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Fit and Fine

Fortis Healthcare makes for a healthy stock...

Fortis Healthcare was established in 1996 by the promoter of Ranbaxy Laboratories, Dr. Parvinder Singh. Today, the company has achieved the distinction of becoming India's second largest private healthcare company with a network of 12 hospitals in northern India. In addition to these hospitals, Fortis Healthcare has 15 satellite heart command centres throughout India and one heart command centre in Afghanistan as well.

Most of Fortis Healthcare's hospitals are multi-specialty hospitals, which provide secondary and tertiary healthcare services. Some of the hospitals also include super-specialty 'centres of excellence' that provide quaternary healthcare services in areas such as cardiac care, orthopaedics, neuro-sciences, oncology, renal care, gastroenterology and mother & child care. Furthermore, two of its hospitals, Escorts Health Institute & Research Centre at New Delhi and Escorts Health Centre at Raipur, are focused primarily on cardiac patients with the former serving as a super-specialty 'centre of excellence' for cardiac care.

Over the 12 years of its existence, Fortis Healthcare has established itself as a leading player in the healthcare services market and to cash in on its enormous growth potential, the company has unveiled a three-pronged approach of greenfield facilities, acquisitions and management contracts. Fortis aims to expand its network with the addition of 28 new hospitals at the cost of Rs. 1,800 crore, which will make it a 7000-bed healthcare company.

Investment Rationale
Increased Expenditure on Healthcare
At present, the expenditure on healthcare in India is quite low at 5.2 per cent of the GDP. Even the government's spending on healthcare is a meagre 1.2 per cent of the GDP. However, with the growing economy and rising incomes, healthcare spending is expected to grow to about 5.5 per cent of the GDP by 2012. Moreover, the country's healthcare services market is expected to rise from Rs. 125,300 crore in 2006 to Rs. 217,200 crore by 2011. And Fortis is well placed to benefit from these expected growths.

Demand will Overshoot Supply
The demand for healthcare services is only going to rise in the coming times. To meet this demand, a substantial increase in India's bed capacity is on the card. According to a CII-McKinsey study, 20 per cent of the additional beds will be required for specialty healthcare needs such as cancer and cardiac diseases. Hence, hospitals with the capacity of a fast ramp-up of bed base and having a geographical spread in metros, where incidences of lifestyle-related diseases are higher, would benefit from these increased demands. Fortis, in particular, would benefit more, given its focus on these medical areas.

Acquisitions to Firm Up Position
Fortis Healthcare has used the acquisitions route to firm up its market position and strengthen its brand value. The acquisitions of Escorts Heart Institute & Research Centre in 2005 (90 per cent stake) and International Hospitals in 2006 (99.9 per cent stake) have enabled the company to become a strong player in cardiology and other specialties. Furthermore, in September 2007, Fortis ventured into southern India with the acquisition of the Chennai-based 180-bed Malar Hospital, a multi-specialty hospital focused on mother-child care. Moreover, Fortis has also entered into a joint venture with DLF to set up 15 new hospitals over the next five years

Capex in Revenue-intensive Specialties
APL's revenue from its international operations grew by 17.6 per cent during H1FY08. The company also saw over 20 per cent increase in volumes while its EBIT margins improved to 6.8 per cent from the earlier 1.8 per cent. Sales in South Asia and the Middle East witnessed robust growth at 44 per cent and 28 per cent respectively. The company's sales from its international businesses is expected to grow from Rs 583 crore in FY07 to Rs 726.6 crore in FY10 while net profits are expected to grow from Rs 33.1 crore to Rs 41.3 crore during the same period.

Risks & Concerns
Pending Litigations
Fortis Healthcare has a number of cases pending against its name. Apart from the suit regarding the acquisition of Escorts, there are lawsuits on termination on lease licenses and nursing licenses. If the Escorts case goes against the company, the said operations would have to be suspended. This would have a significant adverse impact on the company's revenues as the Escorts operations contributed around 60 per cent during FY07.

Availability of Professionals
There has been a surge in the global demand for medical professionals, owing to which the attrition rate in the sector is expected to increase. This trend has posed crucial challenges in identifying fresh talent, training and retaining them. No matter how hard a company tries, it will always remain exposed to talent crunch.

Valuations
With the huge expected demand in the tertiary healthcare care segment, along with the changes in the Indian demography, Fortis Healthcare is expected to benefit in the long-term from its metro-focused multi-specialty facilities with expertise in cardiac care. The target prices has been revised downwards, after having taken into consideration the rising inflation and interest costs, and has arrived at Rs. 88. Overall, the company's current business is fairly valued while an uptick can be expected once the extended bed base becomes operational in FY10.

Source: ICICI Direct