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Why leading domestic and international chains are in hot pursuit of Fortis Hospitals

Though mired in promoter issues and complex management holding structures in the past, there are many factors that make Fortis a 'must chase' target for leading domestic and international chains, say experts in the healthcare industry.

twitter-logo PB Jayakumar   New Delhi     Last Updated: April 27, 2018  | 22:33 IST
Why leading domestic and international chains are in hot pursuit of Fortis Hospitals

The unsolicited bidding war for acquiring the Fortis Healthcare is hotting-up, as the contenders in the fray - Manipal-TPG combine, KKR backed Radiant Lifecare, Malaysian hospital chain IHH which runs Parkway hospitals, Sunil Munjal-backed Hero Enterprise and the Burman's of Dabur group combine and China's Fosun - are now competing against each other to raise their bids.

Though mired in promoter issues and complex management holding structures in the past, there are many factors that make Fortis a 'must chase' target for leading domestic and international chains, say experts in the healthcare industry.

Primarily they say the demand stems from the huge healthcare opportunities in the Indian market with a population in excess of 1.3 billion. Apart from the fast growing middle-class population, which can afford private healthcare and insurance penetration, Medical Value Tourism (MVT) is set to be a global $100 trillion business opportunity by 2020 and $200 trillion by 2025. In this, India can offer one of the cheapest healthcare solutions. Fortis is the second largest hospital chain in the country and it is not easy for new entrants to establish a chain of 30-50 hospitals without acquisitions. It takes nearly 5-7 years for a Greenfield hospital with 200-250 beds to stabilize and start giving return on investment, especially in tier-II and tier-III cities, where quality private healthcare facilities are coming up in a large way.

Already the leader Apollo, which has 70 plus hospitals in different formats, is getting big competition from global players like VPS healthcare, IHH Parkway, Aster DM Healthcare, NMC Healthcare etc. It is also not easy for these chains to attract established specialist doctors to work in hospitals in small cities and mobilize adequate paramedics.  

Apart from these industry environment factors, the fundamentals of Fortis's business are very attractive, they say. A deep look into the basic parameters, which determine health of a healthcare facility, vouchsafe that argument.  Net revenues of the Fortis Group was at Rs 3474 crore for the nine months of FY18, as against Rs 3450 crore in the previous year. Consolidated operating EBITDAC (earnings before interest, taxes, depreciation and amortization, consulting fee expense etc) was Rs Rs 523 crore with a 15.1 per cent margin, which is arguably the best among large hospital groups, which are constantly expanding. While Fortis's hospital business generated a margin of 14 per cent, margins from its diagnostics business was 20 per cent. From its Indian hospitals, the margins were 13 per cent and 18.2 per cent for diagnostics business. Comparatively, EBIT margins for Apollo Hospitals were 5.7 per cent in FY 17.

In the last three quarters, Fortis's average bed occupancy was 71 per cent, 75 per cent and 70 per cent respectively. As against this, rival Apollo's average bed occupancy has been in and around 60-61 per cent. Its average revenue per occupied bed (ARPOB) was Rs 1.51 crore, Rs1.46 crore and Rs 1.48 crore, respectively, in the past three quarters, whereas Apollo's ARPOB was Rs 31,529 by FY17. Average Length of Stay (ALOS), which is good for the hospital if patient is discharged as early as possible, stands at 3.46 days for Fortis, whereas the same was 4.04 days in the case of Apollo.

The experts also note many of Fortis's hospitals are very matured and established facilities. In 2005, it had acquired the Escorts Heart Institute in Delhi for Rs 605 crore. Now this hospital, running Fortis' largest cardiac care programmes, has 294 operational beds with 83 per cent bed occupancy and with an attractive ARPOB of Rs 1.62 crore. In 2013, Fortis acquired Wockhardt's four hospitals in Bangalore, two in Mumbai and three in Kolkata for Rs 909 crore, after many months of negotiations when a debt laden Habil Khorakiwala decided to sell them. The Mulund facility in Mumbai has 292 operational beds with 68 percent occupancy and an ARPOB of Rs 1.57 crore. The 290 bedded FMRI in Gurugram has an ARPOB of Rs 2.81 crore. Its other major cash cows are hospitals in BG Road in Bengaluru, Mohali, Noida (having 82 per cent occupancy), Shalimar Bagh, Anandpur, Jaipur Malar in Chennai etc.  

The experts also point out that Fortis, which was following a light as set model (like managing hospitals instead of owning) has most of its major hospitals in West and North India. The chain was fast expanding to over 10,000 beds, but issues of promoters and mounting debt forced Fortis management to cut down facilities and optimize performance of existing facilities and beds in the last 2-3 years. Currently, its operational bed capacity is less than 5000 beds, they say.

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