Fortis Healthcare Limited, a New Delhi-based healthcare company established by Ranbaxy Laboratories Ltd, India's largest pharmaceutical company recently made a muted beginning on the bourses on May 09, 2007. On the listing day, it started with a small premium of 5 cents (Rs. 2) on the issue price of $2.64 (Rs.108) at the National Stock Exchange (NSE), the largest stock exchange in India and the third largest in the world in terms of volume of transactions. Despite this lackluster beginning on the stock market, there are a number of factors that compel us to put this company on our radar.

Fortis Healthcare is one of the fastest growing healthcare companies of India with its revenue showing a compound annual growth rate (CAGR) of 89% during the fiscal years 2002-03 and 2006-07. Its average revenue per bed (ARPB) of about $105,000 (Rs.43 lakh) is the highest among the Indian healthcare companies. Although the company has not turned profitable yet, the management is confident of posting net profit by the end of this year. Despite pursuing an aggressive expansion, Fortis is in quite comfortable position in terms of the debt-equity ratio, which is at 0.6-1 after its initial public offering (IPO). It entered the capital market with its IPO of about 46 million equity shares with face value of $0.24 (Rs.10) each on April 16, 2007. The IPO that closed on April 20, 2007 was oversubscribed 2.78 times.

Healthy Financials  

Fortis has demonstrated healthy growth in its topline over the past few years. The net sales of the company moved up to $65 million (Rs.292.5 crore) in 2005-06 from $11 million (Rs.49.1 crore) in 2003-04. During the nine month period of April-December 2006, it had registered net sales of $83.6 million (Rs.376.5 crore). Its EBIDTA turned positive in 2005-06 at $4.6 million (Rs.21.1 crore) and further improved in the first nine months of 2006-07 at $7.2 million (Rs.32.4 crore). The company has declared a net loss of $14.5 million (Rs.65.1 crore) in 2005-06, and net loss of $16 million (Rs.72.8 crore) in the first nine months of 2006-07.

Operating in a Promising Industry

Also, the potential of the India’s healthcare sector is very promising. The industry is expected to grow to $40 billion in the next five years from the current size of about $30 billion compared with $20 billion in 2001. The sector will require fresh investments up to $89 billion during 2007-12, and 90% of it is expected to come from private sector companies.

The growth expected in the sector in the coming years will be from the domestic side as well as medical tourism. The economic growth is raising the income levels and purchasing power of people. Apart from that, medical insurance penetration will only move up to register 32% CAGR during 2006-12 from the current dismal levels of merely 4%. Both these factors will enhance the affordability of healthcare facilities for domestic patients. On the other hand, medical tourism in India, which has already reached the mark of 480 million (Rs.2000 crore), offers a big potential for the Indian healthcare industry as it commands only 1.2% share of the $40 billion global medical tourism market .

In fact, India is already being considered a high quality and significantly low cost medical treatment destination. A heart surgery is 95% cheaper in India at $4,400 compared with $100,000 in the U.S., a bone marrow transplant is 88% cheaper in India at $30,000 compared with $250,000 in the U.S., and the cost of hip replacement in India is about $4,500, which is about 92% less than $55,000 in the U.S .

Aggressive Expansion

Fortis Healthcare was formed by the founders of India’s largest pharmaceuticals company Ranbaxy Laboratories in 1996. It has a network of 12 operational hospitals with a total capacity of about 2,000 beds and 16 heart command centres, primarily in the north Indian cities. Most of the hospitals of Fortis are multi-specialty hospitals offering secondary and tertiary healthcare with a strong portfolio in specialty areas such as cardiac care, orthopedics, neurosciences, oncology, renal care, gastroenterology and mother and child care. It also runs Fortis La Femme, a boutique style hospital, which focuses on women's health and maternity care.

Now, it’s aiming to have a pan India presence with its aggressive expansion plan to have 40 super-specialty hospitals by 2010 with 6,000-bed capacity. It’s already in the process of starting new hospitals and greenfield projects in several cities including Mumbai, capital city of the west Indian stare of Maharashtra also regarded as the financial capital of the country. It’s first hospital at Vashi in Navi Mumbai will start operations in the next two-three months. It will also start its hospital in Jaipur, capital city of the North Indian state of Rajasthan in the first week of June. A new greenfield facility in New Delhi, the national capital of India and Medicity at Gurgaon, near New Delhi are coming up in the next phase.

Recent Acquisitions

Fortis had acquired a 90% stake in Escorts Heart Institute & Research Centre Limited, India’s leading cardiac care centre on September 28, 2005 from the erstwhile owners for a consideration of about $140 million (Rs.585 crore). On March 20, 2006, it acquired 99.9% stake in International Hospital Limited. On the same day, it also acquired Oscar Bio-Tech Private Limited.

The acquisition of the Escorts Heart Institute brought additional four Escorts hospitals in the cities of Amritsar in the north Indian state of Punjab, New Delhi, Faridabad in the north Indian state of Haryana and Raipur, the capital city of the state of Chhattisgarh within the fold of Fortis, taking its total operational hospital strength to 12 hospitals. The remaining 10% stake in Escorts Heart Institute is held by Dr. Naresh Trehan, the man considered to be the architect of the institute. The acquisition has also helped the company achieve critical mass in terms of number of beds and revenue, as Escorts Heart Institute contributes to about half of its total revenue. The acquisition, however, was followed by litigation with Delhi Development Authority (DDA), a government body solely responsible for the land development in New Delhi. The case is pending before the Delhi High Court and management has indicated that the litigation might take some more time. In fact, the muted response for Fortis Healthcare in the stock market can largely be attributed to the risk involved with the litigation.

Riding on Retail Opportunities

Company is also preparing for leveraging the opportunities in pharmaceutical retailing. Fortis HealthWorld, a joint venture of Ranbaxy and Fortis Healthcare, has announced its plan to open 250 pharmaceutical retail outlets by the end of this year as part of its $177 million (Rs.800 crore) pan India expansion plan. It has opened its 10th store in the national capital region on May 01, 2007. The $177 million expansion plan envisages opening 1,000 ‘one-stop-shops’ in 400 cities across India in the next five years. These 24/7 stores will offer pharmacy goods, diagnostic centre, personal care products, health food and supplements, ayurvedic and homoeopathic medicines, health goods, and value added services like prescription reminder, OPD appointments and free home-delivery.

Patience to Pay

The gestation period for healthcare sector projects are usually long, and a new hospital might take about 3-5 years to become profitable. Considering the expansion plan of the company, which will increase its capacity by three times to 6,000-beds by 2010 from about 2,000 beds currently, it’s not difficult to reach the conclusion that the company will start exploiting its full potential by 2013-14. Although, investors might see their capital appreciating much earlier as the management has already indicated that the company’s bottomline will turn black by the end of this year.