Healthcare Opportunities Galore in Tier II-III Cities-Sept20,2010

Healthcare l India Research l 20 September, 2010
Healthcare opportunities galore in tier-II/III cities
 Tier-II/III city hospitals have lower establishment cost that leads to shorter
payback period and substantially higher ROE of 22-24%. Such hospitals
are able to attain operational break-even within 2 years compared to 4-5
years for a similar hospital in metro.
 We expect a CAGR of 35% in the Indian healthcare market during FY10-

15E due to massive rise in the chronic diseases in the tier-II/III cities on
account of changing lifestyle against street estimate of 15–20% growth.
Tremendous rise in earning power in Tier-II/ III cities and massive
investment by unorganized sector may drive with such explosive growth.
 We feel Apollo Hospitals is going to be a clear winner due to its focus on

building tier-II/ III cities since 2007-08. We expect its EPS to grow at a
CAGR of 54% during FY10-12E. We initiate coverage on the company with
a BUY rating and a target price of INR535, indicating 30% upside.
 Since Fortis Healthcare remained focused on metros and tier-I cities, we

expect its EBITDA to contract in FY11 on account high competition in the
major cities. We initiate coverage on Fortis Healthcare with a SELL rating
and a target price of INR144, indicating a downside of 12%.
 Delay in execution of newer projects and sudden increase in man-power

cost due to shortage of skilled staff are major risks to our investment thesis.
Higher interest rates and intense competition could also affect our forecasts
adversely.
Analyst:
Souvik Chatterjee
022- 42208932
s.chatterjee@pugsec.com
Healthcare Sector Report
Investment Summary
 Lower cost (60-75% lower CAPEX vs. metro hospitals) and higher returns
(ROE 22-24% vs. 16% in tier-I cities) help tier-II/III city hospitals attains
faster break-even
 Shortage of adequate healthcare facility and rise in chronic diseases in
tier-II/III cities likely to fuel 35% overall industry growth
 Execution delays and shortage of skilled manpower could dampen our
growth outlook
Indian healthcare market is too large to be overlooked by global investors. Opportunities created
by changing demographics and consumer behaviors perticularly in the tier-II/III cities will evince
investors’ interest and in our view, will not let them to stay on the sideline from this sector for
long.
Though the sector has low representation in the key indices, we recommend investors to foresee
the opportunities in the Indian healthcare sector and participate actively.
CAPEX 60-75% lower than metro hospitals

Tertiary hospitals in tier-II/III cities present a better business model because of lower CAPEX
requirements (60-75% lower than in metro cities) and superior returns (ROE of 22-24% vs. 16% for metro
hospitals). Moreover, lower staff cost and lower OPEX coupled with higher occupancy ratio (due to less
competition) facilitate hospitals in tier-II/III cities to achieve operational break-even within two years of
operation vs. four years in metro cities.
Fig 1: Attractive proposition in tier-II/III cities

Particulars Metro Tier II Tier III
Per bed cost (INR Mn.) 15.0 6.7 4.3
Staff cost as % of revenues 24% 15% 12%
Long term ROE (%) 16% 22% 24%
Source: PUG Research
Tier-II/III cities likely to fuel 35% overall industry growth by FY15E

There is a severe shortage of proper healthcare facilities in India, particularly in tier-II/III cities. Increase
in affordability in the tier-II/III cities coupled with rapid rise in chronic and accidental cases are likely to
fuel a 35% CAGR for the hospital industry by 15E. Average healthcare spending in the tier-II/III cities is
estimated to rise by 50% providing huge opportunity for the hospital players expanding presence in the
tier-II/III cities. These cities, act as hubs for other interior towns and villages around, providing
considerable extension in the practical catchment area for hospitals; this will help achieve better returns
and higher profitability.
20 September 2010 2
Growth to surpass consensus estimates

We are optimistic on opportunities in the Indian tier-II/III cities on the back of huge cost advantage and
significant increase in lifestyle and chronic diseases. We are more optimistic on the growth opportunity in
tier-II/III cities than the street expectations. We anticipate healthcare industry to exhibit 35% CAGR over
the next five years as against the street estimate of 15-20%, fuelled by the growth in tier-II/III cities.
Winner and Runner-up

We expect Apollo Hospitals (Apollo) to emerge as a key winner in the Indian healthcare space on the
back of higher profitability from the tier-II/III city hospitals (Reach Hospitals). Contrarily, Fortis Healthcare,
due to its presence, largely in tier-I cities will be a laggard in capitalizing on the impending growth
opportunity in the tier-II/III cities space.
Winner
Apollo Hospitals : Strong focus on tier-II/III cities to drive growth
Rating: BUY TP: INR535 Upside: 30%
Apollo has huge ambitious plans with CAPEX outlay of INR30bn, adding 4,000 beds by 2014 taking its
total number of beds to 12,000. We expect majority of these projects are to be under Apollo‟s „Reach‟
initiative, focusing on tier-II/III cities across India. The company intends to add five new speciality
hospitals in tier-II/III cities in South and West India, which are expected to be commissioned by FY13.
Going forward, we expect Apollo‟s expansion will be largely concentrating on tier-II/III cities, will drive the
subsequent growth for the company.
We forecast Apollo‟s profit to grow by 49% and 58% in FY11E and FY12E, respectively. ROE and ROCE
are expected to improve from 8.4% to 15% and 8% to 16%, respectively between FY10-12E. We initiate
coverage with a BUY rating and a target price of INR535 (average of DCF value of INR558 and 11x
FY12 EV/EBITDA value of INR511) with an upside of 30%. The stock currently trades at 9.8x FY12E
EV/EBITDA.
Runner-up
Fortis Healthcare: Less focus on tier-II/III to hamper medium term growth
Rating: SELL TP: INR144 Downside: 12%
We expect Fortis Healthcare to be a laggard in the healthcare space due to its continuous focus in the
metro and tier-I cities for expansion and over-looking the growth potential of tier-II/III cities. Going
forward, we forecast margin contraction in the metro and tier-I city hospitals, due to increased
competition and pricing pressure. We initiate with a SELL rating with a target price of INR144 (average of
DCF value of INR134 and 20x FY12E EV/EBITDA of INR153). Fortis is currently trading at 44x and 31x
on FY11E and FY12E earnings and 34x and 26x FY11E and FY12E EV/EBITDA respectively.
Key risks to our assumption

Key risks to our assumption include: (i) Delay in proper and timely execution of hospitals will put cost
presssure; (ii) shortage of skilled labour may affect operational efficiency in tier-II/III town hospitals; and
(3) intensifying competition in the smaller cities will negatively impact occupancy levels as well as per
bed revenue.
PUG estimates vs. Consensus

Difference between
Target Potential
PUG EPS Consensus EPS PUG and Consensus
Company Rating price Return
EPS
FY11E FY12E FY11E FY12E (INR) (%) FY11E FY12E
Apollo Hospitals 15.6 24.9 14.5 17.0 BUY 535 30% 4% 38%
Fortis Healthcare 3.7 5.3 3.9 5.6 SELL 144 (12%) (5%) (6%)
20 September 2010 3
Investment Thesis
Parameter Apollo Hospitals Fortis Healthcare
1) Rating BUY SELL
2) Target price/Upside INR535, Upside 30% INR144, Downside 12%
JV with US-based StemCyte for stem cell Parkway stake exit to improve leverage position;
3) Recent developments
research Singapore listing on cards
Commands valuation premium due to higher
Expansion in mid-tier cities to drive longer
4) Key positives ARPOB on account of increased presence in the
term growth and upgrade valuation.
specialty care segment
Debt on books likely to rise due to CAPEX Margin contraction due to high cost of funds;
5) Key negatives
funding Concerns on top management’s focus
25% CAGR in net profit over FY10-12E; margin
6) Financial forecasts 54% CAGR in net profit over FY10-12E
pressure likely to remain over medium term
7) Share price performance
Market performer Consistent underperformance
(3 yr)
Expansion in tier- II/III cities and High synergy domestic and overseas acquisitions
8) Positive catalysts improvement in asset utilization to drive remains a key for growth in the near to medium
54% CAGR in earnings over FY10-12E term
Plans to raise INR15-20bn to increase Contraction in margin due to increased

9) Negative catalysts
D/E level competition in tier-I cities
EMs hospitals peer valuation

Market Cap FY12E FY12E FY12E FY12E FY12E FY12E
Particulars
(USD Mn.) P/E (x) EPS ROE (%) P/Sales (x) P/Book (x) EV/EVITDA (x)
Apollo Hospitals 1,145 17 INR 24.9 15 1.5 2.4 9.8

Fortis Healthcare 1,140 32 INR 5.1 9 2.9 2.1 25.8
EM Peers
Sonic Healthcare, Australia 3,582 14 USD 0.94 6.77 1.4 1.6 9.7
Parkway Holdings, Singapore 3,019 25.8 USD 0.10 2.71 4.4 3.3 19.1
Netcare Ltd, South Africa 2,615 13.6 USD 0.17 39.5 0.8 4.6 10.6
Diag America, Brazil 2,010 18.4 USD 0.40 15.54 2.6 6.7 16.7
Aier Eye Hospital, China 1,708 NA NA 25.94 26.5 49.2 14.7
Odontoprev, Brazil 1,487 27 USD 1.3 6.52 7.0 3.4 5.6
Healthscope, Australia 1,466 16.1 USD 0.3 7.98 1.0 3.6 7.0
Source: Reuters, PUG Research
20 September 2010 4
Contents
Industry Section
Investment Summary 2
Investment Thesis 4
Tier-II/III city hospitals; Low cost-High returns 6
CAPEX in tier-II/III cities is merely 25-40% of that in the metros 6
Operational costs 30% lower than tier-I hospitals 7
Expansion plans in tier II/III cities 9
Our assessment 11
Increase in lifestyle ailment presents a market opportunity of INR60bn by 2015 12
Increasing lifestyle ailments; Healthcare spending in tier-II/III to increase by 50% by FY15E 12
Lack of adequate healthcare facility in tier-II/III cities to fuel demand for affordable hospitals 14
Winner: Apollo Hospitals Enterprise Ltd. (APHC IN) 16
Runners-up: Fortis Healthcare Ltd. (FORH IN) 16
Valuations 17
Peer valuation 20
Key risks 21
Company Section
Apollo Hospitals Limited 23
Fortis Healthcare Limited 32
Appendix -I 39
Appendix -Il 40
Appendix -Ill 42
20 September 2010 5
Tier II/III city hospitals; Low cost-high returns

 CAPEX in tier-II/III cities is merely c25-40% of that in the metros
 Lower operational cost and high earnings potential;faster operational
break-even for tier II/III city hospitals
 Tier-II/III city hospitals-better business model; IRR above 20% and
ROE above 22%
Tier-II/III cities provides tremendous cost advantages both in terms of CAPEX and OPEX. Higher
operational efficiency and better revenue prospects supported by higher occupancy rate help
these tier-II/III city hospitals achieve operational break-even in the first/second year of operations
as compared to four-five years in the metros. With higher IRR (20-26%) and ROE of 22-24%
coupled with low gestation period and higher margin, we believe tier-II/III cities hospitals are
better investment destinations for the hospital players in India in comparision to metros.
CAPEX in tier-II/III cities is merely c25-40% of that in the metros

Tier-II/III cities offer huge low cost advantage in terms of establishment cost as land is available at a
much cheaper rate than in the metros/tier-I cities. The establishment cost, in tier-II/III cities is just a
fraction (c25% in tier-III cities and c40% in tier-II cities) of the CAPEX required in metro cities.
PUG estimates shows that the cost per bed for a typical 100 bed tertiary hospital in a tier-III city of India
is cINR5mn, while the same in a metro city is INR15-20mn, which according to us, will act as a major
driver for expansion in the tier II/III cities.
Fig 2: CAPEX in tier III city is nearly one-fourth of that in metros

25
20
20
15
15
10 9
5
5
0
Metro Tier I Tier II Tier III
Cost per bed (INR Mn)
Source: Industry, PUG research
20 September 2010 6
Operational costs c30% lower than tier-I hospitals

Apart from the CAPEX advantage, tier-II/III offers huge benefit in terms of operational cost (OPEX). On
an average, employee cost in the tier II/III cities is 35%-50%, lower than in metro. Operational
expenditure on the other hand in the tier II/III cities is 15-20% less than compared to metro hospitals,
thus enjoying higher operating margins in comparison to its metro and tier-I peers.
Fig 3: Lower OPEX in the tier II/III cities helps hospitals attains faster operational breakeven
30% 20%
17%
25% 15%
11% 10%
20%
5%
15%
0%
10%
-5%
5% -8% -10%
-12%
0% -15%
Metro City Tier I Tier II Tier III
Staff cost/sales (%) SG&A Exp /sales (%) Other Operational cost /sales (%) EBITDA Margin (%) (LHS)
(RHS)
Source: Industry, PUG research
Higher profitability; revenue differential marginal to metro hospital

Per bed revenue differential is c15-30% compared to metro hospitals
Given the cost advantage that tier-II/III cities offer in terms of hospital projects and operations the
average revenue per operational bed (ARPOB) is not much lower in tier-II/III cities as compared to metro
hospitals, thus offering higher profitability.
As per PUG assessment, per bed revenue in tier-II/III is c15-30% lower than that of a metro city hospital
which combined with better occupancy rates and low cost advantage provides lucrative growth
opportunity for the players in the Indian hospital industry. The average per bed revenue for a tertiary
hospital in a metro city is cINR14,000-16,000, while in the tier-I (non-metro) cities it is cINR11,000-
13,000, however in tier-II/III cities the ARPOB is cINR9,000-12,000.
Fig 4: ARPOB in tier-II/III is c15-30% lower than that of a metro city; provides lucrative growth opportunity (INR)
16,000 15,000
13,500
12,000
10,500
11,000
8,000
7,000
6,000 5,000
3,000
1,000
Metro City Tier I City Tier II City Tier III City
Secondary Tertiary
Source: Industry, PUG Research
20 September 2010 7
Faster operational break-even makes tier-II/III city hospitals a better business model
Lower operational cost helps tier-II/III city hospitals achieves operational breakeven much faster than a
similar hospitals in a tier-I city. Operational margin of tier-II/III hospitals are much higher than its metro
counterpart, due to significantly lower OPEX. As per PUG estimates, tier-III city hospital‟s margin is more
than double than a similar metro hospital. This helps tier III hospitals achieves operational break-even in
the first year of operation, while a tier-II achieves EBITDA positive status in the second year, as against
three-four years required for a similar tertiary hospital in a metro city.
Fig 5: Tier-II/III city hospitals offer significantly higher operating margins

20% 17% 17% 17% 18%
12% 12% 12% 12%
10% 7% 7% 8%
2%
0%
Yr1 Yr2 Yr3 Yr4 Yr5
-10% -6%
-8%
-13% -13% -12%
-20% -16%
-18%
-22%
-30%
Metro Tier I Tier II Tier III
Attractive IRR; ROE of c24% for tier-II/III city hospitals

Tier-II/III offers attractive IRR (21% in case of tier-II city hospitals and 26% for tier-III city hospitals
against 13-14% for metro hospitals) and lower payback period in terms of green-field hospital projects.
Typically, a green field multi-specialty hospital in tier-II/III cities has a payback period of 5-6 years in
comparison to 8-10years for a metro hospital. Also, tier-II/III city hospital attains operational profitability
on the first/second year of operation, mainly on account of lower CAPEX and operational costs.
Fig 7: IRR in tier-III cities is double that of metro city hospitals

30% 26%
25% 21%
20%
15% 13%
10%
5%
Tier I Tier II Tier III
Tier-II/III cities, according to us, are better investment destinations as compared to metro cities because
of the cost advantage and better profitability. We estimate ROE of 22-24% in tier-II/III city hospitals which
is much higher (600-800bps) than ROE of 16% for tier-I hospitals.
Particulars Metro city Tier- I city Tier- II city Tier-III city

Per bed cost (INR mn.) 20 15 9 5
Staff cost as a % of revenue 25% 22% 15% 12%
ROE 16% 16% 22% 24%
20 September 2010 8
Offset of CAPEX and reduction in tax rate to act as key stimulus

Tier-II/III cities offer the unique advantage in terms of offset of CAPEX (excluding land and financial
assets) against profit for the healthcare service providers. Further, reduction in tax (apart from the five
year tax holiday for hospitals with 100 or more beds) from 30% to 24% is likely to act as a stimulus for
the hospitals players to enter in tier-II/III cities.
Expansion plans
Indian hospital players are in an expansion mode. There are nearly 1,500 beds to be added by 2012 with
15 new specialty hospitals across India, particularly in tier-II/III cities. We believe that healthcare
companies expanding in the tier-II/III cities will gain on account of lower establishment cost and higher
returns (ROE of 22-24% vs. 16% in tier-I).
Apollo Hospitals
Apollo has huge ambitious plans in the offing with CAPEX outlay of INR30bn with a capacity expansion
of 4,000 beds by 2014. Majority of these projects are expected to be under its „Reach‟ project in the tier-
II/III cities. Apollo is focusing on the tier-II/III cities of Southern and Western parts of India for its growth as
these cities have larger market and higher affordability. We forecast Apollo‟s net profit to grow by 49% and
58% in FY11E and FY12E, respectively.
Fig 8: Apollo hospitals expansion plans
Year of commission No. of beds City Classification Investment (INR Mn.)
FY11
Kakaikudi (Tamilnadu) 100 Tier-III 230
FY12
Nashik (Maharashtra) 120 Tier-II 540
Nellore (Karnataka) 200 Tier-II 670
Ayanambakkam (Tamilnadu) 200 Tier-III 615
Total 520 1,825
Source: Company
Fortis Healthcare
Fortis Healthcare plans to open 3-5 hospitals of 200 beds each in Northern and Western India in the next
3-5 years.
Fig 9: Fortis Healthcare expansion plans

Location No. of beds City Classification Property Ownership
FY11
Shalimar Bagh, Delhi 350 Metro Owned
Kolkata, West Bengal 414 Metro Owned
Mulund (Mumbai), Maharashtra 344 Tier-I Owned
Total 1,108
FY12
Kangra, Himachal Pradesh 100 Tier-III Lease
Ludhiana – 1, Punjab 200 Tier-II Lease
Gurgaon, NCR 450 Tier-I Owned
Ludhiana – 2, Punjab 100 Tier-II Lease
Ahmadabad, Gujarat 200 Tier-I Lease
Peenya (Bangalore) Karnataka 120 Tier -II Lease
Total 1,170
Source: Company
20 September 2010 9
Apart from these big players, several private hospital chains like Global Hospitals, Care Hospitals,
Colombia Asia and other unlisted players are also expanding in tier-II/III cities for faster growth and to
meet the affordable healthcare needs.
Care Hospitals
Fig 10: Care hospital expansion plans
Cities No. of beds
Pune 120
Raipur 150
Bhubaneswar 200
Vizag 120
Nagpur 150
Surat 120
Source: Company
Columbia Asia
Columbia Asia plans to operate a number of community hospitals in India and is eyeing on the Tertiary
segment in the tier-I cities.
Global Hospitals
Global Hospitals plans to built a 200 bed tertiary hospital in Parel, Mumbai with an investment of
INR20bn (USD45mn) which is likely to be operational by 4QFY11. The group is all set to foray into
Kolkata, Delhi and Bhubaneswar in the next 2 years.
20 September 2010 10
Our assessment
Tier-II/III city hospitals provide affordable healthcare facilities to the local population and would reduce
traveling distance of patients and the average length of stay (ALOS) for the patients. Limited competition
coupled with better operational efficiency and shortened distance of travel (from tier-II/III city hospitals to
metros) for emergency cases would help garner higher returns and better margins.
Tier-II/III cities healthcare market to grow at 35% (CAGR) over FY10-15E

Impending growth opportunity in the sector on the back of tremendous increase in chronic diseases and
increased healthcare affordability in the semi-urban cities would lure hospital players to invest heavily in
these untapped markets. We expect tier-II/III cities to provide 35% CAGR opportunity for the Indian
hospital sector over FY10-15E. Healthcare market in tier-II/III cities is expected to reach INR165bn by
2023 at 20% CAGR, thus providing tremendous growth opportunity for the hospital players expanding in
these cities.
Fig 11: Healthcare market in tier-II/III cities to grow by 35% CAGR

350
300
250
165
200
INR bn
150
100 83
14 31 135
50
46 68
0 21
2008 2013 2018 2023
Metros/Tier I Tier II/Tier III
Source: KPMG, PUG Research
Return ratios to improve

We expect that the untapped opportunities in terms of huge demand and higher cost benefit would see
more hospital players expanding in tier-II/III cities. Attractive IRR of 20-26%, coupled with high ROE of
22-24%, would entice hospital players to expand aggressively in the space.
We anticipate contribution from the tier-II/III city hospitals in the overall revenue to increase substantially
from less than 10% currently to c20% by FY12E. We think the rewards in the tier-II/III city tertiary
healthcare segment are favorable compared to the risks undertaken. We expect Apollo‟s contribution
from its „Reach‟ hospitals to increase from 17% currently to over 20% by FY12E.
Fig 12: Revenue contribution of tier-II/III city hospitals

25%
20%
20% 17% 18%
15%
15% 11%
11% 10%
9%
10%
5%
0%
FY09 FY10 FY11E FY12E
Apollo Fortis
Source: Company, PUG Research
Increase in lifestyle ailment presents a market

opportunity of INR60bn by 2015
 The rise in income level coupled rise in chronic diseases in the tier-II/III cities will lead to
50% rise in healthcare spending by FY15E.
 Lack of adequate healthcare facilities in tier-II/III cities to fuel demand for affordable
hospitals
 Penetration of health insurance to offer additional opportunities
The rise income level coupled with rise in chronic diseases in the tier-II/III cities lead to 50% rise in
healthcare spending by FY15E. Higher demand and absence of adequate healthcare facility in
these cities to provide INR60bn market opportunity for the Indian hospital industry by FY15E.
Moreover, higher health insurance penetration would add to rise in demand for proper and local
healthcare services as propensity for treatment is likely to increase.
Increasing lifestyle ailments;Healthcare spending in tier-II/III cities to increase by 50% by FY15E

Per-capita income in tier- II/III cities to exhibit 12% CAGR over the next decade
As Indian economy grows by over 7%, per capita income in the tier-II/III cities is expected to rise by 12%
CAGR over FY10-20E, according to Asian Development Bank (ADB). With rapid urbanization and
opening up of service sector in these cities, there has been a rapid increase in affordability as well as a
swift change in lifestyle. The savings rate in tier-II/III cities is pegged at 40% vs. 20% in metros.
Fig 13: Trend in per-capita income; tier- II/III cities income to grow at the highest pace
800
Tier-II/III city income
to grow by 12% CAGR
600 over the next decade
Indexed to 100
400
200
-
1990 1995 2000 2005 2010E 2015E 2020E
Tier I/Metro cities Tier II/III cities Rural
Source: ADB, PUG Research
Chronic ailment on rise; healthcare spending in tier-II/III cities to grow by 50% by 2015E
As a result of rapid urbanization, the Indian tier-II/III cities have witnessed a sharp rise in chronic/lifestyle
ailments like obesity, diabetes, cardio vascular ailments and oncology. The healthcare spend on these
lifestyle-related diseases is expected at 50% CAGR by 2015E. This would eventually result in huge
healthcare opportunity in the tier-II/III cities across India.
Healthcare spends to increase: With rise in chronic diseases, the per capita healthcare expenditure as
a percentage of per capita income in tier-II/III cities is likely to increase from 7% in 2008 to 14% by 2020.
However, per capita healthcare spending as a percentage of per capita income in India is much lower at
7% vs. 10% of the world average). With rise in chronic diseases, healthcare spending in tier-II/III cities is
expected at 50% CAGR by 2015E. Penetration of health insurance would also boost healthcare
spending. Currently, health insurance accounts for less than 8% of the overall health expense which is
likely to increase to 15% by 2015.
Fig 14: Healthcare spend in tier-II/III cities to increase Fig 15: Healthcare spend in India significantly below the
world average
20% 16% 25% 17% 20%
16%
11% 14%
20% 14%
15% 12% 15%
9%
8% 12%
7% 15% 10%
10% 8%
10%
10%
5% 4%
5%
5%
0% 0%
0% 0%
2008 2010E 2012E 2015E 2020E
2008 2010E 2012E 2015E 2020E
Metros Tier II/III Rural Average
All India EM (ex India)
Cardiac care market to reach INR10bn by 2015: According to the World Health Organization (WHO),
India will be the home of the largest cardiac patients by 2030, accounting for 15% of the world‟s total.
The share of cardiac treatment in India is estimated to reach 20% of the total healthcare expenses by
2015. Cardiac ailment is estimated to provide INR10bn market opportunity by FY15E at a CAGR of 21%.
Diabetic care market to grow c30% over 2010-15E: According to WHO, diabetes and obesity are likely
to be the most rapidly growing ailment affecting the Indian population. It is estimated that by 2015, c60mn
patients would be affected by diabetes and c85mn by obesity; nearly half of the affected populace are
likely from tier-II/III cities. We expect the diabetic market show a CAGR of c30% over FY10-15E to reach
INR12bn.
Oncology market to reach INR37bn in 2015 (21% CAGR during FY10-15E): Oncology market in India
is expected to reach INR37bn in the next five years, according to the WHO. The number of cancer
patients is likely to grow more rapidly in tier-II/III cities than in metros. Major factors driving the oncology
market include increasing patient population, combination therapy as standard therapy, and novel high-
cost therapy.
Fig 16: Growth in chronic diseases in India provide opportunity worth INR60bn by 2015E
40 37
30
23
INR Bn
20 14
9 10 12
10 6.4 6.5
2.5 4 3.6
2
0
2008 2010 2012E 2015E
Cardiac Diabetic Oncology
Source: WHO, Industry, PUG Research
Lack of adequate healthcare facility in tier-II/III cities to fuel demand for affordable
hospitals
Inadequate healthcare infrastructure in tier-II/III cities has prompted many patients to visit tier-I/metro
cities for treatment. Nearly 30–35% of the in-patient admitted in tier-I hospitals are from tier-II/III cities.
This signifies tremendous demand for affordable healthcare facility in tier-II/III cities across India.
Adequate healthcare facility in tier-II/III cities to reduce dependence on metro hospitals

Due to lack of affordable healthcare facilities in tier-II/III cities across India, nearly 4-5mn patients come
to metro city hospitals every year for treatment. These patients accounts for c30-35% of the total in-
patent number and c15-20% to overall hospital revenue. Proper and adequate healthcare facility in the
tier-II/III cities would reduce the dependence on bigger cities. We estimate a market opportunity of
cINR20bn in tier-II/III cities by 2015 for healthcare players.
INR70bn investment needed in tier-II/III town hospitals over the next five years
Lack of proper and adequate infrastructure coupled with rising demand, particularly in tier-II/III cities in
India, are the major drivers for Indian hospital players to invest heavily for expansion. Tier-II/III cities have
0.6 beds per 1000 patients compared to 1.2 in the metros providing huge scope for expansion in these
high growth markets. Providing adequate healthcare would require an additional investment of cINR70bn
in the next 5years.
Fig 17: Investment of INR70bn envisaged by 2015E

1.2
1.2 1.1
1
Bed per Mn population

0.9
Bed per Mn population
0.9 0.8
0.8
0.6 0.6
0.6
0.4
0.3
0.2
0 0
2008 2010E 2012E 2015E
Tier I Tier II/III India average (LHS)
(RHS)
Source: KPMG, ASSOCEM PUG Research
Accidental cases are on rise in tier-II/III cities; higher demand for local hospitals
On account of increase in affordability, rapid urbanization and change in lifestyle, there has been a huge
upsurge in the emergency cases such as cardiac arrest and stroke as well as accidental cases in tier-II/III
cities. Total accidental cases in India rose by 25% in the last decade and are expected to grow keeping
up pace with growing urbanization. These cases need immediate medical attention. As a result, the
demand for affordable emergency care facilities in these cities is higher than ever before.
Fig 18: Growth in accidental cases boost need for affordable healthcare facility in tier-II/III cities
120,000 5%
100,000 4%
3%
80,000
2%
60,000
1%
40,000
0%
20,000 -1%
0 -2%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Road accident (RHS)
Growth (%) (LHS)
Source: SIAM, National Crime Records Bureau
Penetration of health insurance to offer additional opportunities: Health insurance has become one
of the fastest growing segments in the non-life insurance industry and higher insurance penetration
would result in higher propensity towards healthcare spent.
Currently, tier-II/III cities accounts for nearly 30-40% of the total premium amount, and is expected to
grow by CAGR of 30% during 2010-15. During the last seven years, health insurance premium has
grown ten-fold from INR7bn in 2001-02 to INR66bn in 2008-09. Also, introduction of cashless healthcare
facility by health insurance providers has helped increase inclination towards hospitalization.
Fig 19: 37% CAGR in the tier-II/III cities health insurance over FY10-15E to boost healthcare demand
6000 70%
5000 60%
4000
44% 50%
3000
40%
2000
32%
30% 30%
1000 26% 26%
20% 22% 25%
0 20%
2004 2005 2006 2007 2008 2009 2010 2015E
Health insurance premium (INR Mn) Growth (%) (LHS)
(RHS) (RHS)
% of Tier II/III cities (LHS)
Source: IRDA, E&Y, PUG research
Winner
We expect Apollo Hospitals to benefit from the untapped opportunity in the tier-II/III cities. We expect
Apollo consolidated earnings to grow by 54% (CAGR) over FY10-12E (post adjusted for stock split) on
the back of higher ARPOB. Fortis is expected to lose out on the opportunity in the tier-II/III space, due to
its focus on tier-I cities for expansion.
Apollo Hospitals (APHC IN)

BUY TP: INR535 Upside: 30%
Apollo, through its „Reach‟ project aims at establishing affordable medical facility in tier-II/III cities is
eyeing for the growth in its hospital segment. These hospitals will be providing affordable healthcare
facilities to the local population and would reduce traveling distance of patients and the average length of
stay (ALOS) for the patients. These hospitals will offer higher margin and faster break-even.
We expect contribution from the tier-II/III city hospitals will increase from 17% currently to over 20% by
FY12 in the consolidated revenue of Apollo. We expect tier-II/III city green field hospitals of Apollo to turn
EBITDA positive within 2 years of operation having an ARPOB of INR9,000-11,000. Apollo is trading at
16.5x FY12E earnings and an EV/EBITDA of 9.5 FY12E. We initiate coverage on the stock
recommending BUY, with a target price of INR535 having a potential upside of 30% over the CMP. We
estimate EPS to grow at a CAGR of 54% over FY10-FY12E on the back of increased capacity and higher
ARPOB.
Runner-up
Fortis Healthcare (FORH IN)
SELL TP: INR144 Downside: 12%
In our view, Fortis is likely to be a laggard in tapping the affordable healthcare opportunity in India. Fortis‟
concentration on the metro/tier-I cities and its robust expansion spree through domestic and international
acquisitions can provide growth; however will miss the high opportunities in the tier II/III market in India.
Fortis management however indicated its willingness to enter into the affordable care segment in the
medium to long term. We however expect Fortis to lose out in terms of ROIC in the long term. Fortis is
trading at 32x earnings and 26x EV/EBITDA on FY12E EV/EBITDA. We initiate SELL on Fortis
Healthcare with a target price of INR144, implying 12% downside from CMP.
Valuations
 We have valued hospitals based on DCF and EV/EBITDA, capturing both the stable cashflow
growth and relativity to its peers.
 Apollo is the key winner on the back of exposure to tier-II/III market; we estimate net profit
CAGR of 54% over FY10-12E.
 Fortis Healthcare with aggressive expansion plans in tier-I cities and specific speciality
hospitals likely to command premium on ARPOB, but is expected to dampen long-term
growth; expect profitability to grow at 19% CAGR over FY10-12E
Valuation methodology
Two valuation methods
We assess the value of these hospital companies using two valuation methods: DCF and EV/EBITDA.
With DCF, we attempt to capture the net present value of the hospital‟s future cash flows. We have also
used EV/EBITDA multiple to ascertain relative valuation comparison among the various listed players in
India and across other emerging markets (EM).
Apollo Hospitals Enterprise Ltd. BUY TP: INR535
We initiate Apollo with a BUY rating and a target price of INR535 (upside of 30%) from the CMP. We
believe that Apollo, with its operating efficiency will continue to generate better returns on its newer
establishments, as compared to its peers.
We expect Apollo to generate free cash flow of INR11bn in the next 5 years mainly on the back of the
higher revenue generation and better operating efficiency from tier-II/III hospitals.
DCF Methodology
We have considered the cost of equity for Apollo at 12% based on the CAPM model. We forecast
earnings growth of 54% over the period after considering potential upside from the upcoming projects in
tier-II/III cities across India and also international expansion.
The terminal value is calculated assuming 5% terminal growth rate. We expect Apollo to generate a free
cash flow of INR30bn in the next 10 years mainly on the back of the higher revenue generation and
better operating efficiency from the tier-II/III hospitals.
Accordingly, we estimate the fair value of Apollo at INR558 per share based on DCF analysis.
WACC Calculation
Risk free rate 8%
Equity Risk Premium 5%
Stock Beta (x) 0.5
Cost of Equity 10.5%
Cost of Debt 6%
WACC 8%
First Year Discounted 2011
Debt/Equity (x) 0.5
Equity Value Consolidated (INR Mn.) 68,868
Shares O/S (Mn.) 123
Intrinsic Value (INR) 558
EV/EBITDA Multiple
Apollo Hospitals is currently trading at 22x P/E and 11.8x EV/EBITDA on FY12E. We have valued Apollo
on an EV/EBITDA multiple in comparison to its global peers as there are few listed comparables in the
domestic market. Historically, Apollo has been trading in a band of 8-11x on a 1-year forward EV/EBITDA
multiple. We have valued Apollo at 11x FY12 EBITDA to arrive at a price of INR511.
EV/EBITDA valuation
Particulars INR Mn.
EBITDA, FY12 5,982
Multiple (x) 11
EV 65,802
Net Debt 2,752
Market cap(INR Mn) 63,052
Number O/s Shares (Mn) 123
Value per share (INR) 511

Fortis Healthcare SELL TP: INR144
We initiate coverage on Fortis with a target price of INR144, recommending SELL on the stock having a
potential downside of 12% from the CMP. We believe Fortis to continue its aggressive expansion led
growth in the domestic and overseas market focusing mainly on tier-I and metro cities. We expect to see
continuous margin pressure on the hospitals acquired from Wockhardt. Margins are likely to hover
around 15% from earlier 20% largely due to lower occupancy and increase in cost. Despite robust
expansion plans, we expect margin pressure to remain due to contraction in price in the metro hospitals.
DCF Methodology
We have considered the cost of equity for Fortis at 12% based on the CAPM model. We forecast
earnings growth of Fortis‟ standalone hospitals at 15% CAGR over FY10-12E.
The terminal value is calculated assuming 5% terminal growth rate which is same for all hospital stocks
under our coverage. We estimate the fair value of Fortis Healthcare at INR134 per share based on DCF
analysis.
WACC Calculation
Risk free rate 8%
Equity Risk Premium 5%
Stock Beta (x) 0.80
Cost of Equity 12%
Cost of Debt 5%
First Year Discounted 2011
Debt/Equity (x) 1
WACC 12%
Equity Value Consolidated (INR Mn.) 42,395
Shares O/S (Mn) 317.5
Intrinsic Value (INR) 134
EV/EBITDA Methodology
Fortis Healthcare (Fortis) is currently trading at 32x P/E and 26x EV/EBITDA on FY11E and FY12E,
respectively. We have valued Fortis on 20x EV/EBITDA to arrive at a fair price of INR155.
EV/EBITDA valuation
Particulars FY12E
EBITDA, FY12 2,795
Multiple (x) 20
EV 55,894
Net Debt 6,535
Market cap (INR Mn.) 49,359
Number O/s Shares (Mn.) 317.5
Value per share (INR) 155
Peer valuation
We have selected 7 major listed hospital chains across the Emerging Markets for the peer group
comparison. Indian hospital sector offers high growth opportunities compared to its Asian players. We
find that relative valuation does not reflect the intrinsic value of these companies as their growth is
strong.
We believe Indian hospitals should trade at a premium to their global counterparts given the much higher
growth opportunity in the domestic market. Apollo and Fortis has a reasonable and well-diversified global
peer group, but we believe that in the healthcare delivery model segment, global comparison is not
appropriate as the markets are not uniform. Apollo (17x P/E on FY12E) is trading 15% discount to the
emerging markets hospitals, while Fortis appears expensive at 32x FY12E earnings considering the
global average of 20x 1-year forward earnings.
EM Peer table
Market Cap FY12E FY12E FY12E FY12E FY12E FY12E

Particulars
(USD Mn.) P/E (x) EPS ROE (%) P/Sales (x) P/Book (x) EV/EVITDA (x)
Apollo Hospitals 1,145 17 INR 24.9 15 1.5 2.4 9.8

Fortis Healthcare 1,140 32 INR 5.1 9 2.9 2.1 25.8
EM Peers
Sonic Healthcare, Australia 3,582 14 USD 0.94 6.77 1.4 1.6 9.7
Parkway Holdings, Singapore 3,019 25.8 USD 0.10 2.71 4.4 3.3 19.1
Netcare Ltd, South Africa 2,615 13.6 USD 0.17 39.5 0.8 4.6 10.6
Diag America, Brazil 2,010 18.4 USD 0.40 15.54 2.6 6.7 16.7
Aier Eye Hospital, China 1,708 NA NA 25.94 26.5 49.2 14.7
Odontoprev, Brazil 1,487 27 USD 1.3 6.52 7.0 3.4 5.6
Healthscope, Australia 1,466 16.1 USD 0.3 7.98 1.0 3.6 7.0
Source: Reuters PUG Research
Key risks
 Infrastructure bottlenecks and shortage of skilled manpower could dampen the growth
prospects
 Substantial rise in interest cost may affect near-term investment and profitability in the
Indian hospital space
 Increase in competition in the tier-II/III cities would hamper occupancy and per bed
revenue.
Regulatory risks
In case of land acquisition, usually it is leased from the government or a local body in exchange for a free
treatment to poor (normally 20-30% of the total beds cater for free treatment), the risk of closure or other
government action runs high in case of non-compliance. However, both the companies under our
coverage have a lower risk, as most of their properties are not leased from the local government bodies.
Business Risk
Execution risk
The project execution depends on various regulatory and commercial clearances. Delay in getting these
clearances from the authorities may delay execution. Non-timely execution of hospital projects will
increase the project cost substantially, thus reducing the IRR.
Shortage of skilled manpower

Shortage of skilled manpower in the tier-II/III cities is a major risk to our assumptions as this will
adversely impact the operational efficiency of the hospital. This will impact in reducing occupancy and
per bed revenue thus impacting the overall margins.
Competition risk
Increased competition in tier-II/III cities due to cost advantage may result in lower occupancies and per
bed revenue thus negatively impacting profitability.
Rise in interest rates

Substantial rise in interest cost may affect investment thus delaying expansion plans. On the other hand,
rise in interest rate, would adversely impact profitability as debt service cost increases pulling down
profitability.
Environment Risk
Environmental risks from non-biodegradable hospital waste are very high. Hospitals without adequate
and proper waste management facility could face stringent action from the government agencies.
Company Section
Healthcare l India Research
Apollo Hospitals Enterprise Ltd.
CMP: INR410 Reco: BUY

Target Price : INR535 ■ Investment in tier-II/III cities to earn ROE of 25% vs. 12% in
Upside : 30% metros
■ Aggressive expansion plans in the tier-II/III city to help
Nifty 5,884 Apollo register 54% CAGR in net profit over FY10-12E
Sensex 19,594
■ We expect free cash flow generation of INR11bn in the next
5 years
Stock Data
Sector Hospitals
Reuters Code APLH.BO Company background
Bloomberg Code APHS IN
Apollo is the largest hospital chain with over 8,000 beds across 47 hospitals in India. The
No. of shares (mn) 123
company operates in three business segments: hospitals, retail pharmacy and others. The
Market Cap (Rs bn) 51
subsidiaries of the company are- Samudra Healthcare Enterprises Ltd., Apollo Hospitals
Market Cap (USD mn) 1,145
(UK) Ltd., Apollo Health and Lifestyle Ltd., Imperial Hospital and Research Centre Ltd., and
Avg 6m Vol. 18,051
Pinakini Hospitals Ltd.
Malaysian government sovereign fund Khazanah owns c12% stake in Apollo.

Stock Performance (%)
52-week high/low INR445/227
Recent developments
1M 3M 12M Apollo plans to invest INR30bn for an addition of 4,000 beds by FY15. Apollo hospitals
Absolute (%) 6 8 50
have tied up funds for expansions especially in the tier-II/III cities with IFC for INR2.3bn; the
company has already spent INR2.5bn from internal accruals.
Relative (%) -2 -3 33
Apollo is setting up a wellness island under Apollo Wellness at Lavasa, near Pune and has
also forayed into the stem cell research space. This will be the second wellness centre after
Shareholding Pattern Hyderabad.
On the international front, Apollo plans to set up a 200 bed hospital in Shanghai (China) at
Public & Promoters
33%
others
39% an investment of USD120mn, 150 bed hospitals in Vienna (Austria) for USD95mn and a
100 bed hospital in Nigeria.
DIIs FIIs
4% 24%
Positives
Apollo‟s strong management team, headed by Dr. Pratap Reddy facilitated the company to
become the largest hospital player in the country. Further, close partnership with the
Nifty and Stock Movement Malaysian sovereign fund (Khazanah) is likely to aid in procuring easy funds for domestic
450 6,000 and overseas expansion.
400 5,500
350 5,000
Negatives
300 4,500
250 4,000
Apollo‟s per bed revenue is lower than its peers on account of lesser specialty therapeutic
Oct-09
Apr-10
Feb-10
Jul-10
May-10
Jan-10
Jun-10
Sep-09
Nov-09
Dec-09
Aug-10
Mar-10
mix. Moreover, mix of secondary and tertiary care hospitals is likely to have lower revenue
Apollo Hospital Nif ty
per bed than its specialty focused peers.
Key Catalyst
Tier-II/III cities to fuel growth
Apollo is eyeing for the growth in its hospital segment through its „Reach‟ project which aims at
establishing affordable medical facility in tier-II/III cities. Apollo is expanding its presence with 10 new
projects, majorly in Andhra Pradesh (Hyderguda, Karaikudi and Vikrampuri), followed by Maharashtra
(Nasik, Belapur and Thane) and Karnataka with an investment of INR7bn over the next 3 years. Apollo
plans to commence operations of 4 owned hospitals with a combined capacity of 522 beds by FY11 and
another 4 hospitals in FY12 with a combined capacity of 550 beds.
In our view, Apollo‟s affordable healthcare segment (Reach) will add more value to its core business in
terms of occupancy and ARPOB. However, Apollo‟s ARPOB is lower than its peers but the market mix
and greater reach through its presence in both secondary and tertiary care segment across the country
nullifies the discount in per bed revenue. We expect tier-II/III city green field hospitals of Apollo to turn
EBITDA positive within 2 years of operation having an ARPOB of INR3,000-8,000.
Apollo’s Expansion Plan

Expected year of commission No. of beds Ownership Investment (INR mn)
FY11
Hyderabad 100 Owned 230
Hyderguda 175 Owned 445
Kakaikudi 100 Owned 230
Total 375 905
FY12
Nashik 120 Owned 540
Nellore 200 Owned 670
Ayanambakkam 200 Owned 615
Bangalore 52 JV/Associate 60
Total 572 1,885
FY13
Navi Mumbai 300 Owned 3,500
Thane 260 JV/Associate 500
Total 560 4,000
Source: Company
Core operating profit to grow by 17% in the long term

Apollo‟s operating performance over the last 5 years showed a robust growth of 22% and we expect it to
continue its strong performance with a growth of 54%CAGR FY10-12E on the back of higher occupancy
and increased ARPOB.
We expect revenues from Chennai cluster to register a growth of 14% CAGR over the next 5 years,
whereas the standalone segment to grow at 18% CAGR over the same time period. The in-patient
revenue is expected to grow at 19% CAGR with an average volume growth of 9% CAGR in the next 2
years. Going forward, the average occupancy rate is likely to remain stable at 80% which is higher than
its peers. Apollo‟s focus in the tier-II/III cities through „Reach‟ initiative will help improve efficiency,
profitability and will help reduce the payout period for the new projects.
Fig 20: Revenue break-up of Apollo hospitals (INR Mn)
2,292 2,801 3,296 4,684 5,862 6,790 7,829

1,091 1,423 1,638 1,734 1,919 2,091 2,273
1,437 1,646 1,896 2,058 2,429 2,893 3,276
4,023 5,056 5,485 6,261 7,205 8,493 9,632
37%
14,580 16,686 18,592
24% 12,025
20% 15%
6,551 8,125 13%
16% 21%
9,752
FY09 FY10 FY11E FY12E FY13E FY14E FY15E

Standalone Chennai Cluster Hydrabad Cluster
Others Subsidiaries & JVs Revenue growth
Source: Company, PUG research
Occupancy levels to remain steady

Being the largest player in the Indian hospitality segment, Apollo enjoys a higher occupancy rate than its
listed peers. The average occupancy ratio for Apollo is steady at c80% over the last 5 years. We expect
Apollo‟s occupancy to remain steady over the long run, between 80-85%, on the back of higher
occupancy in tier-II/III city hospitals.
Occupancy Rate FY09 FY10 FY11E FY12E

Standalone 82% 80% 82% 82%
Chennai Cluster 82% 77% 80% 80%
Hyderabad Cluster 83% 85% 85% 85%
Others 75% 75% 79% 80%
Subsidiaries & JVs 72% 75% 79% 80%
Source: Company, PUG research
Non core business: may hive off

Apollo plans to unlock value of its non-core businesses like pharmacy, Health Street and the insurance
business. Apollo has filled a DRHP for Health Street in March 2008 to raise USD70mn through initial
public offering by diluting 15% stake valuing the entire business at USD470mn, however, was
subsequently withdrawn due to the global economic slowdown and non-interest of investors in the capital
markets. We expect Apollo to unlock values of its non-core business in the next few years which will
impart strength to its consolidated financials.
Financial outlook and valuation

Revenue to grow by 34% by FY10-12
We expect Apollo‟s consolidated revenues to grow at a c34% (CAGR) over 2010-2012 on the back of
increase in occupancy and ARPOB. We expect Apollo‟s inpatient revenue to increase by c37% (CAGR)
over FY10-12E contributing in excess of 70% to the overall revenue. Chennai and Hydrabad cluster are
expected to grow by 31% and 42% respectively over FY10-12E, while Apollo‟s subsidiary segment is
expected to grow by 34%, majorly contributed by Apollo Glenegles, Kolkata.
Margins are likely to expand by 180bps in FY11E. We forecast further margin expansion post FY13E due
to increased contribution from the tier II/III hospitals and better operational efficiency. The average
revenue per bed is likely to increase by 9% (CAGR) over FY10-12E.
Fig 20: EBITDA margin to remain steady over the next 2 years (INR Mn)
20%
35000 18% 18%

16.8%
17% 16.4%
16%
INR Mn.
25000 15%
15%
14% 14%
15000
12%
5000 10%
FY07 FY08 FY09 FY10 FY11E FY12E FY13E
Net Sales EBITDA Margin (RHS)
Earnings to grow by 54% by FY12E; ROE to improve

We expect Apollo‟s consolidated earnings to grow at 54% (CAGR) over FY10-12E (post adjusted for
stock split) on the back of higher ARPOB. We expect the average per bed revenue is to at CAGR 16%
over FY10-12E, due to improved operating efficiency particularly in the tier-II/III hospitals. Return on
equity (ROE) is expected to increase by 670bps to 15% over FY10-12E.
Fig 21: Apollo Hospitals EPS to grow by 48% in FY11E and and 51% in FY12E (non adjusted of stock split)
17.0%
55.0 15.0%
15.0%
45.0
13.0%
35.0 11.0%
INR
11.0%
25.0 8.4%
9.0%
6.6%
15.0 7.0%
5.0 5.0%
EPS RoE (%) (RHS)
Non-core business overview

Apollo Pharmacy
Apollo‟s pharmacy business (set up in FY07) recorded impressive margins of 5% during FY10 on the
back of higher sale of branded generics and consumer goods. Apollo plans to expand its retail pharmacy
network to 1,200 from the present 1,080 by end FY11 end.
The company has invested INR1,700mn in FY10 in the retail pharmacy and plans for a JV in the next 12-
18 months. Of its network, 650 pharmacies generate positive EBITDA and the company expects retail
pharmacies to break even in FY11E. We expect revenue per store Apollo‟s pharmacy business to grow
at15% (CAGR) over the next 5 years.
Fig 22: Pharmacy business expected to grow by 15% (CAGR) over FY15E
2,000 6.3 7.0
5.8
5.5 6.0
5.1 5.2
1,500
4.5 5.0
3.8
4.0
1,000
3.0
500 2.0
FY09 FY10 FY11E FY12E FY13E FY14E FY15E
No. of Stores Revenue/store (INR Mn.) (LHS)
(RHS)
Apollo Munich Insurance

Apollo Munich (name changed from Apollo DKV) is one of the late entrant in the Indian health insurance
segment. Apollo holds c20% stake in the joint venture with Munich Re of Germany. The company has 30
offices at the end of FY10 and plans to open 10 more offices in FY11.
Financials
Particulars (INR Mn.) FY09 FY10 FY11E FY12E
Premium income 316 1,175 1,838 2,991
Claims and commission 411 1,211 2,423 4,845
Staff cost 271 481 962 1,923
Administration exp. 750 981 1,495 1,951
Total expense 1,433 2,673 4,879 8,720
EBITDA (1,116) (1,498) (3,041) (5,729)
Other income 113 169 289 367
Depreciation 62 123 163 266
PBT (1,065) (1,453) (2,915) (5,629)
Apollo Health Street
Apollo Health Street is the revenue management and custom IT solution provider company providing
services to the US healthcare industry. Apollo holds c45.5% stake in Health Street which turned
profitable in FY09. The company has completed full integration of the Zavata business (BPO), which it
had bought in 2007 for USD170mn.
Post completion of restructuring of debt, we expect Health Street to do well as the US market is gradually
coming out of the slowdown effect. Moreover, the healthcare industry received a big boost with the US
President Obama‟s health care plans, which adds 30mn additional American citizens into the healthcare
bracket.
Financials
Particulars (INR Mn.) FY09 FY10 Growth (%)
Revenues 4,994 4,577 (8%)
Total Expenses 4,239 4,124 (3%)
EBITDA 755 453 (40%)
Margin (%) 15% 10%
Profit Before Tax 134 106 (21%)
Tax (13) 23
Profit After Tax 147 83 (44%)
Fig 23 : Share price performance vs. Nifty
500 7000
450
6000
400
350 5000
300
4000
250
3000
200
150 2000
100
1000
50
0 0
Jul-07
Jul-08
Jan-09
Jul-09
Jul-10
Sep-07
Nov-07
Jan-08
Sep-08
Nov-08
Sep-09
Nov-09
Jan-10
Sep-10
Mar-08
Mar-09
Mar-10
May-07
May-08
May-09
May-10
Apollo Hospital (RHS)

Nifty (LHS)
Source: Bloomberg
PUG vs. consensus

Estimates higher than consensus
We are marginally ahead of consensus on FY11 estimates and way ahead of the consensus estimate for
FY12E, as we have assumed, most of the tier-II/III town hospitals will be on stream in FY12E. We have
factored in relatively higher revenue share from tier-II/III hospitals in FY12E, and so our EPS forecasts for
FY11E and FY12E are 4% and 38% above street consensus, respectively.
PUG EPS Consensus EPS

Company
FY11E FY12E FY11E FY12E
Apollo Hospitals 15.6 24.9 14.5 17.0
Financials
Apollo Hospitals: Consolidated profit and loss statement
FY Ending Mar, INR Mn. FY09 FY10 FY11E FY12E
Net Sales 16,142 20,265 25,671 36,416
Raw Material Consumed 8,173 10,092 12,770 18,256
Employee Expenses 2,594 3,308 3,973 5,475
Selling, General & Administrative Exp 288 267 274 378
Other Expenses 2811 3585 4404 6326
Total Expenditure 13,867 17,252 21,421 30,434
EBITDA 2,275 3,013 4,250 5,982
EBITDA Margin (%) 14% 15% 17% 16%
Depreciation 640 757 842 1,000
EBIT 1,635 2,256 3,408 4,982
Other Income/Extraordinary items 208 322 147 222
Interest 459 602 1,033 1,174
Profit Before Tax 1,385 1,976 2,522 4,030
Tax 490 676 656 1,048
Tax rate (%) 35% 34% 26% 26%
Net Profit 895 1,300 1,866 2,982
Apollo Hospitals: Key Ratios

Particulars FY09 FY10 FY11E FY12E
EPS (INR) 7.4 10.5 15.6 24.9
P/E (x) 57 41 27 17
ROE (%) 6.6% 8.4% 11.0% 15.0%
ROCE (%) 7.0% 8.1% 10.7% 15.7%
Earnings Yield (%) 1.7% 2.5% 3.7% 5.8%
P/Sales (x) 3.2 2.6 2.1 1.5
P/BV(x) 3.5 3.1 2.8 2.4
EV/Sales (x) 4.3 3.4 2.7 1.9
EV/ EBIDTA (x) 25.9 19.5 14 9.8
EV/Bed (INR Mn) 10.0 9.3 7.9 7.1
Apollo Hospitals: Consolidated Balance sheet

FY Ending Mar, INR Mn. FY09 FY10 FY11E FY12E
Share Capital 679 618 618 628
Reserves Total 13,879 15,786 18,220 21,812
Total Shareholders’ Funds 14,558 16,404 18,838 22,440
Secured Loans 6,402 6,764 8,464 9,164
Unsecured Loans 3,04 2,367 3,367 4,367
Total Liabilities 21,264 25,535 30,669 35,971
Net Block 6,627 8,244 9,725 11,528

Capital Work in Progress 2,373 2,380 2,837 3,393
Investments 6,293 6,671 7,071 7,495
Inventories 1,088 1,376 1,751 2,234
Sundry Debtors 1,596 2,308 3,052 4,329
Cash and Bank 877 2,985 5,313 7,231
Loan and Advances 3,499 3,946 5,010 6,812
Other current assets 1,846 2,586 1,082 2,201
Total Current Assets 15,199 19,871 23,279 30,302
Sundry Creditors 908 1,967 3,081 4,370
Other Liabilities 56 561 (990) 511
Provisions 1,971 2,432 3,081 4,370
Total Current Liabilities 2,935 4,960 5,171 9,251
Total Assets 21,264 25,535 30,669 35,971
Apollo Hospitals: Consolidated Cash Flow

FY Ending Mar, INR mn FY09 FY10 FY11E FY12E
PBT 1,385 1,976 2,612 4,190
Depreciation 640 757 842 1,000
Change in working capital (789) (722) (2,096) (2,510)
Other non-cash adjustments (323) (256) 0 0
Operating cash flow 912 1,756 1,362 2,307
Capital expenditure (1,815) (2,494) (2,284) (2,779)
Change in investments 763 378 400 424
Other investing cash flow (1,656) 44 149 266
Investing cash flow (2,708) (2,073) (1,734) (2,089)
Free cash flow to firm (1,796) (317) (372) 218
Issue of equity 811 0 0 0
Change in borrowings 1,334 2,425 2,700 1,700
Dividend paid (352) 0 0 0
Other (399) 0 0 0
Financing cash flow 1,394 2,425 2,700 1,700
Net cash generated during year (402) 2,108 2,328 1,918
Cash at beginning of year 1,278 877 2,985 5,313
Cash at the end of year 877 2,985 5,313 7,231
Financial Summary
Profit and loss statement (INR mn) Cash flow statement (INR mn)
Year ending 31 March FY09 FY10 FY11E FY12E Year ending 31 March FY09 FY10 FY11E FY12E
Income from operations 16,142 20,265 25,671 36,416 Profit before tax 1,385 1,976 2,612 4,190
Total operating expenses (13,867) (17,252) (21,421) (30,434) Depreciation, Amortization etc. 640 757 842 1,000
EBITDA 2,275 3,013 4,250 5,982 Changes in W.C. (789) (722) (2,096) (2,510)
Depreciation (640) (757) (842) (1,000) Other non-cash adjustments (323) (256) - -
EBIT 1,635 2,256 3,408 4,982 Net Operating Cash Flow 912 1,756 1,358 2,680
Interest expenses (459) (602) (943) (1,014) CAPEX (1,815) (2,494) (2,284) (2,779)
Other income 208 322 147 222 Investments 763 378 400 424
Profit before tax and extraordinary 1,385 1,976 2,612 4,190 Other investing cash flow (1,656) 44 149 266
Extraordinary income - - - - Investing cash flows (2708) (2072) (1735) (2089)
Profit before tax 1,385 1,976 2,612 4,190 Increase in equity 811 - - -
Provision for tax (490) (676) (679) (1,089) Debt raised/ (repaid) 1,334 2,425 2,700 1,700
Net profit 895 1,300 1,933 3,101 Dividends (352) - - -
Minority Interest - - - - Others (399) - - -
Reported PAT 895 1,300 1,933 3,101 Financing cash flow 1,394 2,425 2,700 1,700
Adjusted Profit 895 1,300 1,933 3,101 Closing cash balance 877 2,985 5,313 7,231
Balance sheet (INR mn) Key ratios (%)

Equity Capital 679 618 618 628 Diluted EPS (INR) 7.4 10.5 15.6 24.9
Reserves and surplus 13,879 15,786 18,220 21,812 Book value per share (INR) 242 266 305 357
Shareholders’ funds 14,558 16,404 18,838 22,440 ROE 7% 8% 11% 15%
Minorities - - - - ROCE 7% 8% 11% 16%
Borrowings 6,706 9,131 11,831 13,531 Net debt/Equity 50% 59% 67% 66%
Growth
Gross block 9,407 11,901 14,185 16,963 Revenues 44% 26% 27% 42%
Depreciation (2,780) (3,657) (4,460) (5,436) EBITDA 41% 23% 27% 43%
Net block 6,627 8,244 9,725 11,528 PBT 54% 28% 20% 20%
Capital WIP 2,373 2,380 2,837 3,393 Net profit 87% (7%) 25% 38%
Total fixed assets 8,999 10,624 12,562 14,921 Diluted EPS 1% 42% 49% 58%
Investments 6,293 6,671 7,071 7,495 Margins
Loans and advances 3,499 3,946 5,010 6,812 EBITDA 14% 15% 17% 16%
Inventories 1,088 1,376 1,751 2,234 Net profit 6% 6% 8% 9%
Sundry debtors 1,596 2,308 3,052 4,329
Cash equivalents 877 2,985 5,313 7,231 Valuation ratios
Other current assets 1,846 2,586 1,082 2,201 Year ending 31 March FY09 FY10 FY11E FY12E
Total current assets 8,906 13,200 16,208 22,807 Diluted P/E (x) 57.5 40.1 27.3 17.2
Sundry creditors 908 1,967 3,081 4,370 Price/BV(x) 3.5 3.2 2.9 2.5
Other current liabilities 2,027 2,993 2,091 4,881 Market cap/sales (x) 3.1 2.5 1.9 1.4
Total current liabilities 2,935 4,960 5,171 9,251 EV/sales (x) 4.2 3.3 2.6 1.9
Net current assets 5,971 8,240 11,037 13,555 EV/EBITDA (x) 26.5 20.0 14.2 10.1
Total Assets 21,264 25,535 30,669 35,971 EV/Bed (INR Mn) 10.3 9.5 8.1 7.2
Healthcare l India Research
Fortis Healthcare Limited
CMP: INR166 Reco: SELL
Target Price : INR 145 ■ Less focus on tier-II/III cities to hit organic growth
Downside : 12% ■ Continuous margin contraction in the Wockhardt hospitals remains a
concern
■ Earnings to surge driven by higher occupancy rates and higher Average
Nifty 5,884
Sensex 19,594
Revenue per Occupied Bed (ARPOB)
Stock Data
Company Background
Sector Hospitals
Fortis Healthcare (incorporated in 1996) is one of the aggressively growing Indian hospital
Reuters Code FOHE.BO
company. It is the second largest hospital chains in India with a network of 38 hospitals and
Bloomberg Code FORH IN
5,000 beds under management in the country. In FY10, the company doubled its total bed
No. of shares (mn) 317.5
count from ~4700 beds to over 10,000 beds through the inorganic route (i.e. acquisition of
Market Cap (Rs bn) 53
10 Wockhardt hospitals and hospitals of Raheja and Hiranandani in Mumbai.).
Market Cap (USD mn) 1,140
Avg 6m Vol. 783,883
Recent Development
Stock Performance (%) Singapore listing on cards
Fortis Healthcare is charting out strategies for a possible listing on the Singapore Stock
52-week high/low INR187/96
Exchange. The company is eyeing expansion on the global front after failing to spreading
1M 3M 12M
roots in Singapore, which may include setting up of greenfield projects as well.
Absolute (%) 5 7 48
Relative (%) -3 -4 31 Parkway stake sale
Fortis‟ move to sell the entire stake (25% at SGD3.96/sh) in Parkway holdings is according
to us was the right decision gaining 11% on the investment. The sale proceeds will add
Shareholding Pattern strength to Fortis‟ balance-sheet and improve leverage position.
DIIs
1%
Debt raised
Public &
FIIs others
5% 17%
Promoters
77%
Fortis raised USD100mn through FCCB, conversion price being INR167/share to fund its
expansion.
Positives
Nifty and Stock Movement Strong presence in key therapies segment and penetration in metro and tier-I cities will help
190 6,000 Fortis Healthcare command premium on the average per bed revenue compared to its
165 5,500 peers.
140 5,000
115 4,500
Negatives
90 4,000
Sep-09
Nov-09
Dec-09
Aug-10
Oct-09
Apr-10
Feb-10
Mar-10
Jul-10
May-10
Jan-10
Jun-10
■ Concentration in metros to negatively impact average revenue (ARPOB).

Fortis Healthcare Nif ty
■ Margings to remain under pressure over long term.
Key Catalyst
Less focus on tier-II/III to hit organic growth
Over the past years, Fortis healthcare‟s organic growth has been less than the industry growth of 16%.
The company initially started concentrating into the tier-II markets in Northern India (Jaipur, Faridabad,
Amritsar), however, it shifted focus to inorganic growth. It helped Fortis to increase scale, however it lost
out in tapping the tremendous opportunity in the affordable healthcare delivery model in tier-II/III cities.
Wockhardt deal to add scale; margins remains a concern over the medium term
We believe that the Wockhardt acquisition will add value to Fortis‟ scale and provide geographical
diversification. Fortis, through this deal will have access to high potential metro cities such as Mumbai,
Bengaluru and Kolkata through a set of well-run hospitals.
On the margins front, Wockhardt hospitals (now under FHSL) is facing severe margin contraction due to
increased operational and financial cost pressure coupled with lower occupancy levels. We expect
margin pressure to continue over medium term.
Fig 24: Therapeutic revenue breakup of Fortis and Wockhardt

Fortis Therapeutic Breakup Wockhardt Hospital Therapeutic Breakup
Neuro, 6%
Renal, 6% Neuro, 4%
Renal, 10%
Pharma, 6%
Pharma, 3%
OPD, 9% Cardiac, 38%
Cardiac, 47% OPD, 15%
Ortho, 6%
Ortho, 10%
Critical, 22%
Critical, 18%
Superior turnaround ability and high earnings growth ahead

Fortis management has a proven track record of turning around hospitals. We believe, given majority
beds for the company are about to reach profitable age, earnings will surge led by strong revenue
growth. EPS growth will be driven by higher occupancy rates and higher Average Revenue per Occupied
Bed (ARPOB).
Strong operational capability

Fortis gains its strength from the strong operational capability and the ability to turnaround acquired
hospitals. The company initially started concentrating into the tier-II markets in Northern India (Jaipur,
Faridabad, and Amritsar); however it shifted focus on inorganic growth with the acquisition of Escorts
Hospitals, Hiranandani Hospitals, Wockhardt Hospitals and Raheja Hospitals in Mumbai. These
acquisitions helped Fortis increase scalability and growth.
Forecast and valuation

Margins to remains under pressure
We believe that Fortis Healthcare to continue its aggressive expansion in the domestic and overseas
market, focusing mainly on tier-I and metro cities. We expect Fortis‟ standalone revenues to grow at
c16% CAGR over FY10-12 on the back of 3 new speciality hospital addition in Kolkata, Delhi and
Mumbai. On a consolidated basis, we expect margin pressure on the hospitals acquired from Wockhardt,
to hover around 15% from earlier 20% largely due to lower occupancy and increase in cost.
We expect Fortis‟ EBITDA margin to remain under pressure over FY11-12E mainly due to fall in average
per bed revenue and occupancy rate in its metro and tier-I city hospitals on account of increased
competition and decline in the number of patients from tier-II/III cities.
Fig 25: EBITDA (standalone) unlikely to expand over FY11-12E

1,800 16%
1,600 15.6% 16%
1,400
15.1% 15%
1,200
15.0%
1,000 15%
INR Mn
800 14%
600 13.6%
14%
400
13%
200
0 13%
Adj Net Profit (RHS)

EBITDA Margin (LHS)
Fig 26: EPS growth on account of acquisition; base EPS growth to remain subdued
6.0 9.0% 10.0%
5.0
8.0%
7.1%
4.0
6.0%
3.0
3.9%
4.0%
2.0
1.0% 2.0%
1.0
0.0 0.0%
EPS RoE (%) (RHS)

(LHS)
Valuation
At the current market price of INR165, the stock is trading at 32x P/E and 26x EV/EBITDA of FY12E
numbers.
Our target price of INR144 is based on the average of the estimated fair value using DCF analysis with a
terminal growth rate of 5.0% and 20x EV/EBITDA of FY12E. This is equivalent to 46x FY11E earnings
and 32x FY12E earnings. We recommend SELL on the stock, implying a potential downside of 12%.
Fig 27 : Share price performance vs. Nifty

200 7000
180
6000
160
140 5000
120 4000
100
80 3000
60 2000
40
1000
20
0 0
Jul-08
Jul-07
Jul-09
Jul-10
Jan-08
Jan-09
Jan-10
Sep-07
Nov-07
Sep-08
Nov-08
Sep-09
Nov-09
Sep-10
Mar-08
Mar-09
Mar-10
May-07
May-08
May-09
May-10
Fortis Healthcare Nifty (LHS)
(RHS)
Source: Bloomberg, PUG Research
Our view vs. consensus

Marginally below consensus
We are marginally below consensus on FY11-12E estimate for FY12 for Fortis Healthcare based on the
tepid growth from tier-I city hospitals, and no near term revenue drivers (Fortis is less focused on
expansion to tier-II/III cities). We have factored in high revenue from the new multi speciality hospitals in
Kolkata, Delhi (Shalimar Bagh) and Mumbai (Mulund) coming on stream in 3QFY11 and in FY12. Our
EPS forecasts for FY11E and FY12E are 5% and 6% below consensus estimates respectively.
PUG EPS Consensus EPS

Company
FY11E FY12E FY11E FY12E
Fortis Healthcare 3.7 5.3 3.9 5.6

Source: Bloomberg, PUG Research
Fortis Healthcare : Consolidated profit and loss statement

Particulars INR Mn. FY09 FY10 FY11E FY12E
Revenue 6,305 9,379 14,272 17,911
Raw Material Consumed 1,895 2,627 3,950 5,124
Gross Profit 4,410 6,753 10,322 12,788
Employee Expenses 1,474 1,950 2,585 3,240
Other Expenses 2,078 3,398 5,584 6,754
Total Expenditure 3,551 5,348 8,170 9,993
EBITDA 858 1,405 2,152 2,795
EBITDA Margin (%) 14% 15% 15% 16%
Interest 437 573 1,154 554
Depreciation 487 711 1,013 1,125
Other Income 284 501 1,237 600
Profit Before Tax 218 622 1,222 1,715
Tax 41 33 76 99
Tax rate (%) 19% 5% 6% 6%
Net Profit After Tax 177 588 1,146 1,616
Minority Interest 32 21 10 0
Extra ordinary 0 17 1 0
Reported Net Profit 146 584 1,136 1,616
Fortis Healthcare : Key Ratios

EPS (INR) 0.5 1.8 3.6 5.1
Diluted P/E (x) 360 92.3 46.2 32.4
Price/BV(x) 4.0 2.2 2.1 2.0
Market cap/sales (x) 7.7 5.2 3.4 2.7
EV/sales (x) 11.4 7.7 5.1 4.0
EV/EBITDA (x) 84.1 51.4 33.5 25.8
EV/Bed (INR Mn.) 32.8 25.8 22.4 21.9
Fortis Healthcare: Consolidated Balance sheet

Particulars INR Mn. FY09 FY10E FY11E FY12E
Share Capital 2,387 3,291 3,291 3,291
Reserves and Surplus 10,799 20,063 21,198 22,333
Shareholders’ Funds 13,186 23,354 24,489 25,624
Loan Funds 4,790 8,000 8,000 8,000
Minority Interest 216 250 315 424
Deferred Tax Liabilities 12 96 114 216
Goodwill 3,965 7,960 7,960 7,960

Net Block 8,209 18,716 18,328 17,926
CWIP & others 1,836 1,836 1,836 1,836
Total 14,010 28,512 28,124 27,722
Investments 541 541 541 541
Cash and Bank Balances 588 1,383 2,588 4,652
Other Current Assets 3,047 4,275 6,792 8,051
Current Liabilities and Provisions 2,462 3,011 5,127 6,702
Net Current Assets 1,173 2,647 4,253 6,001
Miscellaneous Expenditure 2,480 0 0 0
Total Assets 18,204 31,700 32,918 34,264
Fortis Healthcare : Consolidated Cashflow statement (INRmn)

PBT 218 622 1,222 1,715
Depreciation 487 711 1,013 1,125
Change in working capital 684 (867) (249) (119)
Other non-cash adjustments (900) 119 219 343
Operating cash flow 489 585 2,205 3,064
Capital expenditure (937) (13,000) (1,000) (1,000)
Change in investments (29) 0 0 0
Investing cash flow (966) (13,000) (1,000) (1,000)
Free cash flow to firm (477) (12,416) 1,205 2,064
Issue of equity 0 9,970 0 0
Change in borrowings 1,010 3,240 0 0
Other (81) 0 0 0
Financing cash flow 929 13,210 0 0
Net cash generated during year 452 795 1,205 2,064
Cash at beginning of year 136 588 1,383 2,588
Cash at end of year 588 1,383 2,588 4,652
Financial Summary
Profit and loss statement (INR Mn) Cash flow statement (INR mn)
Income from operations 6,305 9,379 14,272 17,911 Profit before tax 218 622 1222 1715
Total operating expenses (5,447) (7,975) (12,120) (15,117) Depreciation, Amortization etc. 487 711 1013 1125
EBITDA 858 1,405 2,152 2,795 Changes in W.C. 684 (867) (249) (119)
Depreciation (487) (711) (1,013) (1,125) Other non-cash adjustments (900) 119 219 343
EBIT 371 694 1,139 1,670 Net Operating Cash Flow 489 585 2205 3064
Interest expenses (437) (573) (1,154) (554) CAPEX (937) (13,000) (6,052) (4,135)
Other income 284 501 1,237 600 Change in investments (29) 0 0 0
Profit before tax and extraordinary 218 622 1,222 1,715 Investing cash flows (966) (13,000) (6,052) (4,135)
Extraordinary income 0.4 17 1 - Increase in equity 0 9970 0 0
Profit before tax 218 622 1,222 1,715 Debt raised/ (repaid) 1,010 3,240 3,000 2,000
Tax (41) (33) (76) (99) Dividends 0 0 0 0
Net profit 177 588 1,146 1,616 Others (81) 0 0 0
Minority Interest (32) (32) (10) - Financing cash flow 929 13,210 3,000 2,000
Reported PAT 145 556 1,136 1,616 Net change in cash 452 795 (847) 929
Adjusted Profit 145 540 1,135 1,616 Closing cash balance 588 1,383 536 1,465
Balance sheet (INR Mn.) Key ratios

Equity Capital 2,387 3,291 3,291 3,291 Diluted EPS (INR) 0.5 1.8 3.6 5.1
Reserves and surplus 20,063 21,198 22,333 20,063 Book value per share (INR) 44.1 89.8 95.0 97.4
Shareholders’ funds 13,186 23,354 23,354 23,354 ROE 1% 4% 8% 10%
Minorities 216 250 315 424 ROCE 6% 10% 14% 17%
Borrowings 4,790 8,000 9,000 10,000 Net debt/Equity 36% 44% 39% 43%
Others 12 96 249 486 Growth
Total Liabilities 18,204 31,700 32,918 34,264 Revenues 24% 49% 52% 26%
EBITDA 0% 64% 53% 30%
Goodwill 3,965 7,960 7,960 7,960 Diluted EPS NA 290% 100% 42%
Gross block 11,558 22,599 25,317 27,255 Margins
Depreciation 3,349 3,883 4,937 6,142 EBITDA 14% 15% 15% 16%
Net block 8,209 18,716 20,380 21,113 Net profit 2% 6% 8% 9%
Capital WIP 1,836 1,836 1,836 1,836
Total fixed assets 10,045 20,552 22,216 22,949
Investments 541 541 541 541 Valuation ratios
Cash equivalents 588 1,383 536 1,465 Year ending 31 March FY09 FY10 FY11E FY12E
Other current assets 3,047 4,275 6,792 8,051 Diluted P/E (x) 360 92.3 46.2 32.4
Misc. Expenditure 2,480 0 0 0 Price/BV(x) 3.7 1.8 1.7 1.7
Total current assets 6,115 5,658 7,328 9,516 Market cap/sales (x) 7.7 5.2 3.4 2.7
Total current liabilities 2,462 3,011 5,127 6,702 EV/sales (x) 11.4 7.7 5.1 4.0
Net current assets 3,653 2,647 2,201 2,814 EV/EBITDA (x) 84.1 51.4 33.5 25.8
Total Assets 18,204 31,700 32,918 34,264 EV/Bed (INR Mn) 32.8 25.8 13.8 11.4
Appendix -I
Classification of cities (as per 2001 population census)
Metro: Population above 4 million
Tier I: Population between 2.5 million to 4 million
Tier II: Population between 1.2 million to 2.5 million
Tier III: Population between 0.7 million to 1.2 million
Profile of unlisted hospitals refered in the report

Care Hospitals
Care Hospitals is a multi-specialty hospital chain comprising of 1,400 beds across 12 hospitals. Care
Hospitals is looking to establish hospitals on tier-II cities of Central and Southern India. Through JVs and
Operate and Manage Contracts (OMC), Care Hospitals save the capital investment of a green-field
project.
Care hospital expansion plans

Cities No. of beds
Pune 120
Raipur 150
Bhubaneswar 200
Vizag 120
Nagpur 150
Surat 120
Source: Company
Columbia Asia
Columbia Asia is a major player in the affordable healthcare segment. It operates in India and East Asian
countries like Indonesia, Malaysia and Vietnam. Columbia Asia operates one tertiary hospital in
Bangalore and several primary and secondary hospitals in the other parts of South India.
Global Hospitals
Global Hospitals is a Hyderabad based Super-Specialty Corporate hospital founded in 1988. With
hospitals already functioning in Hyderabad, Bengaluru and Chennai, Global Hospitals have a network of
5 hospitals (3 in Hyderabad, 1 each in Bangalore and Chennai) with a total of 500 beds.
Global Hospitals is associated with King‟s College Hospital, United Kingdom in Liver Transplantations.
Appendix- II
Healthcare Market
Indian Healthcare market is estimated at USD35bn and is projected to grow at 23% (CAGR) to touch
USD77bn by 2013. There are about c15,100 hospitals in India with c870,000 beds (average 58
beds/hospital) with 65% privately held. Tertiary care hospitals over 100-200 beds constitute 6% and >200
beds constitute 1%.
India‟s bed per 1,000 patients is 0.8 against the world average of 2.6 while for the developed countries
the average is 4.5 (5.6 times more of India). In order to reach the world standard of 2.6beds/1,000
patients, India needs 2.1mn additional beds by 2020 with an investment in excess of USD90bn (INR.
420bn).
Almost 80,000 additional hospital beds will be required every year for the next 3 to 4 years to meet
growing healthcare demands. With the public healthcare system adding 8,000 beds per year, the private
healthcare companies have a huge business opportunity to fill the gap.
Fig 28: Growth in the Indian healthcare market

300
300
250
200 150
150 77
100 35
50
0
2008 2013 2018 2023
Source: CII,KPMG,IBEF
Significant Investments opportunity

There were substantial investments announced in 2009 from several private equity firms, including
Global Technology Investment Group in Nova Medical Centers (USD60mn), International Finance
Corporation in Max India (USD33mn), India Venture Advisors in Kavery Medical Centre (USD20mn), and
India Venture Advisors‟ second healthcare fund (USD150m). The private sector is expected to continue
to make substantial investment, and to contribute nearly 80%-85% of the sector‟s total annual spend.
Within healthcare, the most favored sectors for investors are likely to be diagnostic services, medical
devices, hospital chains, and “wellness” products and services.
Capacity expansion and Increasing focus on speciality therepies

The limited supply and high demand for healthcare facilities is expected to drive further capacity expansion
in 2010. We expect this to be focused more towards specialties like cardiac, oncology, and radiology, and a
significant development in niche segments such as for women and maternity care. With the government
now sanctioning corporate hospitals to start their own medical colleges, we also expect the announcement
of plans to set up medical and nursing colleges from some of the established players in 2010.
Consolidation on the cards

Though green-field and existing capacity expansion have their own advantages, a number of firms
(especially larger hospital chains) are increasingly seeing the merits of consolidation. A limited gestation
period, the availability of an existing medical team from day one, and a standing reputation to build on,
are all factors likely to further propel hospital consolidation, which saw increased activity in 2009, with the
largest deal being Fortis‟s acquisition of 10 Wockhardt Hospitals for INR9.1bn. We expect new deals to
be announced in 2010, particularly as bigger players try to expand further and faster through acquisition
of hospitals with a view to improve their infrastructure and utilization levels. Hospitals with less than 100
beds, a capable doctor team, a good reputation, and a scalable infrastructure, will be the ideal
candidates for consolidation.
Concerns
Our major concern on the growth of healthcare sector in India is the limited availability of doctors and
trained medical staffs. High upfront capital investment and long execution periods will also mean that
upcoming players have to have a cautious strategy on their expansion plans. Rising real estate costs
both in the metros and in Mid-tier cities could have negative impact on the growth of this sector.
Appendix- III
Opportunity in Healthcare sector
Medical Tourism
India has emerged as a major hub for medical tourism with more than one million health tourist visiting
the country and is likely to grow by 20% annually for the next 10 years. Medical tourism market is
currently estimated at USD350mn and is expected to grow to USD2.2bn by 2015. Specialty-care and
tertiary hospitals is estimated to account for USD1-1.5bn of the total potential revenue.
Cost of certain treatments in India is as less as 25% of the cost for the same treatment abroad. It makes
India the ideal healthcare destination for highly specialized medical care & High Quality Medical facilities.
India is already one of the most popular destinations for medical tourists.
India offers significant cost advantage with world class treatment facility (e.g. Cardiac therapy in USA
cost USD40,000-60,000, Singapore USD30,000, Thailand- USD12,000-15,000 and India- USD8,000-
10,000). India has the potential to attract one million medical tourists each year, which could contribute
USD5 billion to the economy, according to CII.
Fig 29: Cost of key healthcare procedures (USD)

Type of treatment USA South-East Asia India Cost discount vs. USA (x)
Bone marrow transplant 62,500 62,500 30,000 2.1x
Cardiac surgery 50,000 14,250 4,000 12.5x
Liver transplant 500,000 75,000 45,000 11.1x
Orthopaedic surgery 16,000 7,000 4,500 3.6x
Source: IBEF
Telemedicine
Telemedicine uses information and communication technology to overcome distances between medical
personnel working on a single problem. In a country like India where 90% of secondary & tertiary
healthcare facilities in cities away from rural India where 68% of population lives and primary health care
facilities for rural population highly inadequate, Telemedicine offers tremendous opportunity specially
through the Anganwari and other rural healthcare programs. Despite several initiatives by Government &
the private sector, the rural and remote areas continue to suffer from absence of quality healthcare.
Significant proportion of patients in remote locations could be successfully managed locally with advice/
guidance from specialists/ super-specialists in cities, without having to travel to the specialists.
Advantages
■ Minimal patient displacement for quality treatment
■ Decrease in the relocation of medical specialists to the patient
■ Cost effective method of health care delivery
■ More efficient and effective use of medical and technological resources
■ Enhanced diagnostic and therapeutic quality of care
■ New possibilities for continuing education or training for isolated or rural health practitioners
Notes
Rating System (In Absolute Terms)

BUY = Expected to give a return of 10% or more over a 12 months' time frame.
HOLD = Expected to give a return of -10% to +10% over a 12 months' time frame.
SELL = Expected to give a return of -10% or lower over a 12 months' time frame
Disclaimer:
This report has been prepared by Proactive Universal Group and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at,
based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is
made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or
companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other
financial instruments.
This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or
other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Proactive Universal Group or its affiliates to any registration or
licensing requirement within such jurisdiction.
If this report is inadvertently sent or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced,
distributed or published for any purposes without prior written approval of Proactive Universal Group.
Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In
addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.
It should not be considered to be taken as an offer to sell or a solicitation to buy any security. Proactive Universal Group may from time to time solicit from, or perform broking, or other services for, any company
mentioned in this mail and/or its attachments.
Proactive Universal Group, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on
basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc.
Proactive Universal Group and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make
sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies/ organizations described in this report..
Proactive Universal Group, 703-06, 7th Floor, Arcadia Building, 195, Nariman Point, Mumbai- 400 021
Tel: 91-22- 4220 8900 Fax: 91- 22- 4220 8999 Web: www.pugsecurities.com

Healthcare Opportunities Galore in Tier II-III Cities-Sept20,2010

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Healthcare Opportunities Galore in Tier II-III Cities-Sept20,2010

Uploaded by

Copyright:

Available Formats

Healthcare l India Research l 20 September, 2010

Healthcare opportunities galore in tier-II/III cities

 We expect a CAGR of 35% in the Indian healthcare market during FY10-

 We feel Apollo Hospitals is going to be a clear winner due to its focus on

 Since Fortis Healthcare remained focused on metros and tier-I cities, we

 Delay in execution of newer projects and sudden increase in man-power

CAPEX 60-75% lower than metro hospitals

Fig 1: Attractive proposition in tier-II/III cities

Tier-II/III cities likely to fuel 35% overall industry growth by FY15E

Growth to surpass consensus estimates

Winner and Runner-up

Key risks to our assumption

PUG estimates vs. Consensus

Plans to raise INR15-20bn to increase Contraction in margin due to increased

EMs hospitals peer valuation

Apollo Hospitals 1,145 17 INR 24.9 15 1.5 2.4 9.8

Tier II/III city hospitals; Low cost-high returns

CAPEX in tier-II/III cities is merely c25-40% of that in the metros

Fig 2: CAPEX in tier III city is nearly one-fourth of that in metros

Cost per bed (INR Mn)

Source: Industry, PUG research

Operational costs c30% lower than tier-I hospitals

Source: Industry, PUG research

Higher profitability; revenue differential marginal to metro hospital

Source: Industry, PUG Research

Fig 5: Tier-II/III city hospitals offer significantly higher operating margins

Attractive IRR; ROE of c24% for tier-II/III city hospitals

Fig 7: IRR in tier-III cities is double that of metro city hospitals

Particulars Metro city Tier- I city Tier- II city Tier-III city

Offset of CAPEX and reduction in tax rate to act as key stimulus

Fig 9: Fortis Healthcare expansion plans

Tier-II/III cities healthcare market to grow at 35% (CAGR) over FY10-15E

Fig 11: Healthcare market in tier-II/III cities to grow by 35% CAGR

Return ratios to improve

Fig 12: Revenue contribution of tier-II/III city hospitals

Source: Company, PUG Research

Increase in lifestyle ailment presents a market

Increasing lifestyle ailments;Healthcare spending in tier-II/III cities to increase by 50% by FY15E

Source: ADB, PUG Research

Source: PUG Research

Source: WHO, Industry, PUG Research

Adequate healthcare facility in tier-II/III cities to reduce dependence on metro hospitals

Fig 17: Investment of INR70bn envisaged by 2015E

Bed per Mn population

Source: KPMG, ASSOCEM PUG Research

Source: SIAM, National Crime Records Bureau

Source: IRDA, E&Y, PUG research

Apollo Hospitals (APHC IN)

Apollo Hospitals Enterprise Ltd. BUY TP: INR535

EBITDA, FY12 5,982

Net Debt 2,752

Market cap(INR Mn) 63,052

Number O/s Shares (Mn) 123

Value per share (INR) 511

Fortis Healthcare SELL TP: INR144

Market Cap FY12E FY12E FY12E FY12E FY12E FY12E

Apollo Hospitals 1,145 17 INR 24.9 15 1.5 2.4 9.8

Shortage of skilled manpower

Rise in interest rates

Apollo Hospitals Enterprise Ltd.

CMP: INR410 Reco: BUY

Malaysian government sovereign fund Khazanah owns c12% stake in Apollo.

Apollo’s Expansion Plan