Fortis Healthcare

FORTIS Healthcare has emerged as the fastestgrowing private hospital chain in the country after it agreed to buy 10 properties of Wockhardt Hospitals last fortnight. The second-largest private healthcare provider in the country now plans to float Rs 1,000-crore rights issue to partfund its Rs 909-crore acquisition. Investors looking for a good bargain in this sunrise sector would get a higher return on their investment with Apollo Hospitals, the country’s largest private healthcare provider, which is trading at a more reasonable valuation than Fortis.

BUSINESS:

Fortis Healthcare was incorporated in 1996 and the company started operating its first hospital in 2001. Eight years later, the company manages 3,300 beds in 28 multispecialty and super-specialty hospitals, with a dominant presence in the national capital region, especially Delhi. The company has followed a hub-andspoke model while connecting these multi-specialty hospitals to its superspecialty centres, all of which are either owned by the company or are run on management contracts.

GROWTH STRATEGY:

Fortis Healthcare has preferred the inorganic route for expansion. The company acquired Escorts group’s healthcare business in 2005, adding five hospitals to its network. In 2007, the company took over Chennai-based Malar Hospital and Delhi-based, The Cradle, a boutique hospital for women, calling it Fortis La Femme. Fortis is also working on greenfield projects in north Delhi, Gurgaon, Bengaluru and Kolkata.

LATEST ACQUISITION:

Last fortnight, the company entered into an agreement with Wockhardt to acquire 10 of its hospitals for Rs 909 crore, a deal which will enhance the company’s earnings per share (EPS). About Rs 190 crore from this corpus would be spent on two of these hospitals that are under construction.

The company would need to spend another Rs 200 crore over 15 months for completing these facilities. The value of Rs 909 crore for ockhardt’s 10 hospitals appears attractive as the average enterprise value of Wockhardt Hospitals with 17 properties was Rs 2,525 crore when it had floated its initial public offering in February 2008. This translates into Rs 60 lakh per bed for Fortis on a completed basis. The latest acquisition of Fortis will help the chain grow out of its northern hub and penetrate southern, western and eastern regions. The addition of 1,902 beds will raise the spread of Fortis to 5,180 beds across 38 hospitals. The Wockhardt deal will also help Fortis consolidate its position in specialties such as cardiac, orthopedics, renal and neuro sciences.

FINANCIALS:

Healthcare is a capital-intensive industry with a long gestation period. While Fortis has seen its profits wiped clean every time it acquires a new property, the company managed to turn around in 2008-09 and clocked a small profit. Since Fortis Healthcare has to ramp up its operations to achieve profitability, an investor looking for dividend income will have to wait.

The company’s net sales have been growing at a compounded annual growth rate (CAGR) of 28.5% since 2005-06 and hit Rs 620 crore in 2008-09. Since a specialty division in a hospital logs gross margins between 20% and 28%, the company has registered average revenue of Rs 60 lakh per occupied bed. Fortis plans to float a rights issue of Rs 1,000 crore by mid-September, priced at Rs 110 per share, to fund its expansion.

This issue will add Rs 100 crore of equity to the company’s existing equity of Rs 227 crore. The company intends using a mix of debt and equity to fund this acquisition. A little over Rs 350 crore from the proposed rights issue will be utilised for the acquisition.

VALUATION:

Post-acquisition and rights issue, Fortis is expected to close the current fiscal year with net sales of Rs 875 crore and a net profit of Rs 44 crore. At this rate, the company’s estimated P/E multiple post the rights issue would be around 75. In comparison, Apollo Hospitals, with about 8,000 beds, is trading at just 24 times its trailing 12-month earnings. Besides, Apollo Hospitals is valued at twice its net sales, calculated on a trailing 12-month basis. The scrip is trading at twice its book value.

On the other hand, Fortis Healthcare, whose business model is seen as more risky, is valued at thrice its net sales and is trading at a price that is thrice its book value. So, Fortis is relatively a risky and expensive bet compared to its more matured and larger peer.