Although in a sunrise sector, Fortis still has to prove its mettle. | ||||||||||||
Looking at the Indian healthcare industry, we often encounter two extreme parallels comprising of public healthcare facilities and those provided by private hospitals and healthcare companies. | ||||||||||||
On the one hand, public healthcare is a far cry from being sufficient and lacks even basic facilities necessary for many medical procedures and treatment, while on the other side of the spectrum, India Inc is gearing itself up for medical tourism and organised healthcare to provide sophisticated medical care to consumers. | ||||||||||||
India spends hardly about 5 per cent of its gross domestic product (GDP) on healthcare, while countries at a similar stage of development, like Brazil and Korea have a higher proportion of their GDP allocated for the same. Of this 5 per cent spend, 80 per cent of this spend comprises of private spending, leaving the rest for the government to take care of. | ||||||||||||
Bridging a chasm According to a 2007 study on opportunities in healthcare by Ernst and Young and FICCI, India needs an investment of about Rs 3.5-4 lakh crore in healthcare by 2012, in order to meet the expected demand in the sector. | ||||||||||||
A number of private sector companies like Apollo Hospitals, Wockhardt Hospitals, Fortis Healthcare, Max Healthcare and more, are trying to bridge this gap by creating infrastructure required for providing healthcare on a large scale in an organised fashion. | ||||||||||||
Although a minuscule effort to meet the burgeoning demand, the sector is riding on the growth of infrastructure, shifting demographics and the gradual spread of healthcare insurance among India's population. | ||||||||||||
Further, the lack of adequate speciality and super-speciality healthcare providers adds to the appeal of such companies for their pioneering initiatives both socially and commercially. | ||||||||||||
As a result, the combined out-patient and in-patient market in terms of private spend on healthcare is expected to clock about Rs 16,200 crore by the year 2012, according to a 2001 CII-McKinsey study. Add to this, the medical tourism market in India too is expected to scale up to about Rs 2,025 crore this year.
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The Fortis story Fortis Healthcare made flesh in 1996, with its first hospital planned in Mohali, Punjab. This hospital commenced operations in 2001, and in 2005, Fortis acquired Escorts Hospitals thus increasing its count of hospitals to six. | ||||||||||||
Today, this number has doubled over the seven years of its operations. A Ranbaxy group company, it has established its presence across the north in cities like New Delhi, Faridabad, Noida, Amritsar, Raipur and Srinagar. | ||||||||||||
The company now plans to set up another hospital in the Shalimar Bagh area of New Delhi, for which it is raising about Rs 423.2-Rs 506 crore through an initial public offering (IPO) of about 46 million shares. | ||||||||||||
The issue is priced at Rs 92 at the lower end, and Rs 110 at the upper end of the price band. Rs 100 crore from the proceeds of the issue is going toward investments in its proposed 250-bed Shalimar Bagh hospital, while the rest of the proceeds will be used toward refinancing the company's Escorts Hospitals acquisition and prepayment of short term loans. The company has already managed to raise nearly Rs 154 crore via private placements at an average price of Rs 144 a share last month. | ||||||||||||
Differentiating Fortis "We have developed a hub and spoke model of multi-speciality and super-speciality hospitals across tier-II and tier-I cities, respectively," says Shivinder Mohan Singh, chief executive officer and managing director, Fortis, describing the company's network of hospitals. | ||||||||||||
The company plans to focus on select super-specialities such as cardiac care, orthopaedics, neuro-sciences, oncology, renal care, gastroenterology and mother and child care. The hospital chain consisting of 12 hospitals, has nearly 1,325 operational beds, and has plans in place to set up four more hospitals adding over 900 beds to the count by the end of FY09. | ||||||||||||
Fortis employs medical professionals and doctors as its own staff, unlike some other hospital chains which bring in doctors as consultants on a fee-sharing basis. Further, Fortis doesn't charge differential fees for delivery of processes across different ward classes. | ||||||||||||
"Therefore, the differential between the expenses incurred by a patient in a special room and one in a common ward would only comprise of incremental room rental," claims Anil Panwar, president- finance and growth, Fortis. | ||||||||||||
Spread too thin Fortis is undergoing a massive capital expansion to the tune of Rs 830 crore, and thus still has to invest extensively in setting up its network across the country. As against Apollo Hospitals, its nearest rival, the company has less than half the number of beds. Obviously the revenues are equally small. | ||||||||||||
The expected FY09 revenue per bed per day works out to Rs 7,530, as compared to Rs 6,600 of Apollo for the same period, which is significantly higher. | ||||||||||||
However, this is offset by the lower operating margins that Fortis clocks in. The scenario does not seem to turn any better, because even though there is high demand in the sector, large capital expenditure requirements would make sure that the growth remains slow. | ||||||||||||
Again, Fortis does not have an established presence like Apollo, which is already in its next phase of development by setting up pharmacies and pathological laboratories across the country. | ||||||||||||
"It will take another two years for the company to break even, which again may be pushed further, in case more capital expenditure comes along," says Ranjit Kapadia, head of research- private client group, Prabhudas Lilladher. "Further, the success of organised healthcare providers depends on their ability to take on smaller, unorganised players on the pricing front, since the latter have very low overheads," adds Kapadia. | ||||||||||||
Valuation Since the company is yet to break even, analysts are finding it difficult to value the issue. However, Fortis could be compared on a measure such as its market capitalisation to sales. Apollo's market capitalisation to sales ratio works out to 2.3 times for its expected FY08 revenues, while that of Fortis amounts to 4.2 times for the same period, which is high. | ||||||||||||
What takes away the sheen from Fortis is the fact that Apollo's cost per bed will be derived from its historical cost, whereas new acquisitions to expand Fortis are going to be more expensive. | ||||||||||||
Rising interest rates would again pump up the required rates of return from its projects, in turn hammering the company's valuation. Add to this a longer payback period, as the new projects will start yielding returns only in FY10, and the issue appears expensive. Investors may want to wait and watch.
Issue opens: April 16 | ||||||||||||