector healthcare business models in India were largely one-dimensional with focus on providing multi-specialty tertiary care in larger metros. e.g. e.022 6. A broad scan of the operating environment indicates the presence/ emergence of multiple newer models. Apollo’s proposed Thane hospital in JV with Yash Birla Group • • • • • • NOVEMBER 2010 7 . will be a critical scale-up challenge for hospital operators in India. Shortage of doctors is especially acute in specialized fields In our view. we believe. We are encouraged by the unconventional models being tried out by some of the new entrants as also increased willingness of existing players to experiment with new healthcare delivery formats. e. finding the right people and at the right cost.g. Fortis’ contract with SL Raheja in Mumbai JV Structures e.803 2. e. Vaatsalya Healthcare cities. Given the escalating competitive intensity in metros as well as an increasingly tough operating environment.g.g. supplemented with some element of secondary and primary care setups. Dr Trehan’s Medicity O&M contracts.g. Below we list some of the more interesting ones: • Existing tertiary healthcare providers experimenting with setting up secondary/ primary tertiary care hospitals in Tier II/ III towns – Apollo with Apollo Reach Single specialty tertiary care hospitals.e.653 % shortfall 13 18 41 Healthcare models: Expect increased innovation Hospitals increasingly experimenting with new delivery formats Till recently.491 Shortfall 20.903 4.g. these shortages will be particularly acute in the case of specialized and experienced doctors required for manning the newer tertiary care set-ups. e.
barring Apollo. the two largest and most relevant healthcare stocks in the country have a combined market capitalization of <$5bn. Additionally. Fortis Healthcare and Max Healthcare (subsidiary of Max India – a listed entity). Given that these two are the only relevant listed entities in the Indian healthcare space and the ones that are likely to dominate the market (with a secular growth story) for the next several years. These players have had the early mover advantage to accumulate sizeable hospital assets on land acquired at historical prices and create solid brand equity which enables them to acquire talent from India as well as abroad.and medium-term outlook for the Indian healthcare sector. it is becoming increasingly difficult to run a commercially successful private healthcare business. Increasing entry barriers…advantage Incumbents Shooting real estate prices. especially in metros. Fortis. which makes it relatively difficult for new players to make inroads in these markets. etc). Given that the corporate hospital industry is in an early growth phase. we see little competition for Apollo and Fortis In the private sector hospitals space. we believe these NOVEMBER 2010 8 . we are particularly bullish on two of the leading incumbents – Apollo Hospitals and Fortis Healthcare – as they are well-entrenched in the industry with strong national brand equity as well as a difficult to replicate geographical footprint and capacity. Currently. Interestingly. and increasing shortages in recruiting highly qualified super specialists (required for running high-end tertiary hospitals) as well as the lower skilled paramedics are making it increasingly difficult to run a commercially successful private healthcare business. Initiating coverage on Apollo and Fortis with Outperformer Given their brand identity and geographic spread. These existing players have built up significant franchise in the key metros. This clearly underlines the inherent growth potential in these companies. A $125bn industry by 2015E. We believe that private sector hospitals are the best proxy to play the healthcare opportunity in India. etc. HealthCare Global (oncologyfocused tertiary care hospital chain. are still in relatively early phases of growth. but less than $5bn market cap Private players offer the best proxy to the Indian healthcare opportunity We are positive on the near. the key markets for high-end tertiary care. we believe it will take some time before the implications of their diverse strategies get crystallized and start becoming evident to investors. there are other large unlisted players like Manipal Health (strong presence in South India). Thus. their operations are now reaching a stage where internal cash flows can take care of further expansions to a large extent. while the healthcare market in India is poised to double to US$125bn by 2015.IDFC Securities Competitive landscape – still evolving Indian corporate hospitals industry is relatively nascent The corporate hospitals industry in India is relatively nascent as most of the corporate groups. which is poised to grow rapidly over the next several years and decades. Additionally. Incumbents have wellentrenched franchises in the metros. Narayan Hrudayalaya (another predominantly South-India based entity). These issues are further accentuated by the fact that existing players have already entrenched themselves in most of the high-potential geographies across India. there are three major listed players in the space: Apollo Hospital Group. having entered the business in the last few years. Manipal. a major roadblock for new entrants This means significant advantages for established incumbent players like Apollo.
9 15.3 12.8 25.2 14.6 16.5 29.8 16. IDFC Securities Research.1 10.3 32.4 7.IDFC Securities stocks deserve to command a significant premium with respect to the broader market.6 15.1 33. Fortis has a limited execution track record and the robustness of its business model will be borne out over the next 3-4 years as its newer Greenfield hospitals go on stream and the recent acquisitions stabilize.2 7.0 7.3 13.8 36.7 26.9 20. With as many as 8 hospitals likely to be commissioned over the next two years.3 4.9 14.0 16.7 6.2 6.0 37.9 13. RoCE is also expected to touch 12.4 6.3 18.5 12.7 87. FY12 14.9 94.4 15.7 7.8 13.5 13. Note: * for years FY10.3 17.3 8.3 17.3 15.6 25.5 16.250 beds under management.5 PE (x) CY09 CY10 CY11 EV/EBITDA (x) CY09 CY10 RoE (%) OPM (%) CY11 CY09 CY10 CY11 CY09 CY10 CY11 NOVEMBER 2010 9 .3 11.6 10.1 13.1 17.000 beds under operations currently.0 12.1 24.5 15.9 13.9 27.4 8.2 15. Initiating coverage on the stock with a price target of Rs651/share.1 11.0 10.5 12.3 14.4 6.3 24.3 16. Initiating coverage on the stock with a price target of Rs206/share. Apollo Hospitals – Apollo Hospitals is the largest and probably most well-known hospital networks in India with ~8. Fortis Healthcare – With support from its well-funded promoters.6 14.9 20.6 24.1 23. we expect growth to accelerate in the coming years.9 27.0 5. This is reflected in Apollo’s plans to add ~2. with the growing proportion of mature beds in the network.0 10.4 12.5 11.2 22.9 13.4 20.3 34.4 56. On the flip side.000 over FY10-13.2 16. FY11.0 30.9 22.8 13.0 11.0 45.5 10.2 6.8 19.6 12.3 21.7 23.5 13.8 15.2 24.3 32.5 10.4 8. Apollo is our top pick in the space.9 18.7 15.4 6.7 15.9 24.6 6.9 26.2 13.6 10.5 13.1 27.5 12.0 19.5 16.5 26.7 33.5 25.0 6.5 13.7 12.8 24.6 14. Further.9 11.7 20.4 22.9 24.9 24.7 6.2 15.4 23.3 18. This will drive 19% and 25% CAGR in revenues and EBITDA respectively over the FY10-13.6 16.2 13.8 16.1 7.4 29.2 14.0 24.1 15.2 26.7 17.3 18.2 11. Fortis has grown to be India’s the second largest hospitals player with 3.700 beds over the next three years.7 6.3 45.8 10.7 6.6 13.6 33.5 21. With the relatively conservative management now willing to step on the gas and pursue more aggressive expansion.0 32.0 10.6% by FY13 and expand thereon.1 22.1 14.1 7.3 9.1 13.4 5. Exhibit 8: Global peer valuation matrix (US$ m) Company US Universal Health Services-B Health Mgmt Associates Inc-A Community Health Systems Inc Lifepoint Hospitals Inc Tenet Healthcare Corp Thailand Bangkok Dusit Med Service Bumrungrad Hospital Pub Co Bangkok Chain Hospital PCL Australia Ramsay Health Care Primary Health Care India Fortis Healthcare * Apollo Hospitals Enterprise * Singapore Raffles Medical Group Thomson Medical Centre Malaysia Kpj Healthcare Berhad 20.1 13.1 16.3 5.7 8.4 13. We expect Fortis to create value for stakeholders through unconventional strategies.8 7.0 8.8 8.0 10.8 15.0 22.1 6.8 17.6 14.4 21.3 8.9 28.8 13.7 38.3 6.9 11.6 13.7 7. largely aided by two large ticket acquisitions of Wockhardt Hospitals and Escorts Delhi.7 15.1 Source: Bloomberg.1 5.4 16.2 16.0 11. Fortis will likely expand its operational beds by ~2.0 24.1 12.
The sector is also one of the largest employers in the country with around 4m employees across the sector. NOVEMBER 2010 10 . almost 75% of India’s overall spending on healthcare is accounted for by the private sector. private hospital space was dominated by the unorganized sector but organized players gaining ground with the emergence of corporate hospital chains like Apollo. Hospitals and pharmaceuticals account for 75% of the total healthcare spend. In contrast. IDFC Securities Research Unlike most countries. healthcare is one of the largest industries in India. which is among the highest globally.5% of GDP (as on 2007. the Indian healthcare industry is dominated by the private sector with government spending at only ~1% of GDP. The constituents: The sector is broadly classified into hospitals. diagnostic centers and others (medical equipment. private sector accounts for 80% of India’s healthcare spend. etc).5% of GDP spend. etc Frenetic VC/ PE activity underlines growing investor interest. leads to woeful standards of healthcare against global norms Private hospital providers have moved in to fill the gap over the years and now dominate the tertiary/ quaternary care segments Hitherto. Manipal. and thereby the attractiveness of the organized private healthcare space Healthcare – one of the largest industries in India With national healthcare spending at 5. Interestingly. as compared to 3.5% of GDP in 2009 (as per OESC). unlike government predominance in developed nations Globally. Max. Exhibit 9: India healthcare spend – Hospitals and Pharma account for 75% of the pie Healthcare spend . pharmaceuticals. source: WHO) for Brazil and 1.2010 Insurance & Medical Equipment 15% Diagonistics 10% Hospitals 50% Pharma 25% Source: MAX. healthcare is one of the largest industries in India with hospitals accounting for ~50% of this spend Unlike most other countries where public spend dominates. insurance. Fortis. healthcare provision is typically provided by a largely government-funded public healthcare system.IDFC Securities INDIAN HEALTHCARE: A SNAPSHOT With 5. public healthcare spend lags private spend Private players rule the roost in India.9% for China.
9 62.3 35. sector exp.0 40 India 80 27 Low income Lower middle income Upper middle income High income 0.9 29 348 104 512 536 2.7 9.4 15. India’s public healthcare infrastructure is ‘woefully inadequate’ – and it leaves majority of the population devoid of basic healthcare amenities.7 22.643 2.IDFC Securities Exhibit 10: Public health – lowest on the government’s focus list Health expd.8 58.4 4.2 32.5 59.317 493 Source: WHO.107 546 3. IDFC Securities Research Notably.3 54.8 92 83 93.9 58.968 370 India Brazil China Russian Federation Singapore United Kingdom United States of America Globa l 26. This includes some of world’s poorest nations.2 41. exp.446 3.7 64. With its history of under-spending. on health "Per capita total expenditure on healthc (PPP int. Public health facilities.6 44. exp.5 40. which are not only under-staffed but also ill-equipped in terms of obsolete or poorly managed medical equipment.7 Public exp. exp.4 55. (as % of GDP) Global USA UK Russia China Brazil India (% of GDP) 8.36x) among the countries listed above. IDFC Securities Research Exhibit 11: Healthcare expenditure remains skewed globally Particulars* (2007) Total expenditure on health as % of gross domestic product 4.6 43.8 67.4 18.992 7.285 863 "Per capita govt. on healthcare(PP P in $)" 80 489 129 285 1. as % of total healthcare spend Out-of-pocket exp.0 India Lower middle income High income Low income Upper middle income Per capita spend on health (US$) (2007) 4405 488 6.1 8. offer only basic services. on healthca re (PPP int.6 81.0 2.6 73. India has the lowest ratio of public to private health expenditure (~0. $)" "Per capita Pvt.7 45. as % of total hea lthcare spend Pvt.0 4.3 5. as % of pvt.4 3.4 89.1 8. NOVEMBER 2010 11 .0 0 4 8 12 16 Public sectro spend Private sector spend Source: WHO. $)" 109 837 233 797 1.
The bias against public healthcare is clearly evident from the fact that specialist doctors lean towards private hospitals and that private hospitals have higher occupancy levels vis-à-vis public hospitals (see exhibit below). Besides this. Funds are released in five-year terms. provision for infrastructure is based on population size rather than epidemiology profiles. acceptability and utilization. capital. Lack of incentives to attract skilled resources (doctors/ nurses) and inadequate funding for technology upgradation in public sector healthcare has resulted not only in a drastic change in the perception of patients. etc – with little flexibility to respond to health emergencies. The human resource gap at various levels and long waiting periods compound the problems. creating broad verticals for prevention and control that grossly ignore local/ regional issues. evaluation and feedback systems. Public healthcare lacks efficient monitoring and feedback systems • • Lack of incentives to retain talent has seen doctors veering towards private hospitals in tier I metros • Exhibit 12: Public healthcare facilities continue to face a steady decline in occupancy rates (%) 25 24 23 22 21 21 20 19 19 19 Rural Urban 17 1986-87 (42nd) 1995-96 (52nd) 2004 (60th) Source: NSSO 60 Round (2004) th NOVEMBER 2010 12 . Again. About 72% of the specialist doctors in India are based in Tier I cities. there are no incentives for working well. which results in poor accessibility. in which private hospitals are concentrated.IDFC Securities Public healthcare also weighed down by structural inefficiencies • Planning of Indian public healthcare programmes has always been centralized. The absence of quality measurement standards has led to a dysfunctional health infrastructure. Healthcare financing is equally dysfunctional. but also resident doctors. and divided under several complex budget heads — revenue. We believe the Indian healthcare system lacks efficient monitoring.
Is it lack of funds or structural bottlenecks restricting progress?
Our interaction with healthcare personnel at the village level indicates that it is not the shortage of funds but lack of efficient and flexible mechanisms to utilize the funds that has been impeding improvement in healthcare delivery. So, one cannot argue that the government is not deploying enough funds as a significant amount of allocated funds remains unutilized each year. The problem lies in the way the departmental budgets are structured for a 5-year tenure with the primary divisions being revenue and capital, and plan and non-plan. This leads to fragmentation of the health budget into more than 400 sub-heads, with funds under each head non-transferable and surrendered to the state’s general pool if unutilized at end of the fiscal. We believe such budgeting fares perfectly well from an accounting perspective, with expenditure control as the central objective. This also ensures prevention of misuse or diversion of funds. However, this archaic system of budgeting is not based on any meaningful programme audits and is also not subject to any evaluation or review on physical targets. Our interaction at the village level indicates that cumulative energy of departmental workers remains focused on obtaining utilization certificates to release funds to district societies rather than health outcomes. However, annual budget utilization helps protect future allocations under the scheme. In summary, we believe there is an urgent need to restructure the budgeting system to make it more functional and flexible. Exhibit 13: Extent of under-utilization of the health budget
(%) 15 7.26 5 -5 -6.55 -15 -25 -30.77 Kerala Tamil Nadu Orissa Rajasthan Uttar Pradesh 7.61 5.25 2.37 -3.28 1990-95 12.4 3.81 1995-01
End result – woeful standards of healthcare against global norms
Life expectancy, infant mortality and beds per person much lower In India vs comparable economies
The woefully low as well as inefficient public healthcare spend effectively ensures that quality healthcare is accessible to only to those who can afford to pay for it. Thus, India continues to significantly lag on key healthcare indicators like life expectancy, infant mortality, etc. Life expectancy in India is 66 years compared to 78 years in developed countries while infant mortality rate stands at 70 deaths per 1,000 births as compared to six deaths in developed countries. Further, India has only 0.9beds per 1,000 people as compared to 3.9beds in high middle income countries. Similarly, the ratio of registered doctors per person is also fairly short of the global benchmark. This is clearly reflected in India’s dismal ranking at 134 among 182 countries listed on United Nation’s Human Development Index (HDI).
Government’s baby steps not enough
In the FY11 Union Budget, the government increased healthcare allocation by Rs27bn to Rs223bn. However, the healthcare budgetary allocation is just 2% of the total budgeted outlay i.e., way short of the government’s target of 3% of GDP. More importantly, most of the planned outlay remains concentrated on revenue expenditure (96%), implying that only 4% of the planned expenditure is available for the muchrequired infrastructure creation. Interestingly, despite 46% of the planned allocation for the entire fiscal budget being directed towards infrastructure development, we find healthcare infrastructure attracting only 0.23% of the budgeted corpus. Exhibit 14: Capital expenditure has averaged 4% over last 5years
240 Total (Rs bn - LHS) Capital Exp. (% of Budgeted Exp. - RHS) 8
Helathcare budgetary allocation remains miniscule
5.25 as % of total planned allocation as % of GDP 0.40
0 FY06 FY07 FY08 FY09 FY10 FY11
4.00 FY06 FY07 FY08 FY09 FY10 FY11
Source: RBI, IDFC Securities, Bloomberg
Private healthcare providers gaining relevance
Private players enjoy a lion’s share
With the government’s healthcare spends not keeping pace with the requirement and the focus limited largely to primary and preventive infrastructure in India, private players have been steadily increasing their dominance in tertiary as well as secondary care. In particular, they have established a dominating presence in tertiary/ quaternary care, operating an estimated 93% of all hospitals and owning 64% of beds nationwide. The private healthcare provider space has both for-profit and non-profit healthcare providers. In terms of practice, the scale varies from small solo clinics and nursing homes (in-patient facilities with usually <30 beds) to large corporate hospital chains which typically run high-end tertiary care hospitals with >100 beds.
Unorganized sector rules the roost
Organized healthcare gradually gaining relevance in India
In India, the private healthcare sector is highly fragmented with the unorganized component accounting for ~90% of the private healthcare sector. To put this into perspective, of ~1.05m beds in the country (CRISIL estimates), Apollo (the largest organized healthcare player in India) has only ~8000 beds under management including owned (by itself and associates) as well as managed beds. According to McKinsey, while private sector accounted for ~75% of beds in 2005, hospitals with more than 100 beds (organized players) accounted for ~10% of the overall beds. Hospitals with less than 100 beds accounted for a whopping ~65% of beds.
IDFC Securities Exhibit 15: Private players enjoy a dominant position
Private Government Nursing Homes
Primarily nursing homes and recovery rooms with adequate infrastructure <30 beds
Govt. Hospitals Mid-tier Top-tier Nursing homes
Corporate hospitals with in-house staff and consulting physicians 30-100 beds
Major corporate hospital chains and specialty hospitals
Healthcare centres, district hospitals and general hospitals Variable; based on type
> 100 beds
0 25 50 75 100
Source: Mckinsey-2007, IDFC Securities Research
Share of organized sector set to increase
However, in realization of the huge demand supply gap in the tertiary care offering segment, organized healthcare (corporate hospitals) segment has been slowly gaining relevance over the last few years with the emergence of corporate healthcare hospitals like Apollo, Fortis, Max, Wockhardt, etc and we expect this trend to accelerate.
Govt. has acknowledged the greater role of private players, evident in the tax sops and lower tariffs
Importantly, the government, whose focus has been primary/ preventive care, has acknowledged that the capital intensive nature of the sector would need private players to step in. Several government policies (tax sops for up to five years for setting up hospitals (>200beds) in tier II/ III cities, lowering of tariff rates, etc.) are a clear evidence of the same. This is amply reflected in the fact that over FY06-09, bed additions at Apollo and Fortis Healthcare have grown ~2x the pace of government hospitals. Though this could be partly on account of a low base, we also see a broader trend of growing appetite of Indian corporates to invest in healthcare, and thereby the increasing dominance of organized private players in the Indian healthcare market. Exhibit 16: OverFY06-09, Apollo & Fortis have grown at 2x the pace of government beds
(no of beds) 2,500 Fortis Healthcare Total Govt. hospital beds AHEL Standalone 550,000
500 FY06 FY07 FY08 FY09
Source: IDFC Securities Research, Companies, NSSO
based on investor appetite.g. (b) individual tertiary units in expansion mode (e. The following exhibit details a few recent equity infusions in the sector. of hospitals Hospital mix Other businesses Apollo Hospitals 8064 5476 2588 2668* Pan India 47 Primary/Secondary/ Tertiary Secondary/Tertiary Pharmacies.g. The exhibit below summarizes operations of three of the leading private sector players in India. when Apollo was probably the only relevant corporate hospital group in the Indian market. etc. e.IDFC Securities Multiple large corporate chains on the scene now Unlike the situation a few years ago. The major players include Apollo Group. etc. Domestic and global private equity/ venture capital firms have invested across the Indian healthcare delivery chain. NA 1350^ NCR Region 8 Primary/Secondary/Tertiary Insurance.g... ICICI Ventures. Warburg Pincus and IFC in MAX healthcare).. Exhibit 17: Key players in the organized healthcare sector Particulars No. Actis in Sterling Hospitals). VC activity reinforces the attractiveness of the space That the sector is indeed attractive has been widely acknowledged by financial investors (both domestic and global). multiple new players have emerged on the scene in yet another demonstration of the attractiveness of this high-end tertiary care healthcare opportunity for corporates. NOVEMBER 2010 16 . Company* by FY14. Speciality products Manipal Group 7575 NA NA NA South India 18 Consulting. of beds Owned Managed Planned expansion (No. CARE Hospitals. diagnostic labs. a number of investments have been made in the following areas: (a) holding company level/ chain of hospitals (e. Fortis Healthcare and MAX Healthcare. Healthcare BPO. Source: IDFC Securities Research. Manipal Group. ^by FY16 Education Frenetic PE. Fortis 3250 2885 366 2075* Pan India 39 Secondary/Tertiary Pharmacies. and (c) building a portfolio of beds by pooling. clearly visible in the slew of equity infusions over the past couple of years. Insurance. PE activity mainly seen at holding company level and in tertiary care units Further. The exhibit below lists investments from standalone tertiary care hospitals in metros/ tier II cities. Diagnostic labs. Max India 1100 NA. chains of hospitals. of beds) Geographical presence No.
2 19 n. FDI inflows in the hospital sector have been surprisingly lukewarm given the attractiveness of the space.IDFC Securities Exhibit 18: Recent equity participation in the healthcare delivery sector Buyer IFC JP Morgan Asset Management India Venture Advisors Fortis Healthcare Sequoia Capital Milestone Religare IDFC Premji Invest Evolvence Milestone Religare Kavery Medical Centre & Hospital AIG & J P Morgan Fortis Healthcare Oscal Investments Aavishkaar India Micro Venture Capital Fund.6 30 3. The Singapore-based Parkway Group Healthcare PTE Ltd penetrated into the Indian healthcare market in 2003 through a joint venture with the Apollo group to • NOVEMBER 2010 17 . 26 24 10 15 36 12 57 6 70 104 30 60 15 25 na 100 100 na 13. news flow. Seedfund I-Ven Medicare India Pvt Ltd I-Ven Medicare India Pvt Ltd I-Ven Medicare India Pvt Ltd I-Ven Medicare India Pvt Ltd India Venture Advisors Global Hospitals Fortis Healthcare IDFC APAX Partners Warburg Pincus IFC Actis Indivision Aavishkaar India Micro Venture Capital Fund Global Technology Investment Group BCCL CitiGroup Ashmore funds Oyester & Pearl Sequoia Capital Source: IDFC Securities Research.9 41 25 na na Target Company Rockland Hospitals (RH) Seven Hills Hospital Kavery Medical Centre Apollo RM Hospital Vasan Eye Care HealthCare Global HealthCare Global HealthCare Global HealthCare Global Krishna Institute of Medical Sciences Sea Horse Hospital Narayana Hrudayalaya Malar Hospitals Vaatsalya Healthcare Deal value (USDm) 12 72 20 na 18 7 10 18 6 13 5 89 8 4 % stake na na 30 56 na na na na na 21 34 25 62 32 However. Calcultta Sahaydri Hospital. Pune KG Hospital Shankar Hospital Hiranandani Healthcare. Following are some of the activities undertaken by the foreign players in the Indian healthcare space • Singapore's Pacific Healthcare made its first foray into the Indian market. FDI interest remains low Given the attractiveness of the space. in the Indian city of Hyderabad.5 3.a. A scan of the landscape indicates the presence of limited 100% foreign-owned healthcare players in the Indian market. Navi Mumbai Manipal Hospitals Apollo Hospitals Enterprise MAX Healthcare MAX Healthcare Sterling Hospitals Global Hospitals Swas Healthcare Nova Medical Centers Wockhardt Wockhardt CARE Hospitals Sabre Healthcare Dr Lal's path labs 10 20 90 14 na 1. FDI has been relatively low so far… Despite government incentives to attract FDI investments (including 100% FDI in all health-related services). Delhi Medica Synergie. Oasis Capital. ISI Vikram Hospital. opening an international medical centre. Delhi RG Stone Hospital. which is a joint venture with India's Vitae Healthcare.
a 325-bed multi-speciality hospital at a cost of US $29m. the Heritage Hospital of Hyderabad has formed a joint venture with US-based United Church Homes to recruit. India’s first geriatric hospital. Max Healthcare and Singapore General Hospital (SGH) have a collaboration for medical practice. a Seattle-based hospital services company. The Parkway group had also entered into a JV with a Mumbai-based Asian Heart Institute and Research Centre to set up specialized centres of medical excellence in Mumbai. • • • …but we see the situation changing as the India story grows more compelling However. we do anticipate increased activity on this front going forward as the attractiveness of the Indian healthcare market opportunity compels more players to explore options in India. NOVEMBER 2010 18 . training and education in healthcare services.IDFC Securities build the Apollo Gleneagles hospital. a worldwide developer and operator of community hospitals. research. train and provide placement to registered Indian nurses in USA. Bangalore. started its first American-style medical centre in Hebbal. • Columbia Asia Group.
growing affordability. will driven sustainable high growth We estimate Indian healthcare market to double over the next five years to be a $125bn opportunity by 2015 Along with favorable demographics. increasing penetration of medical insurance along with medical tourism will be key catalysts for growth Organized private healthcare providers. the largest component of the healthcare spend in India. Exhibit 19: Key enablers to growing Indian healthcare Increasing life Increasing life expectancy & expectancy & ageing ageing population population Growing Growing affordability affordability Increasing Increasing awareness awareness Indian Healthcare Rise of medical Rise of medical tourism tourism Growing Growing population population Rising Health Rising Health Insurance Insurance penetration penetration Source: IDFC Securities Research NOVEMBER 2010 19 . growing incidience of lifestyle diseases combined with growth of medical insurance as well as the potential of medical tourism will drive sustainable high growth in the $62bn Indian healthcare industry over the next several years / decades. a steadily growing population which is adding elderly people at a much faster pace.g. particularly in the tertiary care segment. e. will be the biggest beneficiary of this macro trend.IDFC Securities THE BEST IS AHEAD A confluence of multiple positive factors. Hospitals . will be the biggest beneficiary of this growth opportunity Indian healthcare: In a sweet spot A confluence of multiple positive drivers including rapidly growing affordability. an expanding base of elderly population and growing incidence of lifestyle diseases.
Fortis. This implies an overall capital expenditure of ~$40bn over the next 10 years for setting up the incremental 632. (US$/pp) Assumed Growth (%) Health Expenditure (US$bn) Source: IDFC Securities Research 2009 1166 53 62 2010 1189 2 58 10 70 2011 1213 2 64 10 78 2012 1237 2 71 10 88 2013 1262 2 78 10 98 2014 1287 2 86 10 111 2015 1313 2 95 10 125 Private healthcare segment to be the biggest beneficiary With limited public sector funding and high costs involved. We expect the healthcare opportunity to double to US$125bn in the next five years as we estimate population to grow at 2% annually and factor in a 10% annual increase in healthcare spend on the back of changing demographics and rising income levels. ~20% will be required for complex medical procedures in cardiac and oncology segments. As the government is hardly in a position to fund this growth.IDFC Securities Indian healthcare – likely to be a $125bn opportunity in five years Indian healthcare sector is currently valued at $62bn and is estimated to be growing at 13% per annum. private players poised to benefit Crisil estimates that India requires 632.000 beds required. Of these. hospitals are a high gestation business entailing significant upfront investments but long payback periods.000 additional beds over the next 10 years. these organized players provide for complex procedures as also superior service levels. Other than their much stronger financial capabilities. according to our calculations. it presents an attractive opportunity for private sector players. NOVEMBER 2010 20 .5m-3m on an average with a high-end tertiary hospital bed costing Rs5m-5. Construction of a new hospital bed costs Rs2. Going forward. ~60% higher than the current base of 1. Given the huge demand of incremental hospital beds in the private sector and the currently negligible share of corporate hospitals. which significantly enhance their competitiveness. this implies that the sector garners per capita expenditure of ~US$53. we believe the growth trajectory of corporate hospital players in India is limited only by their ambitions and ability to manage growth.5m. Max and Wockhardt will garner a substantially higher market share. In our view. Exhibit 20: Indian healthcare – a US$125bn opportunity by 2015E Particulars Population (in m) Assumed Growth (%) Per capita health expd. we believe the already established and well-funded corporate hospitals like Apollo.05m beds.
5 0 CY80 CY85 CY90 CY93 CY96 CY00 CY05 45 63.0 63.0 65.0 CY04 CY05 CY06 CY07 CY08 CY09 Source: NSSO.3 60. IDFC Securities Research Increasing life expectancy and ageing population India’s population is now more than 1. a combination of population growth. translating into a market opportunity of $125bn by 2015. Exhibit 22: Rising life expectancy and declining mortality rates to see a steady increase in ageing population Infant mortality rates in India (%) 135 Rural Urban 66.0 150 300 192.4 180. should provide further impetus for higher per capita healthare spend over the next several years. India will overtake China by 2030 to become world’s most populous nation. Increasing life expectancy and growing pool of elderly people will necessitate higher healthcare spends in future years.3 9. coupled with increasing health awareness. providing a strong growth thrust to healthcare industry. increasing per capita healthcare spend With Indian economy expected to register 8-9% CAGR over the next several years. This should lead to a jump in the pool of patients who can afford to pay for quality tertiary healthcare as provided by the private sector.5 Urban population 1.IDFC Securities Drivers for Indian healthcare A booming ecomony. We expect private sector hospitals to be the key beneficiary of this trend.1 143.0 100 150 2005 2015 2025 50 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 Rich (1000) Middle Class (200-1000) Poor (<200) 0 1991 2001 2008 2030 Source: Industry. IDFC Securities Research NOVEMBER 2010 21 .6 128.3bn and growing at an annual rate of ~2% over the past five years. More importantly. higher average life expectancy and declining mortality rates will result in sharp growth in the pool of ageing population. It is estimated that India’s population > 45years will increase from 20% in 2007 to 24% by 2017. per capita income and standard of living are expected to improve significantly going forward.0 Average age (years) 90 64. We estimate per capita healthcare spends to witness a CAGR of 10% over the next five yers to US$95. Higher dispsoable incomes. Exhibit 21: Evolving favorable demographics to boost healthcare spend (per capita) 250 Nominal Real (m households) (m) 600 3.2 200 450 13.5 64.5 65. At this rate.
Currently. increased ARPOB for hospitals Exhibit 23: Evolving demographics to drive inpatient volumes & ARPOB (%) 100 Developing world diseases Developed world diseases (% of population) 15 Infectious and respiratory diseases 2 Accident/injuries 5. E&Y. affordability emerges as a key issue in the way to seek healthcare in high-end tertiary hospitals. IDFC Securities Research Increasing insurance penetration – icing on the cake Poor insurance penetration is the key reason for people’s lack of access to quality healthcare The widespread lack of health insurance is one of the primary causes for the limited access to quality healthcare in the country for majority of the population – as reflected in India’s low ranking in the human development index (HDI). While there is a burgeoning middle-upper class which can afford to pay for the fees in high-end corporate NOVEMBER 2010 22 .000 113 22.IDFC Securities Rising lifestyle diseases imply higher revenue per bed Urban residents will account for more than 32% of India’s population by 2014… India’s urban population has increased 4. According to census data. Given this high out-of-pocket expense. which suggests enough scope for penetration levels to rise. …leading to a rise in lifestyle-related diseases …which in turn implies higher treatment costs and. In FY05. of hospitalisation ('000) GDP per capita PPP $(1998) 31 2.5 Source: IBEF.100 39 3. we expect disease profiles to shift from infectious to lifestyle-related.0 2005 2015E 20 34 75 17 44 37 13 12 17 9 4. of patients ( ) 36 62 Diabetes Asthma Obesity Cancer 31 46 27 34 14 34 2.000 Coronary heart disease No. we expect a steady increase in revenue/ bed (ARPOB). Based on this.0 Maternity/gynae Musculoskeletal 15 50 10 16 3 18 4 18 3. While this is bound to steadily result in higher treatment costs.900 127 25. With increasing urbanization and the problems associated with modern-day living in urban settings. most of the new corporate hospitals are coming up in tier I and II cities and cater to the growing urban population and targeting lifestyle-related diseases like cardiac. the share of urban population currently stands at ~28%.600 61 5.0 US-2001 No.0 2. digestive and genitor-urinary ailments. According to an IBEF survey conducted in 2001. the average treatment cost for lifestyle-related diseases was ~7x that of infectious diseases. Based on demographic trends and an expected shift in disease profile (towards chronic segments). The segment is expected to grow at 4% per annum and account for more than 32% of the total population by 2014. we expect a swift increase in in-patient revenues. Group insurance accounted for 35% of the total health insurance business during that period.0 16 19 24 2 25 18 Digestive & Genito urinary 14 2. Notably. while its total population has registered a 3x increase over the same period.800 26 6. Mckinsey.0 19 Circulatory (cardio…) 22 2 4 5 4 3 India-2001 3 5 9 7 3 India-2012 16 7 1 8 Thailand2001 19 5 10 Brazil*-2001 13 4 8 10 Singapore2001 Cancer Other dieases 1. This has led to a situation wherein out-of-pocket payments for medical care account for 69% of the total healthcare expenditure by Indian households (according to FY02 census data). we expect India’s disease profile to follow the pattern of developed economies.5x over 1951-2001. only 1% of the population was covered by private health insurance.0 16 0 0. <12% of the population is covered under health insurance in some form or the other. therefore.
health insurance growth is expected to accelerate. we see improved affordability owing to a wider insurance penetration driving in-patient volumes for private healthcare providers. enhance in-patient volumes • The central government’s ambitious RSBY (Rashtriya Swasthya Bima Yojna) scheme to provide insurance cover to BPL (below poverty line) households is one such step. Several micro-insurance schemes running on partnership bases between the governments of Andhra Pradesh and Tamil Nadu and private healthcare service providers have been hugely successful. high premiums. therefore.7bn by 2015. successful implementation of this scheme will increase healthcare affordability for several million households.Private Standalone Health Insureers …and will catalyze the growth of corporate hospitals 30 20 10 0 FY05 FY06 FY07 FY08 FY09 Source: IRDA AR. inadequate and inefficient back-end infrastructure have kept health insurance out of reach for a large part of the population.Public Non life . An expanding upper middle class and rising healthcare insurance penetration to benefit tertiary care sector… Health insurance has registered a CAGR of 41% over the past four years. Despite the elevated growth rates. NOVEMBER 2010 23 . increasing penetration of health insurance would be a key catalyst in the growth of corporate hospitals in India.IDFC Securities hospitals. Swiss Re estimates India’s health insurance premium market to grow to US $7. we believe growing awareness and penetration of health insurance will significantly enhance the target patient pool for this segment of hospitals. better availability of health insurance would help drive demand for services and provide additional revenues while improving the quality of healthcare. In our view. In our view. Exhibit 24: Health insurance has grown at 41% CAGR over past four years! (Rs bn) 40 Non life . IDFC Securities Research Insurance schemes find favor with state/central governments too Govt schemes will increase affordability and. With increased interest from private insurance players that are targeting this potentially huge opportunity. Also. • In the coming years.
a positive fallout of this trend will be that several nursing homes may not be in a position to implement the norms in line with NABH regulations. Given the growing importance of heath insurance in driving future growth. Insured patient volumes are increasing with 10-15% volume growth each year” -A leading South Delhi Hospital "Increase in insurance penetration is encouraging for healthcare service providers. in turn. Therefore. Exhibit 25: Large organized players have tied up with insurance companies Source: Industry NOVEMBER 2010 24 . etc) and huge cost overheads. we believe hospitals will be forced to get national/ international accreditations like NABH/ JCI. This state of affairs will favour the organized private players. Apart from the economic benefits realizable by tapping into an opportunity presented by a significantly under-insured population. Interestingly. given the expected increase in insurance penetration and growing awareness of quality accreditations. We expect this trend to gain further momentum going forward. Success of Govt. etc – which will impede their capability to get accredited and thereby participate in the health insurance market. this business also provides hospitals an opportunity to cross-sell their products.g. There are reports of several government and state owned enterprises insisting that the Third Party Administrators (TPA) and insurers put accredited hospitals on the preferred provider list. inventory mismanagement. Insured patients account for 18% of our revenues. Apollo Hospitals and MAX Healthcare have formed JVs with international partners like Munich Re and BUPA respectively to set up insurance companies. impacted availability of quality medical care and driven up the cost of quality treatment. etc. This will also help improve the spread of quality medical care. These have. NABH/ QCI/ JCI).IDFC Securities Accreditations and growing insurance spread – advantage corporate providers Historical lack of regulation responsible for rising cost of treatment and low quality • Unregulated growth of private healthcare over decades has led to inefficiencies (lack of clinical protocols. insurance programs in Andhra Pradesh and Karnataka has been encouraging.g. "Insured patients account for 10% of our inpatient volumes with corporates accounting for 70% of volumes. duplication of work. we find the organized private healthcare sector in a sweet spot. we target to increase this to 45% over next few years" -Vaatsalya An increasing number of hospitals are seeking accreditations – a positive trend • • High standards required to qualify for accreditations will favor organized players • Entry into insurance segment will help large hospitals cross-sell services Large hospital chains have also entered the healthcare insurance segment – e. Recent trends suggest growing preference of payors/ insurers towards hospitals that have acquired quality accreditations (e. We believe greater insurance penetration could enhance the availability of quality medical care.
IDFC Securities In another trend.8 1.4 (US $ bn) 1. long waiting periods for patients in the developed world and increasing attraction to innovative/ alternate therapies contribute to the rise in medical tourism. IDFC Securities Research NOVEMBER 2010 25 . hospitals – looking to provide affordable treatment – have tied up with state governments to provide micro insurance for the underprivileged.0 FY06 FY08 FY12 Source: Industry. The trend is developing not just because of the cost arbitrage but also because of India’s emergence as a high-quality healthcare destination. Narayana Hrudayalaya. not just cost arbitrage “Medical tourism”. successfully runs an insurance scheme called Yeshasivini launched in 2002. has been gaining momentum over the past few years. According to IBEF. for instance. a phrase commonly used for overseas patients seeking treatment in India. Exhibit 27: Indian medical tourism expected to grow 6x over FY06-12 2. Also. Indian corporate hospitals have been striving to achieve international accreditations. In a bid to seize this opportunity. Exhibit 26: Organizational structure of Yeshasvini Cooperative Farmers’ health scheme GOVERNMENT’S COOPERATIVE STRUCTURE Department of Co-operation.6 0. the medical tourism market was an estimated US$333m in terms of revenues in 2006 and is expected to grow to US$2bn by 2012.2 0. Gov Karnataka COOPERATIVE SECTOR Federation(s) of Unions TPA State Level Family Health Plan Ltd TRUST Yeshasvini Farmers Health Trust District Level District Coordinator (2) District Coordination Committee(s) Deputy Registrar of Cooperative Societies Union(s) of Cooperative Socities Town/Village Level CLAIM SETTLEMENT Network Hospitals UT ILIZ AT ION Cooperative Society SUBSCRIPTION Member of Cooperative Society Source: Industry Rise of medical tourism – another potential catalyst Indian medical tourism driven by the promise of global quality.
IDFC Securities Research 28 <29 weeks NOVEMBER 2010 30+ weeks 26 . Leading private sector hospitals have seen near doubling of revenues garnered from medical tourists on a yoy basis and remain upbeat on the opportunity.0 12.500 555 8.000 50.000 67.400 4. In particular.500 45.IDFC Securities India’s USP…high quality delivered at significantly lower costs… IBEF estimates medical tourism to be a $2. India’s cost competitiveness is further established by the wide cost difference for various procedures between India and Thailand.0 24. it is an exciting proposition for patients from developed countries like USA and Europe – e. Canada.0 Source: NHS.0 18.500 0 0 <01 weeks 02 <03 weeks 04 <05 weeks 06 <07 weeks 08 <09 weeks In-patient waiting list in UK Can NL PE NS NB QC ON MB SK AB BC 0. accompanied with very high quality standards as a topping. high levels of quality and service in Indian tertiary hospitals and availability of superior medical facilities for patients from the developing countries in Asia and Africa. The Indian government has lent support via expediting the visa-process to eliminate procedural delays. there are ~50m uninsured people in USA who are potential targets for this opportunity. Undergoing a complex medical procedure in India costs as less as one-tenth of the cost in those countries.000 500.g. including the US. Further.2bn opportunity for Indian corporate hospitals by 2012 The value proposition for patients from developed countries is lower cost.000 …and almost no waiting period Overburdened medicare systems in the West and holistic treatments & alternative therapies in India attracting patients Patients in several developed economies. The above factors have led to a visible jump in medical tourism in the country.. we believe.000 4.000 Thailand 62500 75000 14250 6900 7000 1755 na USA 400.000 40. Industry India 30.0 10 <11 weeks 12 <13 weeks 14 <15 weeks 16 <17 weeks 18 <19 weeks 20 <21 weeks 22 <23 weeks 24 <25 weeks 26 <27 weeks 6. Exhibit 29: Long waiting periods a result of overburdened healthcare systems in Canada and UK Wait from GP to specialist (Elective) Wait from specialist to treatment 90.000 22. Exhibit 28: Treatment in India costs nearly a tenth of that in developed countries Treatment cost (US$) Bone marrow transplant Liver transplant Open heart surgery Hip replacement Knee surgery Gall bladder removal Neuro surgery Source: IBEF. is also a target segment.500 4. India’s huge expat population. etc. the erstwhile “Medical Tourism Hub” in Asia.000 na 290.0 30. clearly indicating the emergence of the medical tourism segment. face long waiting periods that often run into months due to over-burdened healthcare systems. Indian healthcare service providers have seen a sharp jump in occupancy rates at their preventive medicine and wellness centers during holiday seasons. UK.000 na 16.
India Bangalore . Kolkata Fortis Hospital Fortis Escorts Heart Institute Fortis Hospitals . For example. India First Accredited: 26 August 2005 Re-accredited: 20 November 2008 Re-accredited: 30 July 2010 Re-accredited: 12 July 2008 Location Palakkad/Kerala. We see steady inflow of patients from Middle East.” -A leading South Delhi Hospital NOVEMBER 2010 27 . India New Delhi. India First Accredition on First Accredited: 24 December 2009 First Accredited: 18 July 2008 First Accredited: 29 January 2006 First Accredited: 28 April 2006 First Accredited: 24 January 2009 First Accredited: 15 June 2007 First Accredited: 20 February 2010 First Accredited: 9 February 2008 Re-accredited on Re-accredited: 31 January 2009 Re-accredited: 17 April 2009 Re-accredited: 24 July 2010 Partnerships with global insurance players Many Indian private hospitals catering to overseas medical patients have entered into tie-ups with foreign insurance players.Bangalore (formerly Wockhardt) Fortis Hospitals . Chennai Apollo Hospitals. Tamil Nadu. We expect these numbers to swell going forward. India Chennai. several Indian private healthcare facilities have already acquired international quality accreditations like JCI (Joint Commission International) an JCAHO (Joint Commission of Accreditation of Hospital Organizations). India New Delhi. Africa and neighboring countries. India Chennai. We also understand that several large hospital chains are in active talks with overseas governments and insurance companies to offer best-in-class medical services at attractive prices on contractual basis. India Mumbai . We expect 10-15% volume growth in this segment in FY11. IDFC Securities Research Chandigarh . In line with the strategy. India Hyderabad . “Overseas medical tourists account for 10% of our in-patient volumes. India Mohali . Hyderabad Apollo Gleneagles Hospital. Exhibit 30: JCI accredited organizations steadily on rise Hospital Ahalia Foundation Eye Hospital Apollo Hospitals. The exhibit below lists the accreditations secured by leading Indian private sector players.IDFC Securities Indian private hospitals – gearing up to tap expected medical tourism inflow Tapping into the medical tourism opportunity is a stated strategic objective for almost all organized Indian private healthcare providers.Mulund (formerly Wockhardt) Grewal Eye Institute Indraprastha Apollo Hospital Moolchand Hospital Satguru Partap Singh Apollo Hospital Shroff Eye Hospital Sri Ramachandra Medical Centre India Source: JCAHO. Bangalore Apollo Hospitals. India Punjab . India New Delhi . First Accredited: 26 May 2007 First Accredited: 18 June 2005 First Accredited: 5 December 2009 First Accredited: 3 February 2007 First Accredited: 18 February 2006 First Accredited: 7 February 2009 Re-accredited: 6 February 2010 Mumbai. Van Breda (Belgium) and Môn dial (France) to direct patients to India. large Indian private healthcare service providers have tied up with insurers like BUPA (UK). India Bangalore. India Kolkata.
We assume successful tertiary hospital players will be efficient at procuring well-located land at attractive prices. have a strong referral network.IDFC Securities TERTIARY HOSPITALS: ATTRACTIVE. hospital economics highly sensitive to these increasingly expensive items Given the shortage of skilled personnel required for tertiary care units. can effectively manage people issues to attract and retain high quality medical personnel while being capable of establishing high quality standards on a sustained basis to attract patients. On the financial front. operators need deep pockets and nerves of steel to succeed in this business given the long gestation periods and stiff challenges related to procuring land. along with 25-30% ROCE. it is a relatively complex business. right people as also an evolving regulatory framework We estimate that a tertiary hospital will take at least three years to turn EBITDA-positive and generate 25-30% EBITDA typically from the fifth year onwards. Despite several years of existence of private sector tertiary hospitals. it will typically take 5-6 years for a successful hospital to reach that milestone. we believe that while a tertiary hospital can make 25-30% operating margins on a steady basis. Multiple challenges exist on account of spiraling land procurement costs. ensure viability and deliver profitability. Land and building account for 30-35% of the cost of setting up a bed. recruiting and retaining people at manageable costs is a challenge Attractive but definitely not an easy business A tertiary hospital can achieve operating margins of 25-30%. we do believe that the jury is still out on the most appropriate business model that can tackle long gestation. NOVEMBER 2010 28 . high upfront equipment and building capex requirements. managing people issues and regulatory issues governing the sector as well as softer issues like the sensitivity associated with patient care. but could take 5-6 years to hit those levels While the tertiary corporate hospital segment presents a lucrative opportunity for private players. A widening shortage of reasonably priced land parcels at desired locations and restricted availability of qualified medical personnel have been adding to the complexity of this business. ensuring high occupancy. tertiary care is a highly attractive business – if executed well However. BUT… With potential 25-30% EBITDA margins in steady state.
Brace for long gestation; the wait is worth it...
An efficient tertiary care unit would take two to three years to break even, assuming steady patient inflow
Tertiary healthcare, in our view, is among the most capital-, people- and technologyintensive businesses. It is characterized by long gestation periods – besides 2-3 years for project conceptualization to commissioning, achieving cash breakeven for a healthcare facility could take up to three years assuming steady patient inflow and no mishandled cases. Cost & Complexity: The initial capital cost of setting up a tertiary hospital bed is Rs7m-10m in larger cities with real estate and medical equipment accounting for 6570% of the total project cost. The industry is characterized by frequent product innovations and evolving technology (e.g., high-cost imported equipment may become outdated earlier than anticipated). The quality of doctors and nurses is critical to the success of any hospital and, hence, retention of key medical personnel is imperative. Real estate, medical equipment costs along with employee retention are the key factors that determine the success or failure of a healthcare delivery model. Rewards: Importantly, post stabilization i.e. typically after fifth year of operations, hospital operators can potentially enjoy >20% EBITDA margins with attractive return ratios. Further, based on management’s abilities to derive cost efficiencies, hospitals could enjoy margins in range of 30-35% by 6th - 7th year of operations and generate 25-30% RoCE. Apollo Chennai for instance operates at 30%+ EBITDA margins. After achieving EBITDA break-even, we expect well-run hospitals to clock steady annuity like cash flows.
Real estate and equipment costs and retaining qualified staff are key challenges for any delivery model
Exhibit 31: Capital cost distribution
Capital Costs breakup
Sweet returns post stabilization of beds
(Rs m) 500 0 Cash flows Operating cashflow Free Cash Flow
RoCE (% - LHS)
Operating margins (% - RHS)
Pre operative expenses 12%
-2,000 YR1 YR2 YR3 YR4 YR5 YR6 YR7
-8 YR1 YR2 YR3 YR4 YR5 YR6 YR7
Source: IDFC Securities Research
The operating matrix of a hospital depends on a host of variables, including location, target markets, price sensitivity, specialization, level of technology, etc.
IDFC Securities The exhibit below cites detailed revenue and cost break-ups for a tertiary care hospital. However, to understand the economics of a multi-specialty tertiary care hospital and for the sake of simplicity, we limit the number of input variables. Exhibit 32: Revenue and cost mix for a tertiary care hospital
OPD 5% Consumables 19%
Personnel cost 22%
Pathology 5% Radiology 4% Doctor's fees 16% Pharmacy 17%
OT Rent 17%
Doctors share 16%
Marketing & PR 2% Maintenance 7%
Admin. Expenses Pharmaceuticals 5% 13% Utilities 6% Consumables 11%
Source: FICCI, E&Y, Industry
How do financials of a well-run hospital look like? Exhibit below is a representation of the scale-up of a typical well run multispecialty tertiary care hospital in a large metro. Exhibit 33: Key operational assumptions for a 200-bed tertiary care hospital
Particulars (Rs m)
No. of beds Occupancy rate (%) ARPOB (Rs m, annualized) yoy increase (%) Revenues Revenues ramp-up (x) Expenses (as % of sales) Consumables Personnel Other Costs Operating margins (%) Net profit margins (%) Source: IDFC Securities Research 30 40 35 (5) (35.3) 30 35 35 0 (20.4) 25 35 30 10 (5.3) 25 25 35 15 2.0 25 20 32.5 23 8.9 25 20 27.5 28 13.1 25 20 25 30 15.5 25 20 25 30 16.1 25 20 25 30 16.6 25 20 25 30 17.1
200 30 20,000 0 438 -
200 45 21,000 5 690 1.6
200 65 23,100 10 1,096 2.5
200 75 25,410 10 1,391 3.2
200 85 27,951 10 1,734 4.0
200 85 30,746 10 1,908 4.4
200 85 33,821 10 2,099 4.8
200 85 37,203 10 2,308 5.3
200 85 40,923 10 2,539 5.8
200 85 45,015 10 2,793 6.4
Per bed capital cost at Rs10m; implies total investment of Rs2bn for 200-bed tertiary care hospital in a metropolis. ARPOB of Rs20000 in first year of operations with 5% increase assumed in second year followed by 10% annual increase thereon. We see 10% increase as conservative after considering an improving case-mix and as well as the inflationary impact. Occupancy rates at 30%, 45%, 65%, 75% in year 1,2,3,4 of operation. Year 5 onwards we expect operations to stabilize with 85% occupancy levels.
Consumables and employee costs account for 30-40% and 35-40% of the sales in initial years of operation. Operational costs include power & fuel, repairs & maintenance, laundry, and other miscellaneous costs, and account for 10-15% of sales. We factor in steady margin expansion as hospital beds mature and the hospital steadily realizes the benefits of scale with higher purchasing power.
Well-run hospitals focus on top line in initial years
The 80:20 principle – 80% of footfalls generate 20% of revenue, and vice versa
Hospital operators, in the first year of operations, focus energies on achieving targeted footfalls to ensure revenue growth. Hospitals usually have an 80:20 footfall ratio, with 80% of footfalls contributing only 20% of the revenues generated. The remaining ~20% of in-patients typically contribute 80% of the revenues generated. Once requisite sustained footfalls are observed in year one, the hospital administration shifts focus to revenue growth and thereafter to operating profits (in years two and three respectively). In the aforesaid scenario, new hospitals typically incur operating losses in the initial two years of operations and turn EBITDA-positive only by the third year of operations.
Losses incurred in the initial years not only erode net worth but may also force companies to borrow short-term funds for working capital. Across scenarios, we observe a ‘camel hump’ gearing profile, with gearing as high as 3x in the third year of operation. Hospital beds, in our view, are a perishable commodity. Medical equipment accounts for a third of the total capital costs. Assuming a depreciable life of five years on critical equipment (say 30% of the equipment cost) would imply that 25% of the cumulative EBITDA of the first five years would need to be provisioned for equipment upgrades by the fifth year of operations. Given capital intensiveness of the sector, hospitals have a payback period stretching over 7-10 years. Return ratios, initially negative, turn positive by the third or fourth year of operations in most cases.
25% of total EBITDA for the first five years may need to be provisioned for equipment upgrades
Medium- to long-term – tertiary healthcare is an attractive business
Importantly, hospital operators of well-administered facilities enjoy healthy operating margins upwards of 20% typically the 5th year of operation. Higher inpatient volumes and consequently improved capital efficiency results to hospitals churn attractive return ratios. We expect well-run hospitals to clock on average 15-20% RoCE from the fifth year of operations. Further, based on improved case-mix and management’s abilities to realize cost gains, hospitals could witness EBITDA margins as high as 35%. Apollo Chennai for instance operates at EBITDA margins in excess of 30%. For a hospital operating in steady state (say 7th year of operation), we expect every 100bps expansion in EBITDA margins to lead to 75-80bps expansion in return ratios. We estimate a hospital operating at 35% EBITDA margins to clock return ratios in the region of 25-30%.
Optimizing case mix and management ability to derive cost gains key to higher margins
4 15. which combines higher average revenue per occupied bed (ARPOB) with lower average length of stay (ALOS). hospitals on stabilization witness steady increase in positive free cash flows reflecting improvement in operational metrics.2 31.5 1. As per our estimates.8 27.3 YR4 6.1 6.7 9. cumulative free cash flows over a five year period post breakeven (in Yr 3) covers nearly ~65% of the initial setup cost.3 24. While it is relatively easy to achieve higher occupancy if the location and service quality of the hospital are in order.6 0.5 YR5 16.0) 3.9 YR8 26.2) Source: IDFC Securities Research. Exhibit 35: Indicators for a healthy tertiary hospital Low “Average Length of Stay” (ALOS) • Inpatient revenues are dependent upon the Average Length of Stay (ALOS) • ALOS indicates average time for which patient occupies a hospital bed.4) (1.1 21.8) (27.7 23.3 0.6 5. along with higher occupancy is the operating Holy Grail of tertiary corporate hospitals.8 2.4) (23.6 YR2 (4.8 YR6 22.IDFC Securities • After initial years of negative cash flows.9) 2.a.4 19. ensuring high occupancy rates is critical.1 0.5 YR7 25.4 1.8 1. NOVEMBER 2010 32 . it is a critical revenue stream • Outpatient revenues act as a strong pull for Inpatient revenues and creates a solid base for a hospital • Also. operating margins in outpatient revenues are significantly higher due to very low operating costs Diagnostic and dispensing related revenues • Hospitals with a higher component of the high margin diagnostic services related and drug dispensing related revenues are able to achieve superior operating margins • Given high fixed costs associated with tertiary hospitals. Interest coverage ratio (x) (1. a hospital’s commercial savvy lies in its ability to achieve these occupancies with a superior case mix.5 28. *Debt service ratio Operating indicators for a successful tertiary hospital While land acquisition at a strategic location and reasonable costs goes a long way towards laying the foundation of a successful tertiary hospital. • Typically a tertiary hospital starts breaking even at 6065% occupancy Source: IDFC Securities Research Achieving an optimal case mix. reduction in ALOS to closer to 23 days will lead to higher profitability for a tertiary hospital Occupancy rates Average daily revenue per occupied bed • An important indicator for the financial health of a tertiary hospital • Indicative of the complexity of average procedures undertaken in the hospital Strong OPD (Outpatient Department) patient flow /revenues • While the Outpatient revenues contribute a relatively smaller component of overall revenues for a tertiary hospital (20-25%).9 3.2 YR3 1.1 (13. we believe some of the following operating parameters help to present a complete picture.0 n.9 YR10 27.0 0.9 YR9 27.9) 1.1 0. • As maximum inpatient revenues are generated within first 48-72 hours of admission. Exhibit 34: Key financial parameters Exhibit RoCE (%) RoE (%) Gearing (x) YR1 (5.
impacts a hospital’s revenues. On the revenue side.IDFC Securities Exhibit 36: Holy Grail to tertiary care hospitals Desired case .mix Lower ALOS + Higher profitability Higher ARPOB Source: IDFC Securities Research Strong brand recognition Improving clinical outcomes at private hospitals are drawing patients away from solo practitioners The long-term success of a hospital clearly rests on the brand image it enjoys in the addressable market. People value hospitals by their consistent quality service. besides setting up external feeder networks (family physicians. location of a tertiary care unit defines the catchment area and. Land and building together account for 30-35% of the total project cost and are among the key measures to gauge a hospital’s financial viability. etc).000 sq ft of constructed space to accommodate all the facilities. thereby enhancing occupancy rates and ARPOB. therefore. importantly. so a 200-bed tertiary hospital would broadly need 1. To tackle the aforesaid scenario.45. patients are increasingly preferring hospitals over solo practitioners. many tertiary care hospitals have set up spokes (secondary hospitals) to ensure steady in-patient volumes at the hub (tertiary care unit). we have estimated that one bed would correspond to ~750 sq ft of space. A 200-bed hospital demands two acres of land Based on expansion plans of upcoming tertiary care units in 2010. Real estate costs: Key to commercial viability Land and building account for ~35% of project cost Real estate cost is probably the most important factor that determines the viability of a hospital project. we believe it is imperative for hospitals to develop strong brand equity to succeed in the long term. on clinical outcomes. correspondingly. Even as we acknowledge the huge supply shortage in the healthcare service delivery space. Unregulated growth and polarization of beds have forced hospitals to compete for patients and grapple with rising cost pressures. To be a success. The hub also realizes lower ALOS as patients are located at the secondary care facilities (spokes) before and after surgery cases. Hub & spoke – unconventional models emerging Tertiary care hospitals are setting up feeder networks to compete for patients and drive down costs The private sector in India has traditionally opted for the multi-specialty format and has focused on tertiary care hospitals. This model not only improves profitability of the hubs but also ensures a steady stream of in-patient volumes with a favourable case-mix. the ability of the hospital to attract a relevant patient pool with the desired economic profile. With the organized private healthcare service sector now focusing on quality of delivery and also. NOVEMBER 2010 33 . Treatment pricing is often dependent on economic profile of the local populace and. a hospital requires significant time and investments which many players find difficult to afford.
000/ sq.0 20% decline Base 20% increase Source: IDFC Securities Research 10. return ratios for a hospital enjoying 30% margins would be impacted only to the extent of 20bps on 20% increase/decline in land & bldg.0 acres of land.9 acres of total land).0 22.000 583 1.8 25.1 30. news-flow No. Setting up a 200-bed hospital would. ft of constructed space and 1. ft as construction cost . a hospital would require 1. ft) 200 383 366 300 150 Area/bed (sq. ft/) 667 696 862 667 750 728 A 200-bed hospital would require ~Rs732m for real estate and construction Assuming an FSI of ~2.1 13. Exhibit 39: RoCE sensitivity to real estate costs (in the fifth year of operations) Land & Bldg. Bhubaneswar Fortis Hospital.5x. of beds 300 550 425 450 200 Total area (000’ sq. Based on our analysis. costs assumptions 15. Kolkata Vikram Hospital.34 0.2 EBITDA margins (%) 20. Extrapolating this for a 200-bed facility (145. Mumbai Fortis Hospital. Bangaluru Average Source: IDFC Securities Research. we arrive at a total cost of ~Rs732m for land acquisition and construction – 37% of the total capital cost for setting up a 200-bed hospital. We assume Rs80m per acre as land acquisition cost and Rs4.8-2. The impact of land & building costs is relatively lower for well-run hospitals.0 18.649 2. Delhi Global Hospital.5 22.000 sq. an increase/decrease in land and building costs by 20% results to contraction/expansion in return ratios by nearly 40-50bps.IDFC Securities Exhibit 37: Average space required for a tertiary care hospital Hospital Apollo Hospital.5 14. ft) Total construction costs (A) Area required for a 200-bed hospital (acres) Area allotted for landscaping/ gardens (acres) Total area required (acres) Assumed land cost per acre (Rs m) Total land cost (B) Total costing (A+B) (Rs m) Source: IDFC Securities Research 145. ft) Construction cost (per sq. Exhibit 38: Land procurement and construction costs Area required for a 200-bed hospital (sq.259 4.53 1.1 NOVEMBER 2010 34 .6 18. require 1.50 58. ft) Assumed FSI limit (x) Required land area (sq. costs. Land and building together account for 37-40% of the total project cost and are among the key measures to gauge its financial viability. i. We assume an additional 40% would be required for open spaces and landscaping.3 22.3 18. we find for a hospital operating at 15% margins in the fifth year of operations.0 14.4 acres to set up its facility.6 9.e. therefore.0 9.87 80 150 732 Impact of real estate cost on return ratios Real estate cost is a key factor that determines the viability of a hospital project.
the market regulator had issued a draft guideline on REITs a couple of years ago. but private players are evolving innovative models In an environment of high lease rentals and land and construction costs. we believe high real estate lease costs weigh heavily on a hospital’s operating cash flows. We understand that several healthcare companies are evaluating the possibility of listing such REIT entities in overseas markets (like Singapore) where there is an appetite for these asset classes. a private player builds and operates the hospital on land owned either by a private entity or the government for a fixed period of time. We expect newer operating models to evolve as the private sector seeks ways to tackle high real estate costs and aggressively expand footprint. some private healthcare service providers have opted for the lease model. A case in point is Fortis wherein lease rentals accounted for 2% of the net sales respectively in FY10.IDFC Securities Some have adopted the leased model to circumvent high real estate costs Due to high land and building costs. For example. o BOT and BLT (build-operate-transfer or build-lease-transfer). Exhibit 40: 60% of Fortis’s planned hospital expansion are under lease contracts Location Shalimar Bagh* Gurgaon Ludhiana -2 Kangra Ludhiana-1 Ahemdabad Gwalior Kolkata* Peenya Mulund Source: Fortis Hospitals. commisioned in Q2FY11 No. we believe increased regulatory intervention is imperative to make healthcare delivery affordable. Regulation may help curtail rising land costs somewhat. Several healthcare providers are looking at REITs to avoid costs of owning properties NOVEMBER 2010 35 . We believe the government’s renewed focus on affordable healthcare could speed up progress on this front. Our base case scenario for a 200-bed hospital operating in a Tier I city and servicing Rs600/ sq. REITs deploy investors’ money in real estate assets. These trusts invest mainly in commercial property and pay the rent collected from these properties to the shareholders as dividend. SEBI. but nothing has happened since then. We list a few emerging trends: • Innovative models: We expect hospitals to follow an asset-light strategy and adopt various innovative models: o REITs: These operate on the principle of a mutual fund. Like mutual funds collect money from investors and deploy it into equities and bonds. land for six of Fortis’s 10 planned Greenfield projects (underway) has been taken on lease. Under these models. of Beds 350 450 100 100 200 200 150 414 120 344 Ownership Owned Owned Lease Lease Lease Lease Lease Owned Lease Owned Having said so. ft/ annum of lease rental would shave off as much as 60% of the cumulative EBITDA generated over the first three years of operations.
which dents profitability due to negative operating leverage. resort to higher treatment pricing. That often leads to a vicious cycle of lower utilization rate. o Tax rebates for setting up hospitals in select geographies and catchment areas. we operate either on leased land or set up our hospitals on acquired nursing homes. Exhibit 41: Industry faces high depreciation costs (%) 12. IDFC Securities Research NOVEMBER 2010 36 . That leads to redundancy of expensive medical equipment every 5-7 years. o Increase in FSI limit for hospitals in metros.0 3. to recover the cost of expensive imported medical equipment over its short life cycles. Hospitals.0 FY04 FY05 FY06 FY07 FY08 FY09 Source: Emerging markets database.IDFC Securities "To overcome high land and real estate costs." -Vaatsalya "We work on quick payback models with a focus on minimizing initial outlay of investments. only one is owned with the remaining on leased land" -A leading hospital chain in South India Hiking FSI limits. This significantly reduces our cost base. The healthcare industry is characterized by frequent product innovations and evolving technology.0 Depreciation The vicious loop of higher pricing 9. Of our 11 premises. Medical equipment: High obsolescence costs Industry estimates indicate that medical equipment accounts for the largest chunk of capital costs (up to 30-40%) towards setting up a tertiary care unit.0 Utilization levels Pricing 0. subsidies and tax rebates are key policy measures that can make medicare affordable • Regulatory intervention: We expect the government to take the following regulatory measures soon to make healthcare affordable. compared with a depreciable life of up to 14 years (based on accounting periods). The problem is compounded by the fact that there is practically very limited indigenous medical device manufacturing industry in India which necessitates purchase of significantly expensive imported equipment.0 Pay back 6. o Land subsidy for hospitals with reserved beds for people below the poverty line.
“cost plus basis” as well as outsourcing model depending on the location and facility offerings" . not the newest” -Fortis Govt could encourage domestic manufacture of equipment by providing sops for R&D However. are involved in R&D. Global majors like GE and Siemens have already taken the first steps in this direction to provide equipment lifecycle management as well as manage technology obsolescence through planned equipment renewals.IDFC Securities Solutions for equipment obsolescence Most large Indian private healthcare service providers have adopted the strategy of having ‘state-of-art’ technology. as a policy. The government needs to encourage domestic manufacturing and sourcing. partly to target lucrative medical tourists and also to provide the best available treatment to domestic patients. None of the domestic manufacturers. has restricted medical equipment purchases to bare essentials like ultrasound machines. ventilators. which could considerably reduce end-product prices. Hospitals tend to buy costly hi-tech equipment to attract doctors. thereby restricting price escalation wherever possible. resulting in higher fixed costs Many tertiary care units also often embrace high-end technology to retain the best of doctors and to showcase their “leading edge” treatment." . Incentivizing R&D further: Most domestic medical device markets continue to be flooded by low-cost Chinese equipment or serviced by majors like GE and Siemens. We note that these “latest technologies” may not be the most appropriate ones for the recommended treatment. Help from the government can also be expected in the form of regulations that incentivize R&D further and encourage domestic manufacturing/sourcing. barring a few likes L&T. "To rationalize high medical equipment costs. we operate on a variety of models like “pay per use”. “We got out of the arms race a few years ago… Fortis now promises only that its scanners are world class.Vaatsalya Measures we expect from the government • The government should stress on the use of ‘appropriate technology’ over ‘latest technology’. • The equipment market is dominated by foreign majors and low-cost Chinese brands • Initiatives from the private sector • Equipment leasing: High medical equipment costs and risks related to earlierthan-expected redundancy of costly imported equipment should force this trend. We believe the government needs to further incentivize R&D. etc. This helps us reduce pay-back periods. This results in a higher fixed cost base and loss of in-patient volumes. This tends to result in a portion of in-patient volumes shopping for more affordable alternatives. X-ray machines. A side effect of this has been that as hospital administrators strive to achieve their target return ratios and with overseas medical tourists still a small fraction of overall patient base. the domestic patient base bears the brunt of high treatment charges. Medical equipment imports have seen a large 18% CAGR over 2000-07. we expect private healthcare service providers to formulate operating models that rationalize the cost of imported medical equipment. “percentage of revenue share”. NOVEMBER 2010 37 .Fortis "Vaatsalya.
Deferred payment on equipment purchases. and >700.g. an equal number of AYUSH doctors. and retention of key personnel is an imperative – especially for tertiary care hospitals. Others: To cope with technological advances and enhance the life of medical equipment.000 High income High middle income countries Low middle income countries Low income 15 18 Beds 58 Per 10.IDFC Securities Deferred payment. part upfront payment with profit sharing.533 hospitals. We believe there is a huge second-hand medical equipment market in India. these shortages will be particularly acute in the case of specialized and experienced doctors required for manning the newer tertiary care set-ups. IDFC Securities Research NOVEMBER 2010 38 . we believe managing people issues – i. part upfront payment. etc are a few innovative methods that have come to the fore. GE and Siemens) have come up with alternate financing mechanisms for larger hospitals chains. India’s medical infrastructure currently includes more than 750. for purchases are some new trends in the private sector • Alternate financing models: Several global medical equipment manufacturers (e. unorganized market.0 10. In our view.000 High income High middle income countries Low middle income countries Low income 14 Nurses 81 39 24. 93. nurses and paramedics are the key enablers of the success of any hospital. …and critical for tertiary care.377 physicians.e.561 nurses and 655.000 hospital beds.0 Physicians 28.332 dental surgeons. fixed rate reagent volume supplies contract. as it demands specialized doctors and other personnel General availability of medical resources – not enough Prima facie. • Right People: A challenging proposition ‘Right people at the right cost’ is crucial for the success of any hospital… Along with the well-known challenges like high upfront capex requirements and long gestation periods. This will logically lead to aggressive wage inflation which will further stress the economics of successfully running tertiary care hospitals.0 40 10 India 9 India 6. or sell them in the secondary.. Exhibit 42: Healthcare infrastructure – bad or worse Per 10.000 High income High middle income countries Low middle income countries Low income 4. finding the right people and at the right cost – will be a critical scale-up challenge for tertiary care hospital operators in India.0 India 13 World Avearage 27 14 28 Source: WHO. 15. 1. they trail even some poorer developing nations. Medical infrastructure in India includes 757.801 pharmacists (as on 31 Dec’08). India has a rich pool of medical practitioners. We expect more such solutions to emerge.0 Per 10. while there are clear indications of shortage in the overall pool of doctors required going forward.652. etc. Doctors.000 physicians. But when considered from a resource density perspective. larger hospitals operating on the hub & spoke model often pass on equipment from hubs (in large cities) to spokes (facilities in Tier II/ III cities).
022 6.000 27.792 26. which effectively means paying significant payouts to these doctors to switch over. NOVEMBER 2010 39 . qualified teaching staff and high entry barriers to medical education have contributed to the poor growth in medical staff. of students enrolled to MBBS Course Educational capacity highly inadequate to meet the burgeoning needs of the Indian healthcare industry 33. India would need to add 0.5% CAGR over the past four years. Exhibit 44: Healthcare infrastructure shortfall from 13-41% As per 2001 consensus (nos. as most often it is the doctor’s reputation that is the key deciding factor for where a patient goes for treatment. IDFC Securities Research India would need an incremental 0. we see significant shortage of skilled resources in the times ahead. There are more than 250 medical colleges in the modern system of medicine and >400 in the Indian system of medicine and homeopathy (ISM&H). Having reputed doctors is fairly critical for a new hospital set-up to gain traction.000 24. The number of allopathic doctors (registered with the Medical Council of India) has grown at a dismal 3.491 Shortfall 20.000 No.903 4.7m doctors by 2025 According to a survey by FICCI. employee expenses form the biggest cost component that influences a hospital’s operating margins (see exhibit below).000 FY06 FY07 FY08 FY09 FY10 Source: Medical Council of India.) Sub -centres PHCs CHCs Source: NSSO Required 158. Exhibit 43: Supply increasing steadily.803 2. nurses and para-professionals.7m doctors by 2025. This leads to fairly high upfront costs and thereby strains the financials of a newly commissioned hospital. At the current rate of doctor addition each year. The country produces ~35. but not fast enough 36.000 30.000 doctors annually in the modern system of medicine and a similar number of ISM&H practitioners.IDFC Securities We believe lack of adequate infrastructure. Doctors are the most important factor of a tertiary care set-up.653 % shortfall 13 18 41 Compensation models in tertiary care hospitals Hospitals need to balance between high salaries and their need to have the best doctors After consumables.
salaries have increased ~2x with overall compensation increasing 3x. we have 50% of the doctors on full time basis and balance as visiting consultants. "To manage employee costs. Bangalore's COE has majority of full time doctors. We operate on a combination of fixed fee and fee for service model to retain and incentivize doctors.for base case scenario Consumables 120 Personnel Other Costs OPM 90 60 30 0 YR1 YR2 YR3 YR4 YR5 YR6 Source: IDFC Securities Research Our interaction with industry experts indicates that employee cost structure for hospitals follow pareto charts. we have full time exclusive consultants at Vaatsalya.IDFC Securities Exhibit 45: Margin profile for a hospital – base-case scenario Margin profile . Given the challenges on key employee availability and constantly escalating costs. Full time doctors contribute 65-70% of our revenues" -A leading South Delhi Hospital "Doctor engagement for us is very location-specific. while Vashi facility has more of visiting consultants. There is enough supply of doctors in secondary care unlike for tertiary care specialties. Our attrition rates are definitely below industry benchmarks" -Fortis "Unlike industry which follows fee-for-service model. ESOPs etc) to rationalize the employee costs. This has been on the back of increased competition in Delhi/NCR” -A leading South Delhi Hospital We believe ‘one size fits all’ doesn’t work in the hospital sector and it is imperative for hospital managements to maintain a judicious mix of compensation structures for doctors (full time/ part time) and cost structures (fixed pay/ fee for service/ revenue sharing. "Over the past three years. to retain the talent is always a challenge" -Vaatsalya NOVEMBER 2010 40 . hospitals have been forced to come up with innovative performance structures. However. For example. with 20% of the employees (mostly doctors) responsible for ~80% of the total employee costs.
IDFC Securities Exhibit 46: Various performance models for medical staff • Model I: The entire staff is on the rolls of the institution and has a largely fixed salary structure – similar to the practice in the public sector. 20% would be doctors. A mix of staff and empanelled models for consultant medical personnel. IDFC Securities Research A 200-bed hospital would need 700 employees to start with: According to our analysis based on industry benchmarks. housekeeping. Of the 3. Exhibit 47: Employee cost distribution Employee distribution per bed (%) No. Therefore. the hospital may deploy the entire medical staff in clinical disciplines on this model and keep the consultant medical staff in diagnostics and anesthesiology on a staff model (model 1) (salary basis with or without an incentive plan). accounts. • Model II: • Empanelled model: • Mixed model: Source: Express healthcare Magazine. The consultant medical staff is on the rolls on a retainer basis and is paid a fixed retainership along with either an incentive plan or sharing of revenues over and above the fixed component (retainership). etc) 35% Doctors 20% 210 140 70 0 Nurses 45% Doctors Nurses Others (technicians. housekeeping. housekeeping. accounts. For example. pantry. a 200-bed tertiary care unit would need 700 employees to start with. This is used to offset the fixed high cost of senior medical staff with a bigger variable component linked to the volume of work. IDFC Securities Research NOVEMBER 2010 41 . pantry. of employees for a 200-bed tertiary care unit 350 280 Others (technicians. and the remaining technicians and those involved in accounts.5 employees and 3.5 shifts operating all the time at 70% occupancy. Industry. etc) Source: CRISIL. 35% nurses and paramedics.5 employees. a tertiary care bed would require 3. etc. Primarily used for consultant medical staff who are paid on the basis of 'fee for service' with a deduction of service charges depending on the policy of the individual hospital. The non-consultants are treated as employees (as in Model I).
address the supply gap.9 2. the government has recently allowed private hospitals to set up medical colleges and as also lowered the land requirement to 10 acres for metros and 20 acres for smaller cities. a minimum of 25 acres land was mandatory for a hospital to set up a medical college. registered societies and public religious and charitable trusts were permitted to set up medical colleges. clinical outcomes and results” -Fortis NOVEMBER 2010 42 . which was not the case a few years ago. only state governments.IDFC Securities Addressing the human resource availability gap Govt has allowed private hospitals to set up colleges and has also eased land requirement policy Until recently. UK.838 15. To address the huge resource demand-supply gap.9 10." -A leading hospital chain in South India “…over the last six months. Reverse brain drain: Hospital chains like Apollo. Fortis and Manipal Hospital have been witnessing increased enquiries from doctors of Indian origin who are looking to come back to India. Indian doctors are returning home and these doctors are adding a tremendous amount in terms of value to the organization from a best practices. This should. the Middle East as well. Also.449 4. could help assuage the supply shortage. to some extent.044 % of workforce 4. government-promoted autonomous bodies. of IMG's 40. we expect leading healthcare service providers like Fortis. we believe. universities.664 62.1 4.0 Total Source: The new england journal of medicine. With corporate chains offering higher salaries. We expect this trend to pick up as the larger hospitals not only offer attractive salaries but also the latest medical technology. IDFC Securities Research The number of Indian medical college graduates practicing (as of 2005) in the US.093 1. We see several applications from overseas doctors. Canada and Australia stood at 62044. This trend catching up pace. we have recruited 17 doctors from overseas – many of them coming from the United States. "The reverse brain drain trend is picking up. Apollo and MAX to set up captive medical colleges in the years to come. from the United Kingdom. What to expect: • Greenfield medical colleges: Based on recent changes in regulation. expat doctors are looking to return to India • Exhibit 48: Indian-origin doctors are are the backbone of healthcare in UK and the USA Indian IMG's (2005) In US In UK In Canada In Australia Rank 1 1 3 2 No. equivalent to ~9% of the number of physicians registered by the Medical Council of India in 2005.
1953 Private Nursing Home Act. and lacks accountability.. In the absence of consistent and relevant regulations in most of the states. 1950 Patients bear the brunt of high costs driven by lack of regulation in private healthcare Consequences: Decades of unregulated growth in the private healthcare market has made the incumbent medical fraternity quite powerful and vociferous. 1991 Clinical Establishments Act. the Centre as well as states have provided tax incentives and concessions to hospitals and nursing homes to promote healthcare delivery. Exhibit 49: Only 13 states mandate registration of hospitals / nursing homes under the Nursing Home Act State Andhra Pradesh Delhi Karnataka Madhya Pradesh Maharashtra Applicable regulation Private Medical Care Establishment Act.. adulterated washing powder. 1997 No. 1973 Nursing Homes Registration Act. which in effect is putting a patient on par with a person complaining about. 1949 (only applies to Mumbai. According to a Business World Survey [Who Cares.3 of 1997 Orissa Punjab Sikkim Tamil Nadu West Bengal Source: BW Survey. Pune. Surprisingly. only 13 states in India [as indicated in the map below] register nursing homes/ hospitals under the Nursing Home Act. 1976 Clinical Establishments Regulation Act. 1991 State Nursing Home Registration Act. On the premise of professional independence. This has manifested in serious problems like opaque pricing. incumbents declare the profession accountable only to themselves (specifically nursing home practitioners). overcharging and inefficiencies in the system. say. April 1997 Clinical Establishment Act. 1992 Clinical and Health Establishment Act. 2008]. 2008 Clinical Establishments Regulation Act.IDFC Securities An evolving regulatory scenario… The growth of Indian healthcare sector has been unplanned and unregulated. 2007 Health Care Establishments Act. Nagpur and Solapur) Manipur Mizoram Nagaland Nursing Home and Clinics Registration Act. 1995 Private Clinical Establishment Act. whereas the remaining states register nursing homes/ hospitals either under the Shops and Establishments Act or even the Societies Act. We believe secondary/ tertiary care treatment costs have risen sharply in the recent years not only due to higher investment costs but also due to the unregulated nature of the industry. but have completely failed to regulate the sector and ensure a minimum level of patient care quality. 2002 Nursing Homes Registration Act. a patient with a grievance would have to approach a consumer court. NOVEMBER 2010 43 .
accreditation • NOVEMBER 2010 44 . NABH accreditation of facilities confirms quality assurance and its standards focus on patient safety and quality of patient care. Assuming the act is eventually implemented nationwide and strictly enforced. 3August 2010. Enforcement of strict regulations/ guidelines pertaining to minimum area/ beds. "We do not want to impose a licence raj on the health sector. Himachal Pradesh and Sikkim – and Union Territories for now. 2010. including those in Australia. Nursing homes have been proliferating in the unorganized private healthcare delivery space. minimum number of qualified doctors/ nurses per bed. NABH standards include 49 applicable licenses and statutory obligations under Indian law. Thailand. and (b) addition of 10 categories of sterile devices under the Drugs and Costmetics Act. reacting to Opposition charges that the legislation would be toothless. "Mushrooming nursing homes (unorganized sector) has definitely impacted the corporate hospitals. we need to go slowly and not take harsh measures which may be problematic. but now applies only to a few states in India Regulating private healthcare delivery systems: The central government passed the Clinical Establishments Bill. NABH standards are based on a comparative analysis of various aspects of healthcare. and have been adapted to meet Indian requirements. Mizoram." Health Minister Ghulam Nabi Azad. maintenance of records.. NABH is an attempt to bring global quality checks to the Indian landscape Ensuring minimum quality standardards: The Ministry of Health and Family Welfare (MoHFW) and the Indian healthcare industry have established a National Accreditation Board for Hospitals and Healthcare Providers (NABH). These guidelines were amended in 2007 in terms of. The bill makes it mandatory for all clinical establishments to register under the Clinical Establishment Act (see details in Annexure 1 of the Appendix section). 2010 (CEA. (a) required regulatory clearances for the imported equipment. Regulating medical devices: The Department of Health and Family Welfare currently has nominal jurisdiction over medical devices with detailed regulation under consideration and sale of medical devices yet to be fully regulated. this would be applicable only to four states – Arunachal Pradesh. Increased competition would see a steady increase in pressure on standalone nursing homes and thereby drive consolidation in the unorganized sector" –A leading hospital chain in South India What to watch for: Better regulation will weed out unscrupulous players and drive in-patient volumes to the organized sector • Nationwide implementation of Clinical Establishment Act. checks on medical equipment.IDFC Securities The government’s role on the aforesaid issues Clinical Establishment Bill is a step in the right direction. However. The Drug Controller General of India (DCGI) has formulated guidelines for the import and manufacture of medical devices with effect from July 2006. there may be a spate of closure of nursing homes. the United Kingdom and the United States. 2010): CEA. 2010 would be implemented only in four states and all Union Territories.. The limited regulation that has been introduced till date covers sterile medical devices under the Drugs and Cosmetics Act 1940.
IDFC Securities requirements. as that would not only drive higher in-patient volumes. According to a recent health ministry directive. but also improve the supply of medical fraternity. NABH accreditation is now mandatory for hospitals seeking empanelment in the Central Government Health Scheme (CGHS). NOVEMBER 2010 45 . This bodes well for organized healthcare service providers. The end result would be good for patients" -A leading hospital chain in South India NABH is now mandatory for empanelment in the Central Govt Health Scheme • Only 54 hospitals in the county have got NABH accreditation of the 450 that have applied for it so far. We believe the recent surge in applications is both a reflection of rising awareness among consumers and minimum requirements set by the government for participation in its healthcare schemes. etc could mount cost pressures on nursing homes – thereby forcing many to close. "Indian healthcare delivery is going through a transformation seen in retail akin to the coming of Big Bazaar and its impact on kirana shops.
organized private sector healthcare models in India were largely one-dimensional with focus on multi-specialty tertiary care in metros. Escalating competitive intensity in metros as also an increasingly tough operating environment due to inflation in real estate and personnel cost in these areas forcing a rethink Strong case for exploring innovative business models to tap into lesspenetrated geographies as well as newer patient segments.Low income segment Mumbai . NOVEMBER 2010 46 .0 1.0 WHO recommended 3. their plans to start looking beyond the conventional “multi specialty tertiary care focused on metros” model has certainly helped.0 All-India Mumbai . Our channel checks indicate pockets of temporary oversupply in tertiary care building up in places like Hyderabad and NCR (especially Gurgaon). supplemented with a few secondary and primary care set-ups.IDFC Securities BUSINESS MODELS: INNOVATION AHEAD Till recently.0 0. where significant capacity addition in specific therapies has happened over the last few quarters. Healthcare models: Expect increased innovation Currently.High income segment Source: Industry. secondary care focused models etc.000 population) 4.Middle income segment Mumbai . Exhibit 50: Bed distribution skewed towads the urban/ affluent class (Hospital beds/10. We are encouraged by unconventional models being tried out by some of recent entrants as well as increased willingness of incumbents to experiment with new healthcare delivery formats Some of the innovative formats include single specialty tertiary hospitals.0 2. day care centers. IDFC Securities Research While the larger incumbents remain fairly convinced that this is a temporary situation and demand will soon begin to outpace supply. bed distribution is lopsided Most of the existing beds are largely located in metros/ A class cities.
e. Trivandrum. Salem and Vijayawada have brown field projects while all others are green field projects Source: IDFC Securities Research.IDFC Securities Innovation is in the air A broad scan of the operating environment indicates presence/ emergence of multiple new models. Karaikudi (Tamil Nadu) and Andaman& Nic obar Islands. Dr Trehan’s Medicity O&M contracts. Karur. Tumkur. Amritsar and Srinagar.g. It has presence in Mohali. e. Chit toor (Andhra Pradesh). We have listed the more interesting ones: • Existing tertiary healthcare providers experimenting with setting up secondary/ primary tertiary care hospitals in Tier II/ III towns – Apollo with Apollo Reach Single specialty tertiary care hospitals. It started green field projects in Mohali. Ludhiana. Fort is got access to hospit als in Rajkot. Mysore. Healthcare Global Day care surgery centers. Vijayawada and Jaipur. The pan is to build 100-150 bed hospit als The list of cities include Nagpur. Nashik and Ludhiana. Nagpur (2).g. Bhatinda and Dehradun with bed strength of 150-250. e. Nova Day Care Centre Hospital chains solely focused on primary/ secondary care in Tier II/ III towns. Vizag. Chandigarh. Vaatsalya Healthcare cities. Sholapur and Pune Manipal Group The Group invested Rs4 bn in tier II projects in places like Goa. Industry news flow NOVEMBER 2010 47 . Raipur. Salem. Erstwhile Wockhardt had plans to set up facilities in Goa. Fortis’ contract with SL Raheja in Mumbai JV Structures – Apollo’s proposed Thane hospital in JV with Yash Birla Group • • • • • • Existing players expanding into Tier II / III towns… Exhibit 51: Larger private hospitals spreading their wings Hospital name Tier II and Tier III plans Apollo Hospitals Apollo plans to set-up upto 200bed hospitals in Karimnagar. Apollo has huge plans to set-up 250 Apollo Reac h hospitals across non-urban India Plans to st art a new model of healthcare delivery for tier II and III cities. e.g. Besides with Wockhardt acquisition. Bhubaneswar. Max Healthcare plans for a three-phase expansion plan to t ier II and III cities. Coimbatore. Surat. e.g.g. Ahmedabad. It intends to set-up small hospitals with capacity up to 200 beds and by reducing the investment costs to half per bed in these areas in order to provide treatment at nearly 50% less cost than present facilities in tier I cities. It also plans to expand to Muradabad or Rohtak Fortis Healthcare MAX Healthcare Global Hospitals It plans to expand to tier II and III cities through acquisitions and tie-ups.
single super-specialty chains face the disadvantage of being inherently ill-equipped to tackle case complexities which require several types of surgeons.3 "Pressure due to oversupply in certain mature markets is visible with a few larger hospitals and new entrants already suffocating. … but could be a viable model for a few segments like oncology and ophthalmology Models focusing on secondary/ primary care in Tier II/ III cities A largely unregulated industry and skewed bed addtions biased towards the metros have resulted in 80% healthcare facilites servicing less than 30% of the country’s population. and thereby have a relatively large pool of doctors to tap into.000 109. Some of the hospital chains adopting this model include HCG (Healthcare Global) focused on oncology and Shankar Netralaya and Arvind Eye Hospital focused on ophthalmology. While the number of procedures that such a set-up can execute are NOVEMBER 2010 48 . etc which can be utilized/ shared by other therapies in a conventional multiple-specialty hospital set-up. Eying the huge opportunity. However.750 2. in our view. This enables them to attract the best of the specialists in those segments and clearly helps these hospitals drive in-patient volumes overriding geographical constraints. Given the relatively less complex nature of facilities provided.IDFC Securities Single specialty tertiary hospital chains Super specialty hospitals are not equipped to tackle case complications… Single-specialty tertiary hospital chains have evolved from hospitals looking to leverage the credibility generated by offering “best in class” treatment in certain defined therapy areas and positioning those hospitals as center of excellence in those therapies.000 63.9 Tertiary care facility in metro 950-1050 89 77. ft) Equipment cost (US$/bed) Total Cost (US$) Total cost per bed (Rs m) Source: IDFC Securities Research Secondary Care 800-900 70 50.500 4. private players like Vaatsalya are working on innovative models to tap the unmet healthcare needs of the majority of the population by setting up the secondary care hospitals in Tier II/ III cities. operate on leased facilites and with limited capital investments. ft) Building cost (US$/sq. single super-specialty model may be effective only for select therapy segments like ophthalmology and oncology. These models offer standardized secondary care with limited specialities including gynaecologists. So. obstretricians and dermatologists. single-specialty hospitals may not be able to optimally utilize the diagnostic infrastructure.9 Low cost secondary care 700-800 45 30.222 7. these set-ups do not require highly specilaized doctors. We won’t be surprised to see consolidation in single doctor practice (nursing homes) in times to come and newer operational models come to fore" -Vaatsalya Daycare surgery centres This involves setting up of healthcare units which essentially focus on conducting procedures where the patient is discharged on the same day and does not need to be hospitalized.778 162. Exhibit 52: Setting up a secondary care facility costs 40-70% less than a tertiary care facility Particulars Traditional bias towards metros has exposed a huge opportunity in tier II/ III cities Floor space/bed (sq. Additionally.
retail & hospitality. knee surgery in India takes 4-5 days unlike in the West where it is a daycare surgery.. commercial & residential complexes. educational & training institutes. Nagpur Chennai Health City. the success of a health city would depend on its location and the ability of the hospital administrator to drive in-patient volumes.000 50. Healthcare service providers seeking entry into Tier I markets. Chennai Bengal Health City. Gurgaon Fortis Medi City.IDFC Securities relatively limited compared to a full-fledged tertiary care centre. Exhibit 53: Several planned health cities Health Cities Dr. we believe the entire concept is ready to be truly replicated in India. Until recently.000 1.000 1. Naresh Tehran's Medi City. the government of India did not even allow private hospitals to set up medical colleges. hence. including wellness centers. However. we believe such daycare centers will bring in more efficiency in the execution of several procedures which currently involve multiple days of hospitalization but can be conducted more efficiently. the roster of possible procedures is significant enough to keep such centers reasonably occupied. the returns are attractive as the capex required is significantly limited in such set-ups. attracting patients could be a challenge. seeking to widen their presence in India. Gurgaon Fortis Medi City. have been veering towards these models. with recent changes in regulation.000 Area (acres) 93 na 52 33 100 46 800 100 5 Investment (USD m) 293 293 122-195 246 na 245 487 488 22 …with regulatory changes that allow private players to replicate Western models in India Apollo Health City. We believe a step towards setting up healthcare cities has already been taken in India." -A leading hospital chain in Delhi/NCR region Healthcare cities – still on the drawing board Many corporates have drawn up plans to set up medicities… “Medicities” are one-stop shops.600 600-800 800 700 2. These models are also used by healthcare providers. Bangalore Narayana Hrudayalaya Health City Source: news flow. Additionally.g. preventive medicine facilities. etc. Hyderabad Nagpur Health City. O&M contracts O&M and PPP models allow hospitals to gauge new territories before infusing large funds We expect private healthcare service providers to increasingly use PPP models and O&M contracts.000 5. Also. research & development centers. Due to large land requirements. NOVEMBER 2010 49 . health cities are often situated on the outskirts of a city and. but wanting to avoid the high real estate costs. Durgapur Narayana Health City. e. They offer all healthcare services. “We expect the Indian healthcare delivery landscape to change substantially going forward. Lucknow Beds 1. to gain an initial understanding of new territories before making large investments. IDFC Securities Research More importantly. Larger tertiary care chains like Apollo are particularly focused on setting up these centers as it enables them to free up capacity in their core tertiary care hospitals and increase the ARPOBs while retaining the patients in the network. clinical research centers. though not completely aligned to the western concept of medicities.
Fortis. finance operations & other functions Corporate hospital (like Fortis.IDFC Securities Hospitals which have a presence in this segment include corporate chains like Apollo and Fortis. the corporate hospital receives a share of profits. finance. some trust hospitals have formed JVs with leading corporate hospital chains like Apollo and Fortis. etc. trust hospitals have been allocated prime tracts of lands at nominal lease rentals. finance and administration. finance & other functions NOVEMBER 2010 50 . Exhibit 54: A typical O&M model Manages mrktg. Apollo. Recently. However. Fortis entered into an O&M contract with S L Rajeha Hospital in Mumbai. given operating model limitations and lack of professional management. etc have typically been undertaking the management responsibility of such hospitals and overlooking several functions like marketing. The corporate hospital chain (new administrator). Traditionally. Of late. These administrators get a fixed annual management fee and enter into revenue/ EBITDA-sharing arrangements. operations. In return. Exhibit 55: JV structure between a corporate hospital (new administrator) and target hospital Corporate / trust hospital Lease rental + share of profits Corporate hospital (Operator) Infuses cash Lease bldg & medical equipments Source: IDFC Securities Research SPV Manages marketing operations. infuses capital and undertakes management responsibility of marketing. several trust hospitals have failed to keep pace with the private hospital sector in terms of technology and occupancy. operations. Under a JV agreement. a trust hospital leases out the entire building and medical equipment to the newly-formed SPV or company. administration. Apollo) Target hospital Fixed mgmt. fee or revenue / EBITDA sharing arrangement Source: IDFC Securities Research JV structures Medical trusts have huge land assets in tier I cities but lack expertise. which has a certain equity stake in the SPV. a gap corporates can efficiently fill Larger hospital chains looking to establish presence in Tier I cities and overcome high real estate costs have opted for the JV route by collaborating with trust hospitals.
India has 6m cataract blind people with an estimated 2m cases being added every year. one for the patient undergoing surgery and the other for the patient being prepped. AEH’s surgeons use state-of-the-art equipment like operating microscopes that can swivel between patients. This takes care of ~70% of the activities in a normal operaton and the surgeon. For example. many remain blind due to the huge demand-supply gap. innovation. Aravind boasts of quality comparable to the best in the world. most importantly. technology. rich and poor Aurolab Telemedicines Rotary Aravind International Eye Bank Source: Company Aravind Medical Research Foundation Method: • Leveraging efficiencies: AEH has an assembly-line approach. Aravind now has more than 4000 beds. the most scarce resource. focus on operational efficiencies. Manpower: Trained manpower and optimization of tasks are key to Aravind’s success story. Motivation: Cataract is the most common cause of preventable blindness. • • • NOVEMBER 2010 51 . each operation theatre has a team of qualified opthalmic assistants and intermediate-level specialists who prepare the patient for surgery. Dr. why can’t Aravind sell millions of sight resotring operations and eventually belief in human perfection?" – Dr Govindappa Venkataswamy AEH’s eye care system Aravind Eye Hospitals Community Outreach Programmes Lions Aravind Institute of Community Ophthalmology (LAICO) Education & Training Mission: To eliminate needless blindness by providing compassionate & high quality eye care to all. Though the condition is curable. Global quality: Contrary to the perception that scale compromises quality. Equipment: Each surgeon works on two tables. As a result. cross-subsidization of costs and. Its surgeons perform 2000 surgeries annually. Govindappa Venkataswamy started Aravind Hospital in 1976 with 11 beds to address this gap. Aravind’s single-speciality focus has led to sharpening of surgeons’ skill sets. made possible by efficient division of labour and innovative use of equipment. philanthropy. 10x the national average.IDFC Securities Aravind Eye Hospital Aravind Eye Hospital (AEH) derives its success from scale of operation. “ If Coca-Cola can sell billons of sodas and McDonald’s can sell billions of burgers. only has to focus on the most crucial activity in the operation theatre.
ECCE requires replacing natural lens with intraocular lens (IOL). vs US$200 for imported lens. The hospital now offers 75% of its patients free treatment via cross-susbsidization of costs.01 UK National survey (N-18472) 4. IDFC Securities Research Free Rs50 (valid for 3months) Rs0 Rs750 Rs3500-6000 Rs6500-12000 53% of surgeries 22% of surgeries 25% of surgeries NOVEMBER 2010 52 .01 0.IDFC Securities Aravind Eye enjoys high success rates across treatments Adverse events during surgery (%) Capsule rupture & vitreous loss Incomplete cortical clean-up Iris trauma Persistent iris prolapse Anterior chamber collapse Loss of nuclear fragment into vitreous Choroidal hemorrhage Loss of intra-ocular lens into vitreous Source: Aravind Eye Aravind.3 0.07 0. Eye camps and technology to ensure steady demand Lowering treatment costs: AEH mainly performs two types of cataract surgeries.4 1 0. It also transports needy patients seeking surgery from villages to its Madurai center. Not only does AEH now offer free ECCE treatment but AURO now exports IOL lenses to more than 85 countries. and 2) despite offering free treatment to two-thirds of its patients getting people to hospital has been a challenge. ICCE and ECCE. in its early days. ICCE is the more common type wherein patients are advised spectacles post diagonisis.3 0. The hospital has been using technology and health camps in partnership with local groups to reach out to patients.5 0.3 0. In 1992 AEH set up the AURO lab which manufactured quality IOL at a cost of US$5 per lens.16 Technology-driven inclusion to drive scale: AEH faces two distinct problems: 1) it needs a continuous flow of patients to feed the efficiencies and scale it has created.75 0.2 na 0. Free treatment for ~75% patients: Innovative strategies and benefits of scale have helped AEH develop an economically viable model. Innovation through cross-subsidization Consulting fee Cataract Surgery with IOL (70% of all surgeries): Poor patients Paying patients Poor patients Subsidized rate Regular rate Phaco surgery Source: Aravind Eye.7 0. AEH.07 0. Coimbatore (N=22932) 2 0. found it difficult to provide free ECCE tratment even to the most needy due to the high cost of imported IOL.
Dr.0 Ophthalmologists graduating annually Source: NHS. nearly twice that of surgeons in the US.0 71% 59% 52.IDFC Securities Aravind performs 59% of NHS surgeries NHS*-UK Aravind AEH leverages its strong resource pool NHS*-UK Aravind 60.000 15. which saves it huge upfront capital investment. Centennial Equipment) which offer best-in-class quality at nearly half the price offered by MNCs like GE or Siemens. NH leases them at a monthly rental. “Japanese companies reinvented the process of making cars. but employee costs (as a percentage of sales) look lower due to surgeons operating longer hours. IDFC Securities Research Narayana Hrudayalaya Narayana Hrudayalaya (NH) started in 2000 with the sole motive of providing affordable and quality tertiary care to people irrespective of financial status. It sources part of its medical equipment from domestic players (eg. which account for the largest cost component for a hospital (upto 35% of sales). which makes the proposition attractive for both parties. The management has indicated that bulk purchases have helped it get 30-35% discount on consumables.5 35. What healthcare needs is process innovation. Surgeons at NH peform an average 19 open heart surgeries and 25 catherization procedures a day. Employee costs are ~22% of sales. Aravind Eye. not product innovation”. 8x the national average. Devi Shetty. NH has also continously replaced costly imported medical equipment with indigineous technology. It also has an arrangement to source reagents from the lessor on a continious basis.000 0 No. Narayana Hrudayalaya Reducing costs and driving scale: Most tertiary care providers are in wont to buy costly medical equipment.000 45. It built a formidable brand equity by process innovation and best-in-class treatment at affordable rates helped by cross-subsidization and high capacity utilization. That's what we're doing in healthcare. Creating scale: The benefits of efficient capacity utilization makes NH’s operating model financially viable. chairman. It sources high-end imported technology from MNCs if substitutes of similar quality are unavailable domestically. Surgeons at NH perform an average 200 surgeries an year. NH says its surgeons are paid on par with market rates. compared with 30-35% for comparable private sector hospitals.000 30. NOVEMBER 2010 53 .5 0. of eye surgeries 70. This has helpd NH retain even its elite customer base. Best-in-class treatment: NH has an uncompromising view on best-in-class treatment. .0 17.
000 Indian private hospitals 5. of CABG surgeries a year Average surgeries a day Number of cardiac surgeons Average surgeries per surgeon Source: HBS Case Study. Vaatsalya is India's first hospital network focused on Tier II and III towns providing primary and secondary care services with an emphasis on disease prevention. In partnership with the Karnataka government. 80% of India’s healthcare facilities are located in urban areas or metros while ~70% of the Indian population lives in semi-urban and rural areas.000 to 42.000 ($) Source: WSJ. the Karnataka government sponsored 29 CCUs for Narayana.000 US Medicare 20.IDFC Securities Price comparisons for coronary bypass surgery Narayana Hrudayalaya 2. It operates one of the largest telemedicine networks in the world in partnership with ISRO. The scheme provides each member (or cardholder) access to free treatment at 150 hospitals spread across 29 districts at just Rs5 a month. IDFC Securities Research Cleveland Clinic 1151 3 11 105 Mass General Hospital 1000 3 9 111 NH 3570 10 18 198 Inclusivenss through technology.000 0 10. orthopaedics. Dr. NH has now forayed into other specialities like neurosurgery. Yeshasvini. IDFC Securites Research NH clearly leveraging benefits of scale Particulars No. Shetty says there is a limit to reducing costs and leveraging benefits of scale for a particular speciality. insurance and parterships NH has smartly leveraged technology. to deepen its reach.500 42. NOVEMBER 2010 54 . Ironically. And it has sucessfuly reduced costs and provided affordable health care in each of these tertiary care segments too.000 31. Given the success of teledensity-CCUs. NH launched a micro-finance scheme. Vaatsalya Hospital Vaatsalya Hospitals aims to address the healthcare needs of millions by adopting a no-frills operational model with a focus on standardization of procedures and lower capital costs. NH initially launched nine cardiac care units (CCUs) which were connected to it via teledensity networks. Shetty also plans to set up a ‘health city’ to provide tertiary care at affordable prices. Dr.500 21. To enhance its rural reach. The way forward: Providing affordable treatment through higher capacity utilization of assets has been behind NH’s success. etc. bone marrow transplants. embraced local partnerships and initiated micro-insurance schemes to reach the rural and needy populace.
HCG has diversified into CRO to enhance its oncology offerings. Empowering doctors: Vaatsalya’s biggest challenge. diagonistic lab and ICU.IDFC Securities Vaatsalya’s footprints across tier II cities Source: Company Afforable treatment in spite of lower scale: Vaatsalya’s focus is to provide primary and secondary care treatment to the masses. building and equipment costs. x-ray machines. Standardization of operations has helped Vaatsalya’s centralized procurement team to achieve significant cost savings. Model: HCG operates on a hub & spoke model with super specialty hospitals supported by daycare centers. It has eight spokes supporting three hubs in Bangalore. NOVEMBER 2010 55 . is South Asia's largest cancer care network. HCG has more than 600 beds across 18 centers. ventilators. Restricting investments: Vaatsalya has opted for a no-frills model with standardized 50-bed hospitals. Having said so. Ahmedabad and Delhi. Vaatsalya pays its doctors up to 20-25% higher than what they would have got in larger cities. To control upfront investments. in our view. a key variable which has helped it retain doctors. HCG has JVs with local partners to set up and run spokes with the JV partners bearing the land. Vaatsalya also offers doctors higher responsibilities and autonomy. is to retain doctors. Also. Healthcare Global (HCG) HealthCare Global Enterprises Ltd. Motivation: HCG’s vision is to transform cancer care by bringing core clinical services to one place and offering comprehensive care. the key risk lies in retaining star doctors and enhancing mass outreach. However. Vaatsalya leases hospital facilities. HCG has been able to expand geographically using this model. headquartered in Bangalore. • • The way forward: We believe steady expansion would make Vaatsalya’s operating model more economically viable as it would be able to leverage the benefits of scale while sourcing consumables and medical equipment. it has restricted medical equipment purchases to essentials like ultrasound machines. pediatrics. etc. each equipped with a pharmacy. general medicine and general surgery. So how does Vaatsalya provide affordable treatment and retain doctors in rural/ sem-urban areas? • Standardization of operations: Vaatsalya has classified operations into four segments – gynaecology. Vaatsalya does not have the advantage of scale that Aravind or Narayana do. substantially lowering payback periods.
it aims to operate 5000+ beds with pan-India presence by 2013. we notice variations in their strategy.IDFC Securities ADVANTAGE INCUMBENTS We are positive on the near. Malar hospital. Fortis commenced operations in 2000 with a hospital in Mohali. primarily through aggressive inorganic growth with a series of acquisitions including Wockhardt Hospitals. Max Healthcare’s strategy focuses on leveraging its two single-specialty tertiary hospitals and consolidating the existing hospital network in the NCR before seeking to expand nationally. making it increasingly difficult for new entrants This state of affairs is positive for the larger incumbents that have already created formidable footprints and have the critical mass to grow We are positive on two of the leading incumbents. According to expansion plans. Punjab. there are three major listed players in the space: • • • Apollo Hospital Group Fortis Max Healthcare (a subsidiary of Max India – a listed entity) While all the players – Apollo. people. Fortis and Max – have a hub-and-spoke model based around tertiary hospitals. etc) are clearly going up. Apollo (top pick in the space) and Fortis as they have acquired a strong national brand equity and have difficult-to-replicate geographical footprint and capacity The fact that two of the largest and most relevant healthcare stocks in the country have a combined market capitalization of <$5bn underlines the inherent growth potential in these companies Competitive landscape still evolving Indian corporate hospitals industry relatively nascent The corporate hospitals industry in India is relatively nascent as most of the corporate groups. Max is likely to have 2450 hospital beds in NCR by 2016 – up from 1100 beds currently. Corporate hospital chains have adopted diverse strategies • • NOVEMBER 2010 56 . However. Apollo has chosen a strategy of establishing multi-specialty tertiary hospitals across locations and to scale-up gradually. Max Healthcare started operations in 2000. Fortis has acquired an almost national footprint in a short period of time. • Apollo is the largest and the oldest corporate hospital player in India with ~8000 operational beds after two decades of inception. Escorts Delhi. etc. having entered the business in the last few years. entry barriers (land.and medium-term outlook for Indian healthcare sector and believe that private sector hospitals are the best proxy to play the opportunity Corporate hospital space in India is still nascent as most players have entered only recently. Currently. barring Apollo. While Fortis currently operates 3250 beds. are still in relatively early phases of growth.
the fact that most of the larger Indian corporates have chosen to stay away from healthcare. Manipal. Given that existing players have already firmly entrenched themselves in most of the high potential pockets and shooting land/ people costs. we believe it will take some time before the implications of their diverse strategies get crystallized and start becoming evident to investors. and HealthCare Global (oncology focused tertiary care hospital chain). Narayan Hrudayalaya (another predominantly South India based entity). the incumbents are poised to grow from strength to strength as their operations start increasingly selfsustaining in this capital hungry business. These issues are further accentuated by the fact that existing players have already entrenched themselves in most of the high potential geographies across the country. particularly in tertiary care. despite the inherent potential in this business. etc. and increasing shortages in recruiting both highly qualified super specialists (required for running high-end tertiary hospitals) as well as the lower skilled para medics add to the challenge. this state of affairs essentially means significant advantages for established incumbent players like Apollo. Thus. Fortis. staff recruitment as well as an evolving regulatory scenario. is yet another indicator of the challenges/ entry barriers in this business. In our view. as processes cannot effectively substitute personal credibility and stature of individual doctors. Given that the corporate hospital industry is in an early growth phase. These players have NOVEMBER 2010 57 . Rising entry barriers…advantage incumbents We strongly believe that running private sector hospitals in India is difficult given the myriad challenges involving land procurement. Such projects entail fairly complicated project management issues (in terms of obtaining the right land parcels at right prices. it is becoming increasingly difficult to run a commercially successful private healthcare business. it is increasingly tougher for new entrants. We expect these entry barriers to only increase going forward – making it incrementally difficult for new entrants to build up a successful healthcare business.IDFC Securities Also. Advantage Incumbents In our view. The people angle adds to the complexities Processes cannot effectively substitute personal credibility and stature of individual doctors While these challenges sound similar to the ones in the hospitality business. there are other large unlisted players like Manipal Health (strong presence in South India). It is relatively easy to institutionalize the hospitality business and thereby decrease the reliance on individuals. but the same is not possible in healthcare. Shooting real estate prices. doing an efficient job of executing the hospital construction and then ensuring that the right mix of doctors comes on board) and complex people management issues (growing shortage of trained medical personnel) on an ongoing basis. especially in metros. Private sector hospitals – An increasingly tougher business Newer players face high entry barriers and formidable competition from well-financed incumbents The private sector hospitals business is arguably quite a challenge to run in India. Further. we believe the situation is more complicated by the big role played by doctors in the healthcare business.
Organic growth faces operational challenges while inorganic opportunities of relevant size are limited… Initiating coverage on Apollo and Fortis with Outperformer We are positive on the near. replicating the achievements (scale and scope) of Apollo and Fortis looks increasingly difficult. NOVEMBER 2010 58 . we believe these stocks deserve to command a significant premium with respect to the broader market. both in terms of beds and geographical spread… We believe it is difficult. Fortis has leapfrogged in the last few years on the back of its aggressive inorganic growth strategy. Apollo and Fortis: Leaders today…and of future The large players have built unassailable positions. While Apollo has gradually built up its network over the last few decades through the organic route. These existing players have built up significant franchise in the key metros. we believe two of the largest players in the industry today – i. the two largest and most relevant healthcare stocks in the country have a combined market capitalization of <$5bn. Also. we are particularly bullish on two of the leading incumbents – Apollo Hospitals and Fortis Healthcare – as they are well-entrenched in the industry with strong national brand equity as well as a difficult to replicate geographical footprint and capacity. …justifying our valuation premiums for Apollo and Fortis In the private sector hospitals space. Additionally. We believe Apollo and Fortis will continue to dominate the Indian private healthcare landscape for the next several years followed by players like Manipal and Max. their operations are now reaching a stage where internal cash flows can take care of further expansions to a large extent. while the healthcare market in India is poised to double to US$125bn by 2015. which makes it relatively difficult for new players to make inroads in these markets. Given that these two are the only relevant listed entities in the Indian healthcare space and the ones that are likely to dominate the market (with a secular growth story) for the next several years. These companies offer scale (in terms of their bed capacities) and a pan-India footprint that they have built up over the years. This clearly underlines the inherent growth potential in these companies. We believe that private sector hospitals are the best proxy to play the healthcare opportunity in India which is poised to grow by leaps and bounds over the next several years and decades. for a new entrant to break into the top league.e. Even among the incumbents. if not impossible. In our view. There are limitations to the pace of scale-up achievable through the organic route given the challenges involved in operationalizing a Greenfield hospital. there are innumerable hurdles to scalability and economic viability in the hospitals business. the key markets for high-end tertiary care. For a new entrant.IDFC Securities had the early mover advantage to accumulate sizeable hospital assets on land acquired at historical prices and create solid brand equity which enables them to acquire talent from India as well as abroad.and medium-term outlook for the Indian healthcare sector. Interestingly. we see limited inorganic growth opportunities (of relevant size) on the horizon unless one of the larger players intends to sell out. Apollo Hospitals and Fortis Healthcare with ~10000 and ~5000 beds respectively under operation by 2013 – are significantly ahead of the pack.
2) The clinical establishment shall undertake to provide within the staff and facilities available. but it should meet the needs and concerns of both. as there were apprehensions that it will only cater to the needs of the people. which will ultimately pass on to the patients making the health services beyond the reach of a common man…. They demanded the restoration of the Medical Council of India (MCI) without any delay. (iii) provisions for maintenance of records and reporting as may be prescribed. July 15 Members of the local unit of Indian Medical Association (IMA) today closed their clinics to protest implementation of the Clinical Establishment Bill. the doctors and the patients. Source: Loksabha documents Doctors protest against Clinical Establishment Bill. namely: (i) the minimum standards of facilities and services as may be prescribed. Patiala. General Secretary of the association said. 2010 1) For registration and continuation. such medical examination and treatment as may be required to stabilize the emergency medical condition of any individual who comes or is brought to such clinical establishment. every clinical establishment shall fulfill the following conditions. “The government should have asked the medical fraternity before introducing the Bill. (iv) such other conditions as may be prescribed. NOVEMBER 2010 59 . 15 July …Doctors were opposing the Clinical Establishment Bill. (ii) the minimum requirement of personnel as may be prescribed.IDFC Securities APPENDIX Annexure 1: Regulatory landscape Extract from Clinical Establishment Act. According to the IMA leaders.” The members said the expenses for meeting the provisions of the bill would significantly increase treatment fees. Malerkotla. the implementation of the Bill on private clinics will cost a huge monetary burden to them.
Key positive steps We list some key positive steps taken by the government: • The government has increased the weighted average deduction for scientific research. According to industry estimates. The finance minister’s Budget speech cites a plan to conduct an annual health survey and prepare district-wise health profiles of the rural populace. PGIMER. The finance ministry rationalized import duty at 5% for all items from only 37 items earlier. We believe this is worth monitoring going forward. 1) encouraging public-private partnership for the creation/ upgradation of health infrastructure. India’s medical device exports grew at 18% CAGR over FY00-07. We see higher deduction for research as a step that could significantly boost domestic R&D. the government reduced allocation for premier institutions like AIIMS. 2) capacity building in manpower. Healthcare budget allocation – a snapshot Source: Union Budget documents NOVEMBER 2010 60 . Exemption of service tax for healthcare services to individual patients will also help contain the cost of medical check-ups. This will likely to increase the disposable income of families covered by CGHS. 3) health insurance penetration. and d) setting minimum quality standards for healthcare delivery and implementation/ enforcement of regulations. This should help the industry reduce import costs. The government has extended the exemption under Section 80D from contributions to health insurance schemes to contributions under the Central Government Health Scheme (CGHS). • • • A negative surprise Even as budgetary allocation for healthcare saw a 22% yoy increase for 2010-11 to Rs223bn.IDFC Securities Annexure 2: Key takeaways from FY09-10 budget We believe the government needs to focus on. We believe using the compiled data efficiently for budgetary allocation would be a step in the right direction. helping reduce the cost of healthcare delivery. Dr Ram Manohar Lohia Hospital and Safdarjung Hospital by 5-11% yoy.
Gurgaon. Gujarat Escorts Hospital and Research Centre Ltd. Bhavnagar.M. Kuppuswamy Naidu Memorial Hospital. Birla Heart Research Centre. New Delhi Narayana Hrudayalaya. Hinduja National Hospital & Research Centre. Plastic & Maxillo Facial Surgery. H. Coimbatore Sterling Hospitals. Maharashtra Batra Hospital & Medical Research Centre. Hospital. Mumbai Fortis Hospital. Gujarat Escorts Hospital and Research Centre Ltd.. Bangalore Dr. Mohali Medwin Hospitals. Haryana Sparsh Hospital for Accidents. G.. New Delhi Sir Ganga Ram Hospital. Bangalore Lakeshore Hospital & Research Centre Ltd. Kolkata MIMS Hospital (MIMS Ltd.D. Karnataka Apollo Speciality Hospital. Gurgaon. Maharashtra Sterling Hospitals. New Delhi Narayana Hrudayalaya. Thiruvananthapuram Max Super Speciality Hospital. Tamil Nadu Shalby Hospitals. Faridabad... Tamil Nadu Frontier Lifeline Hospital. Bangalore Manipal Hospital. Gandhinagar. Coimbatore. Visakhapatnam Dharamshila Hospital & Research Centre. U. Mumbai Fortis Flt. Gujarat Wockhardt Hospital. New Delhi PSG Hospitals. Rajan Dhall Hospital. Calicut Kerala Institute of Medical Science. Vadodara. Kochi Baby Memorial Hospital. New Delhi K. Plastic & Maxillo Facial Surgery. Mumbai.). Noida. Gujarat Wockhardt Hospitals Ltd. L. Nashik Rockland Hospital. Gujarat Artemis Health Institute. Tamil Nadu Shalby Hospitals.M. Lt. Jaipur NABH accredited Hospitals B. Pune. Haryana Wockhardt Hospitals Ltd. Thiruvananthapuram Max Super Speciality Hospital. New Delhi Fortis Escorts Hospital. Ahmedabad. Kalyan Wockhardt Hospitals Ltd .. Bangalore. Birla Heart Research Centre. Tamil Nadu B. Virani Wockhardt Hospital. New Delhi Kasturba Hospital. Vadodara. Kolkata MIMS Hospital (MIMS Ltd. Visakhapatnam Dharamshila Hospital & Research Centre.P. Bangalore Nethradhama Superspeciality Eye Hospital. Kuppuswamy Naidu Memorial Hospital. Bangalore Columbia Asia Medical Centre – Hebbal. New Delhi Kailash Hospital & Heart Institute. Ahmedabad. Rajkot.IDFC Securities Annexure 3: NABH-accredited hospitals NABH accredited Hospitals B. Hyderabad Advanced Medicare And Research Institute (AMRI). Madurai Paras Hospitals Pvt Ltd. Chennai. Hiranandani Hospital.P. Manipal Fortis Hospital. Nagpur. Maharashtra Sterling Hospitals. New Delhi Kailash Hospital & Heart Institute. Gujarat Amrita Institute Of Medical Sciences. Coimbatore. L. Orthopaedic. Kolkata Sevenhills Hospitals Ltd. Hiranandani Hospital. Tamil Nadu Holy Spirit Hospital. G. Calicut Escorts Heart Institute And Research Centre. U. Maharashtra P. New Delhi Moolchand Hospital. Noida Sagar Hospitals. Orthopaedic.G. Haryana Ruby Hall Clinic. H. Ahmedabad. Calicut Kerala Institute of Medical Science. New Delhi Moolchand Hospital. Gandhinagar. Kochi Apollo Speciality Hospitals. Gurgaon. Hyderabad Advanced Medicare And Research Institute (AMRI). Delhi Chacha Nehru Bal Chikitsalaya. Gujarat Godrej Memorial Hospital. Mohali Medwin Hospitals. Bangalore.. Gujarat Artemis Health Institute. Mumbai Fortis Hospital. Pune. Coimbatore General Hospital. Faridabad. New Delhi General Hospital. Haryana Sparsh Hospital for Accidents.L.M. Bangalore Dr. Mumbai N. Kolkata Sevenhills Hospitals Ltd. Kapur Memorial Hospital. Chennai. Noida. Delhi Chacha Nehru Bal Chikitsalaya. Haryana Ruby Hall Clinic. Chennai. Karnataka Apollo Speciality Hospital.). Gujarat Source: NABH NOVEMBER 2010 61 .
Private players seeking to maximize returns on capital employed have turned to asset-light strategies – hospital management (O&M contracts) and consultancy services. 18% State Govt. Incumbents stepping up presence across the healthcare delivery chain Tertiary care Secondary care Diversified offering Primary care Pharmacies Diagnostic labs Consultancy Hospital management Source: IDFC Securities Research Healthcare insurance NOVEMBER 2010 62 . 2% Others.. radiology and pharmacy. 2% Households. 35% Social Insurance. 25% Public firms. IDFC Securities Research Annexure 5: Corporate hospitals – strategies to target primary markets The business models of the larger hospital chains in India have steadily evolved from tertiary care to serving the entire healthcare delivery network. They are clearly positioned to grab a larger pie of the market opportunity by diversifying revenue streams to de-risk the business while pursuing an asset-light strategy. Meanwhile. 2% Private firms. 3% General Govt. 4% NGOs.. Expd. New strategies We list some measures adopted by incumbents to enhance their presence in the healthcare delivery chain.IDFC Securities Annexure 4: Comparaitve healthcare spend – India and global Composition of World health expenditure Composition of Healthcare spend in India Out of pocket spend. 69% Source: WHO -2007. 7% Local Govt. 18% Private Insurance. Reserve Bank of India. larger players have set up captive diagnostic labs and pharmacy centers to tap high margins in diagnostics. 14% Central Govt. 0% External funds... 0% Banks.
an initiative of Apollo Hospitals. MRI and endoscopy. consulting room and lab Source: The Apollo Clinic Diagnostic labs: India boasts of ~45. for instance. Apollo. imaging and cardiology.IDFC Securities Next-door clinics: 50% of healthcare expenditure occurs outside hospitals. Apollo clinic – reception. radiology. has adopted a franchising model and has set up a chain of Apollo Clinics all over the country. larger hospital chains have begun targeting primary healthcare markets by setting up ’next-door clinics‘. SRL has said that owning these laboratories has helped it ensure uniformity in standards and practices.000 diagnostic laboratories. Larger hospital chains and also several standalone players have already entered this space by offering captive services and setting up standalone pathology labs and radiology centers.000 doctors. Apollo advises on setting the prices for medical services offered at the clinic and helps evolve marketing strategy. Apollo offers comprehensive support services like selection and training of all medical and support staff including physicians. part of Apollo Health and Lifestyle Limited. Therefore. We highlight a couple of models: The Apollo Clinic. However. In exchange for this fee and a 5% royalty on sales. Apollo operates these clinics on a franchisee model. Super Religare Laboratories Limited (formerly SRL Ranbaxy Ltd. NOVEMBER 2010 63 . offers several diagnostic services including clinical pathology. procurement of necessary medical equipment and IT systems and also designing of the clinic.) claims to be the largest pathology laboratory network in India covering nearly 4.000 hospitals and more than 50. pathology tests account for up to 5-6% of hospital revenues and enjoy attractive margins. A few Apollo clinics are also equipped with facilities like CT scan. The Apollo Clinic: The ‘next door’ franchise partner bears all the investment-related costs of setting up the clinic and makes a one-time franchisee payment to Apollo (for a specified tenure). As per industry estimates. which conduct over 2m tests daily. this industry is highly fragmented and we see a huge opportunity for organized private providers. We believe the motive goes beyond enhancing its reach to the urban masses – it is also looking to enhance the feeder network for its secondary care hospitals (in tier II cities) and specialty hospitals (in metro cities).
Morepen. Dr. Dial for Health. blood pressure.1 320 2006 Source: Industry.4 2.6 365 2. with organized retail garnering 3. etc. etc. IDFC Securities Research 2. several pharmacy chains like Aushadhi. we believe organized pharmacy chains with strong repute would emerge winners. Large hospitals chains like Apollo and Fortis have opted for different models to grab a pie of this attractive opportunity. SRL acquired Piramal Healthcare’s 107 diagnostic lab network for a consideration of Rs6bn valuing the transaction at 2. NOVEMBER 2010 64 . Pharmacy chains: India’s retail pharmacy sales for CY07 were estimated at Rs488bn. diabetes. pharmacy chains enjoy gross margins (ex-corporate costs) as high as 30%+ at standalone levels. In a market flooded with spurious drugs. Lifeken.4 455 3.9x EV/sales and 15. Medicine Shoppe. Global Healthline. Apollo pharmacies. Guardian Pharmacy. 98. CRS Health. The highly fragmented nature of the industry has thrown up an attractive opportunity for retailers.8x EV/EBITDA. According to industry estimates.0 2007 Several organized players have been providing value-added services like weight measurement. Besides Apollo and Fortis.2 422 410 2.IDFC Securities SRL’s pathology network – steady expansion Source: SRL SRL operates a hub & spoke model – its clinical reference lab and 50 satellite labs are supported by more than 1000 collection centers spread across 450 cities in India and abroad.7 3. to consumers to enhance margins and lower payback periods.4o. Apollo intends to maintain a desired sales mix between Rx drugs and consumer products to enhance its margin profile. have also come up. Recently. Health and Glow. Indian pharmacy market growing rapidly (Rs bn) 500 Indian retail pharmaceutical market (LHS) Organized retail as % of total retail market (RHS) 488 3. offer several value-added services (see exhibit below) to retain its customer base. for instance.2% of total sales.
apollopharmacy. often also recruiting and training staff. has a consultancy arm that undertakes projects primarily classified as ‘transition management’ and ‘operations management’. Chennai Total Hospital Solutions. Domestic hospital chains with vast experience in building and maintaining facilities have set up consultancy divisions to tap this opportunity. New Delhi NOUS Hospital Consultancy (P) Ltd. as it is an effective alternate revenue stream. IDFC Securities Research H-PAMCO. Apollo. Jaipur International hospital management Private healthcare service providers with limited capital to invest and seeking to widen their geographic presence have entered into hospital management contracts. Mumbai MedicontriversIndia PvtLtd Mumbai Ace Vision Health Consultant PvtLtd. the consultancy division runs facilities.in/services. New Delhi Hospic. Under operations management. Jaipur Professional Health Planners. New Delhi Apollo Hospital Enterprise Ltd. NOVEMBER 2010 65 . Mumbai Source: IBEF. Apollo and Fortis.IDFC Securities Value added services provided by Apollo pharmacies Source: http://www. This model would also help private healthcare providers understand new markets. manage several hospitals across Asia and the Middle East. This has allowed hospitals to leverage successfully their operational expertise while remaining asset light. both in India and globally. Hospital consultancies in India – the key players Hosmac. Transition management involves helping clients design and build facilities. We expect several reputed hospitals to enter this segment. New Delhi KSA Technopak. for instance. for instance.html Consulting operations The evolving healthcare landscape has led to a huge demand for healthcare consultants.
IDFC Securities Companies NOVEMBER 2010 66 .
However.142 1.724 124 22.1 2.5 7.8 34.7 23.2 12.com 91-22-6622 2568 NOVEMBER 2010 Price performance FY09 16.9bn in FY13E) and increasing ability to raise resources.0 FY12E 28. Apollo is a formidable brand in the Indian healthcare firstname.lastname@example.org 11.3 FY10 20.4 3.000 beds a year over the next three years. Apollo is our top pick in the space.0 31. Apollo’s ARPOB grew at CAGR of 10%+ as it worked on increasing occupancies and optimizing case mix across its network.0 11. Apollo remains the most formidable healthcare play in the Indian market. Value unlocking in non-hospital businesses may provide further upside triggers. Good getting better. Margins to expand: Despite steady new bed additions (which depresses profitability in initial years). we see a strong case for re-rating of the stock.7 10.6 4.1 35. we expect margins to expand by 227bp over FY10-13 as Apollo drives a consistent improvement in operating metrics for existing beds.068 124 16.831 2. Bolstered by growing internal accruals (EBITDA of Rs5. EPS (Rs) % growth PER (x) Price/Book (x) EV/EBITDA (x) RoE (%) RoCE (%) Nitin Agarwal nitin.000 by 2013.5 FY11E 25.1 26.0 45. taking its total bed count to over 10. its cautious approach has prevented Apollo from effectively leveraging its first mover advantage beyond Southern India till now. Outperformer: Its cautious approach to growth and a defined Southern Indian tilt notwithstanding.IDFC Securities Apollo Hospitals Pole position! Reason for report: Initiating coverage Rs509 Mkt Cap: Rs63.7 30. we expect 19% revenue CAGR for Apollo over FY10-13.377 124 11.0 10. Over FY06-10. along with value unlocking in non-core businesses including Apollo Pharmacy.065 120 8. will drive accelerated growth for Apollo (19% CAGR in revenues as well as earnings) over FY10-13.5 57. we believe.7 3.7 8.0 8. Key valuation metrics Year to 31 Mar Net sales (Rs m) Adj.7 11.com 91-22-6622 2571 67 12-Nov-10 . (m): 0. With mature beds ARPOB growing 2% sequentially. With clear signs of management’s intent to step up investments/ growth. US$1. Initiating coverage with Outperformer and an 18-month SOTP-based price target of Rs651.1 29.8 23.7 3.1 FY13E 34.5 Ritesh Shah ritesh. Apollo now seeks to make inroads in western India as well as enter Tier II / III towns through Apollo Reach format.264 1. With 47 owned hospitals and focus on clinical outcomes.5 17.6 220 185 150 115 80 Apollo Hospitals Enterprise Sensex 12-Dec-09 12-May-10 12-Aug-10 12-Mar-10 12-Nov-09 12-Oct-10 12-Jun-10 12-Apr-10 12-Feb-10 12-Jan-10 12-Jul-10 12-Sep-10 Bloomberg: APHS IN 1-yr High/ Low (Rs): 560/228 6m avg daily vol. While further fortifying its presence in its traditional Chennai/ Hyderabad clusters.408 2.5 13. This.email@example.com 33.9 12. net profit (Rs m) Shares in issue (m) Adj. Apollo is set to enhance its dominance.000+ operational beds and 1.15 Free Float (%): 66. Apollo’s traditionally conservative management is now looking to step up pace through planned expansions beyond South India as well as newer delivery formats like Apollo Reach for entry in Tier II/ III markets. With return ratios set to improve (400bp gain over FY10-13) as proportion of mature beds keeps growing.868 124 15.357 1.000+ retail pharmacies.8 7.2 15. Leader of today and tomorrow: Apollo seeks to extend its leadership position in Indian healthcare market by adding ~1.4bn OUTPERFORMER Apollo Healthcare (Apollo) is Asia’s largest healthcare group with 8.
Over the years. plans to add ~2. AHEL today has over 8. Promoted by Dr Parthap Reddy. 1 end-to-end healthcare service provider in Asia Apollo pioneered high-end private healthcare in India Apollo is Asia’s largest healthcare group in terms of number of beds. one of most wellknown doctors in India. Most of this growth has been largely organic and business has been practically built hospital by hospital. IDFC Securities Research Today. bed by bed.000+ tertiary/ quaternary care beds and 1. the Apollo brand has become synonymous with tertiary healthcare which is reflective of the group’s success.000 beds in 47 hospitals across India and services that span the healthcare delivery chain. Apollo reaches masses via a chain of Apollo Clinics. Apollo has pioneered the concept of delivering high-end private healthcare in India. Apollo services the entire healthcare delivery chain from primary care to tertiary/ quaternary care.IDFC Securities INVESTMENT ARGUMENT AHEL is Asia’s largest healthcare group with 8. NOVEMBER 2010 68 .000+ pharmacy stores across India. Exhibit 1: Apollo – organically increasing capacities Apollo Dhaka Apollo Ludhiana Apollo Bangalore Apollo Bilaspur Apollo Colombo Apollo Speciality Apollo Madurai Apollo Aragonda Apollo Chennai Apollo Hyderabad Apollo Vizag Apollo Indraprastha Apollo Kolkata Apollo First Med Apollo Mysore Apollo Ahmedabad Apollo Samudra Apollo Kakinada Apollo Karim Nagar Apollo Karur Apollo Children’s Hospital Apollo Mauritius Apollo Bhubaneshwar Apollo Lavasa Started with 150 beds 1983-88 1989-00 2000-04 2005-10 Source: Company.700 beds by FY14 Apollo brand epitomizes superior quality and clinical outcomes in healthcare. Additionally. From humble beginnings as a 150-bed hospital in Chennai in 1984. management’s philosophy is to pursue clinical excellence Generates decent return ratios despite the traditional approach of growing organically and owning assets even while using cutting-edge technology – evidence of a calibrated growth strategy and operational skills We value Apollo’s healthcare business at 15x two-year forward earnings and pharmacy at 1x EV/sales to build in the growth premium as well as quality and scale of Apollo’s assets No. hospitals under Apollo Reach initiative and multi-speciality/ superspeciality hospitals offer secondary and tertiary/ quaternary care.
Apollo is at the forefront of India’s growing stature on the global healthcare map backed by the management’s philosophy of pursuing clinical excellence. >49. etc). project consultancy and clinical research divisions working at the cutting edge of medical science. Apollo is a partner of choice of several domestic/ international companies as well as countries looking to set up or maintain high-end tertiary healthcare facilities (Parkway Hospitals. the group has established its footprint in several segments like primary healthcare services (Apollo Clinics).000 cardiac surgeries with a 98.g. health insurance & TPA (Apollo Munich RE). medical BPO services (Apollo Health Street).. NOVEMBER 2010 69 . Apollo has created strong brand equity and is synonymous with quality healthcare and clinical outcomes. retail pharmacies (Apollo Pharmacy). Importantly.IDFC Securities Exhibit 2: Apollo offers services from primary to quaternary care Apollo’s diversified offering Apollo Clinics Primary Source: IDFC Securities Research Apollo reach Hospital Secondary Apollo MS / SS Hospitals Tertiary Besides owning and operating tertiary and secondary hospitals (Apollo Reach Initiative). Exhibit 3: Apollo – presence across the entire healthcare delivery chain Primary Care Clinics Health Insurance and TPA Health Education & eLearning Apollo Clinical Research & Site Management Owned & Managed Hospitals Standalone Pharmacies Technology Services & Solutions Source: IDFC Securities Research Global Projects Consultancy Over a period of three decades. Apollo has been able to achieve world-class success rates (e.5% success rate) in complex tertiary/ quaternary care. Yash Birla Group.
Brand Apollo is synonymous with quality healthcare delivery and clinical excellence. Exhibit 5: Apollo derives 65% of revenues from Cardio. a balanced scorecard that analyzes patient experience in terms of care quality and environment safety. Even as Apollo begins to venture into secondary care (via Apollo Reach). NOVEMBER 2010 70 . Apollo’s quality consciousness and patient-centric approach have resulted in steady improvement in operational and clinical efficiency over the years. Radiology and Transplants. benchmarking it with the best globally. Oncology. etc) and quality healthcare delivery. i. Critical care & Trauma. Orthopedics.IDFC Securities Uncompromising focus on clinical outcomes and quality Operational and clinical efficiency benchmarks Apollo with the best hospitals globally Over the years. Importantly. Neurology.e. IDFC Securities research Initiatives like ACE@25 and Apollo Way measure outcomes to ensure strict clinical standards are maintained Measurable approach to achieve clinical excellence: The group has implemented ACE@25. Apollo’s strategy has been to expand organically with sharp focus on clinical outcomes. Exhibit 4: Apollo owns 50% of JCI accredited hospitals in India Delhi Kolkata Source: Company.and super-specialty hospitals continue to bring 75% revenues even as the group ventures into secondary care Focus on core specialties: Via its multi-specialty and super-specialty hospitals. Apollo has set up Apollo Children’s Hospital in Chennai – specifically offering pediatric care for children from birth to adolescence. IDFC Securities Research Chennai Ludhiana Banaglore Hyderabad Dhaka Multi. This approach has also helped the group strengthen functional efficiency and benchmark it against international standards. all hospital heads under the Apollo network are accountable to the outcomes at the end of each month. That Apollo owns seven JCI-accredited hospitals across specialties is also clear evidence of its focus on clinical processes and outcomes. Ortho and Onco therapies Others 35% Cardiology 30% Oncology 15% Orthopaedics 20% Source: Company. In addition to CONCORT. lean operations. Apollo also runs a pilot project “Apollo Way” with international consulting firms like McKinsey to ensure operational excellence (revenue management. Cardiology. Cardiology. the management seeks to retain its focus on core treatment offerings – CONCORT + pediatrics. Oncology and Orthopedics together contribute 70-75% of Apollo’s revenues. Apollo continues to focus on CONCORT.
Apollo has adopted the hub & spoke model. a key milestone for Chennai. completed successful 20 stem cell transplants. crossed the milestone of having performed the largest number of cadaver Liver Transplants in a single year. conducted the first heart transplant on a US citizen in India. Chennai. completed 10. Apollo emerging… Hitherto. • The Apollo Hospitals Group finalized a roadmap for NABH accreditation for five more hospitals. the first of its kind in India. • Apollo Centre for Liver Disease and Transplantation completed 50 liver transplants. Chennai. Source: Company A new. conducting innovative surgeries in urology. • 27 six-sigma projects completed across various locations in India. Apollo has a strongly entrenched network in this part of the country and the regional focus has enabled Apollo to significantly enhance its profitability over the years as it has been able to garner the full benefit of the hub & spoke model. Jan-Mar10 Oct-Dec09 • Apollo Bramwell Hospital in Mauritius. performed its 100th renal transplant. also conducted the first successful "Autologous Stem Cell Transplant for Acute Leukemia" in Gujarat. most of which are located in the larger metro cities in South India. more aggressive. a first in India. • Revolutionary Ceramic Coated Knee Replacement was performed for the first time in South India at Apollo Specialty Hospital. • Apollo Hospitals. • Instituted a contemporary Neuro Rehabilitation Programme at the main hospital in Chennai. Apr-Jun09 • Apollo BSR Hospitals.330 owned beds are in the three southern states of Tamil Nadu.IDFC Securities Exhibit 6: Roster representing Apollo’s focus on clinical outcomes • Apollo Hospitals. under which its network of multi-specialty hospitals and day care centers (spokes) support its superspecialty hospitals (hubs). • Apollo Knee Clinic’ was launched in all the major Apollo hospitals • Apollo Hospitals. Ahmedabad. • Apollo Hospitals. The Chennai and Hyderabad clusters (1.970 beds) account for 60% of Apollo’s total owned beds and 82% of its standalone revenues as of FY10. Chennai. a JV with BAI. Andhra Pradesh and Karnataka. clocked numerous firsts within its first 100 days of operations.000 coronary bypass operations using the beating heart technique. Mysore. strongly focussed on Southern India Regional focus has helped the hospital chain to significantly increase profitability About 85% of Apollo’s 3. Jul-Sep09 • The Chennai orthopaedic team successfully performed an Arthroscopic Brachial Plexus Catheterization. NOVEMBER 2010 71 . Chennai. • Apollo Group completed a record 268 organ transplants in the nine months ending Dec 2009. to introduce robotics in neurorehab for the first time in India in association with Hocoma. general surgery and orthopaedics.
IDFC Securities Research Exhibit 8: AHEL's other owned beds in South India Location Tamil Nadu Madurai Karur Andhra Pradesh Vizag Aragonda Kakinada Karim Nagar Karnataka Mysore Total beds AHEL's owned beds in other regions Chhattisgarh Bilaspur Orissa Bhubaneswar Total beds Total owned beds Source: Company. unlike its strategy in southern India where it owns most of its hospitals. to establish its NOVEMBER 2010 72 . Sowcarpet Apollo Children’s Hospital SS SS MS MS MS 619 251 61 120 17 81 1. Gerams Lane Apollo Specialty Hospitals. However. western and eastern regions are run either on a contractual basis (O&M contracts) or as part of JV structures with partners. For example. Medhipatnam Apollo Emergency Medical Centre. Nandanam Apollo Hospitals. Apollo has started to work on increasing its geographical reach beyond the southern region. MS: multi specialty Apollo Hospitals SS 290 540 3. Malakpet Apollo Medical Emergency Centre. Jubilee Hills Apollo Centre. most of the hospitals (total 12 hospitals currently) in northern.330 16 100 Apollo Hospitals SS 250 Apollo BGS Hospitals and Medical Centre SS 176 820 25 Apollo Heart & Kidney Hospital Apollo Hospitals Apollo Hospitals Apollo Reach Hospital SS MS MS MS 65 54 150 120 Apollo Hospitals Apollo Loga reach Hospital SS MS 185 70 Name of hospital Type Capacity Relatively limited presence in other parts of the country JVs and O&M contracts characterize Apollo’s lowrisk approach in regions outside South India Over the last few years.149 35 Type* Capacity % of total owned beds Total beds Source: Company. Hyderguda Apollo Medical Emergency Centre. Thondiarpet First Med Hospital Apollo Hospitals.IDFC Securities Exhibit 7: Chennai and Hyderabad clusters account for 60% of Apollo’s owned beds Operating since Name of hospital Chennai cluster 1983 1994 2000 2002 2003 2008 Total beds Hyderabad cluster 1988 1996 1996 2000 2000 2000 2001 2010 Apollo Hospitals. Vikrampuri Apollo Emergency. IDFC Securities Research * SS: super specialty. Kukatpally Apollo DRDO Apollo Hospital. Secundrabad SS MS MS DC DC DC MS MS 405 50 38 4 4 20 150 150 821 25 Apollo Hospitals.
In our view. The opportunity arising due to Apollo’s relatively limited presence outside of South India has been lapped by new entrants like Fortis and Max that have created strong footholds in the lucrative NCR region and are beginning to make in other parts of the country too. Apollo does not have owned beds in North. Exhibit 9: AHEL in rest of India – subsidiaries/ JVs/ associate partnerships Location Owned beds Bilaspur Bhubaneswar JVs/Associates Delhi Kolkata Ahmedabad Noida Bangalore Apollo Hospitals (IMCL) Apollo Gleneagles Hospitals Apollo Hospitals (AHIL) Apollo Hospitals (IMCL) Apollo Hospitals 20 50 50 28 50 7 SS SS SS MS SS MS 1996 2002 2003 2005 2007 2010 632 470 300 100 250 67 Apollo Hospitals Apollo Hospitals 100 100 SS SS 2001 2009 250 290 Name of hospital Ownership (%) Type Since Capacity Lavasa Apollo Hospitals Source: IDFC Securities Research. Delhi (set up in 1996). i. Apollo set up Apollo Gleneagles. etc.e. Gujarat. This clearly reflects the low-risk approach adopted by Apollo over the years as it seeks to go to newer geographies. IDFC Securities Research Overcautious approach = opportunity missed? Limited presence outside South India points to lost opportunity in leveraging its brand advantage nationwide… Apollo’s keen focus on the home market (South India) reflects the management’s cautious approach to building the business – e. owned. Dhaka Apollo Pankaj Hospitals Apollo BSR Hospitals Total beds Franchisee Hospital Beds Margao Indore Apollo Victor Hospitals Convenient Apollo Hospitals SS SS 2003 2001 150 140 290 SS SS SS SS MS SS SS SS SS 1996 1998 1998 2002 2003 2005 2005 2006 2007 137 331 100 350 100 350 330 150 150 1. it implies that Apollo has not been able to effectively leverage its first mover advantage as well as strong brand equity to create a strong footprint of hospitals in other part of the country. a JV with Parkway Hospitals. NOVEMBER 2010 73 . Company Exhibit 10: AHEL in the rest of India . JVs. with the exception of Indraprastha Apollo. in Kolkata in 2002. Apollo has created a formidable geographical footprint and remains an eminent private healthcare provider in India.998 Name of hospital Type Since Capacity Total beds Source: Company. Overall. Its foray into western India was marked by a 50:50 JV with Cadila Pharma to set up a 300-bed super-specialty hospital in Ahmedabad. franchise.managed and franchise beds Location Managed beds Ranchi Pune Bacheli Raichur Ranipet Ludhiana Dhaka Agra Bhilai ARAM Hospital Jehangir Hospital NMDC Hospital Rajeev Gandhi SS Hospital Apollo KH Hospital Apollo SS Hospital Apollo Hospitals. in terms of beds under operation across various categories. West and East India.IDFC Securities presence in the East.g..
while cementing its position on the home turf (Chennai and Hyderabad).000+ by 2013. which we see as positive Further. This would take total operational beds under the Apollo brand to 10. etc. ‘Reach’ hospitals would also ensure a steady stream of screened inpatient flow to Apollo’s multi-specialty/ super-specialty hospitals – leading to higher ARPOB and lower ALOS in those higher-end hospitals.000+ beds by 2013 Planned additions targeted at cementing leadership on the home turf and nationally From its present base of 8. growth plans are quite aggressive and may well mark a dramatic shift in Apollo’s future growth trajectory.000+ beds including O&M. With this. The planned bed addition. day care centers. dialysis centers. Successful execution of the same will enable Apollo to further strengthen its footprint pan-India and fortify the Apollo brand. We are particularly excited on the possibilities offered by Apollo Reach initiative. Hyderabad and Madurai) added over the last six quarters. Bhubaneswar. as it can add a new dimension to the future growth trajectory. Large bed-addition target and entry into new formats point to new-found aggression. Karur. there are clear signs of Apollo management now willing to experiment with newer delivery formats like Apollo Reach hospitals. This is reflected in its plan to add as many as 2668 owned beds over the next three years on top of the ~750 beds and six new hospitals (Chennai. Interestingly.IDFC Securities Having said that. unlike peers that are increasingly adopting the unconventional models like leasing land & building as also machinery so as to reduce the capital intensity of NOVEMBER 2010 74 . the company seeks to build on its leadership position in the Indian healthcare market and experiment with innovative formats to increase effectiveness of the network. we also believe that management’s decision-making would have been influenced by restricted access to capital in the past as limited internal accruals would not have been sufficient to meet the high capex involved in setting up owned facilities. would also expand Apollo’s national footprint. leading to strong return ratios. These hospitals will cost Rs5m-6m per bed compared to Rs8m-12m for conventional tertiary care hospital in a metro.000+ beds.668 beds (including ~825 beds under Apollo Reach) over the next three years with most of the additions to be owned beds. Apollo’s vehicle for entering into Tier II / III town. The ‘Reach’ hospitals would be in the higher secondary and acute care categories and capable of developing into tertiary care centers. Apollo plans to add >500 beds under this initiative over the next three years. …but is also indicative of restricted access to capital and limited cash flows Turning a new leaf In a break from its past characterized by slow and steady growth. Considering that in the last 25 years of existence. Targeting 10.376 owned beds (overall 8. Secunderabad. Apollo has set up a cumulative 5. Apollo has embarked on an ambitious plan to set up 2. Apollo Reach Hospital Initiative ‘Reach’ is a no-frills initiative aimed at expanding Apollo’s presence in Tier I/ II towns Apollo Reach Hospitals (ARH) are positioned as a no-frills model providing quality healthcare and extending Apollo’s presence to Tier II / Tier III towns where it is not economically feasible to set up the conventional high-end tertiary care hospitals. We like this newfound aggression in the management and believe it bodes well for Apollo’s future growth outlook. we believe Apollo is set on shifting the growth gears up by several notches. etc). The hospitals are expected to start breaking even by the second year and generate attractive 20-22% EBITDA margins in steady state.
development of newer delivery formats is the need of the hour for Indian private sector healthcare providers.IDFC Securities the business. …a major thrust on Mumbai is on the cards About 90% of the planned 1000 beds in western India would be in Mumbai Apollo plans to set up ~1.000-bed addition in South India over the next three years. The management recently indicated that it would set up two wholly-owned facilities in Mumbai with a total 650 bed capacity.820 over the next three years. Company. *two different hospitals Owned Owned JV – Yash Birla ARH SS SS Mar-12 Jun-13 Sep-12 125 650 250 JVs . Along with Apollo Reach format. While fortifying presence in Southern India… Apollo plans to add 850 beds in the Chennai and Hyderabad.50% Owned Owned Owned Expansion ARH ARH ARH Oct-10 Oct-12 Jun-13 Mar-13 52 200 300 200 Owned Owned Owned Expansion ARH ARH Sep-12 Jun-12 Sep-10 30 200 100 Owned Owned Owned Expansion SS SS Mar-11 Apr-10 Jun-11 100 150 175 Ownership Type By Bed capacity Some more new delivery formats Apollo is at the forefront of evolving new delivery formats… Given the growing challenges of managing real estate and personnel costs. Apollo is currently setting up a 250-bed super specialty facility in Thane in a joint venture with the Yash Birla group. These plans would. and we expect Apollo to be on the forefront of this trend. Apollo also plans to expand its capacities in Delhi and Chhattisgarh by 150 beds each by FY12.668 Total Source: IDFC Securities Research. where it currently does not have a meaningful capacity. in our view. In addition. Exhibit 11: Ambitious expansion plans to help Apollo maintain its numero uno position Location Hyderabad cluster Hyderabad . Apollo is also adopting three more formats. NOVEMBER 2010 75 . About 90% of the new beds would be in Mumbai. 50% would be under the Apollo Reach initiative.50% Expansion Oct-10 136 JVs . taking the total number of beds in the clusters to 2.000 beds to augment its presence in western India. Of the planned 1. Apollo continues to prefer the traditional approach of growing by owning hospitals and equipment. help Apollo maintain its numero uno position on the domestic landscape.international Secundrabad Hyderguda Chennai Cluster Chennai – MAIN Ayanambakkam Karaikudi Others Bangalore Nellore Vizag Trichy North India New Delhi West India Nashik Mumbai* Thane Central India Bilaspur-Oncology Owned Expansion Sep-11 NA 2.
While the format was initially set up with the intent to reduce the load at tertiary care hospitals in Chennai. Exhibit 12: Apollo – India’s largest retail pharmacy chain (Nos) 700 Indian pharmacy market growing rapidly (Rs bn) 500 Indian retail pharmaceutical market (LHS) Organized retail as % of total retail market (RHS) 488 (%) 3.4 525 455 3.4 175 0 Apollo Medplus Guardian Lifecare Medicine Shoppe Global Healthline Fortis Healthworld 320 2006 2007 2. indicating that the pharmacy retailing industry is largely unorganized. Dialysis clinics: Apollo has also initiated Apollo Dialysis Clinics – India’s first out-of-hospital dialysis clinic. This would enable Apollo to shift the relatively less complex procedures to these centers and free up capacity in the tertiary hospitals. Industry NOVEMBER 2010 76 . BMI estimates pharmaceutical sales to reach US$39bn and US$66bn in 2014 and 2019 respectively. Apollo plans to open these day care centers close to its high-end super-specialty and multi-specialty tertiary care hospitals.IDFC Securities Day care surgery centers: Day care surgery centers involve carrying out procedures where the patient can be discharged in a day and which do not require overnight stay.1 350 410 422 2. which would ease the burden on its superspecialty and multi-specialty hospitals Apollo’s dedicated pediatric foray achieved EBITDA breakeven in the first year Apollo Pharmacies: India’s largest organized chain India’s combined Rx and OTC medicine sales were estimated at US$22bn in 2010. The hospital has been extremely successful – evident in the fact that it became EBITDA positive in the first year of operations.7 2.000 pharmacies.2 3. The organized pharmacy segment is dominated by 10-12 big players. Apollo operates one day care surgery center in Kolkata offering non-invasive treatment.0 Source: CRISIL – 2008 report. Apollo may experiment with this format on its own merit across different cities. …like day care surgery centers. Currently. Dedicated pediatric hospitals – Apollo has recently established a dedicated 81bed pediatric hospital in Chennai. The format provides high-end dialysis facilities designed to address specific issues in this segment of medical care in India. which can then target more valuable and complex procedures.6 365 2. but they form a miniscule proportion of this industry (see exhibit below). The pilot projects seem to be doing well and are witnessing high occupancy rates improving the ARPOB for the overall network. The management plans to have alteast 1 day care surgery centre in Metros and category A cities in near future. Industry estimates indicate that India has >700. These are represented by regional associations or unions.
The management strongly believes the segment can add value to the business while capitalizing on the Apollo brand. surgical & hospital consumables and healthcare products. Apollo Pharmacy achieved EBITDA breakeven in Q4FY10 and we expect the business to be EBITDA-positive in FY12.html Expect SAP to be EBITDA positive in FY12 Increase in mature stores.IDFC Securities Pharmacies – adding value to the business AHEL believes pharmacies will add value to the business. high-margin products and bulk distribution to drive profitability Apollo Pharmacy’s total store count stood at 1. (ii) introduction of generic and self-branded products which command higher margins (management plans to increase share of private label brands to 20% from 8% now).in/services. dressing. including free delivery. and (iii) higher bulk distribution of medical supplies and disposable equipment to healthcare service providers including hospitals.e.700+ stores by FY13. Many of Apollo’s standalone pharmacies operate on a 24-hour basis. etc. Exhibit 13: Value-added services provided by Apollo Pharmacy Source: http://www. Most of Apollo’s pharmacies also have nursing stations to provide basic medical services like measuring blood pressure. appointment with doctors at hospitals. We expect steady improvement in operating metrics on the back of: (i) progressive improvement in the ratio of matured stores to new stores. NOVEMBER 2010 77 .110 as of 30 September 2010.apollopharmacy. it provides several value-added services to customers. i. It plans to expand its reach to 1.066 stores across 21 states. Apollo Pharmacy offers a wide range of medicines. It reports financials in two batches – matured pharmacies. plans to add ~600700 stores to its existing 1110 by FY13 Apollo Pharmacy (SAP) is by far the largest organized pharmacy chain in the India with 1. etc. Additionally. stores set up before 2007 and stores set up after 2007. We expect overall EBITDA margins to improve to 5% by FY13.
While reflecting the value of SAP. NOVEMBER 2010 78 . and we believe value unlocking is now imminent through either induction of strategic investors or an IPO. The SAP business has acquired critical size. of stores EBITDA margins steadily improving (%) 10 5 0 Stores upto 2007 Stores after 2007 1350 900 -5 450 -10 -15 FY07 FY08 FY09 FY10 FY11E FY12E FY13E 0 Q1FY10 Q2FY10 Q3FY10 Q4FY10 FY10 Q1FY11 Q2FY11 Source: IDFC Securities Research.Standalone Apollo Pharmacy Apollo management has been contemplating value unlocking in the SAP business for some time now.700+ by FY13E 1800 No. the largest organized pharmacy in one of the largest pharma markets globally. this event will also generate cash for the parent.IDFC Securities Exhibit 14: SAP to grow to 1. IDFC Securities Research. SAP. HBP – Hospital Based Pharmacies. Company Exhibit 15: Apollo Pharmacy – state-wise distribution (as of 2009) State Andaman & Nicobar Andhra Pradesh Assam Chandigarh Chhattisgarh Goa Gujarat Haryana Himachal Pradesh Jharkhand Karnataka Madhya Pradesh Maharashtra New Delhi Orissa Puducherry Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal 9 0 0 5 0 0 1 3 17 2 1 1 1 1 8 HBP SAP 1 231 2 3 8 3 63 10 1 3 81 5 103 47 14 6 4 24 210 12 42 Total 1 239 2 3 9 4 64 10 1 3 90 5 103 52 14 6 5 27 227 14 43 South India accounts for a bulk of pharmacy stores Total 49 873 922 Source: Company.
208 185 -30 -39 Q2FY10 1. We expect the business to be eventually divested as it is not core to Apollo’s healthcare offerings.1bn in FY10 from Rs481m in FY09. Apollo has a 39. a world leader in health insurance with >5. Apollo holds a 19. Munich Health is a subsidiary of Munich Re. claims generation and patient follow-ups.3bn.5bn and Rs511m respectively in FY10) is a medical BPO offering a range of outsourcing services and IT solutions to hospitals and physicians. Exhibit 16: Apollo Munich Re – key financials (Rs m) Gross written premium Earned premium Other income (inc.38% stake in Apollo Health Street operations.147 700 96 796 (825) 72 (897) (897) Q1FY11 421 280 30 311 (160) 20 (180) (180) Q2FY11 454 317 37 353 (232) 22 (217) (217) Apollo Munich Re doubled its gross written premium to Rs1.110 49 1.000 employees catering to clients in more than 40 countries. The management is positive on the prospects of this business as it continues to add clients and expand service offerings.IDFC Securities Other Ventures Apollo Munich Re Insurance JV with global leader Munich Health to tap the fastest growing non-life business According to industry estimates. Apollo entered the thinly-populated health insurance space through a JV with Munich Health to tap the significant opportunity. Apollo Health Street – a ‘medical BPO’ We expect Apollo to divest its stake in the business as it is non-core Apollo Health Street (revenues and EBITDA of Rs4. health insurance is the fastest growing and second largest non-life insurance segment in the country.577 58 4. IRDA estimates 25% CAGR in health insurance premiums over FY09-14.337 166 13 7 NOVEMBER 2010 79 .138 154 53 42 Q3FY10 1. which implies that its stake in the venture will keep coming down progressively.159 8 53 57 FY10 4.333 4 1.72% stake in the JV and will not be investing any further equity in the JV.130 164 30 23 Q4FY10 1. AHS’s service offerings include medical coding.088 849 134 147 Q1FY10 1.635 511 106 83 Q1FY11 1.205 3 1.094 151 41 33 Q2FY11 1. with insurance premium collections for FY10 at US$1.137 1 1.076 18 1.125 5 1. Exhibit 17: AHS – key financials (Rs m) Revenues Other income Total income EBITDA PBT PAT Source: Company FY09 4. billing. interest income) Total income EBITDA Depreciation Interest PBT Tax PAT Source: Company FY09 481 216 74 290 (675) 43 (718) (4) (722) Q1FY10 194 124 24 148 (102) 15 (117) (1) (118) Q2FY10 294 153 23 177 (208) 18 1 (227) (2) (229) Q3FY10 310 197 26 223 (194) 18 (212) (212) Q4FY10 349 226 23 248 (321) 21 (1) (341) 3 (338) FY10 1. medical transcription.994 94 5.
IDFC Securities Projects and consulting Apollo Global Projects is among the most renowned hospital consultancies. It deploys staff and shares hospital management expertise with its clients. and derives revenues either as a flat fee or as percentage of the value of the project. implementation and operations management arm of the Apollo Hospitals Group. Apollo Global Projects generated revenues of Rs205m in FY10. The venture provides project management and operations consulting services to other hospitals. it contributed Rs205m in revenues Apollo Global Projects is among the most renowned hospital consultants. It is the planning. Exhibit 18: Apollo Global Projects – consultancy revenues have been largely flat (Rs m) 300 Consultancy revenues 225 150 75 0 FY08 FY09 FY10 Source: Company NOVEMBER 2010 80 .
The improvement in ALOS is impacted by the commissioning on several new beds. we expect Apollo’s consolidated net profits to grow at a CAGR of 25% over FY10-13 Strong internal accruals (Rs10bn of cash profits over FY11-13) to support addition of 2.5 7563 - FY08 2237 0. Even while owned beds under operations have gone up by ~50% over FY06-10.77 5.7 7245 - FY07 2135 0. Apollo has put in place a sustainable operating model in the capital-intensive hospital industry. . bolstered by the classic hub & spoke model Higher ARPOB via the hub & spoke model: Apollo follows a classic hub & spoke model – its super-specialty beds (at COE) are supported by multi-specialty hospitals and day care centers.500 beds over the next three years. IDFC Securities Research FY06 1959 0.. With occupancy rates comfortably above 75% over the last four years.76 5. Considering that Apollo’s ARPOB is net of the fees paid to doctors (22-23% of ARPOB). Of the total 1. Despite its significant expansion over the years and adherence to the strategy of owning hospital beds and medical equipment while also using the latest technology. Apollo has had the leeway to consistently increase its treatment prices over the past several years. HBP revenues) Net ARPOB per day (incl..750 17940 Occupancy has increased and AHEL’s ARPOB growth rates are among the best in India.970 beds in the Chennai and Hyderabad clusters.. This is again testimony to Apollo’s operating model.IDFC Securities FINANCIAL ANALYSIS We expect 19% sales CAGR for Apollo over FY10-13 driven by strong growth in heathcare services and Apollo Pharmacy EBITDA margins to expand by 227bps over FY10-13 as we expect steady roll-out of new bed beds and declining losses at Apollo Pharmacy Aided by margin expansion. of beds (owned .18 8767 - FY09 2502 0. This has reflected in a steep growth in ARPOB over this period which has grown at 10%+ CAGR over FY06-10. net gearing to reduce to 0. equivalent to 90% of Apollo’s existing net block position.13 9666 16310 FY10 2717 0. HBP revenues) Source: Company.48x by FY13E A profitable business model Healthy core return ratio of ~15% despite owning assets in a capital-intensive industry With its prudent approach towards managing growth over the years.Apollo standalone) Occupancy (%) ALOS (Days) Net ARPOB per day (Exc. Exhibit 19: Key operational metrics at the group level Particulars No. this is among the highest in the industry despite having a diverse mix of beds under operation. an analysis of Apollo’s key operating metrics over the last five years clearly underlines the quality of the business model and is a validation of its calibrated growth strategy.76 5.77 5. Apollo’s overall occupancy is up to 76% from 72%. While the headlines return ratios do look subdued due to the significant investments undertaken which are yet to mature.. Apollo has been clocking core return ratios of ~12-13% over the past three years.72 5. Apollo’s traditional strongholds. 65% are super-specialty (at COE) and the remaining are multi-specialty and day care NOVEMBER 2010 81 . These data points are even more encouraging when viewed for Chennai and Hyderabad clusters.25 10.
1bn. Apollo has been able to ensure a desired case mix at its capital intensive COE (Chennai Main and Jubilee Hills).IDFC Securities surgery beds.000 14. We expect standalone revenues of Rs31bn in FY13.000 0 FY08 FY09 FY10 FY11E FY12E FY13E SAP 35% Hospital Revenues (includes HBP) 51% Source: IDFC Securiteis Research By FY13. Pune.3bn respectively.9bn and pharmacy (HBP at subsidiaries and JVs) revenues of Rs3.08 0. This has resulted in higher ARPOB and occupancy rates as also lower ALOS at the mature clusters.76 4023 1196 30 61 Chennai FY10 10749 5.9bn and Rs4.8 0. Apollo has been seperately reporting HBP revenues for standalone clusters as well as those derived from subsidiaries/ JVs from Q1FY11. including Rs10.25 0. including Rs10.8 1437 322 22 22 FY10 16218 4.000 ARH 4% 21.23 0. Of this. we expect hospital revenues of Rs15. Karur.8bn from SAP.9bn. Exhibit 20: key operating metrics for mature clusters Particulars FY09 ARPOB (Rs/day) ALOS (days) Occupancy (%) Revenues (Rs m) EBITDA (Rs m) OPM (%) % contribution to standalone revenues Source: Company. our forward estimates have factored in the new available data points. we expect hospital revenues (Rs19bn) to contribute 65% of standalone revenues. we expect the Chennai and Hyderabad clusters to contribute Rs8. NOVEMBER 2010 82 . IDFC Securities Research 9492 5.4bn over FY10-13 driven by strong growth in both heathcare services and Apollo Pharmacy.76 5056 1519 30 62 Hyderabad FY09 13265 5. Vizag. We expect the two businesses to contribute 61% and 35% respectively to standalone sales in FY13. Karimanager.000 7. As a result of the strong bed network and careful screening of patients. Of the remaining Rs18.9bn contribution from relatively newer hospitals at Madurai. Bilaspur and Bhubaneshwar.000 Consolidated Revenues Standalone Revenues (FY13E) Revenues from HBP from sub's/Jvs 10% 28. Mysore. We epxect Rs2. Exhibit 21: Hospital & SAP to contribute 61% and 35% to standalone revenues by FY13 Rs m) 35.8bn from the SAP business We expect 19% consolidated revenue CAGR for Apollo to Rs34. from 72% and 26% in FY10.77 1656 356 21 20 Expect 19% consolidated revenue CAGR over FY10-13 We expect revenues of Rs31bn in FY13.
We factor in bed additions under Apollo Reach as a separate head. we expect Apollo’s EBITDA to grow 1. Margins to steadily expand over FY10-13E Steady increase in operationalized bed. Pune. We expect 5% CAGR in per store revenue contribution over FY10-13. We expect Apollo’s EBITDA margin to steadily expand on back of steady increase in operationalized beds and declining losses at Apollo Pharmacy. We expect revenue contribution from SAP to increase from Rs4.9bn in FY13. Reflecting strong topline growth. We believe our exit rate estimate is conservative as we factor in a 2% qoq increase in ARPOB in each of the clusters and a steady increase in opeational beds.8bn in FY13 from a quarterly run rate of Rs768m in Q1FY11. we expect Apollo Reach margins to be lower in FY12 and then rising to 22. Karimanagar. We expect other facilites (in Madurai. Factoring in bed additions in FY12. Bilaspur and Bhubaneshwar) to operate at 30% margin by FY13.5bn and Rs492m of hospital revenues (ex-HBP revenues) from Chennai and Hyderabad (Q1FY11). We estimate revenue contribution of Rs3. we expect Apollo’s exit rate to increase to Rs1. OPM 16.9bn in FY13.5 14. Mysore.95x over the next three years to Rs5.5% in FY13.8bn in FY10 to Rs10.8bn from subsidiaries/ JVs in FY13. We expect Apollo’s Chennai and Hyderabad clusters to report conservative EBITDA margins of 34% and 20% respectively in FY13.5 Consol. Exhibit 22: AHEL’s EBITDA margins to remain flat in FY11 and FY12 (%) 17.9bn in FY13 from Rs643m in Q1FY11. We expect HBP revenues from Apollo’s standalone hospitals at Rs3.IDFC Securities From a quarterly run rate of Rs1.5 15.8bn in FY13 owing to an increase in the number of stores and potential higher revenues from each store. declining losses at Apollo Pharmacy to aid margin expansion We expect Apollo’s consolidated EBITDA margins to expand by 227bps over FY10-13 with EBITDA registering 25% CAGR over the period to Rs5. We expect HPB revenues derived from subsidiaries/ JVs to increase to Rs2. We expect ARH to contribute 4% to standalone revenues by FY13. We expect tertiary operational beds at the Chennai and Hyderabad clusters to increase by 30 and 350 respectively from existing levels. Karur. Vizag.5 13.5 FY08 FY09 FY10 FY11E FY12E FY13E Source: IDFC Securities Research NOVEMBER 2010 83 .8bn and Rs877m by Q4FY13.
2x times over FY1013. PAT to almost double by FY13E We expect Apollo’s consolidated profit to post 25% CAGR in FY10-13. Apollo plans to add 825 beds under Apollo Reach.700 Consol PAT 2.2% and 12. With turnover at Apollo Pharmacy expected to increase 2. This further strengthens Apollo’s ability to undertake expansions.700 1. We factor in an effective tax rate of 33.200 700 FY08 FY09 FY10 FY11E FY12E FY13E Source: IDFC Securities Research Return ratios to expand by 400bp Healthy growth in turnover and thereby improved capital efficiency to support RoE Over FY10-13.IDFC Securities Working capital – stays lean Strong rise in working capital cycle will support AHEL’s expansion plans While there are significant upfront costs. With a meagre 60bp expansion in EBITDA margin over the period. we expect improved capital efficiency to support RoE expansion. NOVEMBER 2010 84 .6% respectively.200 1. we expect AHEL’s consolidated RoE and RoCE to expand by 450bps and 407 bps to 13.4% over FY10-13. Our estimates do not factor in tax benefits for setting up hosptials in tier-II and tier-III cites.7bn by FY13.77x in FY10 to 2x by FY13. Expansion in RoE would primarily be driven by a higher asset turnover and steady expansion in margins over the next two years. private sector hospital players have a lean working capital cycle due to the low levels of debtors and inventories. Overall. Exhibit 23: Apollo’s consolidated PAT to grow 2x over FY10-13 (Rs m) 2. We expect AHEL’s asset turnover to increase from 1. we expect profitability to largely track topline growth. we expect Apollo’s consoldiated PAT to increase 2x over FY10-13 to Rs2. Apollo’s working capital cycle has improved significantly over FY09-10 with redcution in net working capital cycle from 17 days in FY09 to five days in FY10. The sharp decline in working capital cycle is primarily on the back of a propotionate increase in payable days over the duration with inventory and recievable days largely constant.
142 20.6 7.822 85.408 7.584 17.868 25.0 FY13E 2.MAIN Ayanambakkam Karaikudi Others Bangalore Nellore Trichy Vizag North India New Delhi West India Nasik Belapur Masina Thane Central India Bilaspur-Oncology Expansion 80 13530 0 1250 80 11630 0 2778 Sep-11 Total Source: Company. Completion Operational cash flow of Rs7.576 153.142 6.157 80.566 100.9 34.264 23.822 15.433 153.831 7.4 26.157 13.IDFC Securities Exhibit 24: RoE to expand by 400bps over FY10-13 Du-Point Analysis PAT Sales PAT/Sales (%) Sales Assets Sales/Assets (%) Assets Equity Assets/Equity (%) RoE (%) Source: IDFC Securities Research FY09 1.5bn.668 beds over the next three years.1 23.566 18. Exhibit 25: Apollo’s ambitious expansion plans (Rs m) Own projects Hyderabad Cluster Hyderabad .377 20.2 28. IDFC Securities Research ARH SS SS SS 520 3500 1400 2000 0 0 0 1000 520 3500 1400 500 34 700 0 0 Jun-12 Jun-13 Jun-13 Mar-13 Expansion 400 250 0 0 Nov-10 Expansion ARH ARH SS 60 667 655 1150 0 0 60 667 655 1150 0 85 136 80 Nov-10 Oct-12 Mar-13 Jun-13 Expansion ARH ARH 100 700 260 0 0 0 100 700 260 0 66 238 Sep-12 Jun-12 Sep-10 Expansion SS SS 1225 370 443 0 0 0 1225 370 443 1029 370 40 Mar-11 Apr-10 Jun-11 Project Description Total Cost JV Debt AHEL Share AHEL invstd.1 13.1 20.7 FY11E 1. Estd. The planned capex of Rs11. Apollo continues to fund its expansions by raising incremental debt (US$15m recently raised from IFC via issuance of FCCBs at a conversion price of NOVEMBER 2010 85 .8 11. To maintain its targeted financial leverage.584 95.2bn over FY11-13 will contribute significantly to capex needs Apollo’s strong operational cash flows would allow it to comfortably fund its massive capex rollout.9 28. We expect Apollo to generate operating cash flow of Rs7.7 FY12E 2.international Secundarabad Hyderguda Chennai Cluster Chennai .065 16.0 31.357 26.264 6.408 31.068 28.650 152. The cost of the planned expansion would be Rs13.831 28.2 8.8 20. with Apollo likely to incur a capex of Rs11.212 154.6 16.841 145.724 34.2bn over FY11-13 as against our capex estimate of Rs10bn.6bn (its proportionate share).6bn over FY11-14 translates into ~90% of its existing net block position as of end-FY10.5 FY10 1.291 110.357 7.291 20.5 10.4 25.2 Planned capex for FY11-14E at 90% of existing net block Apollo has ambitious plans to add 2.
IDFC Securities Rs303 per share). We expect proceeds from the planned transactions to be utilized to retire debt or fund incremental expansions. Given that the sustainability of these newer models is yet to conclusively proven. However. strong internal accruals. we expect Apollo’s balance sheet position to grow stronger hereon. we believe it will likely test Apollo’s project execution / operational management capabilities. should limit debt requirement. Apollo’s ability to successfully manage this geographical expansion will be a key metric to track. Key risks Venturing into new geographies Apollo’s ability to successfully execute projects in new geographies like Mumbai will be a key metric to track While we are positive on Apollo’s strategy to venture into newer and challenging geographies like Mumbai as it seeks to reduce the dominance of its Southern India footprint in the business mix. Innovating with newer formats Further.500 -500 -2.500 FY08 Source: IDFC Securities Research FY09 FY10 FY11E FY12E FY13E Timely divestitures to enhance shareholder value We believe Apollo Pharmacy is a prime candidate for a stake sale or an IPO. Risk of spreading resources too thin Over the past few years. Apollo has sought to accelerate the pace of capacity addition while managing to ensure quality delivery standards.500 -4. with aggressive expansion plans in place. With Apollo Pharmacy having already achieved EBITDA breakeven.48x by FY13 (0. but decided to back out due to the unfavorable market conditions. Overall.500 Cash flows OCF Capex FCF 1. However. which will boost expansion plans Apollo management has reiterated its intention of timely divestiture/ value unlocking of its non-core business (Apollo Pharmacies and Apollo Health Street) to enhance shareholder value. Apollo attempted to list its BPO operations in 2008. Exhibit 26: Gross OCF estimated at Rs7bn vs estimated capex of Rs10bn (FY11-13) (Rs m) 3. Apollo is also seeking to aggressively invest in newer delivery formats including Apollo Reach as well day care centers etc. along with cash flows expected from issuance of promoters’ warrants. Apollo’s ability to successfully execute the same remains a key risk to monitor. a strategic stake sale or IPO launch of the retail pharmacy business should not come as a surprise. with consolidated net gearing at 0.36x as of FY10). Apollo could be spreading its resources too thin across NOVEMBER 2010 86 .
A strong brand equity has enabled Apollo to attract good doctors. NOVEMBER 2010 87 . Resource availability poses operational and financial risk Getting specialists for super-specialty hospitals continues to be a challenge India produces 35. which require highly skilled human resources (MBBS and MD doctors). However.000 MBBS doctors on an average each year. Given the nature of Apollo’s service offerings. Apollo’s hospital network includes several multi-speciality and super-speciality centers. getting super specialist doctors for the newer superspeciality units would be a challenge given the scarcity of this highly qualified talent. Even as we believe in the management’s ability to deliver on scale and superior execution skills. we see that as a key operational and financial risk (higher employee costs) for the company. but the number of MDs (super-specialists) is far lower.IDFC Securities newer facilities and which may impact quality. we would continue to monitor the situation.
700 beds over the next three years against ~8.IDFC Securities VALUATIONS & VIEW Apollo Hospitals is India’s largest and probably the best known healthcare provider with a proven business model Internal accruals attaining critical mass. we believe Apollo management’s aggression in pursuing the same bodes well for the stakeholders. With opportunities aplenty in the Indian healthcare space. deserve to trade at premium to global peers We initiate coverage on Apollo with an 18-month price target of Rs651share Apollo – stepping on the gas Strong balance sheet and healthy margins give an edge to Apollo’s scale and geographical spread With 47 owned hospitals and ~8. along with its phenomenal brand equity for quality healthcare. Indian players deserve growth premium We value Apollo using EV/ EBITDA given hospitals’ capital intensiveness and long gestation periods Given the capital-intensive nature of the business and long gestation periods (steady margins attained only by fourth or fifth year of operations). we prefer to value Indian private hospital operators on EV/EBITDA rather than based on DCF and PE multiples. Apollo has created an enviable and difficult to match footprint in India. Apollo is looking to add ~2.75bn by FY12).000 beds opertionalized so far. With increasing real estate costs as well as manpower shortages. In contrast. most of these players are in an aggressive growth phase – leading to regular upscaling of medium-term growth plans. reflecting an average 8% EBITDA CAGR over the next two years.000 beds under operation in prime spots across key cities. This is reflected in its decision to commence operations on a large scale in western India as well as a willingness to experiment with innovative business models like Apollo Reach. While Apollo’s relatively conservative approach to growth in the past. Apollo’s strong balance sheet and healthy EBITDA margins add to the edge. which offers better growth potential for than developed markets NOVEMBER 2010 88 . which have the potential to dramatically alter the business profile in the later years. As Indian players are in their early growth phase in a market offering tremendous potential available as compared to the relatively limited growth opportunities for players in developed markets. we expect EBITDA for leading Indian players like Apollo and Fortis to register a significantly higher CAGR of 26% an 34% respectively over FY1012. we believe Indian hospital players should trade at a significant premium (14-15x one-year forward EBITDA) to global peers Hospitals is a play on Indian healthcare. Overall. Having built a strong base (operating profits likely to cross ~Rs4. may have provided an opportunity for some other new players to create strong foothold in North India. particularly leaders like Apollo and Fortis offering immense growth potential. etc. Further. we believe the company is now willing to step on the accelerator so as to encash on its first mover advantage. we sense a change in the air. Hospital operators in developed economies (USA and EU) trade 8-9x one-year forward EV/ EBITDA. which would be used to fund the ambitious expansion plans of the hitherto conservative management Potential strategic stake sale/ IPO in Pharmacy business as well as divestiture of non-core assets further triggers for value unlocking Indian hospitals. Day Care Centers. involving focus on its Southern India strongholds. Apollo’s competitive edge vis-à-vis the new entrants is bound to increase further.
5 13.1 12. We assign a valuation of 15 FY13 EV/ EBITDA to Apollo’s healthcare business NOVEMBER 2010 89 . which is in line with its historical two-year forward multiples.1 24.7 6.8 10.2 26.4 5.1 13.3 14.1 15.7 15.0 11.2 6.3 11.7 7. we believe.7 38.8 17.3 18.1 22.3 17.2 6. deserve to command significant valuation premium to peers as well as the broader Indian market as they are the only relevant proxies to the rapidly growing and highly attractive domestic healthcare industry (US$125bn by 2015E). In this context.7 20.1 16.0 10.4 8.9 20.5 25.6 14.4 6.6 10. Further.2 22.7 23.2 13.4 29.9 28.1 6.8 15. Note: * For years FY10.0 10.3 17.0 12.1 11.0 10.IDFC Securities Exhibit 27: Global peer valuation matrix (US$ m) Company US Universal Health Services-B Health Mgmt Associates Inc-A Community Health Systems Inc Lifepoint Hospitals Inc Tenet Healthcare Corp Thailand Bangkok Dusit Med Service Bumrungrad Hospital Pub Co Bangkok Chain Hospital PCL Australia Ramsay Health Care Primary Health Care India Fortis Healthcare * Apollo Hospitals Enterprise * Singapore Raffles Medical Group Thomson Medical Centre Malaysia Kpj Healthcare Berhad 20. FY11.8 13.7 12.4 13.6 24.4 20.5 PE (x) CY09 CY10 CY11 EV/EBITDA (x) CY09 CY10 RoE (%) OPM (%) CY11 CY09 CY10 CY11 CY09 CY10 CY11 Valuing retail phamacy: Apollo Pharmacy is a leader in one of the fastest growing pharma markets in the world Like the hospital business.7 6.1 17.4 6.7 17.6 16.3 24.6 6.1 13.0 45.5 13.0 5.5 26.4 12.3 21.5 13.3 4.7 6.9 13.7 26.1 5.0 16.1 14.9 24.0 22.0 8.0 37.7 7.4 22.6 13.5 13.5 16.5 15.9 15.4 21.5 10.2 14. FY12 14. along with its strong brand equity and 25% earnings CAGR over FY10-13E.6 13.9 13. Given the quality and scale of assets. The economic benefits of this enviable leadership position will be visible in the years to come. retail pharmacies also have long gestation periods due to high upfront real estate and other costs.2 7. we prefer to value the pharmacy business on EV/ sales basis.2 15. we value Apollo Pharmacy at a premium to global peers.3 12.9 26.000+ beds operational by 2013E.1 7.2 14.6 14.9 18.9 24.9 24.3 15.1 Source: Bloomberg.2 24.4 7.9 14.6 25.1 33.3 45.3 8.0 30.9 27.9 22.3 6.4 8.0 32.0 6.3 18.7 15.9 20.0 24.3 32.5 10.8 7. IDFC Securities Research .0 24.8 13.5 12.7 87.7 8. retail chains achieve EBITDA and PAT breakeven after suffering losses for a few years.3 32.8 13.8 16.1 27.3 8.6 33.8 16. we value Apollo’s healthcare business (including HBP) at 15x FY13 EV/ EBITDA.8 25.5 29.7 6.5 12. Therefore.2 11.2 16.7 33.1 10. Initiating coverage with an 18-month price target of Rs651/share Apollo deserves command a significant premium to peers Leading private healthcare service providers like Fortis and Apollo. Given the leadership position of Apollo Pharmacy in the one of the fastest growing pharma markets globally and factoring in 31% revenue CAGR over FY10-13E.6 15.3 13.2 15.3 34.9 11.7 15.4 6.8 19.3 18. we strongly believe that with ~10.1 7.2 16. We value Apollo’s consolidated business using SOTP of its hospital and retail pharmacy businesses.4 56.3 5.2 13.9 13.8 8. Apollo will continue to be among the leading players in the domestic market for years (and even potentially decades) as the entry barriers keep on going up.4 16.4 23.3 16.6 12.6 10.9 11.8 15.8 24.3 9.6 16.0 19.9 94.0 11.1 23.8 36.5 12.5 16.5 11.9 27.1 13.6 14.0 10.5 21.0 7.4 15.
000 300 40.0 10.000 0 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 - Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Source: IDFC Securities Research Our target multiple of 15 FY13E EV/ EBITDA is in line with those of leading Indian healthcare players Initiating coverage on Apollo with Outperformer and an 18-month SOTP-based price target of Rs651/share (valuing the hospital business at 15x FY13E EV/EBITDA.339 80.865 10.0 35. and valuing the Apollo Pharmacy business at 1x EV/ sales (FY13E) – implying an upside of 21% from the current levels.0 450 60.459 124 651 28% 15 5.867 460 80. a faster-than-expected pick-up in newer hospitals and value unlocking in non-core assets will lead to upsides on the target price. Ability to accelerate margin improvement in existing hospitals.IDFC Securities Exhibit 28: Historical EV/EBITDA and PE (x) band charts PE (x) 600 Apollo 15.786 1 10.0 15. in line with our target multiple for leading Indian healthcare providers.0 25.080 on FY13 NOVEMBER 2010 90 Nov-10 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 . Exhibit 29: AHEL’s SOTP valuation Deriving price Hospital business Target EV/EBITDA (x) EBITDA (non-SAP operations) Enterprise value (A) Retail pharmacy Revenues Target EV/sales (x) Enterprise Value (B) Total Enterprise Value (A+B) Debt Cash Derived Market cap FDE (no.000 Apollo 5. of shares) Fair value Upside Source: IDFC Securities Research 10.000 150 20.0 EV/EBITDA (x) 80.786 90.
IDFC Securities ANNEXURE 1 – Asia’s largest healthcare group Apollo enjoys pan-India presence with >8.000 beds Source: Company NOVEMBER 2010 91 .
693) 328 1.758 35.5 208 (459) 632 1.875 2.633 15.2 7.0 11.594 38.340 9.367 536 4.845 4.5 0.148 6.499 (22) 512 1.5 12.016 93 583 1.0 10.384 875 (538) 237 (407) FY10 FY11E FY12E 2.149) (961) 917 1.561 500 8.289 26.412) 1.5% Foreign 54.4 23.050 (538) (34) 2.581 4.036 19.821 961 1.585 (3.148 22.2 12.7 3.236 (538) 0 (217) FY13E 4.340 36 1.9% Promoters 33.267 23.7 24.1 0.953 2.4 FY10 FY11E FY12E 14.7 8.148 Non-promoter corporate holding 1. tax) Misc Net chg in cash FY09 1.408 19.1 6.8 3.8 8.590 5.749 13. Items & others Operating cash Inflow Capital expenditure Free cash flow (a+b) Chg in investments Debt raised/(repaid) Capital raised/(repaid) Dividend (incl.653 32.0 2.9 2.724 31.381 43.166 16.1 13.046 (3.0 2.3 0.6 323 (602) 750 2.162 4.259 3.7 28.016 750 (1.845 20.264 38.087 1.738) (2.IDFC Securities Income statement Year to Mar (Rs m) Net sales % growth Operating expenses EBITDA % growth Other income Net interest Depreciation Pre-tax profit Deferred Tax Current Tax Profit after tax Minorities Non-recurring items Net profit after non-recurring items % growth Key ratios FY09 16.8 57.500) (915) 1.5 FY13E 17.142 32.445 294 5.052 3.503 (2.3 2.044) 3.431 4.131 536 2.722 19.917 16.7 3.8 17.867 536 4.082 4.1 45.0 22.550 17.330 (1.021 35.183) (512) 609 1.776 3.1 FY13E 22.072 618 18.9 Shareholding pattern Balance sheet Year to Mar (Rs m) Paid-up capital Reserves & surplus Total shareholders' equity Total current liabilities Total Debt Deferred tax liabilities Other non-current liabilities Total liabilities Total equity & liabilities Net fixed assets Investments Total current assets Other non-current assets Working capital Total assets FY09 602 14.8 2.045 1.861 7 1.377 24.9 13.2 11.0 23.640 32.1 12.166 13.460) (538) (46) (2.3 FY10 FY11E FY12E 20.4 16.817 21.890 43.4 3.868 35.7 Year to Mar (Rs m) EBITDA margin (%) EBIT margin (%) PAT margin (%) RoE (%) RoCE (%) Gearing (x) FY09 14.2 148 (829) 1.500) (346) 500 (538) (11) (395) NOVEMBER 2010 92 .5 Valuations Year to Mar (Rs m) Reported EPS (Rs) Adj.416 15.1 2.123) (2.919 500 9.757 4.6 4.4 10.261 4.6 176 (685) 875 2.4% Govt holding 0.525 5.9 153 (869) 1.264 25.009 56 40 1.963) (1.166 11.4 16.243 FY10 FY11E FY12E 618 15. EPS (Rs) PER (x) Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/CE (x) FY09 9.7 7.2 29.240 2.0 0.131 536 3.883 23.5 17.243 12.357 25.821 875 (2.908 21.914 7.1 33.085 (1.005 32.5 7.1 15.690) (1.325 10.710 (4.086 14.085 3.8 FY10 FY11E FY12E 11.053) (1.154 (3.3 28.5 1.6 7.116) (583) 644 1.989 11.1 6.4 15.425 1.166 12.193 18.7 30.068 10.3% Institutions 3.5 2.1 21.7 FY13E 34.2 2.7 16.067 0 2.845 FY13E 618 20.5 13.311 2.8 11.051 500 10.416 618 17.4% Public & others 6.297 26.019) 486 2.019 2.5 15.087 1.105 43.767 5.1 11.993 500 8.330 4.706 446 1.6 0.3 16.749 2.311) 781 3.045 1.499 632 (1.7 13.072 17.5% As of September 2010 Cash flow statement Year to Mar (Rs m) Pre-tax profit Depreciation Chg in Working capital Total tax paid Ext ord.6 25.804 9.831 13.7 11.1 4.194 39.735 (11) 2.161 10.2 8.1 7.
the group’s innovative streak is also reflected in its willingness to adopt novel models to reduce resourceintensity in its future expansion.000+ installed bed capacity by FY13 as 8 new hospitals go on stream.914 1. Margins to be impacted by new bed additions: With the planned addition of ~2. Fortis is looking to consolidate presence across different regions by adding ~2.3 1.8 17. an aggressive promoter/ management with demonstrated ability to innovate in its bid to create value and a still nascent market that offers multiple growth opportunities.000 Greenfield beds.7 9. Malar.3 7.5 26. limited track record of executing Greenfield hospitals and pending integration of Wockhardt hospitals are key risks to monitor.721 406 4.9 FY11E 14.0 5. we expect Fortis’ margins to decline by 160bp over FY10-13 but improve sharply thereon as the new beds begin to mature. subdued return ratios. Fortis has aggressively pursued inorganic growth (Escorts.7 379. we rate the stock as Outperformer with an 18-month price target of Rs206 per firstname.lastname@example.org FY12E 21. With a national footprint in place.0 61.1 1.8 6.9 24.4 4.872 695 406 1.4 FY13E 27.6 2. strong balance sheet.6 38.250 bed network (~46% in Greenfield facilities).7bn.2 147. Second largest and growing: In addition to organic growth. ~3. While caution is warranted given Fortis’s limited execution history.809 407 9.250 beds and a pan-India footprint built over just ~10 years – aided by aggressive inorganic growth. EPS (Rs) % growth PER (x) Price/Book (x) EV/EBITDA (x) RoE (%) RoCE (%) Nitin Agarwal nitin. Fortis is on track to achieve a 6.7 email@example.com new beds over FY10-13. Wockhardt. US$1. While the backing of well-funded promoters (erstwhile Ranbaxy owners) and a strong balance sheet have enabled Fortis to make bold moves like bidding for Parkway.4 (126.4 50. An exciting growth story despite the execution risks: A 75% earnings CAGR over FY10-13.589 145 406 0.162 Free Float (%):18.7 2.1) 451. Growth in mature beds and new additions should drive 41% revenue CAGR for Fortis over FY10-13. The recent decision to pursue international growth through promoter entities is a positive as it leaves Fortis free to focus on tapping the opportunities in the domestic market.5 Ritesh Shah ritesh.3 1.0 1.6bn OUTPERFORMER Fortis Healthcare (Fortis) is India’s second largest healthcare player with 49 hospitals.3 3.156 2. (m): 2.IDFC Securities Fortis Healthcare Forging Ahead… Reason for report: Initiating coverage Rs161 Mkt Cap: Rs69.3 180 Fortis Healthcare Sensex 155 130 105 80 12-Dec-09 12-May-10 12-Aug-10 12-Mar-10 12-Nov-09 12-Oct-10 12-Jun-10 12-Apr-10 12-Feb-10 12-Jan-10 12-Jul-10 12-Sep-10 Bloomberg: FORH IN 1-yr High/ Low (Rs): 188/92 6m avg daily vol.520 406 6.2 46.com 91-22-6622 2571 93 12-Nov-10 . Key valuation metrics Year to 31 Mar Net sales (Rs m) Adj. However. Fortis is a company to watch for. etc) as also O&M contracts to build ~3.6 10.7 6. We expect 37% CAGR in EBITDA over FY10-13 to Rs4.1 FY10 9.5 56. net profit (Rs m) Shares in issue (m) Adj.0 94. creating a solid platform for funding future growth. Initiating coverage with Outperformer and 18-month price target of Rs206. This should drive 41% CAGR in Fortis’s revenues and 75% CAGR in earnings over FY1013.com 91-22-6622 2568 NOVEMBER 2010 Price performance FY09 6.961 3. which typically take 6-8 quarters to breakeven.5 8.95bn in FY13.3 4.
Since setting up Fortis Hospital at Mohali (Punjab) in 2001. a track record of successfully integrating acquired assets (Escorts Delhi. promoted by the erstwhile owners of Ranbaxy Labs. in line with peers’ average historical 2-year forward multiples India’s second largest healthcare service provider Achieved pan-India presence rapidly and transformed Indian healthcare in the process… Fortis Healthcare (FHL). willing to experiment with non-conventional strategies to build capacity and adopt new paradigms of doing business. we believe. Within 10 years of starting operations. employees. Fortis Malar. equipment. neurosciences. their sustainability over the long run needs to be monitored. we perceive risks of spreading resources too thin and operational integration challenges Our 18-month price target of Rs206 on the stock corresponds to 15x FY13E EV/EBITDA. orthopedics. NOVEMBER 2010 94 . etc) FHL has embraced innovative strategies to reduce resource intensity (land. the group has a network of 49 hospitals and >4. it has significantly altered the traditionally-staid Indian healthcare landscape. FHL’s willingness to push the envelope is also evident in its bid for Parkway Assets. has been among the most innovative of the leading private healthcare service providers. In the process. a fairly unthinkable proposition for an India-based healthcare operator. by bringing senior managers from non-healthcare backgrounds to run the business.053 installed beds (of which 2. FHL has doubled its operational bed capacity in two years.973 beds are operational) across the country. however. renal care. gastroenterology and mother & child care among many others. the group’s first flagship venture.000 beds by FY13 Through aggressive inorganic growth. we believe FHL has upped the “management quotient” in the Indian private healthcare industry – a domain of medical professionals so far. Fortis’s network hospitals include multi-specialty and super-specialty centers providing comprehensive tertiary and quaternary healthcare covering cardiac care. While some of these unconventional moves have proved effective. oncology. This is reflected in the company’s willingness to pursue aggressive inorganic growth in an industry where gradual organic growth was the established norm. Further. is India’s second largest healthcare service provider (listed) and a key player in the secondary and tertiary care segment. etc) and freed up capital to fund expansion plans Growth set to accelerate backed by a strong balance sheet and well-funded promoters (erstwhile Ranbaxy owners). FHL has attained an all-India footprint in a relatively short period of time. Mr Unconventional… … by adopting new paradigms in the largely conservative healthcare business FHL.IDFC Securities INVESTMENT ARGUMENT India’s second largest (listed) healthcare player in the secondary/ tertiary segment is on track to take total installed capacity to >6.
driven mainly by inorganic means FHL’s network beds have doubled in the past two years. 42% Others. Bengaluru 100 Brownfield Source: IDFC Securities Research.973 in 2010. 16% 6750 Others. Chennai Clinique Darne. Amritsar Escorts Hospital. Industry Exhibit 2: FHL’s bed additions – historical timeline Year of inception 2001 2004 2005 Fortis Hospital. GK . Jaipur Fortis Escorts Hospital. This has enabled FHL to acquire a national footprint within a short period of time and strengthen its brand franchise. ^capacity ramped by 70 beds post acquisition Bed count has doubled in the past two years… Bed capacity increased from 1483 in 2008 to 2973 in 2010. Bengaluru Cunningham Road.IDFC Securities Exhibit 1: FHL – India’s second largest private healthcare service provider (Nos) 9000 Speciality Mix (FY10) MSH. 2% Cardiac. 4% Gynae. Vashi Fortis Malar Hospital. NOIDA EHIRC . Mohali* Fortis Hospital. Raipur 2007 2008 2009 Fortis La Femme. Bengaluru BG Road. FHL has aggressively pursued inorganic growth to complement its organic growth trajectory. of beds 1000 180 1902 2009 Wockhardt Hospitals Source: IDFC Securities Research NOVEMBER 2010 95 .Delhi Fortis Escorts Hospital.II. 3% 4500 Pulmo. from 1. 21% OPD. Unlike Indian hospital operators’ approach of largely focusing on organic growth. Company. New Delhi Hiranandani Hospital. Exhibit 3: Recent acquisitions Date 2005 2008 Acquired Escorts Hospitals Fortis Malar Consideration paid (Rs m) 5850 560 9090 No. Mauritius Fortis Hospital. 9% 2250 Gastro 2% Ortho 8% Renal 4% Onco 2% 0 Apollo Fortis CARE Manipal Max Neuro 6% Source: IDFC Securities Research. Mumbai Hospital Ownership (%) 100 100 90 100 100 100 100 31 40 51 29 67 100 100 100 100 100 Category Greenfield Greenfield Brownfield Greenfield Brownfield Brownfield Brownfield Associate Associate Associate Associate Brownfield Brownfield Brownfield Brownfield Brownfield Brownfield Total capacity 300 350 331 320 250 166 50 45 148 250^ 120 100 451 128 40 60 567 55 Nagar Bhavi. Bengaluru Kalyan. Bengaluru Chord Road. Company. Faridabad Fortis Escorts Hospital.483 in 2008 to 2. Mumbai Mulund. * Land on lease.
000 in 2010 including 2. Over the next few years.000 beds by 2013E …as planned capacity additions will be mainly organic FHL has come a long way from 150 beds in 2001 to ~3. these acquisitions have jumpstarted FHL’s progress as a leading hospital player in India. This is in sharp contrast to peers like Apollo and Manipal. NOVEMBER 2010 96 .386 by 2013. it will need to demonstrate the ability to manage growth by building hospitals from scratch. taking the total owned bed count to 4. it will be interesting to watch FHL’s ability to successfully manage this sharp growth over the next few years. The company plans to add 2.IDFC Securities Notably.000 would be operational beds) by FY13.311 owned beds. as FHL’s own Greenfield beds come on stream.000 beds (of which 5. Company FHL‘s installed capacity – over 6. bed acquisitions have mainly been in tertiary space in metro areas. While there could be issues around the valuation paid for these assets. FHL’s installed capacity will increase to 6. the acquisitions are indeed a sound strategic asset. With long timelines associated with setting up of these acute care facilities and growing challenges in procuring real estate at appropriate locations. Exhibit 4: Only 46% of FHL’s operational beds are Greenfield Bed distribution (FY10) HCC 2% Brownfield 30% O&M 12% Associate 10% Greenfield 46% Source: IDFC Securities Research.075 owned beds over the next two years. whose network primarily consists of beds built up through the Greenfield route. …greenfield beds <50% of overall beds Managing Greenfield facilities is a key challenge going forward… Only 46% of FHL’s overall operational beds (as of end-FY10) are greenfield with the remaining either acquired or operated by JVs/ associates or under O&M contracts. As most of this incremental capacity addition will be through Greenfield hospitals.
For example. Tertiary care hospitals typically break even by the fourth year of operations. in our view. of beds 344 414 350 450 100 200 120 200 100 150 Commencement Q2FY11 Q2FY11 Q2FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q4FY12 Q2FY13 4300 Kolkata* Shalimar Bagh* Gurgaon 3200 Kangra Ludhiana-1 Peenya Ahmedabad Ludhiana-2 Gwalior FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E 2100 1000 Source: IDFC Securities Research. imparts confidence on execution Has unblemished track record in integrating acquired assets FHL has not only created excellent physical assets over the past few years but has also managed to grow and integrate assets within the wider Fortis network.4bn in FY10. NOVEMBER 2010 97 . FHL has demonstrated the ability to break even by the second year in several cases. FHL has implemented Fortis Operating System (FOS) and Purchase Supply Management (PSM) programmes. EHIRCL’s operational margins too improved by 1690bps to 21% in FY10. * already commissioned Improving operating metrics. the data points enhance our comfort on FHL’s execution capabiilties. FHL has seamlessly integrated its acquired facilities (Fortis Malar and Escorts Delhi). Company.IDFC Securities Exhibit 5: Fortis seeks to expand operational beds to 5000 by FY13 (Nos) 5400 Fortis planned owned bed expansion over FY11-13 Date of Location Mulund No. Initiatives to standardize services across its facilities have helped improve margins To ensure standardized services across its network and derive gains from economies of scale. Escorts Delhi’s (EHIRCL) revenues recorded 28% CAGR over the past two years and the hospital now contributes 23% to FHL’s consolidated revenues. FHL has doubled its bed count and network revenues have almost doubled from Rs6. This. Its Jaipur hospital achieved EBITDA breakeven in the 14-16th month of operation. underlines the group’s excellent project execution capabilities. This proves FHL’s capability to ramp up scale and achieve superior operating margins much earlier than the conventional norms. While these are early days yet. This has helped FHL demonstrate steady improvement in margins across the network including Greenfield and acquired facilities. Besides scaling up its Greenfield facilities.5bn in FY08 to Rs12.
RHS) 24 FY09 Fortis Malar 700 Revenues (Rs m .500 FY08 Escorts Delhi 2900 Revenues (Rs m .IDFC Securities Exhibit 6: Revenues have tracked bed count (Rs m) 10.6bn.000 Fortis Mohali Esc Jaipur Fortis Noida Escorts Amritsar Escorts Delhi Fortis Malar Escorts Faridabad Wockhardt acquired 7. This should free up capital.LHS) FY10 OPM (% . employees.000 2. FHL seeks to grow aggressively via all means Promoters remain keen on expanding global reach by acquiring assets at a right price. while promoters’ ambition of gaining a global footprint would be routed through their own holding company Withdrawal from the Parkway deal due to expensive valuations enhances comfort in the management’s ability to manage inorganic growth FHL has embraced an innovative asset-light strategy to garner resources (land. etc. Management recently indicated that FHL (listed) would focus on expanding scale at home. equipment. end-FY11E).).RHS) 18 2550 18 550 16 2200 12 400 14 1850 6 250 12 1500 FY08 FY09 FY10 0 100 FY08 FY09 FY10 10 Source: IDFC Securities Research.LHS) OPM (% . Company A well-crafted strategy to support scale Supported by well-funded promoters (erstwhile Ranbaxy owners) and a strong balance sheet position (net cash of Rs6. leaving ample bandwidth for future growth NOVEMBER 2010 98 .500 5.
“ –Mr.6bn as of end-FY11E).. Fortis Healthcare NOVEMBER 2010 99 . The group believes that there is a huge untapped market for quality tertiary healthcare services in India and remains upbeat on its ability to grab these opportunities through organic and inorganic growth strategies. Company Specialties at existing facility Location population base Availability of leading doctors “As we move forward. FHL has employed a fairly broadbased approach for network expansion via building new hospitals. Analysis of FHL’s bed mix over the years clearly reflects its multi-pronged growth strategy with simultaneous increase in beds across multiple categories. FHL has a dedicated team which continously scouts for and evaluates potential acquisition and O&M opportunities with a pre-defined assessment matrix (exhibit below). Malvinder Singh. capital not a constraint FHL aims to tap the wide variety of opportunities in Indian healthcare using a mix of growth strategies FHL has been aspiring to firmly establish itself on both the domestic and global healthcare map.IDFC Securities Aiming to build scale. Company Supported by well-funded promoters and a strong balance sheet (net cash of Rs6. acquiring existing ones. we believe capital constraints would be the least of FHL’ concerns. and entering into O&M contracts for both existing and new hospitals. Exhibit 8: What FHL looks for while acquiring a new facility Cost Quality of infrastructure Work culture Source: IDFC Securities Research. FHL continues to see significant consolidation and expansion opportunities in the domestic market. Inorganic route remains a key growth imperative A dedicated team scouts for and assesses acquisition and O&M opportunities Despite consummating a series of high-ticket deals. yes the focus on growth in India will continue through organic and inorganic opportunities. In this pursuit to build scale and establish a leadership position. Exhibit 7: FHL’s network has grown across multiple dimensions (Nos) 3200 Greenfield O&M Associate Brownfield HCC 2400 1600 800 0 FY06 FY07 FY08 FY09 FY10 Source: IDFC Securities Research.
of beds 120 414 534 No. of beds acquired EV/bed (Rs m) Source: IDFC Securiteis Research NOVEMBER 2010 Rs m 6500 5850 1000 6. Mumbai Kalyan. (EHIRCL) Target Dec-09 Wockhardt Bed capacities (under construction) Yeshwantpur. Bengaluru Cunnigham Road. Bengaluru Chord Road. Kolkata Total Beds Bed capacities (operational) Mulund.368 1.IDFC Securities Synopsis of key recent inorganic growth transactions FHL’s recent acquisitions of Escorts Hospitals and Wockhardt Hosptials has significantly enhanced its profile and accelerated its journey towards becoming a leading hospital player in India. of beds EV/BED (Rs m) Consideration towards Operational Beds No. Bengaluru Nagar Bhavi. Amritsar (under Escorts Delhi) Escorts Hospital. Kolkata Sarat Bose Road.902 Rationale COE in the cardiac.71 Escort acquisition valuations (2005) Enterprise value (Rs m) Acquired 90% at No. of beds 567 60 451 128 40 55 67 0 1. Kolkata Total existing bed capacity (856 operational) Total bed capacity Source: IDFC Securities Research. of operational beds EV/BED (Rs m) Consideration towards ongoing projects Non-operational beds EV/BED Rs m 9090 1368 6. Exhibit 9: FHL’s significant acquisitions over the past few years Target Consideration (Rs m) 5850 2nd largest private health care provider in the country Bed capacity (operational) EHIRC – Delhi Fortis Escorts Hospital. Bengaluru Rashbehari Avenue.64 7190 856 8. Jaipur Fortis Escorts Hospital.40 1900 534 3. Faridabad Fortis Escorts Hospital.090 No.50 100 . Company Consideration (Rs m) 9. of beds 331 150 250 166 50 Largest player in cardiac care in terms of depth of coverage Rationale Sep-05 Escorts Heart Institute & Research Centre Ltd. Raipur No. Mumbai BG Road. Bengaluru Anandpur. neurology and orthopedic segments Three specialties account for 54-58% of revenues Largest cardiac care and joint replacement centre in India Improved purchase and supply management Integrated marketing and customer acquisition Supports depth of coverage given long-term plans Exhibit 10: Valuation of major acquisitions Wockhardt acquisition valuations (2009) Total amount paid Total no.
5%. Brunei (20 beds) and China (14 beds). Fortis made net gains of Rs180m on the parkway exit. At this price. Sucessful closure of the deal could have seen FHL emerge as a leading player in Asia with a network of 62 hospitals and 10.3m from TPG Capital. Exhibit 11: FHL – Parkway deal Details of Parkway foray (2009) Value attributed to Parkway based on Khazanah’s bid Valuing Parkways investment in Parkway Life REIT Valuation attributable to hospital beds and others No.. came up with a Voluntary Partial Conditional Open Offer (VPO) on 27 May to increase its stake to 51.4% stake in Parkway Life REIT. FHL decided to pull out of the price war and exited Parkway by selling its 25.4m per bed and Rs6.000+ beds.) EV/ Bed (Rs m) Source: IDFC Securities Research (in SGD m) 3. … Khazanah counterbid.56 per share in March 2010. it owns a 35.95 per share valued Parkway at SGD3.022 beds).900 beds).8 With Khazanah seemingly determined to seize the asset as part of its broader panAsia healthcare strategy. M/s Khazanah. The offer was earlier priced at SGD3. UAE (260 beds). the bidding war threatened to go out of hand. After Fortis acquired a strategic stake in Parkway Holdings at SGD3. Parkway Holdings is a leading healthcare provider with presence in Singapore (1. It also has a GP clinic network (Parkway Shenton) and provides radiology (Medi-Rad Associates) and lab services (Parkway Laboratory Services).78 and later increased to SGD3. translating into 31x CY09 EV/EBITDA. Post transaction costs. India (425 beds).8%) in Parkway Holdings (PHL). NOVEMBER 2010 101 . the ‘Parkway saga’ Parkway acquisition is a clear indication of FHL’s global ambitions… Besides creating a formidable position in the domestic market.5m per bed paid by FHL for Wockhardt and Escorts acquisitions respectively. … would have led to its emergence as a leading player in Asia Incorporated in 1974. In 2008. Clinique Darné is one of the most modern medical centres in Mauritius with hi-tech facilities and offering a wide range of specialized medical services. On 19 March 2010 FHL acquired a strategic stake (23. FHL has aspired to establish a global footprint. Malaysia (1. in realization that valuations were getting expensive. Singapore. Besides. a rough analysis indicates that Parkway would be valued at EV of Rs29m per bed comapred to Rs8.3bn. for US$685. FHL marked its first major international foray by joining hands with a diversified Mauritiuan group to jointly acquire a controlling stake in Mauritius’ largest private hospital – Clinique Darné. of beds to be acquired (nos. a Malaysian sovereign fund and the second largest shareholder of Parkway. The Khazanah offer priced Parkway much higher than Fortis’ other comparable acquisitions Khazanah’s offer of SGD3.IDFC Securities FHL’s global plans.643 28. which invests in healthcare and related real estate assets.95 in response to FHL’s raised offer.4% stake to Khazanah at USD840m (our estimates) as against a purchase price of USD760m (our estimates). …FHL’s withdrawal… At that stage.079 3.307 228 3.
IDFC Securities …a positive move Exit from Parkway underscores the company’s uncompromising focus on financial discipline We take a lot of comfort from FHL mangement’s decision to withdraw from the Parkway deal as it undelines its adherence to financial discipline even while pursuing an aggressive inorganic growth strategy. Fortis Healthcare However. QHA recorded consolidated revenues and EBITDA of US$131m and US$13. allowing Fortis Healthcare in India to continue to focus on the tremendous growth in the Indian hospital business. over 500 affiliated clinics. As part of this strategy to expand its reach and strengthen the feeder network. QHA is the largest private integrated healthcare service platform in Hong Kong. we believe incremental growth strategy will involve creating COEs in Eastern and Central regions while further strengthening the feeder hospital network across other regioss to strengthen the hub & spoke.000 nurses. and a private nursing agency with a database of over 3. Having established its presence in parts barring East and Central India. we do not rule out the possibility of FHL and healthcare business acquired through promoter entities exploring some sort of synergies at a later stage in time. “Fortis Global Healthcare will be our vehicle of growth for international healthcare businesses outside India. FHL plans to set up low-cost secondary/ tertiary care facilities in Tier-2 cities. The exhibit below shows FHL’s targeted bed capacity and pan-india presence by FY13. Malvinder Singh. providing medical services and allied health services. FHL will continue to hone core strengths. Fortis Healthcare Global (a promoter company) recently bought a Hong Kong based primary clinics chain Healthcare Asia Limited (QHA) for US$193m. over 40 dental and physiotherapy centers.” – Mr. Plan to build low-cost tertiary care units in tier I/ II metros NOVEMBER 2010 102 . Hub & spoke – the mainstay of expansion strategy East and central India to be brought within the ambit of Fortis’ growth plans FHL is using the hub & spoke model to reinforce its presence in existing regions as well as enter new geographies. global forays will be executed at promoter level Recently. It has already set up pilot projects in several cites to guage the market and build active feeder networks for its super-speciality “COE” facilities at the hubs (metros). In our view.1m respectively. It allays fears of managerial hubris prevailing over business economics and aggressive aspirations Focus reorienting towards the domestic market The management recently indicated that FHL would focus only on the domestic market while the promoters’ plans to expand globally would be executed via their own private companies. FHL seeks to establish super speciality “centre of excellence (COE)” facilities in key cities in a region (“hub for the region”) and then build a series of feeder hospitals across the region to feed these high-end hospitals. For the financial year ending 2009. The acquired businesses comprise a network of over 60 wholly-owned medical centers. this delineation of growth strategies will help sharpen the growth focus in FHL and also reduce the complexities associated with the limited disclosures. As part of the strategy. etc available on foreign acquisitions.
renal care.241 777 68 710 67 2. Company No.801 273 1. mother & child care and gastroenterology Secondary / Tertiary Quaternary Quaternary Gurgaon. Mohali Fortis Hospital. New Delhi Fortis Jessa Ram Hospital. New Delhi^ NCR NCR Secondary 150 550 Territory Punjab NCR NCR NCR Punjab NCR NCR Care Quaternary Quaternary Quaternary Secondary Total capacity 300 350 331 250 166 45 200 Focus area Cardiac Orthopedics. enhanced delivery capabilities and driven up in-patient volumes in the region through successful execution of its hub & spoke model and using a mix of organic and inorganic route. Exhibit 13: Dominating presence in North India Hospital Fortis Hospital. in our view. cosmetology.144 481 7. Neurosciences. neuro-sciences and renal care Ludhiana 1. Punjab^ Escorts Kalyani Hospital.739 1. FHL established a network of super-speciality ’centers of excellence‘ and multi-speciality hospitals by acquiring EHIRCL as well as through its own greenfield hospitals like Mohali. This. renal care. mother & child care. ^under progress NOVEMBER 2010 103 . Ghaziabad* GNRC. Lt. Gurgaon* Yashoda Hospital.IDFC Securities Exhibit 12: Expected pan-India presence by FY13 Particulars North India Western India Central India South India Eastern India Total . trauma. Guwahati* Punjab Punjab NCR UP NCR Tertiary Quaternary Secondary Secondary Secondary 200 75 18 5 4 3.000 Oncology.644 Total Source: IDFC Securities Research. joint replacement. Noida EHIRC . Faridabad* Fortis Escorts Hospital. Haryana^ .India Overseas Source: IDFC Securities Research. orthopedics. GK . More than 50% of EHIRCL’s in-patient volumes are from geographies beyond NCR and Delhi. vindicates the credibiltiy of FHL’s hub & spoke model. Oncology Cardiac Multi-speciality hospital Multi-speciality hospital Healthcare needs of women Cardiac.Delhi* Fortis Escorts Hospital. Rajan Dhall Hospital. Vasant Kunj.863 110 Capacity / Total Beds 3. gastroenterology. pulmono-thoracic surgery and diabetec care Oncology Cardiac sciences.FIIBMS NCR 1. New Delhi Shalimar Bagh. Punjab^ Ludhiana 2. New Delhi Fortis Flt. Amritsar * Fortis La Femme. of Hospitals 20 9 6 7 3 45 2 Operational Beds 1. neurosciences. pediatrics.II. * satellite centre.438 120 Success of EHIRCL vindicates the efficacy of the hub & spoke model Northern India: FHL has reinforced its brand equity.
FHL is also setting up a 200-bed tertiary care hospital in Ahmedabad. FHL now has six hospitals and 532 operational beds in Bengaluru.IDFC Securities South India: FHL established its presence in South India by acquiring a stake in Malar Hospital. FHL then acquired a majority stake in RM Hospital. *erstwhile Wockhardt Ambitious plans to expand installed capacity in Mumbai will further strengthen western India presence Western India: FHL has four hospitals in Mumbai. Through this new facility. Kolkata and has recently commisioned another 414-bed tertiary care facility in Anandpur. FHL is also setting up a 120-bed tertiary care facility in Yeshwantpur. Company. FHL aims to attract patients from the eastern states as well as neighbouring countries like Banglandesh and Burma. Its has two hospitals in Rajasthan. The company only has a 44-bed tertiary care facility at Rashbehari Road. Fortis Modi Hospital in Kota and Fortis Hospital in Jaipur. which will be its first unit in Gujarat. Nagpur* Territory Rajasthan Mumbai Mumbai Mumbai Gujarat Rajasthan Maharashtra Care Secondary Tertiary Tertiary Quaternary Tertiary Secondary Secondary Secondary / Tertiary Total capacity 200 280 60 567 200 11 15 148 Hiranandani Hospital. Mumbai Mulund. Chennai Fortis Hospital* BG Road* Cunningham Road* Chord Road * Nagarbhavi* Acquisition-led expansion in South India Territory Tamil Nadu Bengaluru Bengaluru Bengaluru Bengaluru Bengaluru Care Secondary / Tertiary Secondary / Tertiary Quaternary Tertiary Tertiary Tertiary Tertiary Total capacity 250 100 451 128 40 55 120 Yeshwantpura Bengaluru Source: IDFC Securities Research. The group plans to have a total installed capacity of 1. FHL has adopted a diffrentiated asset-light strategy built around the following: Overcoming land/ building costs: Prohibitive land and building costs have driven FHL to embrace the lease model over the traditional practice of owning property. Company. The Kota hospital’s strategic location enables it to attract patients from Madhya Pradesh and Gujarat as well. Exhibit 14: Steadily gaining ground in South India Hospital Fortis Malar Hospital. Bengaluru. a multi-specialty hospital located in central Bengaluru. This was followed by the acquisition of Wockhardt in 2009. An asset-light strategy provides enough leeway for growth The hospital industry is inherently capital intensive. NOVEMBER 2010 104 . which cemented FHL’s position in South India. Acknowledging this. Chennai in 2008. Two of these were part of the Wockhardt transaction. Kota S L Raheja Hospital Kalyan. Vashi Mumbai Source: IDFC Securities Research.055 beds in Mumbai by FY13. The following exhibit shows that 60% of FHL’s incremental hosptial properties (36% of beds) are leased. *Satellite Centers A 414-bed tertiary care facility to cater to patients from the eastern states and also neighboring countries Eastern and central India: This region has so far remained out of focus for Fortis. Exhibit 15: Increasing foothold in the western region Hospital Fortis Modi Hospital. Mumbai Ahmedabad Goyal Heart Institute. Jodhpur* Arneja Heart Institute.
This strategy should free up capital to support the group’s aggressive expansion plans.Mr. Company. several of its network hospitals have active tie-ups with Super Religare Laboratories (SRL) to manage diagonostic and radiology services. which often implies hefty remunerations. FHL is employing a combination of owned. By adopting the aforementioned asset-light strategies. "…the MRI machine that is being used at our hospitals should be the most modern. ownership Owned Owned Owned Owned Bldg. leased and outsourced models to provide modern technology while retaining its asset-light model. we don't need to be trail blazers.IDFC Securities Exhibit 16: Fortis adopting asset light strategies to reduce land and building costs Date of Location Mulund Kolkata* Shalimar Bagh* Gurgaon Kangra Ludhiana-1 Peenya Ahmedabad Ludhiana-2 No. Fortis Healthcare Has ‘fee for service’ arrangement with reputed doctors to rationalize costs while ensuring quality Resources: ‘Availabilty of renowned doctors’ is among the key criteria FHL looks at while assesing potential acquistions. wherein a certain portion (55-60%) of the compensation is fixed and the remaining is variable and marked to performance. Lease Bldg. FHL has adopted a ‘fee for service model’ for its key doctors. Lease Bldg. *commissioned in Q2FY11 This is quite a variation from the usual practice of owning assets – an essential element of strategy with peers like Apollo. FHL strives to minimize its upfront capex spend – especially on projects – going forward. To keep fixed costs low." -. Daljit Singh. Lease Land lease Commencement Q2FY11 Q2FY11 Q2FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q4FY12 Gwalior Q2FY13 Source: IDFC Securities Research. which also helps attract reputed doctors and medical tourists. FHL has adopted innovative operating strucutres to ensure that it stays at updated on the technology front while sustaining its asset-light model. but we do need to be sufficiently modern and contemporary. of beds 344 414 350 450 100 200 120 200 100 150 Land & Bldg. Several facilities have partners to manage diagnostic and radiology services Technology – contemporary. We may not need cutting-edge or innovative technology. FHL is also reportedly in talks with several international medical equipment majors like GE and Siemens to implement ‘pay-per-use’ and ‘leasing’ models at its network hospitals. yet cost efficient: FHL uses some of the most advanced technologies to provide best-in-class healthcare facilities. Lease Bldg. NOVEMBER 2010 105 . FHL believes in bringing reputed doctors on board while starting new operations. FHL has sucessfuly managed to keep fixed costs low while linking variable compensation to topline growth. With innovative methods like these. Importantly. For example. Lease Bldg.
With this focus. The project also seeks to centralize shared services and provide analytical capabilities to identify and replicate best practices among the network hospitals. Project JOSH: FHL has implemented project JOSH to simplify and standardize nursing to improve patient outcomes. Fortis has not only steadily improved operating metrics of its standalone greenfield/ acquired facilites but also managed to seamlessly integrate the myriad facilites across the Fortis network. “It's always a challenge if your aspirations are to grow very fast. in general. FHL’s ability to effectively standardize processes and quality will be the key to its success. We need to train people to be able to cater to the requirements of patients and to the standards of the hospital. an initiative in collabration with HCL. We have a program called FIELDS (Fortis Institute of Enhanced Leadership Development). The company has undertaken initiatives such as FOS (Fortis Opertating System). etc. quality of patient care and enhance efficiency. which provides internal training. Project NEXT and JOSH to standardize processes across the network and drive operational efficiencies. standardization of processes and quality has been a priority at FHL. The challenges were compounded by the fact that more than 50% of FHL’s current operational capacity has been acquired/ under O&M contracts with varying standards/ processes. In this backdrop. been weak on institutionalizing processes. NOVEMBER 2010 106 . so we are looking at creating this capability ourselves. is aimed at standardizing processes to facilitate consisent delivery of high quality services. FHL expects to complete the project by Q2FY12.Daljit Singh. The healthcare industry in India has. Fortis Healthcare Initiatives like NEXT and JOSH ensure best practices across hospitals and improve clinical outcomes Project NEXT: Project NEXT.IDFC Securities Standardizing quality across the network Driving operational efficiencies and consistent quality across the network are key to success Rapid scale-up at FHL over the past few years makes it a challenge for the company to efficiently manage this growth by putting in place the requisite systems and processes. In realization. We cannot get people with common standards readymade.” – Mr.
126 772 799 628 775 174 133 277 4.131 1.221 495 5.7% by FY13 PAT expected to grow 5x to Rs3.872 FY11E 2.330 832 1.IDFC Securities FINANCIAL ANALYSIS We expect 41% CAGR in FHL’s consolidated revenues over FY10-13 with 50% of consolidated revenues from new beds by FY13 Aggressive bed additions to lead to margin compression.556 1. Exhibit 17: New beds to contribute 50% of consolidated revenues by FY13 (Rs m) Fortis Mohali Fortis Noida Escorts Delhi Escorts Faridabad Esc Jaipur Escorts Amritsar Fortis Malar Mulund Extension Fortis Kolkata Fortis Kangra Fortis Ludhiana-1 Fortis Peenya Fortis Ahmedabad Fortis Ludhiana-2 Fortis Gwalior Fortis Shalimar Bagh Fortis Gurgaon Wockhardt acquired Total revenues Source: IDFC Securities Research FY08 1.085 9.520 1.079 2.355 21.589 FY10 1.8bn by FY13.026 1. we estimate EBITDA margin to decline by 161bp to 17.7bn) each to consolidated sales by FY13.718 512 169 259 181 5.038 1.813 FY12E 2.955 3.945 992 6.963 NOVEMBER 2010 107 .574 956 2.184 2.423 197 441 194 294 321 100 1.436 27.158 FY13E 3.821 740 637 501 644 12 1.190 4.3% respectively on high margins and a rise in asset turnover ratio Expect 41% revenue CAGR over FY10-13 Matured and new beds to contribute equally to consolidated revenue by FY13E FHL’s consolidated revenues recorded 23% CAGR over FY07-10.248 807 1. we expect matured and new beds to contribute 50% (Rs13. We estimate 18% revenue CAGR from matured beds over FY10-13 on the back of a steady improvement in occupancy rates and 2-3% qoq increase in ARPOB.081 594 382 412 324 6.109 14.583 3. The robust consolidated growth would be driven by incremental contribution from new bed additions (FY11 onwards) and sustained topline growth at matured beds.293 1. Overall.480 FY09 1. which we expect to accelerate to 41% CAGR over FY10-13 with 37% CAGR in network revenues. interest income to account for ~56% of consolidated PBT over FY11-13E We expect FHL’s RoE and RoCE to expand by 477bp and 540bp to 9.719 1.5% and 8.833 910 969 717 878 784 783 106 166 39 1. led by strong topline growth and investment yields from accumulated cash accruals.
we expect EBITDA margin to decline by 161bp to 17.482 FY12E 24.343 0 - FY11E 17.IDFC Securities Exhibit 18: Consolidated revenues expected to register 41% CAGR over FY10-13 (Rs m) 30.862 4. we expect 37% CAGR in consolidated EBITDA over FY10-13 to Rs4. We expect new beds to register 164% CAGR in revenues over FY10-13 on the back of a 70% increase in bed capacity (by 2. Company FY10 12.500 0 2008 2009 2010 2011 2012 2013 Source: IDFC Securities Research Expect new beds to clock 164% revenue CAGR over FY10-13 We consider Wockhardt beds (acquired in Q4FY10) and new beds added by Fortis from FY11 as total ‘new bed addtions’.817 8.075 to 5.000 7.259 27.7% by FY13 due to the impact of aggressive bed additions over the next three years.500 15.000 22. We estimate 16% CAGR in FHL’s O&M revenues with 16% contribution to consolidated revenues in FY13. Despite lower margins.410 9.740 3.948 4.793 20.028 FY13E 32.343 9. However.926 11.9bn in FY10.914 14.9bn led by strong topline growth. NOVEMBER 2010 108 . Exhibit 18: Strong revenue growth on back of contribution from new beds Particulars (Rs m) Network revenues Consolidated revenues From matured cluster From new beds Contribution from O&M contracts Source: IDFC Securities Research.681 13.731 13.646 9.717 Margins to slip in the interim Aggressive bed additions to suppress EBITDA margins until FY13E FHL’ s consolidated EBITDA margin has expanded by 760bp over FY07-10 to 19.3% with absolute EBITDA growing 3x to Rs1.048) even as we factor in conservative occupancy rates and ARPOB on the incremental capacity.766 4.
with the impact of contracting margins getting offset by investment yeilds from accumulated cash accruals. vs 2-3 years for most tertiary care units Conventional tertiary care facilities typically achieve EBITDA breakeven by the second or third year of operations.0 12. Over FY11-13.000) FY07 FY08 FY09 FY10 FY11E FY12E FY13E Source: IDFC Securities Research.8bn.000 3.5 10.IDFC Securities Exhibit 19: FHL’s OPM to contract by 161bp over FY10-13E (%) 20.000 1.5-15% EBITDA margins in the first two quarters of operations and improve steadily thereon. Our estimates factor in FHL’s matured cluster to witness 50-100bp margin expansion every year driven by improved operational parameters and higher pricing.000 - (1. Company FHL’s new hospitals to achieve EBITDA breakeven in 7-8 quarters.000 2. We factor in new tertiary/ quarternary hospitals to operate at negative 7. Expect PAT to grow 5x over FY10-13E Investment gains should offset the impact of margin contraction.8bn in FY13. helping strong earnings growth We expect FHL’s consolidated net profit to grow 5x to Rs3. Exhibit 20: Net profit to register 75% CAGR over FY10-13E (Rs m) 4. Company NOVEMBER 2010 109 .5 15. We expect 37% CAGR in EBITDA owing to strong top-line growth. we expect FHL’s consolidated net profit to clock 75% CAGR over FY10-13 to Rs3. we estimate interest income to account for ~56% of FHL’s consolidated PBT.0 Operating margins 17. we have assumed that FHL’s newer hospitals would achieve EBITDA-neutral status by the seventh or eighth quarter of launching operations because of the asset-light business model.0 FY07 FY08 FY09 FY10 FY11E FY12E FY13E Source: IDFC Securities Research. Overall. However.
We expect FHL’s FATR ratio to increase to ~1.215 37.956 62.379 14.5 6.7 FY13E 3.5 1.5% and 8.5 -6.0 23.379 14.7 220.185 151.8) 5.0 -12.76x in FY10.6x by FY13.880 13. driven by sharp potential improvement in asset turnover ratio (FATR) and net profit margin.0 9.8 6.813 21.562 16.6%.305 34.071 (11.158 27.305 2.0 PAT/Sales (%) Sales Assets Sales/Assets (%) Assets Equity Assets/Equity (%) RoE (%) 0.IDFC Securities Return ratios to expand by > 450bp.403 9.963 20.071 33.956 62.068 46. overall return ratios will continue to be lower than for peers like Apollo in the near term due to the impact of FHL’s large ticket acquisitions as well as massive planned expansion over the next few years.0 116.0 14.771 13.202 47.639 46. Company NOVEMBER 2010 110 .609 9.960 18.4 60.158 27.5 9.61x in FY08 to 0.202 47.068 46.609 14. IDFC Securities Research RoE .960 18. low compared to peers Big-ticket acquisitions and massive expansion plans to damp return ratios We expect FHL’s RoE and RoCE to expand by 478bp and 540bp to 9.Asian Peers (FY10) Ramsay Primary Healthscope Fortis Health Care Health Care Healthcare Apollo Hospitals Enterprise Raffles Medical Parkway Holdings Thomson Medical Centre Kpj Healthcare Berhad Exhibit 22: RoE to expand by 478bp over FY10-13E (%) 12.0 6.963 9.813 21.0 RoCE RoE Du Pont analysis (Rs m) PAT Sales FY08 (601) 5.920 28.639 46. FHL’s persistent focus on sweating assets has resulted in FATR improving from 0.5 128.5 2.2 1.3 277.8 44.3% respectively.5 4.6 7. Exhibit 21: FHL has among the lowest return ratios in comparison to Asian peers (%) 25 20 15 10 5 0 Bangkok Bumrungrad Bangkok Dusit Med Hospital Chain Service Hospital Source: Bloomberg. However.031 40. Also. robust revenue growth and strong other income would lead to 660bp improvement in net profit margin over FY10-13 to 13.9 FY10 FY11E FY12E 700 7.470 11.4 (7.2) 133.9 FY09 178 6.0 FY08 FY09 FY10 FY11E FY12E FY13E Source: IDFC Securities Research.
9x in FY10 to 0.2bn over the same duration).00 0. This will arguably be one of the most aggressive bed rollouts in the Indian hospital industry.000 0 (10.000 30.LHS) 50. Inorganic growth – operational integration challenges Margin decline at Wockhardt post acquisition is a cause for concern FHL’s growth trajectory has amply illustrated the management’s appetite for inorganic growth. we believe ability to sustain this performance over the next 6-8 quarters will be critical as ~2.000) FY09 FY10 FY11E FY12E FY13E Net gearing (x .00 2.IDFC Securities Improving balance sheet health Proceeds from the Parkway exit and strong internal cash will help reduce gearing Strong internal accruals. Assuming organic growth to be largely in line with ongoing plans and no major inorganic growth initiatives in the near term. given that most of FHL’s recent growth has been through the inorganic route. Fortis has not quite delivered in line with expectations related to Wockhardt Hospitals – its largest acquisition till date.28x in FY11E. Wockhardt NOVEMBER 2010 111 .5bn over FY11-13 (after factoring in a capex of Rs5.RHS) 3. and an efficient working capital cycle should strengthen FHL’s balance sheet.00 1. Fortis has sucessfuly integrated assets it acquired in the past.00 Source: IDFC Securities Research Key risks Limited track record of successfully running greenfield hospitals Ability to execute and manage ambitious organic capacity addition is the main concern While FHL has shown commendable improvement in operating parameters over the last few quarters. Exhibit 23: FHL’s balance sheet to grow stronger with Rs13bn of net cash by FY13 Net debt (Rs m .50 1. Overall. Also. which will reduce gearing from 2.000 greenfield beds become operational over the next three years.000 10. there has been limited evidence on FHL’s ability to manage such elevated levels of organic growth. Therefore.000 40.50 3.50 0. FHL’s ability to successfully implement its mega organic bed rollout over the next three years will be a key monitorable and remains a key risk going forward.50 2. we expect FHL’s consolidated gearing to drop to 0. Prior to the acquisition. FHL has indicated that it would utilize the Parkway proceeds to repay debt. proceeds from the Parkway exit.000) (20.000 20. Having said so. we believe the confluence of growing scale and steady improvement in operating metrics should allow FHL to generate cumulative free cash flows of ~Rs5.1x with net cash of Rs13bn by FY13. as demonstrated by the seamless integration of Escorts Delhi and Fortis Malar.
The litigations include: (i) EHIRCL’s right on leasehold on the land on which EHIRCL’s Delhi hospital is currently located.000 MBBS doctors on an average each year. Given the complex nature of heatlhcare business. An adverse court judgement on EHIRCL. Though we believe a part of the margin decline could be due to accounting changes. NOVEMBER 2010 112 . we see that as a key operational and financial risk (higher employee costs) for the company. in our view. getting MDs for super-speciality units would be a challenge. and (iii) income tax exemptions claimed by EHIRCL’s predecessors. with aggressive expansion plans in place. which require highly skilled human resources (MBBS and MD doctors). but the number of MDs (super-specialists) is far lower. Given the nature of FHL’s service offerings. However. However. Mumbai. (i) an ongoing litigation of EHIRCL with Delhi Development Authority (DDA) pertaining to a leasehold arrangement with the latter. A strong brand equity has enabled FHL to attract good doctors. FHL could be spreading its resources too thin across newer facilities and which may impact quality. is beset by several litigations. we will monitor FHL’s operational integration capabilities – specifically for acquired assets. FOS.IDFC Securities Hospitals enjoyed an EBITDA margin of 18%. we see integration of assets. FHL’s management remains confident of the litiagtion being resolved in its favour. Uncertain outcome of pending litigations and contingent liabilites Management remains confident that litigations will be resolved favorably FHL’s 89. but has not provisioned for the same. Risk of spreading resources too thin. Inititives like FIELD. FHL has indicated contingent liabilites of Rs982m pertaining to income tax litigations with EHIRCL. FHL has expanded capacity at a rapid pace while managing to ensure quality delivery standards. Resource availability poses operational and financial risk Getting MDs for super-specialty hospitals continues to be a challenge India produces 35. some of them even questioning the validity of the acquisition. we would continue to monitor the situation. (ii) provisioning of free treatment to indigent patients at EHIRCL Delhi. and (ii) the IT department’s claims of Rs1. This was in contrast to FHL mangement’s guidance of an expansion in margins (18%+) from Q1FY11 even after factoring in planned capacity expansion at its hospital in Mulund. Project NEXT and Project JOSH provide comfort and even as we believe in the management’s ability to deliver on scale and superior execution skills. Proceedings of several of these litigations are at various stages and outcome is yet uncertain. However. FHL’s auditors have expressed their inability to comment on. We expect Wockhardt’s operating margin to steadily expand from 15% currently to 17.9% subsidary. The management attributes the drop to a change in accounting policy which demanded higher provisioning for debt and allowances for deductions. would significantly impact FHL’s financials and also lead to potential loss of the entire fixed asset investment at EHIRCL Delhi. FHL’s hospital network includes several multispeciality and super-speciality centers. post the management change at Wockhardt. Escorts Heart Institute and Research Centre (EHIRCL).5% by FY13. standardization issues Over the past few years. EBITDA margin dropped to 15% in Q1FY11 and 12% in Q2FY11.2bn. processes and resources as a key operational risk.
we expect Fortis to create significant value for stakeholders Indian hospitals. Fortis has carved out a niche for itself and entered the top-3 club in the industry With an aggressive management willing to explore uncharted areas in the industry. the company’s limited execution track record in setting up and scaling up Greenfield facilities remains a risk – especially given its aggressive bed rollout plans over the next few three years. FHL’s bed under operations and revenues and have grown ~2x (to 2. As Indian players are in their early growth phase in a market offering tremendous potential available as compared to the relatively limited growth opportunities for players in developed markets. Indian players should command growth premium over global peers Leading Indian players including Fortis offer better earnings growth than their global peers Given the capital-intensive nature of the business and long gestation periods (steady margins attained only by fourth or fifth year of operations). implying 15x FY13 EV/EBITDA. Further. most of these players are in an aggressive growth phase – leading to regular upscaling of medium-term growth plans. EU. in recognition of its growth possibilities as well as leadership position in the domestic healthcare space Fortis Healthcare – youngest and among the brightest… FHL doubled capacity and trebled EBITDA in the last three years by constantly pushing conventional norms Backed by well-funded promoters with the willingness and ability to unlock the hitherto untapped potential in the Indian healthcare space through unconventional models. is commendable. etc) trade 8-9x one-year forward EV/EBITDA.311beds) and 23% CAGR respectively while EBITDA has grown 3x over this period. Fortis has leapfrogged into the big league of Indian healthcare space within 10 years of existence. as demonstrated in its decision to hire a CEO from a non-healthcare background and intent to explore newer models of delivering healthcare as well as unlocking value for shareholders. NOVEMBER 2010 113 . Over the last three years. In contrast. The management’s willingness to push the envelope on traditional strategic thinking. particularly leaders like Apollo and Fortis. Fortis is one of the companies to watch out for among private hospital care providers in India. Propelled by its big-ticket acquisitions of Escorts Delhi. we prefer to value Indian private hospital operators on EV/EBITDA rather than based on DCF and PE multiples .IDFC Securities VALUATIONS & VIEW Despite being one of the youngest hospital chains in the industry. Hospital operators in developed economies (USA. reflecting an average 8% EBITDA CAGR over the next two years. we expect EBITDA for leading Indian players like Apollo and Fortis to register a significantly higher CAGR of 26% an 34% respectively over FY1012. However. which have the potential to dramatically alter the business profile in the later years. deserve to trade at a premium to global peers in view of their future growth potential We value FHL at Rs206/share. we believe Indian hospital players should trade at a significant premium (14-15x one-year forward EBITDA) to global peers.
IDFC Securities Exhibit 24: Global peer valuation matrix
(US$ m) Company
US Universal Health Services-B Health Mgmt Associates Inc-A Community Health Systems Inc Lifepoint Hospitals Inc Tenet Healthcare Corp Thailand Bangkok Dusit Med Service Bumrungrad Hospital Pub Co Bangkok Chain Hospital PCL Australia Ramsay Health Care Primary Health Care India Fortis Healthcare * Apollo Hospitals Enterprise * Singapore Raffles Medical Group Thomson Medical Centre Malaysia Kpj Healthcare Berhad 20.5 15.6 14.1 Source: Bloomberg, IDFC Securities Research; Note: * for years FY10, FY11, FY12 14.5 11.0 10.3 18.3 17.3 17.5 12.4 12.7 12.0 37.0 45.9 28.6 33.2 24.5 29.6 25.7 33.4 20.0 22.3 16.9 20.4 16.1 11.6 16.4 13.1 17.3 12.7 23.9 24.9 24.1 27.5 25.2 26.9 94.3 45.7 38.1 33.7 26.0 30.4 56.4 23.0 24.7 17.0 16.3 15.3 4.7 8.7 6.6 10.7 7.0 11.0 19.3 14.8 16.1 16.5 16.2 16.5 26.1 12.8 17.2 11.1 15.1 10.0 11.3 8.4 8.4 6.8 7.7 6.3 18.1 5.8 15.3 5.6 16.0 6.1 13.3 24.9 13.8 25.6 13.9 26.3 32.1 22.9 18.2 22.9 20.8 16.8 19.3 18.2 14.6 13.4 15.0 10.3 9.9 11.3 8.8 8.8 10.1 7.8 13.0 24.1 24.6 14.3 21.7 20.9 15.4 22.5 21.9 22.4 21.9 27.9 24.1 23.4 29.6 24.8 24.0 32.7 15.8 15.5 12.1 13.0 12.2 16.5 13.5 10.9 11.6 12.5 13.5 12.0 10.0 10.7 15.1 7.0 7.2 7.2 6.3 6.4 7.1 6.7 6.7 6.4 6.4 5.6 6.2 6.4 6.0 5.7 15.8 36.1 13.7 7.7 87.2 13.3 34.5 13.4 8.3 32.5 13.9 27.8 13.0 8.2 15.8 13.9 14.9 13.5 16.6 10.9 13.2 14.3 13.6 15.5 10.6 14.1 14.2 13.2 15.3 11.5
PE (x) CY09 CY10 CY11
EV/EBITDA (x) CY09 CY10
CY11 CY09 CY10 CY11 CY09 CY10 CY11
Initiating coverage with a 18-month price target of Rs206/share
Fortis will continue to dominate Indian healthcare scene for the long term
Leading private healthcare service providers like Fortis and Apollo, we believe, deserve to command significant valuation premium to peers as well as the broader Indian market as they are the only relevant proxies to the rapidly growing and highly attractive domestic healthcare industry (US$125bn by 2015E). Further, we strongly believe that with 5,000+ beds operational by 2013E, Fortis will continue to be among the top 2-3 players in the domestic market for years (and even potentially decades) as entry barriers keep rising. The economic benefits of this enviable leadership position will be visible in the years to come. We initiate coverage on FHL with Outperformer and an 18-month price target of Rs206/share (valuing it at 15x FY13 EV/EBITDA; in line with our target multiple for leading Indian healthcare providers). Our target price implies an upside of 28% from current levels. Ability to accelerate margin improvement in existing hospitals as well as a faster than anticipated pick-up in newer hospitals are key upside triggers on the target price. Exhibit 25: Valuing FHL at Rs206/share
Particulars (Rs m)
Assumed EV/EBITDA EBITDA Enterprise value Debt Cash Market Cap Fair value % upside Source: IDFC Securities Research
We value the stock at 15 FY13E EV/ EBITDA, which implies 28% potential returns from current levels
15 4,949 74,229 7,733 22,500 88,996 206 28
Fortis – organizational structure
Fortis Healthcare Ltd (FHL) Owned hospitals: Fortis Hospital – Mohali O&M contracts: Jessa Ram Hospital, Fortis Modi Hospital Other facilities: 2 satellite and heart command centers
Sunrise Medicare Private Ltd Associate hospital and O&M contract: Fortis La Femme
Hiranandani Healthcare Private Ltd (HHPL) Associate Hospital: Hiranandani Hospital Vashi
Escorts Heart Institute & Research Center Ltd (EHIRCL) Owned hospital: Escorts Hospital – Delhi Collaboration with Government of Chattisgarh: Fortis Escorts Hospital – Raipur Other facilities: 3 satellite and heart command centers
Fortis Hospotel Ltd (formerly, Oscar Bio-Tech Private Ltd) (EHTL) O&M contract: Fortis Flt. Lt. Rajan Dhall Hospital Projects under development: Fortis Shalimar Bagh Gurgaon hospital
International Hospital Ltd (IHL) Owned hospital: Fortis Hospital - Noida
Escorts Heart nad Super Speciality Institute Ltd (EHSSIL) Owned hospital: Fortis Escorts Hospital - Amritsar
Escorts Heart Center Ltd (EHCL) Other facilities: 7 satellite and heart command centers
Fortis Health Management Ltd (EHML)
Fortis Healthcare International Ltd (FHIL)
Fortis Hospital Management Ltd (FHoML)
Escorts Heart and Super Speciality Hospital Ltd (EHSSHL) Owned hospital: Fortis Escorts Hospital - Jaipur
Escorts Hospital and Research Center Ltd (EHRCL) Owned hospital: Fortis Escorts Hospital - Faridabad
Malar Hospitals Ltd (MHL) Associate hospital: Fortis Malar Hospital
Lalitha Healthcare Private Ltd (LHPL) Owned hospital and O&M contract: Fortis Hospital Seshadripuram
Medical and Surgical Centre Ltd (MSCL) Associated hospital and O&M contract: Fortis Clinique Darne
IDFC Securities Income statement
Year to Dec 31 (Rs m)
Net sales % growth Operating expenses EBITDA % growth Other income Net interest Depreciation Pre-tax profit Deferred Tax Current Tax Profit after tax Minorities Non-recurring items Net profit after non-recurring items % growth
6,589 20.3 5,447 1,142 85.1 (437) 505 213 35 6 172 216 63 208 (137.5)
FY10 FY11E FY12E
9,872 49.8 7,966 1,906 66.8 (573) 616 749 (120) 153 716 345 (0) 695 233.5 14,914 51.1 12,509 2,405 26.2 1,120 (752) 811 2,006 266 1,740 364 180 1,901 173.6 21,156 41.9 17,730 3,426 42.5 1,260 (619) 1,006 3,132 582 2,551 395 2,520 32.6
27,961 32.2 23,013 4,949 44.4 1,190 (334) 1,136 4,743 887 3,856 442 3,809 51.1
Year to Dec 31 (Rs m)
EBITDA margin (%) EBIT margin (%) PAT margin (%) RoE (%) RoCE (%)
17.3 9.7 2.2 1.3 4.1
FY10 FY11E FY12E
19.3 13.1 7.0 4.7 2.9 16.1 10.7 11.5 6.6 2.7 16.2 11.4 11.9 7.0 5.4
17.7 13.6 13.6 9.5 8.3
Year to Dec 31 (Rs m)
Reported EPS (Rs) Adj. EPS (Rs) PER (x) Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/CE (x)
0.5 0.4 451.8 6.0 10.6 61.3 4.5
FY10 FY11E FY12E
1.7 1.7 94.3 3.5 10.9 56.4 1.5 4.7 4.2 38.1 1.9 4.0 24.7 1.4 6.2 6.2 26.0 1.7 2.6 16.3 1.2
9.4 9.4 17.3 1.6 1.9 10.7 1.2
Shareholding pattern Balance sheet
Year to Dec 31 (Rs m)
Paid-up capital Reserves & surplus Total shareholders' equity Total current liabilities Total Debt Deferred tax liabilities Total liabilities Total equity & liabilities Net fixed assets Investments Total current assets Deferred tax assets Other non-current assets Working capital Total assets
2,387 10,799 10,917 2,462 4,790 12 7,265 18,181 10,045 541 3,635 3,961 1,173 18,181
FY10 FY11E FY12E
3,217 17,438 18,550 3,693 54,706 3 58,402 76,952 16,649 34,485 17,069 124 8,626 13,376 76,953 4,050 31,881 33,846 5,873 9,400 3 15,276 49,122 17,582 500 22,290 124 8,626 16,417 49,122 4,050 34,401 38,181 8,331 7,733 3 16,067 54,248 18,076 500 26,923 124 8,626 18,592 54,248
4,050 38,210 42,037 11,010 3,931 3 14,945 56,982 18,940 500 28,793 124 8,626 17,783 56,982
Public & others 7.8%
Institutions 2.7% Non-promoter corporate holding 2.1%
As of September 2010
Cash flow statement
Year to Dec 31 (Rs m)
Pre-tax profit Depreciation Chg in Working capital Total tax paid Ext ord. Items & others Operating cash Inflow Capital expenditure Free cash flow (a+b) Chg in investments Debt raised/(repaid) Capital raised/(repaid) Dividend (incl. tax) Misc Net chg in cash
213 505 684 (6) 63 1,459
FY10 FY11E FY12E
749 616 331 (153) (0) 1,543 2,006 811 (155) (266) 180 2,576 (1,744) 832 33,984 13,376 2,887 3,132 1,006 (175) (582) 3,382 (1,500) 1,882 71 1,714 2,000
4,743 1,136 (190) (887) 4,802 (2,000) 2,802 (0) (3,802) (1,000)
(1,050) (11,886) 410 (10,344) (222) (34,632) 1,035 (778) (26) 419 7,485 108 12,534
49,916 (45,306) (1,667)
CARE treats several patients under state insurance scheme at subsidized rates (upto 35%). B.3bn respectively in FY09. it is that a ‘good conscience’ can actually translate into ‘good businesses.IDFC Securities CARE Hospitals NOT LISTED Care Hospitals is a multi-specialty hospital chain started by cardiologists Dr. N Krishna Reddy in 1997. Somaraju Model: CARE has restricted capital cost per bed to Rs2.5m to keep costs low and provide affordable care. QCIL’s revenues grew at a CAGR of 35% over FY06-09. Motivation: CARE philosophy is to provide quality healthcare services at affordable prices. Expansion plans: CARE has more than 1500 beds across 11 hospitals and plans to double bed count over next few years.4m and Rs 3. CARE has 11 hospitals but it owns land and building of only one hospital in Nampally. “If there is one thing that we have demonstrated over the last decade at CARE. Hyderabad. Hyderabad Musheerabad. The balance 45% lies with doctors (20%) and other smaller corporates (25%). CARE’s mature hospitals have operating margins of more than 20%. Quality Care India Ltd (QCIL) is the holding company of Hyderabad-based CARE group. B Soma Raju and Dr. of beds 430 200 100 33 140 100 105 100 110 110 1. Hyderabad Secundarabad. Financial investors like Matrix Group. CARE’s hospitals are largely built on leased land and buildings to reduce upfront capital costs.” – Dr.428 Banjara. Hyderabad Nampally. Ashmore Investments and Rakesh Jhunjhunwala together own 55% stake in CARE. Hyderabad Vizag Vijaywada Nagpur Raipur Bhubaneswar Surat Pune Total Financials: According to media reports. CARE hospitals enjoys a pan-India presence CARE no. The group reported a net profit and operational income of Rs98. NOVEMBER 2010 119 .
Hospital.IDFC Securities Manipal Hospitals NOT LISTED Manipal Hospitals is a leading healthcare service provider in South India. The exhibit below lists its key operational facilities. Sikkim STNM Hospial. It also has presence in other parts of India and Nepal and Malaysia. Manipal Hospitals operates across the healthcare value chain and offers primary. Lady Goschem Hospital Total Source: Company No. Manipal KMC Hospital. Kasargod Manipal Teaching Hospital. Wenlock Hospital. Tumkur TMA Rotary Hospital. Nepal Green Pastures Leprosy Hospital Govt. Manipal hospitals Particulars KMC Hospital.005 NOVEMBER 2010 120 . Nepal Western Regional Hospital. secondary and tertiary healthcare services. Malaysia Govt. Karkala Central Referral Hospital. Mangalore Muar General Hospital Tangkok Hospital Melaka General Hospital. Udipi Manipal Hospital. It has more than 8000 beds spread across 23 hospitals and several primary clinics. Model: Manipal has a hub & spoke model comprising a mix of owned hospitals as also JV and managed units.230 250 165 120 600 180 40 240 70 25 100 500 375 40 700 350 75 515 800 80 800 170 8. Sikkim Uma Hospital. Udipi Women and Child Hospital. Attavar. Udipi Manipal Hospital. Ajjarkad. Ambedkar Circle. Mangalore Manipal Northside Hospital. Mangalore Kasturba Hospital. Bangalore Manipal Hospial. Goa Govt. of beds 580 1. Bangalore TMA Pai Hospital. Manipal Shirdi Sai Baba Cancer Hospital.
mainly driven by an increase in operational beds and improvement in ARPOB. IDFC Securities Research Financials: Max Healthcare’s revenues have grown at a CAGR of 42% in the past three years to Rs5.000 500 0 FY09 FY10 FY12E FY16E 770 1. Max hospitals expansion plans (nos) 2. obstetrics & gynecology. promoted by Max India.2 SECONDARY • Clinics / Implants . oncology and aesthetic & reconstructive surgery. Warburg Pincus and IFC Washington hold 16. Improved case mix and higher volumes translated into a CAGR of 8% in ARPOB over NOVEMBER 2010 121 . orthopedics and joint replacement. Max steadily increased its operational bed count from 346 in FY06 751 in FY10.6% subsidiary of listed entity Max India. including 324 ICU beds. Max has centers of excellence in a wide rage of specialties. cord blood banking and stem cell research.500 1.9 PRIMARY Source: MAX Expansion plans: MAX has lined up aggressive expansion plans to fortify its presence in North India. MAX operating model • • • • • Heart and Vascular Neuosciences Joint Replacement and Orthopaedics Aesthetics and Reconstructive surgery Oncology • • • • Surgery and inpatient facilities Mother and Child Doctor consultation Eye and Dental Care • Specialist doctor constult • Basic diagnostics like pathology collection • Max Heart and Vascular Institute • Max Super Specialty Hospital TERTIARY • Max Hospitals – 4 • Specialty Centers . pediatrics. Model: Max predominantly operates in North India. Max Healthcare is a 75.6bn in FY10. according to the management.4% and 3. in eight hospitals. with tertiary healthcare facilities supported by secondary care hospitals and primary care clinics.150 2.100 Source: MAX.450 Max Hospitals Dehradun Shalimar Bagh Mohali Bhatinda Greater Noida No. It has a conventional hub & spoke model.1% respectively in Max Healthcare. It plans to add other specialties like organ transplant. metabolic and bariatric care. neurosciences. is among the leading hospital chains in North India with over 1100 beds. including cardiac. minimal access.500 2. It plans to increase its bed count from 1100 to more than 2450 by FY16.000 1.IDFC Securities MAX Healthcare NOT LISTED Max Healthcare. of beds 150 300 300 300 300 Date of commencement Jun-11 Sep-11 Sep-11 Sep-11 FY16 2. The land required for the expansion plans is already in place.
2% in FY10.IDFC Securities FY06-10 to Rs20.000 54 1. IDFC Securities Research NOVEMBER 2010 122 .LHS) 6.RHS) 58 4. Contribution margins have steadily improved over years on back of operational efficiencies and benefits of scale.500 56 3.500 52 0 FY06 FY07 FY08 FY09 FY10 50 Source: Company.000 contribution margin (% .431 now. expanding by 660bps over the past four years to 57. Revenues have grown at a CAGR of 42% over the past four years Revenue (Rs m .
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