Fortis Malar Hospitals Ltd BSE Scrip Code:

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1 Fortis Malar Hospitals Ltd BSE Scrip Code: Healthcare Services September 13, 2012 Current Market Price Rs. 52 Week High / Low Rs. Market Capitalisation Free Float Dividend Yield % One Year Regression Beta 50 0 Equity Statistics Rs. crores Rs. crores Times BSE Volumes Trend - Average = 2.72 Thousand in '000s / Business Summary Fortis Malar Hospitals Ltd (Fortis Malar) is operating one of the largest corporate hospitals in Chennai providing quality multi-super specialty healthcare services. The hospital has 180 beds and focuses on providing comprehensive medical care in areas of cardiology, neurology, orthopedics, nephrology, gynecology, gastroenterology, pediatrics and diabetics. During FY12, the company has obtained ISO certification for multi specialty healthcare services. In FY12, Fortis Malar reported net sales of Rs.94.8 crore and adjusted net profit of Rs.7.1 crore. Core strength for Fortis Malar is in the established brand name of the group and presence of highly skilled and trained clinicians. Key risks are in terms of controlling the cost of treatments, retention of highly trained and qualified medical professionals, continuous need for technological advancements and increasing competition in healthcare sector particularly in Southern India. Going ahead, the company plans to focus on aligning itself with the globally emerging trends in the healthcare services along with emphasizing on key talent, quality standards and growth Relative Returns Fortis Malar is currently trading at 7.3 times FY12 EPS and 2.9 times FY12 adjusted book value. 0 Sensex Fortis Malar Returns (%) 1M 3M 6M 1Yr Absolute 13% 9% 5% -3% Relative to Sensex 10% 3% 4% -11% Shareholding Pattern 100% 50% 0% Sep `11 Dec `11 Mar `12 Jun `12 Promoter DII FII Others Board of directors Person Role Qualification Aditya Vij NED, Chairman C.A, M.B.A V.Vijayarathna WTD B.Sc, M.H.M Ashish Bhatia NED Graduate Nithya Ramamurthy NED M.B.B.S P.Murari NED, Independent NA Ramesh.L. Adige NED, Independent NA Sanjay Jayavarthanavelu NED, Independent M.B.A Source: AR and CARE Research Note: WTD: Whole-time Director ED: Executive Director, NED: Non Executive Director 1 Initiative of the BSE Investors Protection Fund

2 Background Fortis Malar manages and operates a multi-specialty hospital in Chennai, India. The company offers healthcare services primarily in the areas of cardiology, cardiac surgery, neurology, neuro surgery, orthopedics, nephrology, gynecology, gastroenterology, pediatrics, and diabetics. The company was incorporated in 1989 and it commenced operations in The company was formerly known as Malar Hospitals Limited and changed its name to Fortis Malar Hospitals Limited after acquisition by the Fortis Group in early It operates as a subsidiary of Fortis Hospitals Limited (63.2% shareholding as on June 30, 2012). Fortis Malar has a wholly-owned subsidiary by name of Malar Stars Medicare Limited which is engaged in setting up, managing /administering hospitals and to provide medicare and health care services. Business overview Fortis Malar is operating one of the largest corporate hospitals in Chennai providing quality multi-super specialty healthcare services. Its services include healthcare, telemedicine, research and corporate services. The major cost components for the company are the professional charges/consultation fees to doctors and purchase of medical consumables and drugs which comprises of more than 45% of the total operating expenses. Strengths and growth drivers Established brand name of the Fortis group and healthy operational performance of the hospital. The average revenue per operating bed has improved from Rs.0.7 crore in FY11 to Rs.0.9 crore in FY12. Furthermore, due to the high quality of health care, the average length of stay of patients reduced to 3.7days in FY12 from 4.3 days in FY11. The main growth drivers for the company are cardiac sciences division, gynecology, gastroenterology, and dialysis and health checks. The hospital provides medical expertise with the finest talents amongst doctors, nurses, technicians and management professionals. Risk and concerns In light of the fact that there is severe shortage of highly qualified and trained medical as well as nursing staff, the company ability to hire and retain its medical staff along with providing adequate training would be a critical factor. Fortis Malar faces significant competition from other established and upcoming multi-specialty hospitals in Chennai and nearby areas. Future strategy and expansion plans The company plans to increase focus on training of their medical staff by introducing fellowship programs in various streams like critical care, emergency and anesthesiology in the near future. In continuation to the on-going internal corporate restructuring of the Fortis Healthcare Ltd and its subsidiaries with an objective to align the company with the globally emerging trends and transforming into an asset light business model, Fortis Malar intends to transfer its clinical establishment division (including outpatient department business and radiodiagnostic services) on a ongoing concern basis by way of slump sale to Fortis Health Management Limited. Industry outlook The Indian healthcare industry is estimated to be valued at Rs.2.8 trillion in size in FY11; growing at a 5-year CAGR of 13.1% p.a. The healthcare industry has the potential to almost double to Rs.5 trn over the next five years, implying a growth rate of 12% p.a. This will be mainly driven by rise in per capita spending on healthcare, change in demographic profile, transition in disease profile, increase in health insurance penetration and the fast-growing medical tourism market. The hospital industry accounts for roughly 70% of the total healthcare market. The hospital industry is classified into three segments namely, primary, secondary and tertiary. The Indian hospital industry is highly fragmented in nature due to large presence of unorganized players, capital intensiveness with long gestation period, positive supply-demand fundamentals, favorable government policies and attractive business model for long-term investors with project IRR of 15-17%. 2 Initiative of the BSE Investors Protection Fund

3 Peer Comparison Year ended March 31, 2012 Income statement (Rs. crore) Fortis Vimta Kovai Total income Net sales EBITDA Ordinary PAT 7.7 (15.4) 12.0 Adjusted PAT 7.1 (15.4) 12.0 Per share data (Rs.) Adjusted BVPS Diluted EPS Growth (Y-o-Y) (%) Growth in total income 14.1 (13.2) 27.4 Growth in net sales 13.8 (8.7) 27.3 Growth in EBITDA 16.7 (92.6) 21.4 Growth in adjusted PAT 30.2 NM (0.9) Growth in EPS 41.8 NM (1.2) Profitability ratio (%) EBITDA margin Adjusted PAT margin 7.4 NM 5.3 Valuation ratios (Times) Price/EPS (P/E) 7.3 NM 9.4 Price/Book value (P/BV) Enterprise value (EV)/EBITDA Note: Vimta: Vimta Labs Limited, Kovai: Kovai Medical Center & Hospital Ltd NM: Non Meaningful Quarterly financials Quarter ended June 30, 2012 Income statement (Rs. crore) Q1FY13 Q4FY12 Q3FY12 Q2FY12 Q1FY12 Total income Net sales EBITDA Ordinary PAT Adjusted PAT Growth (Q-o-Q) (%) Growth in net sales 0.6 (0.5) (0.9) Profitability ratio (%) EBITDA margin Adjusted PAT margin Initiative of the BSE Investors Protection Fund

4 Financial analysis In FY12, Fortis Malar reported net sales of Rs.94.8 crore up 13.8% y-o-y. The growth came from all streams mainly driven by cardiac sciences, neuro sciences, renal sciences and gynecology. The professional/consultancy charges to doctors and purchase of medial consumables and drugs form the largest portion of cost for Fortis Malar. In FY12, these costs as a percentage of net sales were at around 47%. The company reported EBITDA margins and adjusted PAT margins of 14.6% and 7.4%, respectively in FY12. The improvement on y-o-y basis was on account of growth in occupancies and revenues along-with focus on efficiencies and cost control. Fortis Malar had a comfortable capital structure as on March 31, The total debt as on March 31, 2012 was at Rs.6.2 crore compared to adjusted net worth of Rs.33.6 crore. Operating cash flows for the company have been positive in each of the last four years (i.e. period considered for analysis). The company has not paid any dividend for FY12. Annual financial statistics FY08 FY09 FY10 FY11 FY12 Income statement (Rs. crore) Total income Net sales EBITDA Depreciation and amortization EBIT 0.5 (0.5) Interest PBT 0.2 (1.2) Ordinary PAT 0.1 (1.8) Adjusted PAT Balance sheet (Rs. crore) Adjusted networth Total debt Cash and bank Investments Net fixed assets (incl. CWIP) Net current assets (excl. cash, cash equivalents) 1.7 (0.4) 4.0 (6.5) (1.6) Per share data (Rs.) Adjusted BVPS Diluted EPS* DPS Growth (Y-o-Y) (%) Growth in total income Growth in net sales Growth in EBITDA (25.2) Growth in adjusted PAT NM NM Growth in EPS NM NM Key financial ratio EBITDA margin (%) Adjusted PAT margin (%) RoCE (%) NM RoE (%) NM Gross debt - equity (times) Net debt - equity (times) Interest coverage (times) 1.4 NM Current ratio (times) Inventory days Receivable days Note: Financial Year (FY) refers to period from April, 1 to March, 31 4 Initiative of the BSE Investors Protection Fund

5 DISCLOSURES Each member of the team involved in the preparation of this grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company. This report has been sponsored by the BSE Investors Protection Fund. DISCLAIMER CARE Research, a division of Credit Analysis & REsearch Limited [CARE] has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain or from sources considered reliable. However, neither the accuracy nor completeness of information contained in this report is guaranteed. Opinions expressed herein are our current opinions as on the date of this report. Nothing in this report can be construed as either investment or any other advice or any solicitation, whatsoever. The subscriber / user assumes the entire risk of any use made of this report or data herein. CARE specifically states that it or any of its divisions or employees do not have any financial liabilities whatsoever to the subscribers / users of this report. This report is for personal information only of the authorised recipient in India only. This report or part of it should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied for any purpose. PUBLISHED BY CARE Research is an independent research division of CARE Ratings, a full-service rating company. CARE Research is involved in preparing detailed industry research reports with 5-year demand and 2-year profitability outlook on the industry besides providing comprehensive trend analysis and the current state of the industry. CARE Research also offers research that is customized to client requirements. Credit Analysis & REsearch Ltd. (CARE) is a full service rating company that offers a wide range of rating and grading services across sectors. CARE has an unparallel depth of expertise. CARE Ratings methodologies are in line with the best international practices. Head Office: 4th Floor Godrej Coliseum, Off Eastern Express Highway, Somaiya Hospital Road, Sion East, Mumbai Tel: Fax: Regional Offices: New Delhi Kolkata Ahmedabad Bangalore Hyderabad Chennai Pune Published on behalf of The Stock Exchange Investors' Protection Fund First Floor, P J Towers, Dalal Street, Mumbai. Tel: /34