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Wednesday, September 17, 2008

Fortis Healthcare - good long-term investing-money spinning mid cap

Aggressive expansion plans, a differentiated business model and improving efficiencies/financials make Fortis Healthcare a good long-term investing & money spinning bet for mid cap investors

THE FAST growing healthcare sector has poor representation in the domestic equity market. Only a handful of companies from the sector are listed on the bourses currently, limiting the choice for investors. With rising economic prosperity, the tertiary care segment is growing steadily. Midsized player Fortis Healthcare is a promising pick from this space.


The Delhi-based company reported its maiden profit in the June ’08 quarter. With the company’s hospital network reaching a critical mass, its financials are expected to improve further in the forthcoming quarters. Aggressive expansion plans, a differentiated business model and improving efficiencies make Fortis a good longterm bet for investors. Besides, the healthcare segment is expected to outperform in a bearish phase.

BUSINESS:
Incorporated in 1996, Ranbaxy-promoted Fortis Healthcare started its business in ’01. With a dominant presence in North India, the company currently operates a network of 14 hospitals and eight satellite/heart command centres, including one heart command centre in Afghanistan. These hospitals include multi-specialty hospitals, as well as super-specialty centres providing tertiary and quaternary healthcare to patients in areas such as orthopaedics, neurosciences, oncology, renal care, gastroenterology and mother & child care with expertise in cardiac care.
Among the 14 hospitals, four are run under management contract, while Fortis owns the remaining. Barring the hospital located at Jaipur, all the nine hospitals under Fortis are back in the black. The company also runs two other hospitals under the publicprivate partnership arrangement. It has an average occupancy rate of 60-70% across its various facilities. Fortis acquired the Escorts group of hospitals in ’05, which added five hospitals to its kitty, including the famous Escorts Heart Institute in Delhi.

GROWTH STRATEGY:
Fortis has primarily grown through acquisitions. Unlike other players in the field who are building a national presence without being dominant players in any region, Fortis believes in regional consolidation. First, it built a considerable presence in North India and it now plans to do the same in West and South India.

Fortis’ immediate priority is to extend its market share and it aims to grab the share of the unorganised healthcare market to achieve a national footprint. The company acquired Chennai-based Malar Hospital last September. In the short run, the company is looking at inorganic growth to increase the quantum of its facilities, while relying on organic expansion in the long run.

Given its brand equity, the company views Escorts as an underperforming asset and hence, intends to grow the Escorts network of hospitals. Escorts’ incremental growth will further beef up Fortis’ margins.

The company has two hospitals under construction in the National Capital Region (NCR) and a hospital at Vashi in Navi Mumbai (Maharashtra) is being commissioned under the public-private partnership model. With a planned expenditure of nearly Rs 2,250 crore, Fortis aims to increase its hospitals network to 40 by ’11, taking its total capacity to 6,000-7,000 beds. It is looking at greenfield projects, management contracts and acquisitions to expand. Fortis intends to raise funds via internal accruals and debt, while remaining open to further fund infusion by investors, including promoters. Raising funds will not be a constraint, as the promoters are expected to receive nearly Rs 10,000 crore from the sale of Ranbaxy Labs.

FINANCIALS:
The healthcare sector is a capital-intensive service sector with a long gestation period. In the case of Fortis, new acquisitions and greenfield projects have been eating into the company’s profits from existing facilities. However, as the proportion of old facilities rises in the company’s portfolio, Fortis is expected to become profitable on a sustained basis.

It reported its maiden profit in the June ’08 quarter. The turnaround was aided by various cost-cutting measures and improvement in efficiencies by standardisation of operating systems, procedures and sourcing across the chain. The company’s net sales have increased at a compound annual growth rate (CAGR) of 67% since ’03 to Rs 507 crore in FY08, while losses have grown at a slower pace and touched Rs 55.5 crore in FY08.
During FY08, the company’s net sales suffered due to a decline in revenues posted by Escorts Hospital on account of the loss of business due to the exit of well-known cardiologist Naresh Trehan.

Fortis’ older facilities have the highest operating margins of 27% in the industry vis-a-vis 18% for Apollo Hospital. While each specialty hospital division has differ ent gross margins, the company has registered a 10-15% growth in revenue per occupied bed over the past year.
Rising occupancy and a lower length of stay have contributed to higher asset turnover, which has led to better operating margins. As the company ramps up occupancies across hospitals and simultaneously reduces the average length of a patient’s stay, its operating margin and net profit will improve. Currently, in the growth phase, the company intends to plough in its profits to further the growth momentum. So, investors looking for dividend income will have to wait for a while.

VALUATIONS:
Having been a loss-making company in the past, Fortis is now looking at a positive turnaround during this fiscal year. Taking a conservative estimate of 25% increase in revenues, it is likely to achieve a turnover of Rs 634 crore by ’09 and its operating profit is estimated to be around Rs 90 crore.
Accordingly, the stock is currently trading at around 19 times its forward EBITDA (earnings before interest, depreciation, tax and amortisation or operating margins). In comparison, it is trading at around 25 times its trailing EBITDA. This provides a good upside potential for long-term investors.

BOOSTER SHOT
** Ranbaxy-promoted Fortis Healthcare is one of the largest private hospital chains operating in the tertiary care segment It has a dominant presence in North India.
** Fortis currently operates a network of 14 hospitals and eight satellite/heart command centres, including one heart command centre in Afghanistan Fortis’ older facilities have the highest operating margins of 27% in the industry. Its peer Apollo Hospitals’ operating margins stand at 18%
** The company’s net sales have increased at a CAGR of 67% since ’03 to Rs 507 crore in FY08, while losses have grown at a slower pace and touched Rs 55.5 crore in FY08 Unlike other players in the field which are building a national presence without being dominant players in any region, Fortis believes in regional consolidation With a planned expenditure of nearly Rs 2,250 crore, Fortis aims to increase its hospitals network to 40 by ’11, taking its total capacity to 6,000-7,000 beds
** Raising funds will not be a constraint, as promoters are expected to receive nearly Rs 10,000 crore from the sale of Ranbaxy Labs
** The company intends to plough in its profits to further the growth momentum.
So, investors looking for dividend income will have to wait for a while

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