sec pharma hospitalshsbc 110712

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India is substantially underinvested in

healthcare with 17% of the world’s population but only 6% of the beds

Meagre public healthcare spending in India presents a big investment opportunity for private players

Initiate coverage on Apollo (OW) and Fortis (N)

Huge demand-supply mismatch: At 0.9 beds per 1,000

people, India ranks low among emerging nations in

healthcare provision, even though it carries 20% of the

global disease burden. Increasing affluence, changing

demographics and shifting lifestyle-driven disease patterns

support growth. The investment opportunity for private

players is huge in our view, given public participation is low

and out-of-pocket spend is as high at 80%.

Significant capacity in pipeline: Leading players Apollo

and Fortis plan to cumulatively add 5,000 beds by FY15

(51% of their current combined capacity). We expect

industry margins to remain flat despite significant new

capacity addition, thanks to improving returns from mature

beds and a continued focus on improving occupancy, case

mix and turnover.

Existing challenges thriving new delivery models: Shortage of skilled medical personnel, increasing real estate

costs and emergence of new entrants despite significant

entry barriers have compelled Apollo and Fortis to diversify.

Apollo’s low-cost REACH hospitals and Fortis’s foray into

overseas markets and new service segments are new,

developing business models.

Initiate OW on Apollo Hospitals, N on Fortis Healthcare. We initiate coverage on Apollo with an OW rating on the

back of the strong growth in its hospital business, increasing

contribution from pharmacy and adequate funding for

expansion. Any potential strategic tie-up in pharmacy could

act as a near-term share price catalyst. On the other hand, we

expect near-term earnings for Fortis to remain under

pressure given its high interest burden after its overseas

expansion. While its growth in India is strong, its

international prospects are uncertain.

Healthcare Hospitals

India Hospitals

India's health gap

HSBC India Hospitals coverage

Ticker Company Rating TP (INR)

Price EV/EBITDA (x)*

PE (x)*

Potential return (%)*

APHS IN Apollo Hospitals OW 796 650 13.9 32.6 22.9FORH IN Fortis Healthcare N 115 107.5 12.9 50.1 6.5

Note: * EV/EBITDA and PE for FY13, PE and Potential return based on 5 Jul 2012 closing price. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield. Source: HSBC estimates, DataStream

9 July 2012 Girish Bakhru*, CFA Analyst HSBC Securities & Capital Markets (India) Private Limited

+91 22 2268 1638 [email protected]

Damayanti Kerai* Associate Bangalore

View HSBC Global Research at: http://www.research.hsbc.com

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

Issuer of report: HSBC Securities and Capital Markets (India) Private Limited

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

To vote for HSBC in Asiamoney 2012 – www.asiamoney.com/survey/takesurvey/en/BP12/

Click here for more information on HSBC's India Research Team

http://www.research.hsbc.com/

http://www.asiamoney.com/polls

https://www.research.hsbc.com/midas/Res/RDV?ao=20&key=0H3j24srBC&n=333694.PDF

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Healthcare Hospitals 9 July 2012

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Apollo and Fortis at a glance

Parameters Apollo Hospitals Fortis Healthcare

Bloomberg ticker APHS IN FORH IN Shareholding pattern Promoter (33.10%), FII (40.04%), DII (2.40%),

Others (24.46%) Promoter (81.48%), FII (4.96%), DII (0.83%), Others (12.73%)

Market cap (USD m) 1,623 801 52 week high/low (INR) 716.9/452.2 171.5/81 Rating OW N Target price (INR) 796 115 Price (INR) 650 107.5 Potential return (%) 22.9 6.5 ROE (FY13e) 10.4% 2.6% Net Debt/Equity (FY13e) 0.2 1.5 3-year sales CAGR (FY12-FY15e) 21.8% 33.0% 3-year PAT CAGR 29.6% 47.2% Sales mix Standalone hospitals: 62%, Retail pharmacy: 27%,

JV/subsidiaries: 11% India: 50%, Australia & NZ: 31%, Hong Kong :15%, Vietnam: 3%, Dubai: 1%

Operational parameters Number of hospitals 51 75 (68 in India) Employees >16,000 >23,000 Doctors network >4,000 >3,900 Beds operational 5,153 3,985 (doesn’t include international beds) Owned beds 5,888 2,985 (doesn’t include international beds) Beds in pipeline 2,955 3,165 Total bed network 10,731 12,325 (including 1,500 beds in international locations) CoE (%) 65% 65-70% Average Revenue per Operating Bed (ARPOB) (INR/day) 20,455 (net of doctor fees) 25,479 Average Length of Stay (ALOS) (days) 4.78 4.00 Occupancy (%) 71 73 In-patient admissions 281,020 276,983* Out-patient visits 2.31mn NA Revenue per adjusted patient admissions (INR) 77,745 NA Key positives Leadership position in private healthcare in India,

strong brand equity Second largest private healthcare player in India

after Apollo; strengthened its domestic position through aggressive acquisitions – Escorts, Wockhardt, Malar, SRL

Strong established presence in Chennai and Hyderabad with improving mix resulting in growth in ARPOBs

Entry to diagnostic business and international markets provide good diversification

Largest player in organized retail pharmacy in India, key beneficiary of FDI in retail

Key negatives Concentration of revenue in Chennai and Hyderabad cluster (c55% of total healthcare service revenues), increasing competition and other operational issues can impact the overall company performance

Leverage is high especially after acquisition of international assets and return ratios are lowest among peers in Asia

Pharmacy is a drag on overall margins Lack of experience in greenfield operations given large part of growth is driven by acquisitions

Risk of execution given entry into international markets where Fortis has less experience

Key catalysts Margin expansion in pharmacy business, Increasing occupancy at Hyderabad cluster, quick ramp up in new beds – esp. under Mumbai cluster

Listing of clinical establishments REIT, commencement of operations at Fortis colorectal hospital Singapore, recovery of margins in SRL diagnostic business

Note: Potential return based on 5 Jul 2012 closing price. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield. Source: Company data, HSBC estimates

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Investment summary 4 Structural deficiencies 4

Healthcare: An emerging private affair 5

What we look for in hospitals 7

Initiating coverage 9

Valuation and performance 10

India healthcare overview 13 Healthcare infrastructure inadequate in India 13

Key drivers 15

Key hurdles 19

Company profiles 23

Apollo Hospitals (APHS) 24 Leader in private healthcare 24

Financials & valuation: 25

Hospital business brings in 75% of revenue 27

Apollo Hospitals: Operating metrics 32

Retail pharmacy at inflection point 34

Other ventures 36

Earnings CAGR over 20% 37

Balance sheet is healthy 37

Key downside risks 38

Initiate as OW, TP of INR796 39

Fortis Healthcare (FORH) 44 Pan-Asia branding 44

Financials & valuation: 45

Pan-Asia focus 47

India hospital business 50

Diagnostic business 53

International businesses 56

Sales growth on consolidation 59

Balance sheet is stretched 60

Key downside risks 60

Key upside risks 61

Initiate as N, TP INR115 61

Key metrics overview 65 Basic operating metrics 65

Appendix 68 Healthcare snapshot in India 68

Differentiation among hospitals 69

Budget 2012-13 highlights 70

Healthcare in 12th Five-year Plan 70

History of private equity deals in India’s healthcare sector 72

India physician and nursing density well below

world average 73

Healthcare infrastructure in India 74

Disclosure appendix 77

Disclaimer 79

Contents

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Structural deficiencies Low on supply

While the healthcare delivery market is huge

(USD60bn in 2010) and has been growing at a

c12% CAGR (over2007-2010), investment in the

industry has lagged significantly behind. Public

participation has been poor, with more than 75% of

overall investment in healthcare coming from the

private sector (one of the highest rates in the world).

Despite a large share (c50%) of hospitals overall

healthcare market, the infrastructure in terms of

number of hospitals, beds and medical personnel

is far below the world average. India only has 9

beds per 10,000 people, versus the US (31 beds)

and the world average (29 beds). This is despite

India carrying a higher share of the world’s total

disease burden (at 20%).

We estimate c60% of India’s c30,000 hospitals

are private and c45% of hospital beds are private.

We believe this ratio would be even higher if we

look at beds only in tertiary care, given public

healthcare infrastructure is currently oriented to

primary and secondary needs.

India accounts for 20% of global disease burden while its share of health infrastructure is inadequate

20%

6%8% 8% 9%

1%

0%

5%

10%

15%

20%

25%

Dis

ease

burd

en

Beds

Doc

tors

Nur

ses

Hea

lth

wor

kers

Lab

tech

nici

ans

Source: Fortis Healthcare

Investment summary

Structural healthcare deficiencies and rising healthcare spend

suggest growth among private players is sustainable

Significant capacity expansion over the next decade and new

business models also contribute to growth among private players

While there are number of challenges and risks, high entry

barriers favour incumbents such as Apollo and Fortis

Numbers of hospitals and hospital beds in India

Attribute/Year 1981 1991 2001 2010*

No. of Hospitals 6,805 11,571 15,622 29,760 No. of private hospitals 2,926 6,595 11,404 17,000 % in private sector 43 57 73 57 No. of beds 504,538 806,409 903,952 1,048,715 No. of private beds 141,271 258,051 343,501 471,922 % in private sector 28 32 38 45

Note: * 2010 numbers are extrapolated numbers Source: Directorate General of State Health Services, India

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In-patient and out-patient revenues in India are expected to grow significantly

9031,802

3,205787

1,175

1,745

0

1,000

2,000

3,000

4,000

5,000

6,000

2008 2013e 2018e

INR

bn

In-patient Out-patient

2008-18 CAGR

In-patient: 14%

Out-patient:8%

Source: CRISIL

High in demand

Some of the key factors driving growth in demand

for healthcare services include:

Rising income levels: increasing affordability

and awareness for quality treatments

Changing demographics: increasing

proportion of elderly who have more

healthcare needs

Changing disease profile: higher incidence

of cardiac ailments, diabetes and other

lifestyle-related medical disorders that require

more hospitalization

Medical tourism: low cost quality treatment

makes India a favoured destination

Increase in health insurance: increasing

insurance penetration increases affordability

It is estimated that the overall healthcare market

will reach cUSD80bn by 2015 (source: CRISIL),

the majority of which will be in-patient revenues.

Currently cINR250bn worth of spending is on in-

patient services and the majority (c60%) of

healthcare spending is out-patient; this which

indicates healthcare affordability remains low and

disease patterns are still dominated by acute

infections. We believe with an increased share of

lifestyle disorders and improving affordability

among middle class, the in-patient revenues will

be a key growth driver within healthcare services.

Importantly, we believe the rise in demand will

largely benefit private players given their stronger

brands and focus on higher successful outcomes

(which are benchmarked against developed world

healthcare).

Healthcare: An emerging private affair India’s national healthcare spending is 4.1% of

GDP (source: World Bank 2010), which is among

the lowest rates in the world. As a result, quality

healthcare has increasingly fallen into the hands of

private players. Over the last two decades, a large

number of tertiary care hospitals within the public

sector have faced a resource crunch resulting in an

inability to maintain quality service.

This along with increasing affordability, growing

demand for complex diagnostic and therapeutic

treatments and increasing awareness has increased

the preference for private hospitals.

USD160bn investment opportunity and largely private

Given India’s current low global ranking in terms

of the ratio of hospital beds to population, we

believe there is a huge investment opportunity.

Assuming the population continues to grow at the

current rate, India needs to add c930,000 beds by

2020 to improve its bed to population ratio to just

15 beds per 10,000 people. This would require an

additional investment of cUSD52bn assuming a

bed costs USD50,000. We believe 30% of

additions will be required for complex medical

treatments in cardiac, oncology and transplant

therapies. To reach the global average of 30 beds

per 10,000 people, we calculate India would need

to invest to cUSD160bn in hospital healthcare.

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Crucially, we believe the investment opportunity

will continue to fall largely in the hands of private

players given the low government participation.

Huge investment opportunity towards goal of meeting global average beds per population

Current population 1,200m

Growth rate assumption 1.25-1.3%

2020e population 1,325m

Per bed development cost INR2.5mn or cUSD50,000

Target no. of beds per 10,000 people

15 20 25 30

Additional no. of beds required (‘000)

932 1,594 2,256 2,918

Additional investment required (USDbn)

52 89 125 162

Source: HSBC estimates

Both Apollo and Fortis have been aggressive in

expanding bed capacity. Apollo aims to add c40%

of current bed capacity in the next three years

which would take its owned beds to over 8,500.

The Fortis model has been more acquisition

driven and share of greenfield projects may

slowly increase. The group has widened its

network to 75 hospitals and over 12,000 beds

including acquisition of assets under FHIL (Fortis

Healthcare International).

Advantage to Apollo and Fortis

Given the high initial set-up costs, long gestation

periods and continuing challenges in terms of the

shortage of skilled medical personnel and

continual change in medical technology, the

barriers for entry to healthcare provision in India

are high.

Existing players including Apollo and Fortis have

already achieved the following:

Established a presence in “hot-spots”

including metros across the country.

Utilized their early-mover advantage to create

sizeable capacity and reach and establish

brand equity that defines quality healthcare

Established an ability to attract and retain

strong medical talent which we believe is

critical to success of a hospital

Reached a stage of reaping significant cash

flows from mature beds

We believe it will be difficult for new players to

establish a significant presence in tertiary care in

major Indian markets, like the large cities, in light

of the above.

Apollo and Fortis - Stock performance against HSBC Drug Index and Sensex

0

50

100

150

200

250

300

Jul-0

7

Oct

-07

Jan-

08

Apr-0

8

Jul-0

8

Oct

-08

Jan-

09

Apr-0

9

Jul-0

9

Oct

-09

Jan-

10

Apr-

10

Jul-1

0

Oct

-10

Jan-

11

Apr-1

1

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Apollo Fortis HSBC Drug Index Sensex

Source: DataStream

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What we look for in hospitals Balanced capacity expansion and higher proportion of younger beds

The growth in the hospital industry hinges on new

beds. We prefer operators with a planned gradual

build-up of capacity and a portfolio of hospitals

with a larger proportion of younger beds (under

three years since development and acquisition),

which provide margin enhancement opportunities.

Improving or stable returns on capital

While most of the hospital industry suffers from

low returns due to its capital intensive nature, we

prefer organizations that have a history of

generating higher returns on incremental

investments and/or are exhibiting meaningful

improvement in their ratios as most facilities

mature in the portfolio. Typically a tertiary bed

can generate over 25% operating margin from the

fifth year of operation with the peak at c30%.

Lower gearing and exposure to bad debt

Given the capital intensive nature of the hospital

business, companies with easier access to new

capital have an advantage. We believe exposure to

bad debt is an issue to consider when evaluating

hospitals. Given the relatively high share of out-

of-pocket expenses in the country, the exposure to

bad debt has so far been low.

Portfolio end-market characteristics

We prefer high exposure to local markets that

operate with significantly higher ARPOBs (lesser

competition), higher affordability (higher per

capita disposable income) and have reasonably

strong in-patient and out-patient volume. We

believe characteristics of markets that hospitals

operate in can greatly affect financial and

operational performance of the overall business.

Net debt/EBITDA comparison

Company FY12 FY13e FY14e FY15e

Apollo 1.0 0.7 0.8 0.6 Fortis 11.4 6.6 5.9 5.2 Bumrungrad 1.3 0.8 0.7 Tenet 4.0 3.6 3.3 3.0 Lifepoint 2.7 2.6 2.3 2.3 Health South 2.6 2.5 2.1 2.1 Universal health 4.0 2.6 2.1 1.9

Source: Datastream, Company data

ROE comparison for key hospitals

0

5

10

15

20

25

30

35

FY12 FY13e FY14e FY15e

Bumrungrad

Univ ersal Health Tenet

ApolloLifepoint

Fortis

Raffles

Source: Datastream, Company data

Geographical distribution of facilities for Apollo and Fortis

_________________________Fortis _________________________ ________________________ Apollo _________________________ Region Operating beds No. of Hospitals Region Operating beds No. of Hospitals

North India 2,067 31 Chennai 1,159 9 South India 712 15 Hyderabad 930 8 West India 688 9 Kolkata 425 2 East India 388 10 Delhi 681 2 International 130 3 Bangalore 236 1 Ahmedabad 228 2 Other India 1,294 11 International 200 1 Total 3,985 68 5,153 36

Source: Company data

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Hospitals peer comparison

Market cap

Rating Price Target price

Pot'l return

EPS CAGR FY13-15e

________ EPS (LC) _________

_________ PE (x) __________

Company (USDm) (LC) (LC) (%) FY12 FY13e FY14e FY15e FY12 FY13e FY14e FY15e

Apollo 1,622.8 OW 650 796 22.9% 31.0 16.2 20.0 27.2 34.3 40.4 32.6 23.9 19.0 Fortis 800.5 N 107.5 115 6.5% 63.1 1.8 2.1 3.9 5.7 60.3 50.1 27.2 18.8 Raffles 1,003.0 NR 2.3 NA NA 12.8 0.1 0.1 0.1 0.1 24.8 21.2 19.4 16.6 Bumrungrad 1,744.7 NR 75.3 NA NA 16.0 1.8 2.7 3.2 3.7 41.1 27.7 23.7 20.6 Tenet 2,106.3 NR 5.1 NA NA 12.8 0.4 0.6 0.6 0.7 13.8 9.3 8.1 7.3 Lifepoint 1,943.9 NR 39.9 NA NA 11.4 3.2 3.3 3.7 4.1 12.4 12.0 10.7 9.7 Health South 2,265.3 NR 23.7 NA NA 8.4 1.4 1.5 1.6 1.8 16.7 15.9 14.7 13.5 Universal health 4,145.7 NR 42.8 NA NA 10.1 4.0 4.4 4.9 5.3 10.6 9.8 8.8 8.1

Note: LC=Local Currency, INR is LC for Apollo and Fortis, SGD for Raffles, Thai Baht for Bumrungrad and USD for Tenet, Lifepoint, Health South, Universal health; Price and potential return as of 5 Jul 2012 closing price. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield. Source: HSBC estimates, DataStream, Company data

Hospitals peer comparison (continued)

Company ________EV/EBITDA (x) ________ _____ EBITDA margin (%) ______ __________ ROE (%) __________ FY12 FY13e FY14e FY15e FY12 FY13e FY14e FY15e FY12 FY13e FY14e FY15e

Apollo 16.7 13.9 11 9.1 16.3 16.3 16.9 16.8 10.0 10.4 12.7 14.5 Fortis 23.6 12.9 11.3 9.9 13.4 14.2 14.7 14.7 2.2 2.6 4.7 6.4 Raffles 18.5 16.5 14.1 11.9 24.5 24.5 25.0 25.2 16.2 16.2 16.7 16.9 Bumrungrad 20.2 18.1 16.0 13.3 26.3 24.9 25.0 24.8 24.8 28.0 28.6 28.5 Tenet 6.0 5.4 4.9 4.5 11.1 13.2 13.6 13.8 14.4 17.8 15.9 16.9 Lifepoint 6.4 6.1 5.6 5.4 15.1 16.8 17.1 17.4 8.5 8.1 8.6 8.3 Health South 7.5 7.1 6.6 6.3 23.0 23.0 23.0 23.5 135.7 61.5 56.7 46.9 Universal health 8.6 5.9 5.3 4.9 12.0 16.4 16.6 16.8 18.6 16.5 15.9 14.9

Note: LC=Local Currency, INR is LC for Apollo and Fortis, SGD for Raffles, Thai Baht for Bumrungrad and USD for Tenet, Lifepoint, Health South, Universal health Source HSBC estimates, DataStream, Company data

Apollo Hospitals: EV/EBITDA (x) range Fortis Healthcare: EV/EBITDA (x) range

0

5

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15

20

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7

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Jul-1

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Jul-1

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Jul-1

2

EV/EBITDA Mean Min Max

Mean: 10.4x

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150

200

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Jul-0

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Jul-1

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EV/EBITDA Mean Min Max

Mean: 11.7

Source: DataStream, HSBC estimates Source: DataStream, HSBC estimates

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Initiating coverage We initiate coverage on the two leading private

hospital chains in the country — Apollo Hospitals

and Fortis Healthcare. We value both using sum-

of-the-parts primarily using EV/EBITDA

methodology for the hospitals business. We also

use DCF as an alternative valuation approach.

Apollo Hospitals (APHS IN, OW, TP INR796)

We initiate on Apollo Hospitals with an

Overweight rating. Apollo is the largest hospital

chain in the country with 8,300 beds (5,888

owned and 2,388 managed) of which 5,153 beds

were operational as of FY12. The company has an

aggressive expansion plan with over 500

operational beds planned in FY13 alone.

Over the next three years it has an expansion plan

of c2,900 beds, funding for a large part of which

is tied up. The retail pharmacy business is at an

inflection point with margin expansion expected

on the back of incremental contributions from

new pharmacy stores as they reach maturity.

We value the hospital business at 14x FY14e

EBITDA and pharmacy at 0.5x sales. These two

segments form over 95% of our target price. We

value Apollo’s 22% stake in Indraprastha Medical

(listed associate) at 1x market cap and Apollo’s

39.4% stake in Apollo Health Street at book value

to arrive at a target price of INR796.

Fortis Healthcare (FORH IN, N, TP INR115)

We initiate on Fortis Healthcare with a Neutral

rating. Fortis is the second largest hospital chain in

India in terms of operational beds but has been most

aggressive in terms of growth which in large part has

been the result of acquisitions including Escorts,

Malar and Wockhardt hospitals. The India hospital

business now forms only 50% of total revenues after

the consolidation of its international assets, which

were previously held by its promoter company.

These recent acquisitions have significantly

increased leverage and worsened its return ratios.

While a pan-Asia presence is a positive, the higher

costs and debt will put pressure on near-term

margins. Nonetheless the expansion plan is robust

with close to a doubling of its bed capacity in India

over the next three years. Additionally, as per

company recent plans for splitting the company’s

assets and listing a REIT structure in Singapore may

bring additional funds and lower debt. The

diagnostic business under SRL recently made its

third private equity investment and may see a

turnaround in margins in the longer term. We value

the India business at 14x FY14e EBITDA (similar to

Apollo) and the international business at 12x FY14e

EBITDA. Our 12-month target price is INR115.

HSBC vs. Consensus estimates

(INRm) _________ Net sales __________ _________ EBITDA ___________ _________ Net profit__________ FY13e FY14e FY15e FY13e FY14e FY15e FY13e FY14e FY15e

HSBC Apollo 37,060 44,669 56,846 6,124 7,869 9,555 2,782 3,778 4,769 Fortis 53,730 61,824 70,222 7,646 9,085 10,324 865 1,598 2,304

Consensus

Apollo 37,881 45,514 54,837 6,345 7,710 9,371 3,050 3,788 4,457 Fortis 47,219 59,820 73,112 6,717 8,399 10,405 977 1,733 2,212

HSBC vs. consensus

Apollo -0.7% -1.9% 3.7% -3.5% 2.1% 2.0% -8.8% -0.3% 7.0% Fortis 13.8% 3.4% -4.0% 13.8% 8.2% -0.8% -11.5% -7.8% 4.2%

Source: HSBC estimates, Bloomberg

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Indian hospitals trading at a premium

Both Apollo and Fortis are trading at premium

valuations compared to hospitals in developed

markets. However, we think this is justified by

strong expansion plans and the sector’s structural

growth story, which favours private players.

We note that the group is currently trading at

14.5x one-year forward EV/EBITDA, compared

to a historical trading range of 10-25x and a five-

year average of 16x. While Apollo has seen a

stable EV/EBITDA of 14x in the past year, the

EV/EBITDA multiple for Fortis has come off

from high levels after its foray into overseas

markets through Fortis International.

On a PE basis, Apollo currently trades at 31.6x

FY13e and 23.2x FY14e EPS. The stock has

historically traded at an average one-year forward

PE of 29.3x and three-year average of 26.1x.

Fortis, on the other hand, is trading at a 49.6x one-

year forward PE with a one-year average of 54.1x

owing to its low earnings.

EV/EBITDA over PE

EV/EBITDA is widely used to value hospitals

largely because of substantial changes to financial

structures over time. Each hospital has its unique

capital structure and allocation strategy; the

impact on depreciation, interest expenses and

ultimately net profit varies depending upon

whether the company acquires or divests facilities

or utilizes cash to pay off debts. Additionally,

different groups of hospitals at different ages and

sizes affect expenses below operating level. Thus

we prefer using EV/EBITDA over PE. A lack of a

substantial history of positive earnings merits use

of EBITDA multiples in certain cases (such as

Fortis). Lastly the group tends to trade in a tighter

band on EV/EBITDA than on PE.

Valuation and performance

Indian hospitals trade at a premium to global peers

High valuations are justified by significant market potential and

growth dynamics favouring incumbents, in our view

We use a sum-of-the-parts valuation methodology, with the

hospital business valued using relative EV/EBITDA

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India Hospital Index: 12-month forward EV/EBITDA

05

1015202530

Jan-

08

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12-month forw ard EV/EBITDA

1 y r av g: 15.9

3-y r av g: 17.4

Source: DataStream

India Hospital Index: 12-month forward P/E

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12-month forw ard PE

1 y r av g: 22.1

3 y r av g: 24.6

Source: DataStream

Operating efficiency of key hospitals

Universal Health

Health South

Lifepoint

Tenet

Raffles

Fortis

Apollo

0%

5%

10%

15%

20%

25%

30%

35%

0 25 50 75 100 125 150

Asset turnoverO

p. m

argi

n

Bumrungrad

Source: DataStream (Bubble size = ROIC)

EV/Bed

EV/Bed is a frequently used tool to value

hospitals. While it is easy to compute and use

within one geographical set of hospitals, the

number of beds is not a good indicator of the

profitability of the business as the economic

conditions in different geographies vary

considerably. Hence it is of limited use when

comparing hospitals across different markets.

P/E vs EPS CAGR comparison

5

1015

20

2530

35

40

45

50

55

5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0

EPS CAGR (%)

P/E

Fortis

Apollo

Bumrungrad

Tenet Healthcare

Raffles MedicalHealthSouth

Universal HealthServ ices

Lifepoint

Note: EPS CAGR for FY12-15e

Source: DataStream

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DCF

We have used DCF as an alternative methodology

for valuing Indian hospitals. We believe DCF is

an apt tool to value hospitals given the capital

intensive nature of the industry and large cash

flows tied to the future.

Current valuations, however, also reflect

heightened M&A activity and private equity

interest, which we believe are not accounted for in

DCF. We believe hospital valuations react to such

events favourably. See a list of PE and M&A

deals in the hospital space in the appendix.

Historical price performance

Hospital stocks are considered very defensive

given that healthcare demand tends to be resilient

even during poor economic conditions. Apollo has

been a strong performer in this space beating

Fortis and the broader equity index by a large

margin. Apollo has outperformed the BSE Sensex

by a whopping 70% in the past two years. Even

during the past year with the Sensex down 8%,

Apollo appreciated by 30%. Fortis, on the other

hand, has seen a sharp share price decline

following its acquisition of Fortis International.

The stock has underperformed BSE Sensex by

30% in the last 12 months.

EV/Bed matrix across hospitals

Company No. of shares outstanding

Share price (LC)

Market cap(m in LC)

Net debt(m in LC)

EV(m in LC)

No. of beds EV/bed (USD '000)

Apollo 136 652 88,573 4,928 93,501 5,153 363 Fortis 405 107 43,476 45,699 89,175 3,985 448 Raffles 537 2 1,252 -28 1,224 380 2,553 Bumrungrad 728 75 54,812 3,694 58,506 554 3,728 Tenet 414 5 2,106 4,247 6,353 13,509 470 Lifepoint 49 40 1,944 1,471 3,415 6,048 565 Health South 96 24 2,265 1,225 3,490 6,500 537 Universal health 90 43 3,832 3,613 7,445 25,006 298

Note: LC=Local Currency, INR is LC for Apollo and Fortis, SGD for Raffles, Thai Baht for Bumrungrad and USD for Tenet, Lifepoint, Health South, Universal Health; calculations based on 5 Jul 2012 closing price Source: DataStream

Apollo has seen strong absolute stock performance in the last two years

Apollo has outperformed both Fortis and HSBC Drug Index

-60%-40%-20%

0%20%40%60%80%

2012 y td 6 mth 1-y r 2-y r

Apollo Fortis Sensex BSE Healthcare

0

50100

150

200250

300

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Jul-1

2

Apollo Fortis HSBC Drug Index

Source: DataStream Source: DataStream

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Healthcare infrastructure inadequate in India Structural deficits present significant opportunities

According to the World Health Organization

(WHO) Health Statistics 2011 report, India lags

several developing nations like China, Brazil,

Russia and Mexico, as well as smaller countries

like Thailand, Sri Lanka and Vietnam in terms of

healthcare provision.

In terms of beds, India had just 9 per 10,000

population during 2000-09, well behind the global

average of 29. India also lags behind in terms of its

ratios of medical personnel to population, with

just 6 physicians per 10,000 population versus a

global median of 14, and 13 nurses and midwives

per 10,000 compared to a global average of 29.

This structural shortage represents a huge growth

opportunity for healthcare companies in India.

Assuming the average cost to develop a bed

excluding land cost is INR2-2.5m, we estimate

India would need to investment INR5,000-6,100bn

just to reach the global average of 29 beds per

10,000 people. We believe private sector healthcare

players will benefit the most from this investment

opportunity given the private sector accounted for

68% of spending on healthcare in 2008 in India

(source: WHO). Private sector players consist

mainly of corporate, diagnostic laboratories,

pharmacies, trusts, charitable organizations.

India had lowest bed to population ratio in 2000-09 period

29

9

41

24

97

16 1829

2231

0

20

40

60

80

100

120

Glo

bal

Indi

a

Chi

na

Braz

il

Rus

sia

Mex

ico

Mal

aysi

a

Viet

nam

Thai

land

Sri

Lank

a

No. o

f be

ds p

er 1

0,00

0 po

upul

atio

n

Source: World Health Organization Report

As seen from the exhibit, India’s healthcare

expenditure as a percentage of GDP is one of the

lowest in the world at just 4.2%. India’s

government healthcare spending is particularly

low because of the high proportion of private

healthcare spending. As public health is a

responsibility managed at the state level in India,

the increased participation requires commitment

from state governments.

India healthcare overview

Sector growth prospects in India are compelling, as existing

healthcare infrastructure is inadequate for demand

Disposable income growth, rising healthcare awareness and

changing demographic and lifestyle trends to drive the growth

Players with an established base and strong record of execution

to emerge as winners

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As per the 12th Five-Year Plan, the government

plans to triple spending on healthcare, raising it

from 0.9% to 2.5% of GDP over 2012-17. The

increase in budgeted allocation is in accordance

with the increasing focus on National Rural

Health Mission (see appendix), introduction of

district-wide pilots of Universal Health Coverage

(UHC), planned establishment of new medical

colleges like All India Institute of Medical

Sciences, and the creation of a public health cadre

(government appointed healthcare supervisors)

and a central procurement agency to provide

access to free medicines.

Healthcare expenditure as % of GDP in India is one of lowest across globe

India healthcare expenditure trend

4.2

0.0

5.0

10.0

15.0

20.0

US

Ger

man

Fran

ceC

anad

aA

ustra

lia UK

Spai

nB

razi

lR

ussi

aM

exic

oV

ietn

amT

haila

ndC

hina

Indi

aM

alay

sia Sri

Glo

bal

HC as % of GDP, 2009

0

20

40

60

1996

1998

2000

2002

2004

2006

2008

2010

USD

-50510152025

%

Health ex penditure per capita (current USD)-LHS

y oy grow th (%)-RHS

Health ex penditure as % of GDP-RHS

Source: World Bank Source: World Bank

Density of doctors and nurses per 10,000 population in India is among lowest in the world

0

20

40

60

80

100

120

US

Ger

man

y

Fran

ce

Can

ada

Aust

ralia UK

Ital

y

Spai

n

Sin

gapo

re

Braz

il

Rus

sia

Mex

ico

S Ko

rea

Vie

tnam

Thai

land

Chi

na

Indi

a

Mal

aysi

a

Indo

nesi

a

Sri L

anka

Glo

bal

No. of doctors per 10,000 population No. of nurses per 10,000 population

Source: World Health Organization Report

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Key drivers According to Frost & Sullivan, the Indian

healthcare market was worth USD59.5bn in 2010,

and is expected to grow at a CAGR of c15% over

the next few years. Of the total healthcare market

in India, 70-72% comprises healthcare delivery

services, 20-22% pharmaceutical market and the

remaining is medical technologies and

other services.

This growth will mainly be driven by: 1) rising

income levels and health awareness; 2) changing

disease profiles with a shift from acute to chronic

diseases; 3) changing demographics; 4) booming

medical tourism; and 5) increasing healthcare

insurance coverage.

Rising affluence

Rising income and education levels have raised

the standard of health awareness, boosting

demand for both standard and advanced

healthcare services among the population. This

can be observed in the rising trend of private

healthcare expenditure as a proportion of GDP

over the past decade. Growth of over 25% in

private healthcare expenditure in 2010 was much

higher than the average growth of 12% of the

last decade.

This trend suggests a shift in demand towards

private healthcare, which have gained market

share from public hospitals. According to India’s

Central Bureau of Health Intelligence, the

majority of Indians prefer private healthcare

despite a higher average cost of USD4.3

compared to USD2.7 in government-owned

facilities. Only 23.5% urban residents and 30.6%

rural residents prefer government facilities, which

imply a widespread lack of confidence in the

public healthcare system.

Rising trend of personal disposable income in India

0

10

20

30

40

50

FY05 FY06 FY07 FY08 FY09 FY10

'000

INR

0%

5%

10%

15%

20%

Per capita personal disposable income-LHS% y oy change-RHS

Source: Press Information Bureau, Government of India

Healthcare delivery forms the major component of overall healthcare expenditure

Hospital service expense has grown consistently

Healthcare

serv ices

59.5%

Medical dev ices &

supplies, 8.2%

Pharmaceuticals

32.3%Healthcare deliv ery : 42.8%

Diagnostics:3.6%

Retail pharmacy :13.1%

0%

5%

10%

15%

20%

25%

1995 2000 2002 2004 2006 2007 2011

Hospital serv ices ex pense as % of total consumerex penditure on healthcare

CAGR 2000-2007:12.1%

Source: ICRA report Source: Euromonitor, HSBC estimates

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In India, 67% of spending on healthcare is private,

of which 75% is out-of-pocket expenditure (which

is one of the highest levels in the world). Also,

with rising disposable income and increasing

awareness about healthcare, a relatively large

proportion of discretionary income in India is

being spent on healthcare services. As seen above,

despite a fall from pre-2005 levels, healthcare and

medical needs as a proportion of total private

consumption are expected to increase from the

current 4.8% to 6.5% by FY20.

We believe rising disposable income of Indian

households and increasing discretionary spending

on healthcare will be the key growth drivers for

healthcare service providers, mainly the private

players as a majority of healthcare spend is out-

of-pocket private spending.

Changing disease profile

Rising affluence of Indian households has led to

an epidemiological shift towards life-style-related

chronic diseases like cardiovascular disorders

(CVS), mental disorders and diabetes. The extent

of chronic disease burden is clear: India is now

the diabetes centre of the world with more than

50m diabetic patients and this number is further

expected to increase. Increasing proportion of

aging people in the overall population is another

factor contributing to increasing chronic disease

burden as aged people are more susceptible to

chronic disease such as hypertension, diabetes and

heart ailments.

Considering the higher cost and longer duration

involved in the near-term treatment of chronic

diseases, there will be increasing demand for

Medical and healthcare services increasing as % of total private consumption expenditure

5 4.8 5.6 6.50

20

40

60

80

100

FY05 FY10 FY15e FY20e

(%)

Recreation & Education Medical care and health serv ices Furnitures & appliances Clothing & footw ear Gross rent, fuel & pow er Transport & communicationFood, bev erages & tobacco Misc. goods and serv ices

Source: CSO, D&B

Household annual disposable income trend in India

No. of households _______ ( calculated at constant 2009 value)_________ _____ Compounded annual growth rate (CAGR) _____('000) 2010 2015e 2020e 2010-2020e 2000-2007* 1995-2007*

above US$500 222,980 241,746 258,855 1.5% 2.5% 2.3% above US$1,000 213,802 236,111 255,295 1.8% 4.5% 4.0% above US$5,000 73,722 123,948 171,261 8.8% 20.3% 15.8% above US$10,000 18,357 42,211 77,050 15.4% 12.9% 10.1% above US$25,000 3,663 6,579 12,926 13.4% 11.5% 9.4% above US$45,000 1,760 2,936 4,590 10.1% 11.6% 9.6% above US$75,000 931 1,558 2,440 10.1% 11.7% 9.7% above US$150,000 392 660 1,035 10.2%

Note:* 2000-2007 and 1995-2007 BAGR based on constant 2007 value Source: Euromonitor International

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advanced, well-equipped diagnostics centres and

hospitals. Increasing affluence help ensure that

Indian households can afford the cost of chronic

disease treatment. As per industry estimates,

cardiovascular diseases, cancer and diabetes

accounted for 13.8% of all hospitalized cases in

India in 2008 (accounting for 38.6% of in-patient

revenues in value terms). Chronic diseases are

expected to account for approximately 17.5% and

19.9% of the hospitalized cases in 2012 and

2017 respectively. As per a WHO report (Mahal et al. 2010),

between two study periods (1995-96 and 2004)

the share of chronic disease in total out-of-pocket

health expenditures in India increased from 31.6%

to 47.3%, which shows the growing importance of

chronic diseases in terms of their financial impact

on households and a financial burden on affected

individuals and households. Also, it was observed

that hospitalization expenses due to chronic

diseases were nearly 160% higher than

hospitalization expenses due to communicable

diseases. Hence, increasing chronic disease

burden underpins growth for hospitals and other

healthcare service providers.

Increasing chronic disease burden in India (cases per 100,000 population)

380 310

650

405460

800

596

962

598

1,000835

641

0

200

400600

800

1,000

1,200

Cardiac

disease

Diabetes Mental

health

COPD and

asthma

2005 2015e 2030e

Source: The National Commission of India, HSBC estimates

Changing demographics

The changing population dynamic is another

factor to fuel demand for healthcare infrastructure

and services in India. As per the exhibit below,

the aging population (+50 years/+60 years aged)

is becoming a larger share of total population. The

Consumer expenditure on hospital services have grown more than other spend on healthcare*

(INR bn) 1995 2000 2002 2004 2006 2007 1995-2007 CAGR

2000-2007 CAGR

Medicines, medical devices 285.8 393.9 483.9 578.2 732.4 756.6 9.3% 9.8% Out-patient services 211.2 338.9 436.4 519 665.6 700.3 11.5% 10.9% Hospital services 82.9 136.4 183.3 221.8 286.6 303.2 12.5% 12.1% Total 579.9 869.2 1103.6 1319 1684.6 1760.1 10.6% 10.6%

Note: expenses calculated at constant 2007 values Source: Euromonitor International

Chronic diseases are increasingly the main cause of deaths projected in India

0

2

4

6

8

10

12

2004 2008 2015 2020 2025 2030

Dea

ths

(×1

000

000)

HIV/AIDS, Tuberculosis and malaria Other infectious diseases Maternal, perinatal, and nutritional disordersCardiov ascular disease Cancers Other non-communicable diseasesRoad traffic injuries Other unintentional injuries Intentional injuries

Source: World Health Organization

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United Nations Population Division projects that

India’s population aged 50 or more will expand to

34% by 2050 from the current 12-13% level.

As per various studies, c50% of older Indians

have at least one chronic disease like diabetes,

asthma, cardiac and mental disorders. The aging

population will lead to an increase in these

diseases which in turn increases demand for

healthcare services.

India’s aging population is becoming a large share of total population

0%

5%

10%

15%

20%

1950

1960

1970

1980

1990

2000

2010

As

% o

f to

tal

pop

ulat

ion

Aged 60+ Aged 50+

Source: United Nations Population Division

Medical tourism

Due to ballooning healthcare costs in developed

nations (US, UK, Western Europe), more patients

from these countries are viewing India as a

preferred destination for affordable, quality

medical care. According to a report by the

Associated Chambers of Commerce and Industry

of India (ASSOCHAM), India’s medical tourism

sector is expected to grow to INR95m by 2015

from INR15m in 2008.

In 2010, 730,000 foreigners visited the country, of

which 156,000 were medical tourists. The

ASSOCHAM report estimates this number will

grow at a CAGR of 40% over 2011-15. That said,

while India faces stiff competition from Singapore

and Malaysia which are also emerging as

healthcare destinations, increasing medical

tourism demand is emerging from parts of Middle

East and Western Asia.

The cost of advanced surgeries like heart-valve

replacement in India is about one-tenth of the

price of comparable treatments in the US or the

UK (see below). We believe India’s cost

advantage and quality medical services leave

Indian healthcare service providers well placed to

benefit from the growth in medial tourism.

Medical tourists increased by c20% over 2008-10

82 93 108 111 114156

-

50

100

150

200

2005 2006 2007 2008 2009 2010

-

100

200

300

400

500

Medical Tourists ('000s) - left ax is

Medical Tourists Receipts (USD mn) - right ax is

Source: Bureau of Immigration

Apollo has the largest market share among the

private hospitals in the country and received about

50,000 medical tourists in 2010, followed by

Max, Fortis, Care and Sterling. Growing specialty

services with a focus on highly skilled technology

driven surgeries including robotics is expected to

drive medical tourism in the future.

Medical tourists by nationality, 2010 (in %)

24%

23%

4%4%3%3%

2%

37%

Maldives

Bangladesh

Nigeria

Oman

Afghanistan

Sri Lanka

UAE

Others

Source: HSBC, ASSOCHAM

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JCI accredited hospitals distribution in Asia

Israel

3.6%

Qatar

2.6%Phillipines

2.1%

South

Korea

6.3%

Thailand

9.4%

Singapore

7.3%

Jordan

5.2%

Indonesia

2.6%

India

8.3%

Others

5%Saudi Arabia

20.3%

China 7.3%

UAE 20.3%

Source: Joint Commission International

Increase in health insurance

Given that there is a large proportion of out-of-

pocket spend on healthcare in India, healthcare

insurance has yet to become material in terms of

affordability and reach. As the penetration of

healthcare insurance increases, quality healthcare

will become more affordable to a larger percentage

of the population. Currently less than 5% of the

population has some form of health insurance and

this is expected to increase to 20% by 2015.

Gross Written Premium (GWP) for new health insurance has consistently grown in India over the last few years

0

50

100

150


Gross Written Premium ( INR bn)

Source: IRDA

Key hurdles Trained personnel shortage

Finding and retaining qualified doctors and nurses is

challenging especially when the country has a low

ratio of medical personnel to the population. India

suffers on these parameters essentially due to a lack

of adequate training and the high incidence of

migration of talent to developed markets.

According to data released by the government of

India in 2008, India had a shortfall of 0.6m doctors,

1m nurses and 0.2m dental surgeons. This is

particularly problematic for the public healthcare

system, which is at risk of losing experienced and

qualified staff to the private sector.

As per the Medical Council of India, around 34,700

doctors graduated from 335 medical colleges in

India in 2010. Assuming a similar level of growth in

the number of graduating doctors and medical

colleges, we believe the number of doctors per

10,000 people can increase from the current level of

6 to 8.3. Although this level won’t completely ease

the shortage of qualified doctors in India, this will

bring the doctor to people ratio closer to the WHO

recommended level of 10.

The retention of talented medical pool is a critical

issue given most patients are tied to a doctor and

there have been instances in the past where the

departure senior talented personnel has resulted in

lower occupancy that has impacted profitability.

High cost burden

Setting up a facility in a large town/metro is costly

with an average cost of INR8-10m per bed. About

India has a cost advantage over other countries for performing same surgeries

(USD) US UK Thailand Singapore India

Heart Surgery 100,000 41,726 14,250 15,312 6,000 Heart Valve Replacement 1,60,000 30,000 10,500 13,000 6,000 Bone Marrow Transplant 250,000 292,470 62,500 150,000 30,000 Liver Transplant 300,000 200,000 75,000 140,000 45,000 Knee Replacement 48,000 50,109 8,000 25,000 6,000 Hip Replacement 38,000 18,000 10,000 12,000 6,000

Source: Fortis Healthcare

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50-55% of this cost is attributed to the acquisition

of land and construction related expenses.

Many leading companies are opting for an asset-light

model by leasing their assets over a long period of

time (typically 30 years) and paying lease rate with

certain escalation every year to the lessor. In certain

cases, the lessee shares the percentage of EBITDA.

Such a model helps ease the need for upfront

investments and also leads to lower depreciation and

interest expenses going forward, thus reflecting

better on return ratios.

Additionally the purchase and replacement of

advanced medical equipment involve significant

costs, and expose hospitals to currency fluctuation

risk, given most equipment needs to be imported

from overseas.

Access to capital and land

Given the high capital intensity, access to capital

is a constant risk and could be critical to a

successful business strategy.

Additionally, the acquisition of new land and

expansion into existing areas can be costly and

challenging and is subject to market movements.

Many firms are opting for a lease on a long-term

basis over owning direct land.

Most hospitals look for favourable lease

arrangements when accessing new territories

which are unexplored in terms of market

potential. In certain cases, negotiations and re-

arrangements might lead to certain disputes and

may incur additional costs.

Technological advancement

Constant upgrading of facilities and incorporation

of new technologies are essential to sustain patient

volumes and reduce average length of stay.

Additionally, the lack of modern medical

equipment and operating theatres could lead to

market share losses. Many large hospitals are

benchmarking their medical equipment against

western hospitals to attract foreign patients. In our

view, this is critical factor to sustaining long-term

growth in medical tourism in India.

While surgical treatment costs are low in India,

equipment costs and other investments in

technology incur similar pricing and can put

pressure on margins.

Increasing competition in local markets

The penetration of medical services is uneven

across India. In Gurgaon and Hyderabad, for

example, the supply of beds outstrips demand,

impacting occupancy and pricing power. This can

make building a brand and market presence in

some metro areas a significant challenge for

nationwide players.

As per the latest data available, Chennai,

Bangalore and Hyderabad rank high among

metros with over 2 beds per 1,000 population vs

Delhi (1.4), Mumbai (0.8) and Kolkata (0.8).

Additionally, some hospitals are establishing a

competitive advantage by specializing in a

particular field, such as Asian Heart Institute in

cardiology and Aditya Jyot Hospital in

Private players dominate the healthcare facilities in Indian metros

Metro No. of hospitals No. of private hospitals No. of beds No. of private beds

Delhi 523 380 35,200 21,000 Mumbai 539 151 37,370 21,500 Kolkata 200 72 20,938 14,657 Bangalore 320 212 18,000 10,800 Hyderabad 523 300 14,000 8,400 Chennai 350 210 20,508 10,254

Source: Company data (Data as of 2010. Number of hospitals is estimate for Chennai, private beds are estimated for Kolkata, Hyderabad and Chennai)

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ophthalmology. These hospitals tend to present

tough competition to hospitals that offer a wider

range of services, as they have built up a strong

brand within their own field, offering proven

expertise in handling complicated cases. They

operate on lower costs and hence have

better profitability.

The potential entry of overseas healthcare chains

in India is another threat.

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Company profiles

Apollo Hospitals (APHS IN): Leader in private healthcare

Fortis Healthcare (FORH IN): Pan-Asia branding

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Leader in private healthcare Apollo is the established leader among private

healthcare providers in India, with the widest

footprint in the southeast and an increasing presence

in the northwest. With coverage expansion to over

50 self-owned hospitals and 8,500 self-owned beds,

we believe the company is well positioned to benefit

from the potential growth in the country’s currently

weak healthcare infrastructure base. We expect

timely additions of beds, ramp-up in occupancy

levels in Hyderabad and other clusters and further

improvement in average revenue per operating bed

(ARPOB) at key clusters including Chennai and

Hyderabad to be material drivers of growth in the

near term. The standalone pharmacy business, while

still a drag on overall margins, is likely to show

gradual improvement; value in this business could be

unlocked through a potential divestment.

Core hospital business outlook strong –

Mumbai cluster newest entry: Apollo Group

currently has 5,888 beds and aims to add about

3,000 new beds through FY15, which includes

setting up a new cluster in Mumbai which should

bring higher ARPOB given the industry statistics

in metros. At the same time, occupancy is

increasing in Hyderabad and ARPOB at flagship

hospitals is expanding through an improving case

mix and focus on centres of excellence. The

REACH model (targeting non-metro and non-

urban) is expected to scale up patient volumes in

bigger hospitals. We expect hospitals to remain

the key driver of earnings, contributing over 95%

of the total in the next three years. We estimate

sales to grow at a CAGR of 22% over FY12-15 in

the core business and operating margins to expand

50bp during this period.

Unlocking value in retail pharmacy and other non core businesses: The retail pharmacy

business which broke even last year is at an

inflection point, with profitability expected to

continue improving. A potential stake sale to a

strategic partner and likely divestment of

outsourcing business under Apollo Health Street

(as guided by the company) could unlock

significant value, in our view.

Initiate with OW: We initiate coverage of Apollo

Hospitals with an OW rating, valuing it using a

sum-of-the-parts methodology (14x EV/EBITDA

for hospitals, 0.5x EV/sales for pharmacy business

and additional INR23 per share for associates). Key

risks include delay in execution of key projects and

slower margin build up in pharmacy business.

Apollo Hospitals (APHS)

Strong brand and broad reach enables Apollo to maintain

leadership in both hospital and pharmacy businesses

Increasing occupancy in Hyderabad and other clusters, coupled

with aggressive expansion plans, suggests ample room for growth

Initiate with OW and TP of INR796; unlocking value in non-core

businesses is a material catalyst

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Financials & valuation: Apollo Hospitals Overweight Financial statements

Year to 03/2012a 03/2013e 03/2014e 03/2015e

Profit & loss summary (INRm)

Revenue 31,475 37,602 46,669 56,846EBITDA 5,131 6,124 7,869 9,555Depreciation & amortisation -1,239 -1,464 -1,678 -1,878Operating profit/EBIT 3,892 4,660 6,192 7,677Net interest -891 -920 -950 -1,000PBT 3,260 4,020 5,522 6,977HSBC PBT 3,260 4,020 5,522 6,977Taxation -1,150 -1,339 -1,839 -2,323Net profit 2,193 2,782 3,788 4,769HSBC net profit 2,193 2,782 3,788 4,769

Cash flow summary (INRm)

Cash flow from operations 1,835 3,521 2,845 5,050Capex -4,539 -4,000 -3,500 -3,500Cash flow from investment -4,065 -3,900 -3,395 -3,385Dividends -648 -822 -1,119 -1,409Change in net debt -1,717 -424 1,669 -256FCF equity -2,963 -759 -935 1,250

Balance sheet summary (INRm)

Intangible fixed assets 1,351 1,351 1,351 1,351Tangible fixed assets 20,855 23,391 25,213 26,836Current assets 14,679 17,033 19,795 22,378Cash & others 2,368 3,903 3,140 3,855Total assets 42,771 47,661 52,245 56,450Operating liabilities 4,733 4,927 5,936 6,323Gross debt 8,517 9,707 10,614 11,073Net debt 4,928 4,504 6,174 5,917Shareholders funds 25,068 28,573 31,242 34,602Invested capital 29,783 32,944 37,282 40,386

Ratio, growth and per share analysis

Year to 03/2012a 03/2013e 03/2014e 03/2015e

Y-o-y % change

Revenue 20.8 19.5 24.1 21.8EBITDA 22.7 19.4 28.5 21.4Operating profit 20.1 19.7 32.9 24.0PBT 24.7 23.3 37.3 26.4HSBC EPS 8.4 23.8 36.2 25.9

Ratios (%)

Revenue/IC (x) 1.1 1.2 1.3 1.5ROIC 10.3 10.9 12.7 14.1ROE 10.0 10.4 12.7 14.5ROA 6.8 7.3 8.6 9.8EBITDA margin 16.3 16.3 16.9 16.8Operating profit margin 12.4 12.4 13.3 13.5EBITDA/net interest (x) 5.8 6.7 8.3 9.6Net debt/equity 19.7 15.8 19.8 17.1Net debt/EBITDA (x) 1.0 0.7 0.8 0.6CF from operations/net debt 37.2 78.2 46.1 85.3

Per share data (INR)

EPS Rep (fully diluted) 16.15 19.99 27.23 34.28HSBC EPS (fully diluted) 16.15 19.99 27.23 34.28DPS 4.00 4.95 6.74 8.48Book value 184.53 205.39 224.57 248.72

Valuation data

Year to 03/2012a 03/2013e 03/2014e 03/2015e

EV/sales 2.7 2.3 1.9 1.5EV/EBITDA 16.7 13.9 11.0 9.1EV/IC 2.9 2.6 2.3 2.1PE* 39.7 32.1 23.5 18.7P/Book value 3.5 3.1 2.9 2.6FCF yield (%) -3.7 -0.9 -1.2 1.5Dividend yield (%) 0.6 0.8 1.1 1.3

Note: * = Based on HSBC EPS (fully diluted)

Issuer information

Share price (INR)640.95 Target price (INR)796.00 2

4.2

Reuters (Equity) APLH.BO Bloomberg (Equity) APHS INMarket cap (USDm) 1,582 Market cap (INRm) 86,186Free float (%) 67 Enterprise value (INRm) 85175Country India Sector HEALTH CARE PROVIDERSAnalyst Girish Bakhru Contact +91 22 22681638

Price relative

270

370

470

570

670

770

2010 2011 2012 2013

270

370

470

570

670

770

Apollo Hospitals Rel to BOMBAY SE SENSITIVE INDEX

Source: HSBC Note: price at close of 05 Jul 2012

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Apollo’s hospital network across India

Hospital owned by AHEL

Hospital owned by Subsidiary/Associates/JVs of AHEL

AHEL Affiliated Hospitals

Clinics / Diagnostic Centres

Under Construction

Ludhiana

Gurgaon NoidaDelhi

Bacheli

AgraAgra

Bhagalpur

KolkataBilaspurRanchi

Bhilai Bhubaneswar

Indore

Ahmedabad

Nasik

BelapurPune Karimnagar

Mumbai, Byculla

Thane

Margoa

LavasaTaranaka Hyderabad Vizag

KakinadaKurnool

Bellary

Raichur

ArgondaChitoor Tirupathi

AyanambakkamChennaiTiruvannamalai

Thirukadaiyur

Karaikudi

MaduraiKarur

Calicut

MysoreBelandurBangalore

RanipetTrichy

NelloreHospital owned by AHEL




Under Construction

Hospital owned by AHEL




Under Construction

Ludhiana

Gurgaon NoidaDelhi

Bacheli

AgraAgra

Bhagalpur

KolkataBilaspurRanchi

Bhilai Bhubaneswar

Indore

Ahmedabad

Nasik

BelapurPune Karimnagar

Mumbai, Byculla

Thane

Margoa

LavasaTaranaka Hyderabad Vizag

KakinadaKurnool

Bellary

Raichur

ArgondaChitoor Tirupathi

AyanambakkamChennaiTiruvannamalai

Thirukadaiyur

Karaikudi

MaduraiKarur

Calicut

MysoreBelandurBangalore

RanipetTrichy

Nellore

Source: Company data, HSBC

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Hospital business brings in 75% of revenue Largest hospital network in India

Apollo obtains revenues from two main segments:

healthcare services and retail pharmacy.

Healthcare services comprising hospital-based

revenues, hospital-based pharmacies and

consultancy generated 75% of revenues in FY12

while retail pharmacy accounted for 25%.

With over 51 hospitals and 8,000 beds, Apollo has

the widest reach in the country with a significant

presence in major metro areas, including Chennai,

Hyderabad, Ahmedabad, Bangalore, Kolkata and

New Delhi.

Founded in 1979, the group owns about 5,890

beds through its own hospitals and JV

partnerships, and manages another 2,600 beds.

The company started its operations in Chennai

and had just 150 beds in 1983. In 1988, it

expanded to Hyderabad.

It was in early 2000 that it made its entry in New

Delhi and Kolkata (until then it had no presence in

northern India). The company opened the 425-bed

Gleneagles Hospital in Kolkata through a 50:50 JV

with Parkway Group of Singapore and another in

Ahmedabad in JV with Cadila Pharma. In 2008, the

company launched its REACH initiative to make

quality healthcare accessible to people in rural areas.

“Apollo” brand

Apollo records close to 750 admissions, 6,500

out-patients, 200 critical care cases, 120 key

cardiac procedures, 50 neuro-surgeries, and

conducts 400 dialysis and 40,000 laboratory tests

every day.

Apollo has many firsts to its name (see exhibit

below). The well-known ACE@25 programme

implemented in 32 of the group’s centres focuses

on centres of excellence and aids in improving

clinical outcomes at its hospitals (benchmarking

against globally renowned healthcare institutions

with 25 parameters).

During FY12, the Apollo Transplant Institute

completed 929 transplants in a single year making

it one of the busiest programs of its kind in the

world. The company has adopted the latest

technology – the daVinci Si Surgical robotic

system – to obtain the best clinical outcomes in

various procedures. The Apollo Institute of

Robotic Surgery, launched six months ago, has

already completed 55 robotic surgeries.

ACE@25 – cornerstone of superior clinical outcome

Few parameters Institutes benchmarked against

Mortality Rate Cleveland Clinic ALOS Mayo Clinic Complication rates National Healthcare Safety Network Healthcare associated infection rates

Massachusetts General Hospital

Patient satisfaction with pain management

US Census Bureau

Medication errors Singapore General Hospital Transplant survival rates National Kidney Foundation (NKF)

Source: Company, HSBC

Apollo expansion timeline

Apollo Hospital, Chennai Indraprastha Apollo Hospitals, Apollo Gleneagles, Kolkata Imperial Hospital, Bangalore Plans to add 2,418 bedsApollo Hospital, Hyderabad Delhi Hospitals in Mysore, 2 REACH Hospitals, and by FY14

Apollo Specialty Hospital, Ahmedabad, Bilaspur hospitals in Bhubaneshwar, Chennai Apollo Standalone pharmacy Secunderabad, Mauritius,

Lavasa, Dhaka, KakinadaApollo Muncih Health InsuranceApollo Health Street

1983-88 1989-2000 2001-04 2005-10 2011-14


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Apollo has highest number of JCI accredited hospitals in India including one in Dhaka, Bangladesh

Hospital City

Apollo Hospital Chennai Apollo Hospital Hyderabad Indraprastha Apollo Hospital New Delhi Apollo Gleneagles Hospital Kolkata Apollo Hospital Bangalore Apollo Dhaka Hospital Dhaka, Bangladesh Apollo Ludhiana Ludhiana


Centres of Excellence

CONCORT (cardiology, oncology, neurology,

critical care, orthopaedics, radiology and

transplants) represents Apollo’s focus areas when

it comes to improving case mix. Case mix is an

important driver of revenue growth and

profitability given that lifestyle disorders are

growing faster and attracting better pricing.

Apollo has dedicated centres of excellence for the

above key specialities and super specialities.

Apollo performed over 9,095 PTCAs

(percutaneous transluminal coronary

angioplasties) and over 7,603 cardiac surgeries in

FY11. Its six Centres of Excellence contributed

c65% of revenue as of FY12 and are targeted to

reach c80%. This will be boosted by the addition

of new super specialities and growth of existing

specialities. Typically, oncology and

transplantation units are added to a hospital after

2-3 years of operation.

According to CRISIL (Credit Rating and

Information Services of India Ltd), cardiac and

cancer cases accounted for 22.3% and 13.1%,

respectively, of in-patient hospital revenues in

India in 2008 and this is expected to increase to

32.1% and 16.2%, respectively, by end 2018. We

expect the focus on Centres of Excellence to

benefit private players, including Apollo, on the

back of changing lifestyles leading to new disease

patterns in the overall population.

A few firsts at Apollo

First in critical surgeries First transplants First in technology

929 solid organ transplants in a single calendar year, the transplant programme of the Apollo hospitals is the first program in the world to cross the 900 barrier in transplants

Paediatric liver transplant in India First to install the most modern diagnostic and surgical infrastructure like the 320-Slice CT Scan and many others

First donor incompatible kidney transplant performed at Apollo Hospitals Chennai using technique of column adsorption of blood group antibodies

Adult liver transplant in India First hospital group to bring the 320 Slice CT- Angio scan system and the 64 Slice CT-Angio scan system to India

World's 1st iPod Navigation Hip Resurfacing Surgery was successfully performed at Apollo Speciality Hospitals, Chennai

Cadaver liver transplant in India First hospital group in Southeast Asia to introduce the 16 Slice PET-CT Scan

Pioneered open heart surgeries and cardiac catheterization, in the early 1980’s

Transplant in acute liver failure in India Equipped with the largest and most sophisticated sleep laboratory in the world

By 1992, Apollo Hospitals introduced Artery Stenting for the first time in India

Liver-kidney transplant in India were all performed by Apollo Hospitals

Introduced the most advanced CyberKnife® Robotic Radio Surgery System in Asia Pacific, the world’s first and only robotic radiosurgery system designed to treat tumours anywhere in the body with sub-millimetre accuracy

Conducted over 90,000 cardiac surgeries - one of only 10 hospitals in the world to achieve these volumes. Achieved a 99.6% success rate in cardiac bypass surgeries, over 91% of which were beating heart surgeries

Apollo Hospitals was the first Indian hospital group to introduce Stereotactic Radiotherapy and Radiosurgery for cancer treatment

Indraprastha Apollo Hospitals launched Novalis Tx - an advanced form of radiotherapy and radiosurgery that offers a versatile combination of advanced technologies for treatment of tumours and lesions

Pioneer of the preventive health check programmes in India and performed 3m checks to date

Pioneered orthopaedic procedures like hip and knee replacements, the Illizarov procedure and the Birmingham hip re-surfacing technique

Full Field Digital Mammography with Tomosynthesis (3D) system, First-of-it's-kind in South Asia was launched at Apollo Speciality Hospital, Chennai


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Flagship hospitals improve ARPOB in tough environment

Flagship operations in Chennai and Hyderabad

accounted for little over half of the revenues in

FY12. ARPOB increased in both clusters at a

double-digit (c15%) pace despite challenging times.

Chennai and Hyderabad – key contributors

Parameter Chennai Hyderabad

% of owned beds located 20% 16% % contribution to healthcare services revenue 39% 16%

Source: HSBC, Company data

While out-patient volume growth was robust at

c16% in the Chennai cluster in FY12, in-patient

volumes remained flat. The company has guided

for stronger growth going forward as visible in

early trends in April-May. Chennai however

improved its occupancy from 73% in FY11 to

75% in FY12 essentially on the back of a decrease

bed capacity due to the removal of 30 beds in the

main hospital to accommodate an operating

theatre for liver transplantation and robotic

surgery. The EBITDA margin in Chennai was

c32-34% in FY12, one of the highest in the group.

With a marginal expansion plan in Chennai in the

near term and already high occupancy levels, we

expect incremental growth to come from an

increase in ARPOB essentially.

The Hyderabad cluster, however, has room for

improvement; occupancy dipped from 65% in FY11

to 62% on the back of empanelment delays from

certain institutional clients owing to disputes with

insurance companies and the addition of new beds.

As these issues have now been resolved, we

expect occupancy to improve materially. Both in-

patient and out-patient volume growth in this

cluster remained strong at 16% and 25%,

respectively, in FY12 which will drive occupancy.

We expect occupancy to increase to c67% by

FY15 despite the addition of beds. We expect all

of the 1,300 commissioned beds are operational

by FY15.

Apollo: Key owned and managed hospitals

S.No. Name and location Year of commencement/

incorporation

Land-owned/ Leased

Building-owned/ Leased

Type No. of beds

Directly owned 1 Apollo Hospital, Chennai 1983 Owned Owned SS 583 2 Apollo Specialty Hospital, Nandanam 1994 Partly owned Partly owned SS 279 3 Apollo Hospital, Hyderabad 1988 Owned Owned SS 514 4 Apollo Specialty, Madurai 1997 Leased Leased SS 205 5 Apollo Hospital, Bilaspur 2001 Leased Leased SS 300 6 Apollo BGS Hospital, Mysore 2001 Leased Leased SS 200 7 Apollo Hospital, Kakinada 2005 Owned Owned MS 120 8 Apollo Hospital, Bhubaneswar 2009 Leased Owned SS 290 9 Apollo Loga Hospital, Karur 2009 Leased Leased MS 62 10 Apollo Heart & Kidney Hospital, Vizag 1999 Leased Leased SS 120 11 Apollo Hospital, Karimnagar 2008 Owned Owned MS 125 Indirectly owned through subsidiaries, JVs or associates

1 Apollo Hospital, Bangalore (Apollo's stake: 51%) 2007 Owned Owned SS 297 2 Apollo Hospital, New Delhi (Apollo's stake: 21.06%) 1996 Leased Owned SS 648 3 Apollo Hospital, Ahmedabad (Apollo's stake: 50%) 2003 Leased Owned SS 300 4 Apollo Gleneagles Hospitals, Kolkata (Apollo's stake: 50%) 2002 Leased Owned SS 460

Source: Company data (SS=super-specialty, MS=multi-specialty)

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Average Revenue per Operating Bed (ARPOB) for Chennai and Hyderabad cluster (INR/day)

5,000

10,000

15,000

20,000

25,000

30,000

FY10 11Q2 11Q4 12Q1 12Q3 FY12

Chennai Hy derabad


Despite a challenging environment, we expect a

healthy improvement in ARPOB on back of an

improving case mix, reducing ALOS (Average

Length of Stay) and better pricing.

Aggressive expansion plan

Apollo’s expansion plan over FY12-15 includes

the addition of 2,955 beds across 14 hospitals and

increasing its hospital network from 37 to 51. This

will raise the number of self-owned beds from

5,888 to over 8,800 by FY15. The company

expects to have more than 7,000 beds operational

by FY15.

The company plans to add about 555 beds this

year. As Mumbai is the only big metro where

Apollo does not have a significant presence, it

plans to establish three hospitals (two self-owned

and one JV) there. Of the two self-owned

hospitals, Navi Mumbai is expected to come on

line by 4QFY14 or early FY15. In addition to this,

it plans to expand its Chennai main facility, which

is already operating at c75-80% occupancy rate.

The capex plan includes cINR17.5bn (Apollo’s

share of total estimated project cost) over the next

three years of which INR2.6bn is already

invested. The company added 368 beds to its

operation in FY12 and about 800 beds over the

past 18 months. Of these, 85% were added to

existing hospitals and mature clusters, with the

rest added under REACH. Around 700 beds were

added in Hyderabad, Bhubaneshwar, Karaikudi,

Lavasa and Secunderabad. The company has

guided capex of INR4bn in FY13, the majority of

which is already tied up.

The company has transitioned its growth trajectory

and experimented with new delivery formats

including the addition of beds under REACH.

REACH hospitals are essentially “no-frills”

secondary care centres that provide quality care in

semi-urban and rural areas. These are equipped to

become higher secondary/tertiary centres (Madurai,

for example, started as REACH but is now a tertiary

set up) but typically benefit from lower operating

costs and act as source of referrals for super-

specialty hospitals in the metros. For instance, a

REACH hospital may or may not have CTVS

Apollo: Key operating highlights

_____________________________AHEL standalone hospitals______________________________ _____ Chennai cluster ______ ____ Hyderabad cluster_____ _________Others __________ Significant subs/JVs/associates Parameter FY11 FY12 % yoy

change FY11 FY12 % yoy

changeFY11 FY12 % yoy

change FY11 FY12 % yoy

change

No. of operating beds 1,194 1,159 809 930 1,127 1,246 1,637 1,818In-patient volume 70,628 70,520 -0.2% 39,298 45,575 16.0% 53,451 59,314 11.0% 102,048 105,611 3.5%Out-patient volume 282,223 327,668 16.1% 113,413 141,204 24.5% 151,011 158,937 5.2% 324,750 347,181 6.9%In-patient ALOS (days) 4.52 4.5 4.88 4.64 5.63 5.43 4.51 4.66Bed occupancy rate (%) 73% 75% 65% 62% 73% 71% 77% 74%In-patient revenues (INR mn) 6,013 6,703 11.5% 2,402 3,027 26.0% 2,402 2,942 22.5% 7,751 9,176 18.4%Out-patient revenues (INR mn) 1,917 2,141 11.7% 498 629 26.3% 416 528 26.9% 1,505 1,776 18.0%AROPB (INR/day) 24,858 27,853 12.0% 15,114 17,307 14.5% 9,367 10,784 15.1% 20,091 22,275 10.9%Total net revenue 7,930 8,844 11.5% 2,900 3,656 26.1% 2,818 3,470 23.1% 9,256 10,952 18.3%


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(cardiothoracic vascular surgeries) and certainly not

transplant or oncology units.

No. of owned beds is consistently increasing over the years

3,0005,376 5,842 5,8881,000

2,6082,875 2,388

1,500750300

0

2,000

4,000

6,000

8,000

10,000

FY90 FY95 FY00 FY05 FY10 FY11 F Y12

Ow ned Managed


Typically a REACH hospital will costs INR5-6m

per bed, as against INR8-10m for a conventional

tertiary care centre set up in a metro and will thrive

on higher volume growth given less competition in

rural townships. A REACH hospital is typically

constructed on a land area of c1-2 acres. The

Apollo REACH hospital in Karimnagar was the

first such hospital in the country established on this

model. The hospital performed open heart surgery

with cardiopulmonary bypass and valve

replacement surgeries within three months of its

inauguration. Moreover, the hospital broke even in

the second year of operation.

Other REACH hospitals in the pipeline include

those at Ayanambakkam (Chennai), Nashik,

Nellore and Trichy. The company plans to expand

this model to most semi-urban/rural areas in the

country and has identified a number of second and

third tier cities which currently lack penetration but

have sizeable markets. Apollo has guided that it

plans to establish about 100 more REACH

hospitals over the next 10-15 years. In the ongoing

first phase of the REACH program, it plans to open

25 hospitals over two years. A cookie-cutter model

with a timeline of 18-24 months from land

procurement to start of operations has been adopted

for a speedy roll out.

Besides REACH, the company has been

experimenting with other new formats, including

day care centers and specialty clinics. Apollo’s

sole day care center in Kolkata has had a

successful pilot run and the company plans to roll

out similar projects in other parts of the country.

Specialty clinics too are at a pilot stage and being

explored on a separate business unit basis.

Currently most clinics are part of the hospital

business. Apollo has around 100 clinics (across

dialysis, cosmetic, wellness and sugar clinics), of

which c50% is 100%-owned. Most clinics do not

attract huge investments (less than INR10m) and

are helpful in attracting out-patient volume.

India’s future metros are areas of expansion for hospitals

Tier I cities Tier II cities Tier III cities

New Delhi Pune Trichy Mumbai Ahmedabad Madurai Kolkata Lucknow Nasik Chennai Chandigarh Baroda Bangalore Mangalore Allahabad Hyderabad Vizag Udaipur Cochin Agra Trivandrum Ajmer Coimbatore Kota Surat Meerut Bhubaneshwar Kanpur Jaipur Shillong Ludhiana Dhanbad Bhopal Hoshiarpur Gwalior Ambala Amritsar Vijayawada Nagpur Jalandhar Indore Raipur

Source: ASSOCHAM, India

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Apollo Hospitals: Operating metrics Apollo: In-patient admissions volume Apollo: Operating beds and bed utilization trend

190211

235265 281

0

50

100

150

200

250

300

FY08 FY09 FY10 FY11 FY12

('000

)

No. of In-patient admissions

3,613 3,9304,257

4,786

0

1,000

2,000

3,000

4,000

5,000


68%

70%

72%

74%

76%

78%

No. of operating beds (LHS)Bed Utilization rate % (RHS)

5,153

Source: Company data Source: Company data

Apollo: Average length of stay (ALOS) in days Apollo: Average revenue per occupied bed, ARPOB (INR/day)

5.18 5.15

4.84 4.79 4.78

4.4

4.6

4.8

5

5.2

5.4


Av erage length of stay (day s)

0

5,000

10,000

15,000

20,000

25,000


Av erage rev enue per occupied (INR/day )

CAGR FY09-12: 10.4%


Apollo: In-patient revenue by specialty areas FY11 Apollo: Revenue CAGR (FY09-11) for specialty areas

Cardiology

27%

Oncology

8%

Neuro

10%Transplants

2%

Others

38%

General

Surgery

4% Orthopaedic

11%

18%

19%

17%

27%

28%

Transplants

Orthopaedics

Neurosciences

Oncology

Cardiology

Source: Company data Source Company data

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Apollo Hospitals expansion plan and update on execution

Location Expected completion date

Type of hospitals No. of beds Total estimated project cost (INRm)

AHEL's share of cost (INRm)

Mumbai Cluster Navi Mumbai FY14 Super Specialty 350 3,500 3,500 Byculla, Mumbai FY14 Super Specialty 300 1,400 1,400 Thane* FY14 Super Specialty 250 2,200 550 Sub Total 900 7,100 5,450 Chennai Cluster Chennai Chennai-Main (Expansion) FY13 Super Specialty 30 100 100 Ayanambakkam FY13 REACH 200 700 700 MLCP FY14 0 337 83 Women & Child FY14 Super Specialty 60 740 740 Chennai (OMR) FY14 Super Specialty 45 310 310 South Chennai FY15 Super Specialty 350 2,940 2,940 Sub Total 685 5,127 4,873 REACH Nashik FY14 REACH 125 520 520 Nellore FY14 REACH 200 667 667 Trichy FY13 REACH 200 655 655 Sub Total 525 1,842 1,842 Others Patna Phase I FY15 Super Specialty 240 2,760 2,760 Vizag FY14 Super Specialty 300 1,150 1,150 Bangalore Ortho & Spine FY13 Super Specialty 125 558 558 North Bangalore FY14 Super Specialty 180 770 770 Bilaspur – Oncology Block FY13 Super Specialty - 80 80 Sub Total 845 5,318 5,318 Total 2,860 18,611 16,463

Note: * held through JV Source: Company data

Apollo Hospitals: Bed capacities and no. of hospitals

Category wise Total beds Operational beds No. of Hospitals

Owned 5,888 5,153 36 Managed 2,388 NA 14 Grand Total 8,276 NA 50 Cluster wise (owned) Chennai 1,161 1,159 9 Hyderabad 1,130 930 8 Kolkata 468 425 2 Delhi 801 681 2 Bangalore 297 236 1 Ahmedabad 320 228 2 Other India 1,511 1,294 11 International* 200 200 1 Grand Total 5,888 5,153 36


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Retail pharmacy at inflection point Largest player in organized pharmacy

Apollo is the largest player in the organized

pharmacy retail market with 1,364 stores as of

4QFY12. Total revenues from retail pharmacy

grew 31% in FY12 to INR8.6bn with the

operating margin improving by 150bp to 1.9%.

Organized pharmacy in India is a miniscule 3% of

the total pharmacy industry. Major players include

Apollo, Medplus, Guardian, Medicine Shoppe,

Dial for Health and Fortis Healthworld. There are

over 650,000 pharmacies in the country, of which

only 20,000 form part of organized retail. Even

though the absolute number of dispensing outlets

is high, we think the company has the opportunity

to increase its share of organized pharmacy outlets

within the industry in line with its increased share

in transaction volume.

Additionally, the distribution network and footfall

attracted by stores can be leveraged to market and

sell non-pharmaceutical products. Apollo’s typical

store size is c300-350 sq ft and carries a range of

products from medicines and surgical products to

personal care and wellness offerings. Personal care

and wellness products include cosmetics, skin care,

fragrances, vitamins and hair care products.

Typically a retail pharmacy store takes about 4-5

years to mature and around 12 months to break

even at the EBITDA level. As of FY12, the

company had 298 stores that would be classified

as mature, having been opened prior to 2008. The

mature stores have an operating margin of 5.7% in

FY12, with revenue per store growing 14.3% to

INR9.6m.

Apollo added 81 stores and closed seven for a net

addition of 74 stores in 4QFY12. Total net stores

added in FY12 were 165. We expect margin

improvement to be gradual in this business given

the company is in expansion mode and expects to

maintain the current trend of adding 35-40 stores

per quarter. We believe as the proportion of

mature stores increase, margins will improve in

this business. In the near term, the focus will be

on improving the mix of consumables with an

increasing proportion of private label and

wellness products.

Apollo: No. of pharmacy stores has gone up consistently while store revenues are stabilizing

642

883

1,0491,199

1,364

500

700

900

1,100

1,300

1,500


0%

20%

40%

60%

80%

No .of stores-LHS

% y oy rev enue grow th-RHS


Apollo standalone pharmacies performance


Revenue (INR m) 2,021 3,343 4,850 6,614 8,606 % yoy growth 65.5% 45.1% 36.4% 30.1% Revenue/store (INR m) 3.1 3.8 4.6 5.5 6.3

EBITDA margins of stores by maturity Upto FY07 batch 5.2% 5.7% FY08 batch 0.3% 2.5% Total stores 0.5% 1.9%


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Increase in share of private label products to drive margins

Apollo plans to increase proportion of private

label product revenue from 4% to over 12-15% in

the next 1-2 years (with an ideal target of c20%).

This will raise operating margins to 8-10% from

the current 5% in mature stores.

The company has plans to sell a stake in the

business and has been on the lookout for a

strategic partner. We believe the potential

unlocking of value will be beneficial in terms of

providing funds to the core hospital business.

Rollout of GST (Goods and Services Tax) and

easing of FDI norms in retail could give this

segment a sharp boost.

Apollo’s EPS sensitivity to EBITDA margin in pharmacy

FY13e FY14e FY15e EBITDA margin _____ Incremental EPS (INR) ______

Base+50 bps 0.27 0.33 0.39 Base+100 bps 0.55 0.66 0.77 Base+200 bps 1.09 1.32 1.54 Base EBITDA margin 2.1% 2.4% 2.8% Base EPS (INR) 20.0 27.2 34.3


Recent deals in pharmacy have been at attractive valuations

Pharmacy Partner _Deal Amount _ Remarks Entity (USDm) (INRm)

Med Plus Pharmacy

Mount Kellet Capital Management

90 4,100 Deal values Med Plus at USD260m (INR12bn) - at c2.5x sales

Metropolis Labs

Warburg Pincus

85 3,920 As of June 2010, Metropolis had 45 state of art labs with over 350 collection centers in India and processed over 12mn tests a year

Dr Lal Pathlabs

TA Associates

35 1,630 16% stake bought

Source: Press Releases, HSBC

Apollo standalone pharmacies: Maturity-wise details

Batch Attribute Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12

No. of stores 317 315 315 314 314 311 300 299 298 298 Revenues/store 1.89 2.12 2.18 2.2 8.4 2.2 2.37 2.45 2.5 9.6 EBITDA/store 0.09 0.11 0.11 0.1 0.43 0.11 0.14 0.14 0.1 0.54

Upto FY2007 batch

EBITDA margins % 4.6% 5.3% 5.2% 5.4% 5.2% 5.1% 5.9% 5.8% 5.8% 5.7% No. of stores 205 205 203 203 186 185 183 183 Revenues/store 1.54 1.62 1.6 6.2 1.87 1.98 2 7.74 EBITDA/store 0.02 0.01 0 0.02 0.04 0.06 0.1 0.2

FY2008 batch

EBITDA margins % 1.3% 0.7% 0.7% 0.3% 2.3% 3.2% 3.4% 2.5% No. of stores 1,066 1,110 1,143 1,199 1,199 1,220 1,257 1,290 1,364 1,364 Revenues/store 1.31 1.48 1.52 1.52 5.49 1.55 1.66 1.74 1.74 6.3 EBITDA/store -0.03 0.03 0.01 0.01 0.03 0.02 0.03 0.04 0.04 0.12 Total

EBITDA margins % -2.0% 1.8% 0.7% 1.0% 0.5% 1.2% 1.8% 2.3% 2.2% 1.9%

Note: Revenue/Store and EBITDA/store in INR mn Source: Company data

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Other ventures Apollo Munich Re Insurance – Apollo has a tie-

up with Munich Health in the health insurance

space. During FY12, the company achieved gross

written premium (GWP) of INR4.7bn against

INR2.8bn in FY11. The JV achieved breakeven at

the EBITDA level in 4QFY12. The company

expects it to move into positive net profits in the

next 15-18 months. Apollo has a 10.4% stake in

the JV.

Apollo Health Street – Apollo provides

outsourcing services through Apollo Health

Street. The business grew 10% in FY12 to

INR4.9bn with operating margin improving

significantly to 17.2% vs. 11.6% in FY11. The

business process outsourcing (BPO) arm provides

services including IT solutions to hospitals and

physicians besides coding, billing, transcription,

claims generation support and patient follow-ups.

Apollo has a 39.3% stake in Apollo Health Street.

The company has previously discussed plans to

divest this business as it is a non-core asset. In

FY12m, the company reported lower profits due

to one-off litigation costs and interest reset.

Consulting – The consulting business is

essentially a brand building exercise where

Apollo Global Projects provides hospital

consultancy to other hospitals. It operates on two

levels:

Project management – This comprises

overseeing facility development, feasibility

studies, infrastructure planning and advisory,

staff management and recruitment assistance.

Operations consulting – These are

essentially post commissioning consultancy

services as per management contracts,

including day-to-day operations support and

training of manpower.

The segment has been generating revenues of

INR200-250m per year and has essentially

remained flat over the last few years though

margins are high at c45-50%. The company has

been voluntarily focusing on signing few

management contracts.

Apollo Clinics – Primary healthcare clinics were

set up under Apollo Health and Lifestyle across

India. The company initially set up these clinics

through a franchise model for one-time fixed

payment and regular royalty payments. As per the

current model, Apollo is setting up clinics through

its own investment. Currently, Apollo has 62

Apollo Munich Health Insurance: Key Financials

(INR mn) Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12

Total income 421 454 192 580 1,647 718 832 774 988 3,312 EBITDA -191 -232 -240 -42 -705 -143 -118 -142 21 -382 PAT -181 -217 -226 -170 -794 -95 -71 -97 -211 -474 Gross Written Premium (GWP) 421 454 528 1432 2,835 718 2,621 1,550 4,759 Earned premium 1,487 3,008 Incurred claim ratio 66% 67% 68% 62% 62% 59% 60% 61% 60% 58% Assets under Management 3,346 2,801 4,192


Apollo Health Street key financials

(INRm) Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12

Total income 1,084 1,331 861 1,200 4,476 1,220 1,220 1,251 1,218 4909 EBITDA 147 176 139 58 520 192 184 186 280 842 EBITDA margin 13.5% 13.2% 16.2% 4.8% 11.6% 15.7% 15.1% 14.9% 23.0% 17.2% PAT 27 9 -35 47 48 -44 -40 -18 103 1


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clinics with an additional 35 under

implementation. These clinics provide basic and

advanced consultation and diagnostic tests. All

clinics have a 24-hour pharmacy as well.

Earnings CAGR over 20% We expect c22% sales CAGR over FY12-15e

driven by c25% growth in hospital revenues and

c20% growth in pharmacy. EBITDA CAGR over

the same period is projected at c23%.

We expect near-term margins to improve, albeit only

slightly (c50bp over FY12-14e) on the back of an

improving case mix in mature hospitals resulting in

higher ARPOBs, improving ALOS and the addition

of new beds with over three years of maturity. We

expect mature beds to show better operating

performance through improved asset utilization.

Additionally, we expect the pharmacy business to

show gradual improvement in margins with

increasing share of mature stores.

Apollo Hospitals presence as per maturity

Maturity wise (owned) Total beds Operational beds

No. of Hospitals

> 5 years 4,239 4,044 24 3 - 5 years 381 316 3 1 - 3 years 1,100 713 7 < 1 year 168 80 3 Grand Total 5,888 5,153 37 > 5 years hospital contribution 72.0% 78.5% 66.7%


Balance sheet is healthy Working capital cycle has been low given the

high proportion of out-of-pocket expenditure.

Because a large part of its business is conducted

in cash with immediate payment, average account

receivables are low. Inventories are essentially on

account of standalone pharmacies.

Debt to equity at the end of FY12 was 0.34x and

is expected to remain at this level or go lower on

the back of an equity infusion through warrant

conversion.

The company recently did a QIP (Qualified

Institutional Placement) through which it raised

cINR3.3bn. Additionally, conversion of 3.08m

warrants in FY12 brought in required funds to

meet near-term capital requirements. The

company has an additional 3.27m warrants with

conversion price of INR472.46. We have assumed

conversion of these warrants in our model in

FY13 (given they expire on 4 August 2012) and

accounted for equity dilution (c2.4%).

Apollo segment sales split

(INR m) FY10 FY11 FY12 FY13e FY14e FY15e FY12-15e CAGR

Standalone Hospitals 13,412 16,712 19,402 23,085 28,960 35,979 22.9% Standalone Pharmacy 4,850 6,614 8,606 10,507 12,703 14,833 19.9% JV/subsidiaries revenue 2,003 2,728 3,468 4,009 5,007 6,034 20.3% Consolidated revenue 20,265 26,054 31,475 37,601 46,670 56,846 21.8%

% of consolidated revenue

Standalone Hospitals 66% 64% 62% 61% 62% 63% Standalone Pharmacy 24% 25% 27% 28% 27% 26% JV/subsidiaries revenue 10% 10% 11% 11% 11% 11%

Source: Company data, HSBC estimates

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Apollo EBITDA margin trend

1,000

3,000

5,000

7,000

9,000

11,000


0%

5%

10%

15%

20%

25%

Apollo EBITDA (INR mn)Total EBITDA margin-RHSHospital margin-RHSPharmacy margin-RHS

Source: HSBC estimates, Company data

While aggressive bed additions and investments

in the pharmacy business have resulted in muted

return ratios with ROE at c10%, we expect ROE

to improve to 13% by FY14e driven by higher

contribution from mature hospitals and scale-up in

pharmacy margins.

Apollo: ROE and ROCE trend

0

5

10

15

20

FY11 FY12 FY13e FY14e FY15e

ROE % ROCE % (HSBC)


Key downside risks Increased competition in key clusters – Chennai

and Hyderabad constitute 19% and 16% of total

self-owned beds and are markets with higher

share of revenues. Higher supply of beds in these

regions is a concern and could impact occupancy

and pricing in these markets.

Execution delays – Delays in planned additions

of beds can impact growth forecasts and could be

significant in regions that attract higher ARPOBs.

Higher costs – Acquisition of new land, even if

leased, can turn costlier with multiple brands

looking for new locations. Additionally, rising

property prices can increase overall costs

including development and construction.

Recruitment and retention of trained skilled

personnel – Given the scarcity of quality resources

this is a potential risk in healthcare delivery with the

competition hunting for similar talent.

Changes in taxation laws – Hospitals currently

enjoy 150% depreciation under section 35D and

section 11b of 80I. Changes in certain benefits

could have an adverse impact on cash flows.

Apollo has stable working capital cycle Apollo’s net debt/EBITDA ratio is consistently improving

0

10

20

30

40

50

FY10 FY11 FY12 F Y13 FY14 FY15

Debtor Day s Inv entory Day s Creditor Day s

0.0

0.5

1.0

1.5

2.0


Net debt/EBITDA

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

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Indexed performance of Apollo vs. Sensex

050

100150200250300

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Jul-1

2

Apollo Sensex

Source: DataStream

Initiate as OW, TP of INR796 We initiate with OW on Apollo Hospitals and

value it on a SOTP basis. We value the hospital

business at 14x FY14 EBITDA (in line with

current valuations and sector average for past one

year) and pharmacy at 0.5x sales to arrive at an

implied equity value of INR796. Under our

research model, for stocks without a volatility

indicator, the Neutral band is 5ppts above and

below the hurdle rate for Indian stocks of 11%.

Our target price implies a potential return of 23%

(including forecast dividend), above the Neutral

band; therefore, we are initiating with an OW

rating. Potential return equals the percentage

difference between the current share price and the

target price, including the forecast dividend yield

when indicated.

SOTP valuation (INRm)

Hospital Business Remarks

FY14 EBITDA 7,564 EV/EBITDA 14 In-line with current and 1yr average Hospitals EV 105,891 Pharmacy Business Sales 12,703 EV/Sales 0.5 at discount to retail chains like

Pantaloon, Shoppers Stop Pharmacy EV 6,352 Total EV 112,243 Net debt / cash 4,504 Minority Interest 126 Indraprastha Medical (22% stake)

731 valued at market price

Apollo Health Street (39.4% stake)

2,458 valued at book

Implied Equity Value 110,802 No of shares 139 Equity value / share 796


Over the last five years, the stock has traded at a 1-

year forward EV/EBITDA of 10.5x. On a PE basis

the stock is trading at 31.6x FY13e and 23.2x FY14e

EPS estimates. This is a significant premium over

the last five-year average PE of 20.8x.

We use DCF as an alternative valuation yardstick.

Assuming cost of equity of 10.5%, interim growth

between FY15e and FY20e of 15% and a FCF

exit multiple of 15x, we arrive at a target price of

INR740. We believe the current share price

largely reflects the valuation of its hospital

business and announced pipeline of beds. A

potential tie-up or divestment in the pharmacy

business and continued momentum in bed

addition could drive significant upside.

Apollo Hospitals: 12-mth fwd rolling PE band (x)

100

300

500

700

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Price (INR) 15 20

25 33

Source: HSBC estimates, DataStream

DCF sensitivity to WACC and FCF multiple

8.2% 8.7% 9.2% 9.7% 10.2%

5 550 518 488 460 434 10 708 663 622 584 548 15 867 809 756 707 662 20 1025 955 890 831 776 25 1184 1101 1025 954 890

Source: HSBC (WACC on top row, FCF multiple on left column)

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Apollo Hospitals: 12-mth fwd rolling EV/EBITDA band (x)

100

200

300

400

500

600

700

800

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Price (INR) 8 10 12 15


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Apollo Hospitals: Margin analysis

(as % of total sales) FY10 FY11 FY12 FY13e FY14e FY15e

Materials consumed 50.0 50.8 49.6 49.5 49.8 49.8 Staff expense 16.3 15.9 16.0 16.0 15.8 15.8 Advertising and marketing 1.4 1.7 2.1 2.1 2.1 2.1 Others expenses 17.5 15.6 16.0 16.0 15.5 15.5 EBITDA 14.8 16.1 16.3 16.3 16.9 16.8 EBIT 11.1 12.4 12.4 12.4 13.3 13.5 Pre-tax profit 9.8 10.0 10.4 10.7 11.8 12.3

Net profit 6.8 7.1 7.0 7.4 8.1 8.4


Apollo Hospitals: Profit and loss statement

(INRm) FY10 FY11 FY12 FY13e FY14e FY15e

Net revenue 20,265 26,054 31,475 37,602 46,669 56,846 Materials consumed 10,136 13,225 15,623 18,613 23,241 28,309 Staff expense 3,308 4,151 5,029 6,034 7,362 8,981 Advertising & marketing 274 436 668 801 961 1,173 Other 3,542 4,059 5,025 6,029 7,235 8,827 Total expenses 17,259 21,871 26,344 31,478 38,800 47,291 EBITDA 3,006 4,183 5,131 6,124 7,869 9,555 Depreciation 750 942 1,239 1,464 1,678 1,878 EBIT 2,256 3,242 3,892 4,660 6,192 7,677 Interest expense 602 814 891 920 950 1,000 Interest income 96 110 0 0 0 0 Other Income 227 76 259 280 280 300 Pre-tax profit 1,976 2,614 3,260 4,020 5,522 6,977 Total tax 676 873 1,150 1,339 1,839 2,323 Tax rate 34.2% 33.4% 35.3% 33.3% 33.3% 33.3% Profit before minorities and associates share 1,300 1,741 2,110 2,682 3,683 4,654 Minority interest 36 15 12 15 15 15 Share in associates 39 84 71 85 90 100 Net profit 1,376 1,840 2,193 2,782 3,788 4,769 EPS (INR) 22.3 14.9 16.1 20.0 27.2 34.3 DPS (INR) 7.0 3.8 4.0 4.9 6.7 8.5

% yoy change Net revenue 25.5 28.6 20.8 19.5 24.1 21.8 Materials consumed 23.4 30.5 18.1 19.1 24.9 21.8 Staff expense 27.5 25.5 21.1 20.0 22.0 22.0 Advertising and marketing 9.0 59.4 53.1 20.0 20.0 22.0 Others 25.8 14.6 23.8 20.0 20.0 22.0 EBITDA 32.6 39.2 22.7 19.4 28.5 21.4 Depreciation 18.6 25.6 31.6 18.1 14.6 11.9 EBIT 38.0 43.7 20.1 19.7 32.9 24.0 Interest expense 31.2 35.3 9.5 3.2 3.3 5.3 Pre-tax profit 42.8 32.2 24.7 23.3 37.3 26.4 Net profit 34.2 33.7 19.2 26.8 36.2 25.9


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Apollo: Balance sheet


Gross Intangible Assets 500 677 1,351 1,351 1,351 1,351 Gross Fixed Assets 16,950 19,767 23,632 27,632 31,132 34,632 Accum. amortisation & depreciation 4,231 5,148 6,387 7,851 9,529 11,407 CWIP 3,037 3,610 3,610 3,610 3,610 3,610 Total Long-Term Assets 16,257 18,905 22,205 24,742 26,564 28,186 Investments 4,166 5,020 5,642 5,642 5,642 5,642 Deferred tax assets 240 256 245 245 245 245 Total non-current assets 20,663 24,181 28,092 30,628 32,450 34,073 Inventories 1,412 1,584 1,915 2,224 2,878 3,341 Cash & Bank Balance 3,117 1,781 2,368 3,903 3,140 3,855 Debtors 2,228 3,003 3,867 3,859 5,731 5,950 Loans & Advances 5,238 5,730 6,528 7,046 8,046 9,232 Total Current Assets 11,995 12,098 14,679 17,033 19,795 22,378 Total assets 32,658 36,279 42,771 47,661 52,245 56,450 Creditors 1,967 1,927 2,490 2,685 3,694 4,080 Provisions 2,067 2,102 2,532 2,532 2,532 2,532 Others 1,939 2,326 2,243 2,243 2,243 2,243 Total Current Liabilities 5,973 6,355 7,264 7,459 8,468 8,855 Share Capital 618 624 672 689 689 689 Reserves & others 15,917 18,366 24,396 27,884 30,553 33,913 Shareholders' Funds 16,535 18,989 25,068 28,573 31,242 34,602 Minorities//Preference 241 249 126 126 126 126 Long-Term Debts 9,132 9,585 8,517 9,707 10,614 11,073 Deferred Taxation 776 1,101 1,796 1,796 1,796 1,796 Total Liabilities + shareholders’ fund 32,658 36,279 42,771 47,661 52,245 56,450


Apollo Hospitals: Cash flow statement


Cash flow from Operating Activities

EBIT 2,256 3,242 3,892 4,660 6,192 7,677 Adjustments for: Other Income 227 76 259 280 280 300 Depreciation and amortisation 750 942 1,239 1,464 1,678 1,878 Operating profit before working capital changes 3,232 4,259 5,390 6,404 8,149 9,855 Change in Working Capital -1,059 -1,092 -1,514 -625 -2,516 -1,481 Interest expense -602 -814 -891 -920 -950 -1,000 Tax paid -676 -873 -1,150 -1,339 -1,839 -2,323 Cash flow from operations 895 1,480 1,835 3,521 2,845 5,050 Cash Flow from Investing Activities Capital Expenditure -4,122 -3,590 -4,539 -4,000 -3,500 -3,500 Interest received 96 110 0 0 0 0 Investments 1,749 -854 -621 0 0 0 Cash flow from investing -2,278 -4,334 -5,161 -4,000 -3,500 -3,500 Retained Free Cash Flow -1,383 -2,854 -3,325 -479 -655 1,550 Cash flow from financing activities Dividends Paid -504 -544 -648 -822 -1,119 -1,409 Shares Movements 975 1,158 4,533 1,545 0 0 Others 727 450 1,096 100 105 115 Debt Raised (repaid) 2,426 453 -1,068 1,191 907 459 Cash used in financing activities 3,624 1,518 3,913 2,014 -107 -835


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Apollo Hospitals: Basis of consolidation

AHEL Standalone Location Description

Chennai Main Chennai Hospital ASH - Chennai Chennai Hospital Tondiarpet - Chennai Chennai Hospital FirstMed - Chennai Chennai Hospital Apollo Children's Hospital Chennai Hospital Madurai Madurai Hospital Karur Karur Hospital Karaikudi Karaikudi Hospital Hyderabad Hyderabad Hospital Bilaspur Bilaspur Hospital Mysore Mysore Hospital Vizag Vizag Hospital Pune Pune Hospital Karim Nagar Karim Nagar Hospital Bhubaneswar Bhubaneswar Hospital Subsidiaries Location Description AHEL Ownership Samudra Healthcare Enterprises Ltd. Kakinada Hospital 100.0% Imperial Hospital and Research Centre Ltd. Bangalore Hospital 51.0% Unique Home Healthcare Limited Chennai Paramedical Services 100.0% Apollo Health and Lifestyle Ltd. Hyderabad Apollo Clinics 100.0% AB Medical Centres Limited Chennai Infrastructure 100.0% Apollo Cosmetic Surgical Centre Pvt Ltd Chennai Cosmetic Surgery 61.0% JVs Apollo Hospitals International Ltd. Ahmedabad Hospital 50.0% Apollo Gleneagles Hospitals Ltd. Kolkota Hospital 50.0% Apollo Gleneagles PET-CT Pvt. Ltd. Kolkota Hospital 50.0% Apollo Munich Health Insurance Company Ltd Health Insurance 11.0% Quintiles Phase One Clinical Trials India Pvt Ltd Clinical Trial 40.0% Apollo Lavasa Health Corporation Ltd Maharashtra Hospital 34.7% Associates Indraprastha Medical Corporation Ltd. Delhi, Noida Hospital 22.0% Family Health Plan Ltd. TPA, Health Insurance 49.0% Apollo Health Street Ltd. Healthcare BPO 39.4% Stemcyte India Therapeutics Pvt Ltd Ahmedabad Stemcell Banking 13.1%


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Pan-Asia branding Over the last decade Fortis has emerged as a

serious contender in India’s healthcare services

market, pursuing strong organic as well as

inorganic growth models. The company’s

acquisition of Escorts, Malar and Wockhardt

hospitals and more recently assets under Fortis

Healthcare International has created a significant

pan-Asia presence. With a total of over 12,000

beds (including 4,000 under construction) across

75 hospitals, Fortis is on the brink of a growth

spurt. International business is a new challenge

and has come at the cost of increasing leverage.

India business remains a key driver: FY12

India hospital business growth of 30% was driven

by improving operating metrics at mature

hospitals and improving integration of hospitals

acquired from Wockhardt. The company has a

plan to add 3,000 beds (most of which on an

asset-light model) by the end of FY15. We expect

an improving specialty mix and patient referral

support from the diagnostic business under Super

Religare Laboratories (SRL) to improve

profitability and volume in long run. We forecast

a 15% CAGR in sales for FY12-15e in the India

hospital business.

Overseas business - a new frontier: Given its

business outside India is new and has few

comparables, we assume modest growth

assumptions in the near term. We expect the

revenue contribution from international business to

remain at 50% over FY13-15 driven by double-digit

growth in Dental Corp and Hoan My. Additionally,

the commencement of a specialty colorectal hospital

in Singapore is a near-term trigger.

Balance sheet health coupled with muted margin expansion a concern: From a net cash

position following the sale of Parkway to 1.5x

leverage after the acquisition of international

assets, the balance sheet has seen significant

change. Although the acquisition was priced at

book, the sharp growth in intangible assets is a

worry. Additionally, margin expansion under SRL

has been slower than expected.

Initiate with N, TP: We initiate with a Neutral

rating and a SOTP-based target price of INR115

(valuing the India business at 14x EV/EBITDA

for the international business at 12x

EV/EBITDA). Key downside risks include a

delay in the execution of key projects and risks

associated with the integration of acquired

facilities. Upside risks would be sooner than

expected recovery of margins in SRL diagnostic

business and inflow of target capital through

planned listing of clinical establishment of REIT.

Fortis Healthcare (FORH) Second largest healthcare chain and largest diagnostic player,

with significant footprint outside India as well Inorganic growth spurt, but accompanied by high leverage and

lower return ratios Initiate coverage with N and a TP of INR115; margin recovery in

diagnostic business, listing of REIT would be key catalysts

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Financials & valuation: Fortis Healthcare Neutral Financial statements

Year to 03/2012a 03/2013e 03/2014e 03/2015e

Profit & loss summary (INRm)

Revenue 29,828 53,730 61,824 70,222EBITDA 4,000 7,646 9,085 10,324Depreciation & amortisation -1,823 -2,557 -2,760 -2,995Operating profit/EBIT 2,177 5,089 6,325 7,329Net interest -2,196 -4,758 -4,878 -4,998PBT 1,080 1,331 2,447 3,531HSBC PBT 1,080 1,331 2,447 3,531Taxation -410 -452 -832 -1,201Net profit 722 865 1,598 2,304HSBC net profit 722 865 1,598 2,304

Cash flow summary (INRm)

Cash flow from operations 32,711 -1,429 -37 4,142Capex -74,886 -3,000 -3,500 -4,000Cash flow from investment -67,449 -3,013 -3,517 -4,026Dividends 0 0 0 0Change in net debt 37,077 4,405 3,554 -116FCF equity -43,274 -5,429 -4,537 -1,058

Balance sheet summary (INRm)

Intangible fixed assets 64,823 64,823 64,823 64,823Tangible fixed assets 36,186 36,629 37,369 38,374Current assets 20,684 25,405 27,605 33,328Cash & others 4,156 1,714 161 2,277Total assets 124,543 129,707 132,647 139,375Operating liabilities 32,918 35,217 34,559 36,982Gross debt 49,919 51,919 53,919 55,919Net debt 45,699 50,105 53,658 53,542Shareholders funds 32,563 33,428 35,026 37,331Invested capital 84,619 89,926 95,077 97,266

Ratio, growth and per share analysis

Year to 03/2012a 03/2013e 03/2014e 03/2015e

Y-o-y % change

Revenue 101.1 80.1 15.1 13.6EBITDA 728.1 91.2 18.8 13.6Operating profit 133.8 24.3 15.9PBT -28.8 23.3 83.8 44.3HSBC EPS -41.9 19.8 84.6 44.2

Ratios (%)

Revenue/IC (x) 0.5 0.6 0.7 0.7ROIC 3.7 5.7 6.3 6.8ROE 2.2 2.6 4.7 6.4ROA 2.9 3.2 3.7 4.1EBITDA margin 13.4 14.2 14.7 14.7Operating profit margin 7.3 9.5 10.2 10.4EBITDA/net interest (x) 1.8 1.6 1.9 2.1Net debt/equity 140.3 149.9 153.2 143.4Net debt/EBITDA (x) 11.4 6.6 5.9 5.2CF from operations/net debt 71.6 7.7

Per share data (INR)

EPS Rep (fully diluted) 1.78 2.14 3.94 5.69HSBC EPS (fully diluted) 1.78 2.14 3.94 5.69DPS 0.00 0.00 0.00 0.00Book value 80.37 82.50 86.45 92.13

Valuation data

Year to 03/2012a 03/2013e 03/2014e 03/2015e

EV/sales 3.2 1.8 1.7 1.5EV/EBITDA 23.6 12.9 11.3 9.9EV/IC 1.1 1.1 1.1 1.1PE* 59.3 49.5 26.8 18.6P/Book value 1.3 1.3 1.2 1.1FCF yield (%) -88.7 -11.1 -9.3 -2.2Dividend yield (%) 0.0 0.0 0.0 0.0

Note: * = Based on HSBC EPS (fully diluted)

Issuer information

Share price (INR)105.70 Target price (INR)115.00 5

.0

Reuters (Equity) FOHE.BO Bloomberg (Equity) FORH INMarket cap (USDm) 786 Market cap (INRm) 42,827Free float (%) 19 Enterprise value (INRm) 98892Country India Sector Health Care ProvidersAnalyst Girish Bakhru Contact +91 22 22681638

Price relative

69

89

109

129

149

169

189

2010 2011 2012 2013

69

89

109

129

149

169

189

Fortis Healthcare Rel to BOMBAY SE SENSITIVE INDEX

Source: HSBC Note: price at close of 05 Jul 2012

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Fortis’s current stronghold is in Northern India, focus towards Central and Southern India to deepen its pan-India presence

Focus area

Owned facility

Managed facility

Heart command centers (HCCs)

Projects

Presence across

17 States

35 Cities

Focus area

Owned facility

Managed facility

Heart command centers (HCCs)

Projects

Presence across

17 States

35 Cities

Source: Company data, HSBC

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Pan-Asia focus Fortis Healthcare was incorporated in 1996 and

started its operations in 2001 with the

commencement of Fortis Mohali. Fortis is now

the second largest healthcare chain in India with a

two-pronged organic and inorganic growth

strategy. The company has 68 hospitals in India of

which 23 are 100%-owned, 30 managed and 15

under development with a total of 12,000 beds

(including self-owned, managed and project

beds). The group had 2,982 operational self-

owned beds as at end FY12.

Additionally, the company is working on 15 green

or brown field projects with a total of more than

3,100 beds. The group has seen significant growth

driven by acquisitions in the past. The recent

acquisition of international assets has elevated the

Fortis brand to a pan-Asia level.

Inorganic expansion of bed capacity

Over the last 10 years, Fortis has increased bed

capacity by 50% through acquisitions. The idea

behind these acquisitions was to ramp up capacity

by acquiring mature assets rather than wait for

greenfield set ups, which tend to have a long

gestation period, to mature. For more details

regarding acquisitions, refer to the exhibit below.

Fortis Healthcare geographical presence

Facility Description Location

Fortis Hospitals Leading hospital operators in India with >10,000 beds under management

India

Religare SRL India Key diagnostic service provider India Lanka Hospitals One of the largest hospitals in

Sri Lanka Sri Lanka

Fortis Hospitals for Colorectal surgery

South East Asia's first specialty hospital for colorectal treatment, expected completion in mid 2012

Singapore

Radlink The largest private diagnostic and imaging Company in Singapore

Singapore

Fortis Clinique Darne Mauritius SRL Diagnostics, Dubai

The largest private pathology laboratory in Emirates

Dubai

Dental Corporation Australia's largest operator of Dental practices which operates in top 30% of the Australian dental market

Australia/ New Zealand

Hoan My Medical Corporation

Leading private healthcare provider in Vietnam with 5 hospitals and 3 clinics across the country

Vietnam

Quality Healthcare Largest integrated primary healthcare service provider in Hong Kong with c590 primary care centres

Hong Kong


Fortis Hospitals expansion history

20012003 &

2004 2005 2007 2008 2009 2010 2011

Revenues grow4x with strong

presence in NCR

Company achievesprofitability on

consolidated basis

Commenced two Greenfield facilities at Shalimar Bagh, Delhi and Anandpur,

Kolkata; Launched an Oncology block at Mulund, Mumbai

Started first hospital atMohali, Punjab with acapacity of 300 beds

Acquired Escorts chain of hospitals Acquired Malar Hospitals, Chennai

Took a significant step in establishing Fortisas a Global Healthcare Brand by its attempt to acquire Parkway Holdings Ltd – Asia’sfinest healthcare provider, but exitedconsidering high valuations of the asset

Acquired Strategic stake in Super Religare

Laboratories (SRL)

Enters DelhiCommences operations at Noida

Listed on BSE and NSE with a market cap of USD543mn Starts hospital at Jaipur

Rights Issue Acquired 10 hospitals from Wockhardt

Within first decade of operations,Fortis touched a mark of 10,000 bedsacross 66 hospitals across India andoverseas market

20012003 &

2004 2005 2007 2008 2009 2010 2011

Revenues grow4x with strong

presence in NCR

Company achievesprofitability on

consolidated basis

Commenced two Greenfield facilities at Shalimar Bagh, Delhi and Anandpur,

Kolkata; Launched an Oncology block at Mulund, Mumbai

Started first hospital atMohali, Punjab with acapacity of 300 beds

Acquired Escorts chain of hospitals Acquired Malar Hospitals, Chennai

Took a significant step in establishing Fortisas a Global Healthcare Brand by its attempt to acquire Parkway Holdings Ltd – Asia’sfinest healthcare provider, but exitedconsidering high valuations of the asset

Acquired Strategic stake in Super Religare

Laboratories (SRL)

Enters DelhiCommences operations at Noida

Listed on BSE and NSE with a market cap of USD543mn Starts hospital at Jaipur

Rights Issue Acquired 10 hospitals from Wockhardt

Within first decade of operations,Fortis touched a mark of 10,000 bedsacross 66 hospitals across India andoverseas market


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Fortis’s acquisitions were relatively cheaper to other international hospital acquisitions

Acquirer Entity acquired Year of acquisition

Deal size (INRm)

Bed strength

EV/Bed (INRm)

Remarks

Escorts chain of Hospitals, NCR

2005 5,850 for firs 90% and 1,300 for another 10%

881 8.1 Acquired 90% stake first and then additional 10% stake later in Escorts Heart Institute and Research Center – 4 key locations Delhi, Amritsar, Jaipur and Faridabad

Hiranandani Hospitals, Mumbai

2007 250 152 1.6 First entry in Mumbai for Fortis

Malar Hospitals, Chennai

2008 346.8 (48% stake first for 257.6mn then

additional for total c63%)

178 3.1 Strong turnaround achieved in Malar hospitals

Wockhardt Hospitals 2009 9,090 1368 6.6 Acquired 10 hospitals from Wockhardt including 2 in construction – gave access to Mumbai, Bengaluru and Kolkata

Parkway Holdings 2010 31,181 - - Fortis acquired 23.9% stake in Parkway Holdings, Singapore. This was later sold in July 2010 with a gross profit exceeding INR3.4bn

Super Religare Laboratories (SRL)

2010 8,030

Fortis Healthcare

Fortis Healthcare International

2011 32,700 Acquired international assets held under FHIL at 1x book for USD665mn. Provides assets in international markets Australia, Vietnam, Hong Kong, Sri Lanka, Dubai and Singapore

Acquirer Entity acquired Year of acquisition

Deal size (USDm)

Bed strength

EV/EBITDA (x)

Universal Health Services

Ascend Health Corp. 2012 517 800

Community Health Systems

Triad Hospitals 2007 6,800 (5,700 cash) 9.0 Community became largest publicly traded hospital in US after this acquisition with over 18,700 beds

Lifepoint Province Healthcare 2005 1,700 5,285 11.0 At 2.04x sales Highmark West Penn Allegheny

Health System 2011 475 2,000

MPIC Asian Hospital 2012 34 1,800


Fortis Hospital expansion plan

No. Location Beds Area & Land Ownership Date of commencement Estimated capex (INR mn)

1 Kangra 100 37,000 sq. ft., B. Lease FY13 240 2 Dehradun 50 27,000 sq.ft., Public Private Partnership FY13 150 3 Gurgaon 450 11 Acres, Owned FY13 3,250 4 Cochin 45 43,000 sq.ft., B Lease FY13 180 5 Richmond Road, Bangalore 100 52,000 sq.ft., B Lease FY13 350 6 Ludhiana – 1 200 1,55,000 sq. ft., B. Lease FY13 500 7 Arcot Road, Chennai 200 138,000 sq.ft., B Lease FY13 920 8 Ludhiana – 2 75 60,000 sq ft. B. Lease FY13 200 9 Peenya, Bangalore 120 ~70,000 Sq ft; B. Lease FY13 180 10 Kharadi, Pune 350 252,000 sq.ft., B Lease FY13 630 11 Gwalior 200 2.5 Acres, L. Lease FY14 720 12 Ahmedabad 200 1,55,000 sq. ft., B. Lease FY14 500 13 AB Road, Indore 250 175,000 sq.ft., B Lease FY14 500 14 Marathalli, Bangalore 375 270,000 sq.ft., B Lease FY14 2,000 15 Hyderabad 450 300,000 sq.ft., Owned FY15 2,100 Total 3,165 12,420


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The company has planned capacity additions of

3,165 beds by FY15. Of this increase, Fortis plans

to add 1,700 beds by FY14 through greenfield

projects. A large part of the pipeline (c75%) is being

developed under an asset-light model. This asset-

light model is more prudent in view of rising real

costs mainly in metros and Tier I cities. In a

traditional hospital model, which is asset heavy, a

company purchases land and builds hospital

building, which together usually account for 65-

70% of total project cost. In the asset light model, a

company identifies a property, refurbishes it and

invests in medical and other equipments for it and

manages it as its own hospital. The original

landowners develop the infrastructure and hospital

pays fixed lease rent to the owner for use of the

property. In this way, land and building cost is

removed from the company’s balance sheet which

automatically improves return ratios. Note that the

peak ROE for a typical 200 bed facility is 39% in an

asset light model, versus 20% in a traditional model.

Asset light model (for 200 beds facility)

EBITDABreakeven

Cash Breakeven

Book Breakeven

Rev

enue

s

-100

0

100

200

300

400

500

Variable Personnel SG&A Cost EBIDTAR* Rent

LandOther Equip

MedicalEquip

Building &Utilities

CAPEXCost of set up is

Rs. 60-90 lacs/bed

Debt: Equity – 1:1

ROCE = 26%ROE = 20%

13%12%

25%

50%

X

4X[1.3x – 1.5x of CAPEX]

30% 85%

Year 1 Year 2 Year 3 Year 4 Year 5

Occupancy

(16%)

40%38%38%

36%

33%31%

31%

30%

23%16%

29%

28%

20%

23%

27%

28%

17%

28%

18%11%

8%

6%

5% Besideselongated book

breakevenperiod, Fortis’ towitness higherreturns on itsInvestmen

ROCE = 51%ROE = 39%

Fortis to investonly on Medical

and Otherequipment (~37%of project cost).

*EBITDAR is Earnings before Interest, Tax, Depreciation, Amortisation and Rent/lease

EBITDABreakeven

Cash Breakeven

Book Breakeven

Rev

enue

s

-100

0

100

200

300

400

500

Variable Personnel SG&A Cost EBIDTAR* Rent

LandOther Equip

MedicalEquip

Building &Utilities


Rs. 60-90 lacs/bed

Debt: Equity – 1:1

ROCE = 26%ROE = 20%

13%12%

25%

50%

X

4X[1.3x – 1.5x of CAPEX]

30% 85%


Occupancy30% 85%

Year 1 Year 2 Year 3 Year 4 Year 5Year 1 Year 2 Year 3 Year 4 Year 5

Occupancy

(16%)

40%38%38%

36%

33%31%

31%

30%

23%16%

29%

28%

20%

23%

27%

28%

17%

28%

18%11%

8%

6%

5% Besideselongated book

breakevenperiod, Fortis’ towitness higherreturns on itsInvestmen

ROCE = 51%ROE = 39%

Fortis to investonly on Medical

and Otherequipment (~37%of project cost).

*EBITDAR is Earnings before Interest, Tax, Depreciation, Amortisation and Rent/lease


Traditional hospital operating model (for 200 bed facility)

0

100

200

300

400

500

30% 85%

Variable Personnel SG&A Cost EBIDTA


X

4X

EBITDABreakeven

Cash Breakeven

Book Breakeven[1.3x – 1.5x of CAPEX]

LandOther Equip

MedicalEquip

Building &Utilities


Rs. 60-90 lacs/bed


Rs. 60-90 lacs/bedDebt: Equity – 1:1

ROCE = 26%ROE = 20%

Rev

enue

s

13%12%

25%

50%

(16%)

Occupancy

40%38%38%

36%

33%

31%

31%

30%

23%16%

29%

28%

20%

23%

27%

28%

17%

28%

Indicative Hospital Operating Model

0

100

200

300

400

500

30% 85%

Variable Personnel SG&A Cost EBIDTA

Year 1 Year 2 Year 3 Year 4 Year 5Year 1 Year 2 Year 3 Year 4 Year 5

X

4X

EBITDABreakeven

Cash Breakeven

Book Breakeven

EBITDABreakeven

Cash Breakeven

Book Breakeven[1.3x – 1.5x of CAPEX]

LandOther Equip

MedicalEquip

Building &Utilities


Rs. 60-90 lacs/bed


Rs. 60-90 lacs/bedDebt: Equity – 1:1

ROCE = 26%ROE = 20%

Rev

enue

s

13%12%

25%

50%

(16%)

Occupancy

40%38%38%

36%

33%

31%

31%

30%

23%16%

29%

28%

20%

23%

27%

28%

17%

28%

Indicative Hospital Operating Model


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India hospital business The company’s India hospital business recorded

revenue of INR19.1bn in FY12. 4QFY12 revenues

grew 52% to INR6.42bn with occupancy at 74%.

The ARPOB was cINR10m and ALOS at four days

for the quarter for the entire hospital segment.

Specialities include cardiac sciences, orthopaedics,

neurosciences, renal sciences, pulmonology and

gastroenterology are performing well with growth in

excess of 25%. Fortis performed c60,000 cardiac

and c100,000 dialysis procedures in FY12.

Fortis, Mohali: This hospital began operations in

2001 and was the first to do so in the Fortis hospital

network. It has 300 beds, of which 256 are

operational. Fortis Mohali contributes 15% of the

company’s revenue and has a healthy operating

margin of 23-25%. The hospital has significantly

improved its operating performance with bed

occupancy rate at 83%, ALOS below four days and

ARPOB cINR8.45m. The company is creating an

oncology block at this facility with 75 beds (third

facility in network to have radiation facilities).

Fortis Escorts, New Delhi: This hospital is the

largest hospital in the Fortis network in terms of

revenue contribution and number of operating

beds (284). Accredited by Joint Commission

International, it contributes c20% of total revenue

and has seen high bed occupancy rates of over

85% in the last few years.

Fortis Malar, Chennai: Fortis Malar was acquired

in February 2008. The facility’s revenues surged

from INR332m in FY09 to over INR900m in FY12.

Fortis, Jaipur: This greenfield hospital started its

operations in 2008 and broke even on an EBITDA

level within its fourth quarter of operation. Fortis,

Jaipur is the one of the fastest growing hospitals

with revenue growth above 30% in FY12.

Key Fortis hospitals in India

Name & Location Operating beds

Year of commencement/ incorporation

Fortis Mohali 256 2001 Escorts Delhi 284 2006 Fortis Noida 177 2004 Fortis Faridabad 210 2006 Fortis Amritsar 142 2006 Fortis Jaipur 177 2008 Fortis Malar, Chennai 170 2008 La Femme 38 2007 Fortis Vasant Kunj 126 2006 Fortis BG Road, Bangalore 239 2006 Fortis CG Road, Bangalore 95 Fortis Mulund 210 2002


New hospitals - Fortis, Shalimar Bagh,

Anandpur, Kolkata, Moradabad, Alwar:

Fortis Shalimar Bagh was commissioned in

September 2010 and began with 88 beds. The

hospital has now scaled up operations and is on the

way to joining the leagues of bigger hospitals with

a greater focus on centres of excellence.

Alwar is a 100-bed facility with a plan to expand

to 150 beds. The hospital was added to the

network as part of a reverse O&M (operations and

maintenance) arrangement whereby large

investments in the facility are made in partnership

with an associate. Fortis, in turn, makes payment

to the partner over the term of the agreement. This

mode of engagement is a logical extension and

key component of Fortis asset light model.

Hospitals performance in India by maturity-wise Q3FY12

Maturity of hospitals Operating beds

Revenue contribution

EBITDA contribution

Average EDITDA margin*

Average Occupancy

Average ARPOB (INR mn)

5 years and above (five hospitals) 14% 24% 29% 23.5% 76% 11.7 3-5 years (ten hospitals) 56% 57% 67% 22.5% 67% 8.2 1-3 years (ten hospitals) 23% 18% 5% 5.2% 64% 6.9 Upto 1 year (four hospitals) 7% 1% -1% -15.2% 32% 1.9

Note: * Average EBITDA margin on unit basis Source: Company data

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The new hospitals generated revenue of INR366m

in 4QFY12.

Fortis India hospital revenue expectation

0

10,000

20,000

30,000

40,000

FY11 FY12 FY13e FY14e FY15e

0%

20%

40%

60%

80%

Hospital Revenues (INR mn) % grow th


Fortis key hospitals revenues and operating margins Q3FY12

786

559450

355 359304

211 203 208

831

595464 424 432

348239 282 242

0

200

400

600

800

1,000

Esco

rts

Del

hi

Moh

ali

Noi

da

BG R

oad,

Ban

galo

re

Mul

und

Vasa

nt

Kun

j

Mal

ar

Jaip

ur

Farid

abad

(IN

R m

n)

Q3FY11 Q3FY12

18%17% 23%

26%

21%

30% 27%

19%

21%14%

24%26% 15%18% 27%22%

17%13%


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Fortis Hospitals: Region-wise split for total no. of hospitals in India FY12

Fortis Healthcare: Revenue split FY12 by specialty areas

East

10.9%

West

16.9%

North

40.3%

South

19.6%

NCR

12.4%

Renal

6%

Cardiac

33%

Pulmo

2%

Oncology

5%

Gastro

2%

OPD and

Others

14%

M ulti-specialties 23%

Ortho 8%Neuro

6%


Fortis EBITDA margins are stabilizing Fortis operational parameters improving with increasing ARPOB and decreasing ALOS

0

500

1,000

1,500

2,000

2,500

3,000

FY09 FY10 FY11 FY12

12%

13%

14%

15%

16%

EBITDA (INR mn)-LHS

% EBIT DA m argin-RHS

0

5,000

10,000

15,000

20,000

25,000

30,000

FY09 FY10 FY11 FY12

3.4

3.6

3.8

4

4.2

4.4

ARPOB (INR/day )-LHS ALOS (day s)-RHS


Aggressive bed additions by Fortis through both organic and inorganic routes

800 7751,000

1,368

3420

500

1,000

1,500


Bed additions

Malar Hospital

acquistion:180

Wockhardt Hospitals

acquisition: 1,368Shalimar Bagh:350

Anandpur: 414


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Diagnostic business The diagnostics service sector in India accounts for

c2% of the healthcare services market with an

estimated market size of cUSD2bn. This market is

expected to grow to a USD5.6-6bn market by 2015

at a CAGR of 32%. Currently, the diagnostic

market in India is highly unorganized; organized

players have a market share of only 9%, while the

top-three corporate diagnostic service providers

account for an 80% market share.

Diagnostics industry is India is largely unorganized

Unorganized, 90.9%

Organized, 9.1%

of w hich SRL

commands c48%

market share

Source: ICRA Management Consulting Services Ltd

Overall diagnostic services can be divided into

radiology, pathology and other services. The

pathology market is c2% of the overall market with

over 40,000 labs serving c1-1.25m patients per day.

This includes special labs, facilities within hospitals

and nursing homes and other multitude small

standalone facilities. The leading players include

SRL, Dr Lal Pathlab, Metropolis and Quest

Diagnostics. Radiology is another 1% of the market

but growing much faster owing to a large number of

studies requiring medical imaging to promote

immediate diagnosis and faster detection of chronic

ailments such as cancer. The main competitors in

radiology include Metropolis, Dr Lal Pathlab, Quest

Diagnostics, Thyrocare and Medinova.

Fortis’s SRL is the leading player in organized

diagnostic market with a market share of c48%.

Pathology and radiology/imaging are the largest

two segments of diagnostics market and both of

these segments are expected at a CAGR of 28-

30% between 2012-15 periods. Pathology and

radiology currently accounts for 82% and 18% of

total diagnostics revenue for SRL.

Fortis acquired 42.7m equity shares for an 82.2%

stake in SRL in mid-2011 for INR8.0bn. The deal

was valued at 2.2x sales and 12x EBITDA.

SRL is the largest player in Indian organized domestic market

Metropolis

20%

Dr Lal

Pathlab

25%

Thyrocare

7% SRL+

PDSPL

48%

Pathology: 82%

Radiology :18%


No. of key procedures done at Fortis Hospitals

Procedures FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12

Cardiac 39,651 12,225 12,700 12,332 14,609 51,866 13,988 15,017 13,903 14,876 57,784 CTVS & paediatrics 6,924 2,622 2293 2120 2,742 9,777 2,625 2644 2424 2,827 10,520 PTCA 8,214 2,314 2568 2634 3,261 10,777 2,937 3178 3057 5,109 14,281 CAG 20,851 6,380 6656 6415 7,379 26,830 7,049 7781 7093 6,724 28,647 Others 3,662 909 1183 1163 1,227 4,482 1,377 1414 1329 216 4,336 Ortho 9,543 2,659 2,618 2,455 3,035 10,767 3,421 3,483 3,109 3,272 13,285 Knee replacement 2,530 1,029 860 890 975 3,754 1,374 1,205 1059 1,223 4,861 THR & others 7,013 1,630 1,758 1,565 2,060 7,013 2,047 2,278 2050 2,049 8,424 Neuro 2,709 1,152 1,284 1,284 1,208 4,928 1,340 1,411 1469 1,712 5,932 Dialysis 44,096 15,636 18,346 15,887 12,446 62,315 23,055 22,834 24822 26,173 96,884


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The rationale behind the acquisition was to

become an integrated player with a presence in all

major areas of medical services.

With its pan-India geographical coverage, strong

talent pool, well established brand and strong

logistics, SRL has strong synergies with Fortis’s

hospital business. SRL currently offers 3,300 tests

including 1,900 routine tests and 2,300

specialized and esoteric tests out of a range of

5,500 tests. SRL has wide pan-India presence as

apparent from the exhibit below.

SRL had earlier bought a diagnostic business from

Piramal for INR6bn in August 2010. Through

Piramal Diagnostics, SRL offers a range of

pathology and radiology services including CAT

(computerized tomography), X-ray, MRI

(magnetic resonance imaging), ultrasound and

PET (positron emission tomography). Piramal

Diagnostics had sales of INR2.1bn in FY10. The

deal was priced at c3x sales.

Fortis recently announced that its SRL chain has

signed agreements with high quality investment

partners – NYLIM Jacob Ballas India Fund III

LLC (NJBIF) and International Finance

Corporation (IFC). As per announcement, NJBIF

and IFC will invest INR2.5bn and INR1.2bn,

respectively, via compulsorily convertible

preference shares (CCPS). The conversion of the

CCPS will be in a price band of INR201-220,

after which Fortis will continue to hold a 55-56%

equity stake in SRL. This is the third round of

private equity infusion in the company after

Avigo Capital Partners and Sabre Partners. The

majority of these funds will go towards repayment

of debt.

PE investment history in SRL

Date PE Investment INR m Stake (%)

Jun-12 IFC 1200 7-8 Jun-12 NYLIM Jacob Ballas India Fund 2500 15-16 May-11 Sabre Partners 500 4 Apr-11 Avigo Partners 1000 9.27

Source: HSBC SRL has ramped up its testing capacities significantly


# Labs 18 27 37 45 189 # Collection Centres 550 741 972 1,044 888 No. of test performed (mn) 2.2 2.8 4.0 5.6 12.4


Fortis (SRL) has wide network of diagnostic labs

Type _____________________________ India_______________________________ International Total North India South India East India West India

Reference Labs 1 1 1 3 2 8 Pathology Labs 27 69 18 50 0 164 Radiology Labs 1 3 0 13 0 17 Wellness Centres 4 5 1 5 0 15 Collection Centres 339 114 218 194 23 888


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India diagnostic market 2009 India diagnostic market 2015e

Radiology

31%

Pathology

69%

2009 Market Size: USD 1.3bn

Radiology

31%

Pathology

69%

2015e Market Size: USD 5.6bn

Source: Fortis Source: Fortis

SRL revenue trend SRL EBITDA and EBITDA margin trend

0

1,000

2,000

3,000

4,000

5,000

FY07 FY08 FY09 FY10 FY11 F Y12*

Rev enue (INR m)

-200

0

200

400

600

800

FY07 FY08 FY09 FY10 FY11 FY12*

(IN

R m

)

-5%

0%

5%

10%

15%

20%

25%

EBITDA-LHS EBITDA margin-RHS


SRL revenue contribution SRL offers 3,300 tests out of spectrum of 5,000 tests

Radiology , 20%

Routine tests,

38%

Specialised &

esoteric tests,

41%

e-Pathology , 1%

1900

3300

1400

0

1000

2000

3000

4000

Routine tests Specialized/esoteric

tests

Total


CAGR 2009-15e: 27.5%

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International businesses International business now forms 50% of

revenues after the acquisition of Fortis Healthcare

International. The acquisition provides the

following benefits:

Creates a strong foothold in Asia Pacific

Expands into new service areas such as

primary care and day care specialty

Adds 8 hospitals, 1,500 beds, 580 primary

healthcare centres, 190 specialty day care

centres and 1 diagnostic reference laboratory

Expands geographic coverage to 9 additional

countries (Australia, New Zealand, Hong

Kong, Vietnam, Dubai, Mauritius, Canada,

Singapore and Sri Lanka) with a network of

2,200 doctors.

Dental Corp, Australia

Dental Corp is one of the leading providers of

dental services with operations in Australia and

New Zealand. It is a partnership-based model

aimed at providing high quality dental services.

The partnership model allows Principal Dentists

to focus on dentistry and retain clinical autonomy

while removing complexities associated with

independent practice (like dentist writing revenue,

managing staff, run IT requirements or a day

surgery). Dental Corp provides a comprehensive

range of support services and assistance in

growing practice operations, allowing dentists to

focus on their core responsibilities.

The largest provider of dental services in

Australia, Dental Corp generated revenues of

AUD310m, 172 operating practices and 176

principal dentists at the end of FY12. Fortis had

acquired c25 practices. The company currently

has a 5% market share and expects that to increase

significantly. The company recently entered the

Canadian market through a partnership model.

Dental Corp, Australia: Performance highlights

1,000

2,000

3,000

4,000

Q1FY12 Q2FY12 Q3FY12 Q4F Y12

(INR

mn)

13%

14%

15%

16%

17%

18%

Rev enue-LHS EBITDA margin-RHS


Fortis International acquisitions

Entity acquired Year of acquisition Stake acquired Rationale

Dental Corporation, Australia 2011 58.1% To enter high margin Australian dental market; Dental Corp operates in top 30% of the market

Quality Healthcare, Hong Kong 2010 100.0% One of the largest radiology network in Hong Kong; Fortis can potentially utilize HK as an base for expansion into China

Hoan My, Vietnam 2011 65.0% Association with the leading healthcare providers in Vietnam

SRL Dubai* 2011 100%/82.5% To enter lucrative diagnostic market in Middle-East Fortis Hospital, Singapore 2011 100.0% The largest private diagnostic and imaging company in

Singapore Sri Lankan Hospital 2011 28.6% One of the largest hospitals in Sri Lanka

Note:* SRL Dubai compromises of tow entities; SRL LLC in which Fortis has 100% stake and MENA Healthcare in which it holds 82.5% stake Source: Company data

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Dental Corp is the leading player with largest number of operating sites in Australian dental market

173

92

27 25 20

0

50

100

150

200

Dental

Corp

Albano Primary

Dental

Pacific

Smiles

1300

Smiles

Number of sites


Dental Corp revenue has seen strong growth with CAGR of c44% between FY08-12

0

50

100

150

200

250

300


Rev enue (USD mn)


Quality Healthcare, Hong Kong

Quality Healthcare is a physician led provider

group offering an integrated range of healthcare

services including facilities management, third-

party plan administration and paramedical

support. The group has wide network of more

than 580 orthodox western and Chinese medical

centers and 47 dental and physiotherapy centers.

The group is the largest primary integrated

healthcare services provider in Hong Kong and

had annual revenues of HKD1.2bn (INR7.55bn)

in FY12. The company also has a nursing agency

that has been providing private professional

nursing care for 35 years and has network of

4,000 nurses to serve customers at home and in

the hospital.

Quality Healthcare, Hong Kong: Steady performance in FY12

500

1,000

1,500

2,000

2,500


INR

mn

0%

2%

4%

6%

8%

10%

12%



Hoan My, Vietnam

One of the leading healthcare providers in

Vietnam, Hoan My has ownership interest in six

full service hospitals and three clinics. Total bed

capacity is 1,100. The company recently opened a

fifth general hospital with 200 beds and capacity

to serve 2000 patients a day.

The company reported 4QFY12 revenues of

INR430m and a 20% EBITDA margin. The

average occupancy was 75%.

Hoan My, Vietnam: Performance highlights

340

360

380

400

420

440


(INR

mn)

0%

5%

10%

15%

20%

25%



Fortis acquired a 65% stake in the company for

USD64m.

RadLink, Singapore

RadLink-Asia is Singapore’s largest out-patient

and molecular imaging and radiopharmaceuticals

group. The diagnostic firm has four main business

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segments – diagnostic imaging, molecular

imaging, cyclotron (radio isotopes manufacturing)

and general practitioner (GP) clinics. The

company offers range of services including CT

coronary angiogram, CAT scanning, MRI,

mammography, bone mineral densitometry,

fluoroscopy and ultrasound.

Fortis Singapore acquired 85% stake in RadLink-

Asia for purchase consideration of USD62.9m.

4QFY12 revenues were INR290m with a 23.6%

EBITDA margin.

RadLink, Singapore has seen consistent growth in FY12

220

240

260

280

300


(INR

mn)

0%

5%

10%

15%

20%

25%



Fortis Colorectal Hospital

Fortis is planning a specialist surgical hospital

focusing on colorectal diseases. This would be the

first hospital of its kind in South Asia. The

planned investment is USD70m.

The hospital is expected to commence operations

shortly with ambulatory and day surgeries

initially. This will soon extend to full clinical

services including in-patients and major surgeries.

The hospital will have out-patient support through

Novena Specialist Centre.

Super Religare Laboratories, Dubai

SRL Dubai had a small share of revenues in FY12

at AED11.8m, up 72% y-o-y. The entity operates

on a hub-spoke-spike model with one reference

lab in UAE and seven collection agents in GCC.

SRL has strengthened its agent and sales team in

Qatar, Tanzania, Bahrain and KSA. 3QFY12

revenues were at INR40m. The operation made a

loss of INR30m at the EBITDA level. It added 28

new clients in the last quarter.

Lanka Hospitals, Sri Lanka

Fortis acquired a 28.6% stake in this hospital in

March 2011. It is a leading tertiary care multi-

specialty hospital. The hospital has a premium

market positioning and is one of the largest

hospitals groups in the region with a strong brand.

Fortis Healthcare: Geographical mix FY12 Fortis Healthcare: Product mix FY12

India

50%

Vietnam

3%Hong Kong

15%

Auatralia & NZ

31%

Dubai 1%

Diagnostics

11%

Day care

specialty

32%

Primary care 15%

Secondary / ter tiary /

quarternary care, 43%


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Sales growth on consolidation We forecast a c33% CAGR in sales over FY12-

15e. FY13e sales are expected to grow 80% on

the back of the consolidation of international

revenues. 4QFY12 was the first quarter when

international revenues were consolidated and sales

were up by 208% y-o-y.

The India hospital business is expected to show

continued momentum on the back of the addition

of new beds in areas like Gurgaon, Ludhiana, and

Pune. With improving case mix and increasing

investment in technology, we expect Fortis to

benefit in terms of improving ARPOBs and

occupancy in key hospitals. We forecast c15%

sales CAGR in hospital revenues in India over

FY13-15e. This is on the back of modest growth

assumptions in SRL given the slow scale-up and

lower pricing differential.

International business is a new area for Fortis but

is already sizeable at 50% of total sales. We have

forecast double-digit growth in most entities with

growing contributions from Dental Corporation

and Hoan My. We have not yet factored Fortis

Colorectal Singapore hospital into our model.

Margins to gradually scale up

We forecast overall margins to expand 130bp over

FY12-15e on the back of improving ARPOBs in

key hospitals and breakeven in newly added beds.

We assume an over 250bp margin improvement at

the EBITDA level in the India hospital business

alone. Additionally, we have assumed diagnostic

business under SRL to report double-digit margins

over FY13-15e reaching 11.2% in FY15e.

We have assumed a 50bp margin improvement

annually in the international business as well

driven by cost integration and operating synergies.

Fortis Healthcare sales split

(INRm) FY10 FY11 FY12 FY13e FY14e FY15e FY13e-15e CAGR

India business Hospitals revenue 9,379 14,830 19,120 21,883 25,778 29,388 15.9% Diagnostics revenue 4,340 4,774 5,251 5,777 10.0% Total India revenue 9,379 14,830 23,460 26,657 31,029 35,165 14.9% International business Dental Corporation, Australia 15,445 17,761 20,425 15.0% Quality Healthcare, Hong Kong 8,305 9,136 10,049 10.0% Hoan My, Vietnam 1,896 2,275 2,730 20.0% RadLink, Singapore 1,242 1,428 1,643 15.0% SRL Dubai 185 195 210 6.5% Total international revenue 6,370 27,073 30,795 35,057 13.8% Total consolidated revenue 9,379 14,830 29,830 53,730 61,824 70,222 14.3% % of total sales

India business

Hospitals revenue 100.0% 100.0% 64.1% 40.7% 41.7% 41.9% Diagnostics revenue 14.5% 8.9% 8.5% 8.2% Total India revenue 100.0% 100.0% 78.6% 49.6% 50.2% 50.1% International business Dental Corporation, Australia 28.7% 28.7% 29.1% Quality Healthcare, Hong Kong 15.5% 14.8% 14.3% Hoan My, Vietnam 3.5% 3.7% 3.9% RadLink, Singapore 2.3% 2.3% 2.3% SRL Dubai 0.3% 0.3% 0.3% Total international revenue 21.4% 50.4% 49.8% 49.9%


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EBITDA margin improvement to be gradual

0

1,500

3,000

4,500

6,000


INR

mn

12.5

13.0

13.5

14.0

14.5

15.0

(%)

India Hospital EBITDA India Diagnos tic EBITDA

International EBITDA Overall EBITDA margin (RHS)

Source: HSBC (FY12 international business EBITDA is only reflected for part booked in year)

Balance sheet is stretched REIT listing to reduce debt

Fortis is planning to raise funds via the listing of a

REIT entity, called Fortis Religare Health Trust,

in Singapore. The company obtained approval

from the Singapore Stock Exchange (SGX) on 24

May 2012 to go ahead with the listing. Religare

Health Trust spins off certain non-core areas such

as out-patient departments, existing and upcoming

hospital buildings and radiology divisions. It will

be the first REIT of its kind. After the de-merger,

Fortis Healthcare will be left with in-patient

departments, intensive care units (ICUs),

operating theatres and emergency services, which

constitute its core operations.

REITs operate under the principles of a close-

ended mutual fund and like mutual funds collect

money from investors for deployment into defined

areas of investments. Under this structure, Fortis

will transfer ownership of 12 key existing hospital

buildings and 2 new planned to the trust and pay

lease to the trust. The rent collected from these

properties is paid as a dividend to shareholders.

Under normal circumstances, the entity is listed

within 90 days of the approval. The company

expects the infusion of USD362.5m (cINR20bn)

from this listing; if successful, could reduce its

debt burden by c45%.Outside healthcare, the

other known Indian company to spin off a REIT is

Indiabulls, which had Indiabulls Properties

Investment Trust listed on the SGX in June 2008.

Fortis has accumulated debt of INR50bn. This is

essentially post the acquisition of Fortis Healthcare

International for USD665m from its promoter group

company. The debt position of the company has

changed significantly post this event.

Last year, the company raised USD100m through

5% foreign currency convertible bonds (FCCBs)

and also called for the conversion of detachable

warrants, which were issued to subscribers of

rights issue in 2009. The warrant conversion

resulted in infusion of cINR13bn. Additionally,

the sale of a stake in Parkway Holdings also

brought gross profit of INR3.45bn last year.

Capital raising history

Nature Date Amount (INRm)

IPO May-07 4,986 Rights Issue Aug-09 9,971 FCCB May-10 4,620 Warrants Jun-10 13,870 REIT Listing in SGX planned 20,000

Source: HSBC, Company data

We haven't built REIT equity infusion yet

-

20,000

40,000

60,000

80,000

100,000

FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

INR

mn

-

5

10

15

20

25

30

35

Net Debt Net Debt/EBITDA

Source: HSBC

Key downside risks Higher component of inorganic growth: Given

large contribution of acquisitions, we believe the

company has less success with organic growth.

Given low execution capabilities, future growth

may miss expectations. Additionally, the larger

the number and size of acquisitions, the higher are

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the challenges and complexities with integration

of assets.

International sales come with higher foreign

currency costs: International footprint comes at

higher costs and is currently at a low 12% at

EBITDA margin level. While margins may improve

a bit on the back of successful integration we

believe synergies are limited given the different

nature of businesses. Additionally, Fortis has

relatively little experience with international

markets and growth assumptions are based on

limited knowledge of these businesses and markets.

Resource availability remains a challenge:

Fortis has more doctors on its payroll than Apollo,

but is still constrained by the shortage of medical

talent in India. Future resource availability is a

key risk for private players and is tied to

government policy decisions on human resource

management in healthcare.

Key upside risks Faster recovery in margins in SRL diagnostic

business: We have currently built 50bp margin

improvement annually in the SRL business. Faster

improvement in margins could be a

potential catalyst.

Capital infusion through REIT listing: We

believe this is a material upside risk as it could

bring in much needed cash for further expansion

and reduce interest burden.

Commencement of operations at Fortis

colorectal hospital: We have not factored any

upside from this entity in our model. This hospital

is unique and is expected to generate significant

ARPOBs.

Initiate as N, TP INR115 We value Fortis on a sum-of-the-parts basis.

While the India business has comparables

(primarily Apollo), the international business

comprises a relatively diverse range of businesses

and is structurally different. We value the India

business at 14x EBITDA (in line with the sector

average) and the international business at a 12x

EBITDA. Under our research model, for stocks

without a volatility indicator, the Neutral band is

5ppts above and below the hurdle rate for Indian

stocks of 11%. Our target price implies a potential

return of 6.5% (including forecast dividend),

above the Neutral band; therefore, we are

initiating with a N rating. Potential return equals

the percentage difference between the current

share price and the target price, including the

forecast dividend yield when indicated.

The stock is currently trading at EV/EBITDA of

12.9x FY13e and 11.3x FY14e.

SOTP valuation

India Business FY14 EBITDA 5,199 EV/EBITDA (x) 14 India EV 72,783 International Business FY14 EBITDA 3,886 EV/EBITDA (x) 12 International EV 46,635 Total EV 119,418 Net debt / cash 64,705 Minorities 8,308 Implied Equity Value 44,986 No of shares 405 Equity value / share 115


We use DCF as an alternative valuation

methodology, assuming a weighted average cost

of capital of 9% (cost of equity of c13.8%, after

tax cost of debt at 5.8%). We use a higher equity

risk premium relative to Apollo given the

management’s relative lower experience in

execution. We have assumed a terminal growth

rate of 3.5%. Our DCF derived 12-month target

price is INR107.

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DCF summary (INRm)

PV of Cash Flow - Explicit Period 3,954 PV of Cash Flow - Implicit Period 18,815 Terminal Value 131,974 PV of Terminal Value 72,233 Enterprise Value 95,003 Less: Debt 49,919 Minority Interest 8,308 Add: Cash 4,156 Short Term Liquid Investment 2,348 Value attributable to Equity Shareholders 43,280 No of Equity Shares 405 Value per Share (INR) 107


Sensitivity to WACC and terminal growth rate

8.0% 8.5% 9.0% 9.5% 10.0%

2.0% 103 83 67 52 40 2.5% 119 97 78 62 48 3.0% 139 113 91 73 57 3.5% 163 132 107 86 68 4.0% 194 156 126 101 80 4.5% 233 185 149 119 95

Source: HSBC estimates (WACC on top axis, growth rate on left axis)

Fortis Healthcare: 12-mth fwd EV/EBITDA band (x)

0

50

100

150

200

250

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Price (INR) 20 45 60 75


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Fortis Hospital: Profit and loss statement


Net Sales 9,381 14,830 29,828 53,730 61,824 70,222 Material Consumed 2,627 3,930 6,666 10,209 11,128 12,640 Staff expenses 1,950 2,731 7,383 15,503 17,829 20,146 Professional charges and consultation fees to Doctors 1,074 2,388 2,908 3,781 4,537 5,172 Power and fuel 258 414 497 596 715 858 Other operating expenses 1,081 1,683 1,936 2,323 2,787 3,345 SGA & other expense 977 3,201 6,440 13,672 15,743 17,737 Total Expenditure 7,966 14,347 25,828 46,084 52,739 59,898 EBITDA 1,414 483 4,000 7,646 9,085 10,324 Depreciation 599 1,045 1,823 2,557 2,760 2,995 EBIT 815 -562 2,177 5,089 6,325 7,329 Interest expense 573 2,500 2,946 4,758 4,878 4,998 Interest income 121 846 750 0 0 0 Other Income 371 3,741 1,099 1,000 1,000 1,200 Pre-tax profit 734 1,526 1,080 1,331 2,447 3,531 Total tax 34 152 410 452 832 1,201 Profit before minorities & associates share 700 1,373 669 878 1,615 2,330 Minority Interest 21 44 -40 45 55 68 Share in associates 16 -75 13 32 38 42 Net profit 695 1,244 722 865 1,598 2,304 EPS (INR) 1.7 3.1 1.8 2.1 3.9 5.7 % yoy change Net revenue 48.8 58.1 101.1 80.1 15.1 13.6 Materials consumed 38.6 49.6 69.6 53.2 9.0 13.6 Staff expense 32.3 40.1 170.3 110.0 15.0 13.0 Professional charges and consultation fees to Doctors 104.9 122.2 21.8 30.0 20.0 14.0 Power and fuel 19.3 60.7 20.0 20.0 20.0 20.0 Other operating expenses 56.1 55.7 15.0 20.0 20.0 20.0 SGA & other expense 51.4 227.8 101.2 112.3 15.1 12.7 Total expenses 46.3 80.1 80.0 78.4 14.4 13.6 EBITDA 64.6 -65.9 728.1 91.2 18.8 13.6 Depreciation 23.0 74.3 74.5 40.3 7.9 8.5 EBIT 119.3 -169.0 -487.4 133.8 24.3 15.9 Interest expense 31.2 336.3 17.8 61.5 2.5 2.5 Pre-tax profit 235.9 107.9 -29.2 23.3 83.8 44.3 Total tax -18.3 354.0 169.3 10.3 83.8 44.3 Net profit 233.7 79.0 -41.9 19.8 84.6 44.2


Margin analysis (as % of sales)

FY10 FY11 FY12 FY13e FY14e FY15e

Materials consumed 28.0 26.5 22.3 19.0 18.0 18.0 Staff expense 20.8 18.4 24.8 28.9 28.8 28.7 Professional charges and consultation fees to Doctors 11.5 16.1 9.8 7.0 7.3 7.4 Power and fuel 2.7 2.8 1.7 1.1 1.2 1.2 Other operating expenses 11.5 11.3 6.5 4.3 4.5 4.8 SGA ad other expense 10.4 21.6 21.6 25.4 25.5 25.3 EBITDA 15.1 3.3 13.4 14.2 14.7 14.7 EBIT 8.7 -3.8 7.3 9.5 10.2 10.4 Pre-tax profit 7.8 10.3 3.6 2.5 4.0 5.0 Profit before minorities & associates share 7.5 9.3 2.2 1.6 2.6 3.3 Net profit 7.4 8.4 2.4 1.6 2.6 3.3


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Fortis Healthcare: Balance sheet


Gross intangible assets 8,626 8,846 64,823 64,823 64,823 64,823 Gross fixed assets 16,404 21,316 39,413 42,413 45,913 49,913 Accum. amortisation & depreciation 4,011 4,924 6,747 9,304 12,064 15,058 CWIP 4,256 2,708 3,520 3,520 3,520 3,520 Total long-term assets 25,275 27,946 101,009 101,452 102,192 103,197 Investments 34,485 902 2,348 2,348 2,348 2,348 Deferred tax assets 124 144 502 502 502 502 Total Non-Current assets 59,884 28,991 103,859 104,302 105,042 106,047 Inventories 238 263 799 1,556 1,831 2,016 Cash & bank balance 13,113 1,636 4,156 1,714 161 2,277 Debtors 1,567 1,952 5,489 5,952 7,002 7,904 Loans & advances 1,424 14,525 10,176 16,119 18,547 21,067 Other 222 284 64 64 64 64 Total Current Assets 16,563 18,661 20,684 25,405 27,605 33,328 Misc. expense & debit from P&L account 2,449 790 0 0 0 0 Total assets 78,896 48,442 124,543 129,707 132,647 139,375 Creditors 1,977 1,895 4,532 6,831 6,173 8,596 Provisions 266 354 749 749 749 749 Others 944 1,301 28,386 28,386 28,386 28,386 Total Current Liabilities 3,187 3,550 33,667 35,966 35,308 37,731 Share Capital 3,217 4,094 4,095 4,095 4,095 4,095 Reserves & others 17,438 29,524 28,468 29,333 30,931 33,236 Shareholders' funds 20,654 33,618 32,563 33,428 35,026 37,331 Minorities 345 304 8,308 8,308 8,308 8,308 Long-term Debts 54,706 10,883 49,919 51,919 53,919 55,919 Deferred Taxation 3 86 86 86 86 86 Total liabilities & shareholder’s fund 78,896 48,442 124,543 129,707 132,647 139,375


Fortis Healthcare: Cash flow statement


Cash Flow from Operating activities EBIT 815 -562 2,177 5,089 6,325 7,329 Adjustments for: Other income 371 3,741 1,099 1,000 1,000 1,200 Depreciation & amortisation 599 1,045 1,823 2,557 2,760 2,995 Operating profit before working capital changes 1,785 4,224 5,098 8,646 10,085 11,524 Change in working capital 616 -13,300 30,219 -4,864 -4,412 -1,183 Interest expense -573 -2,500 -2,946 -4,758 -4,878 -4,998 Tax paid -34 -152 -410 -452 -832 -1,201 Cash flow from Operations 1,794 -11,728 31,961 -1,429 -37 4,142 Cash Flow From Investing Activities Capital Expenditure -11,870 -3,715 -74,886 -3,000 -3,500 -4,000 Interest Received 121 846 750 0 0 0 Investments -33,944 33,583 -1,446 0 0 0 Cash Flow From Investing -45,692 30,714 -75,583 -3,000 -3,500 -4,000 Retained Free Cash Flow -43,897 18,986 -43,622 -4,429 -3,537 142 Cash Flow From Financing Activities Dividends paid 0 0 0 0 0 0 Shares movements 6,774 11,721 -1,778 0 0 0 Others -259 1,639 8,884 -13 -17 -26 Debt Raised (Repaid) 49,916 -43,823 39,036 2,000 2,000 2,000 Cash Used In Financing Activities 56,431 -30,463 46,142 1,987 1,983 1,974


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Basic operating metrics In-patient admissions (IPA) – Admissions refer to

the total number of patients admitted in the facility

and is used as a measure of in-patient volume.

Patient days is another volume metric that refers to

total number of days of care provided to in-patients.

Patient days can be adjusted (like admissions) to

reflect out-patient visits.

Out-patient visits (OPV) – Out-patient visits

refer to hospital visits by a patient who doesn’t

remain in the hospital for overnight care and

includes emergency room visits, out-patient

surgeries (day-care surgeries) and observation

services. Recent surgical advances have led to

more day-care surgeries at the expense of

admissions. Equally important, there have been

advances in anaesthesia, which have led to faster

recovery post surgery.

Profit per out-patient visit is calculated by

deducting out-patient operating expenses from

out-patient revenue and dividing resulting amount

by total visits. Low values are essentially a factor

of high costs. Most hospitals however focus on

improving out-patient to in-patient conversion

ratio than improving profitability in out-patient

visits alone.

Profit per out-patient visit formula

Profit per out-patient visit

= (Out-patient revenue – out-patient operating expenses)

/ Total Visits

Source: HSBC

Adjusted admissions – The adjusted admission is

a commonly used statistic in the industry. It

attempts to capture in-patient admissions and out-

patient visits. It is calculated by multiplying

admissions by sum of gross in-patient and out-

patient revenues and then dividing the resulting

amount by gross in-patient revenues. The equation

assumes similar aggregate pricing trends among

in-patient and out-patient procedures.

Patient adjusted admissions formula

(In-patient revenue + out-patient revenue) X in-patient admissions Adjusted

admission =

In-patient revenue

Source: HSBC

Average daily census measures in-patient volume

on basis of number of patients. In most situations,

a higher average daily census would be better

because fixed costs are spread over larger number

Key metrics overview

Healthcare expenditure is a common macro tool that allows

comparison across countries

Operating parameters including in-patient admissions and out-

patient visits are a benchmark for volume growth

ARPOB, ALOS and occupancy are often determined by case

specialty mix and nature of treatment service rendered

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of patients (operating leverage) which

improves profitability.

Average Daily Census (Census)

Average Daily Census

= Total annual patient days / 365

Source: HSBC

Pricing – Per patient revenue is calculated by

dividing net revenue by adjusted admission and is

a good indicator of pricing. It is not a pure

indicator however, given per patient revenue can

increase as a result of severe nature of admissions

requiring costly procedures while the base pricing

remains same.

Average revenue per operating bed (ARPOB)

is another good indicator of improving pricing

which could be due to improvement in case mix,

better technology resulting in charging premium

over competitors and/or established monopoly

in a region.

Average revenue per operating bed (ARPOB)

Average Revenue Per Operating Bed

= In-patient revenue / total annual patient days

Source: HSBC

The above formula may be adjusted to include

out-patient revenue as well. Apollo Hospitals

include hospital-based pharmacy revenue as well

in ARPOB calculation.

Average Length of Stay (ALOS) – This is

simply the average number of days a patient is in

a hospital and is a good indicator of utilization

and clinical management. Most hospitals attempt

to reduce ALOS and increase turnover per bed.

Increasing ALOS is not necessarily bad either.

Increasing ALOS could show the hospital is

treating higher acuity patients who require a

longer stay in hospital to recuperate.

Length of stay (LOS)

Length of Stay = Total annual patient days

/ Total discharges (admissions)

Source: HSBC

This metric is often adjusted for difference in case

mix that a hospital receives. The adjustment is

done by dividing the above result by case mix

index. The hospital with a higher case mix index

treats more cases with complex diagnoses which

would be expected to have higher LOS. This

adjustment removes biases thus created.

Adjusted length of stay (ALOS)

Adjusted Length of Stay

= Total annual patient days / (Total discharges X Case

mix index)

Source: HSBC Typical ALOS in certain surgeries/cases

PTCA 3 days Bypass 8-9 days Transplant 12 days Neuro 7-8 days Gastro 3-4 days Knee replacement 7-8 days Oncology > 5 days

Source: HSBC

Occupancy – is calculated by dividing average

daily number of patient days by weighted average

of beds in service in the period. This is a purely in-

patient only metric. Most hospitals mature hospitals

operate at c80% occupancy. It would be ideal to

have 100% occupancy, which would mean all beds

will be occupied all the time over a period. To

increase occupancy, hospital can: 1) increase

admissions, which are a factor of in-patient volume

or out-patient visits conversion; 2) increase average

length of stay (not preferred, as this impacts

profitability); or 3) reduce number of beds.

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Occupancy

Total annual patient days X 100 =

Number of beds X 365

Average Daily Census X 100

Occupancy Rate

= Number of beds

Source: HSBC

Intensive care index – It is the ratio of intensive

care patient days to total patient days during a

calendar period. Higher utilization of intensive

care units leads to higher revenues given high

value nature of services rendered in ICU.

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Healthcare snapshot in India

Appendix

Healthcare overview in India

Attribute 1991 2001 2005 2010

Population (million) 846 1,027 1,096 1,193 Urban to Total Population (%) 25.7 27.8 29.0 31.2 Age Distribution (%) 0–14 37.8 35.4 32.4 31.9 15–59 55.5 57.2 60.4 60.9 60+ 6.7 7.5 7.2 7.2 Expectation: Life at Birth (years) 58.6 61.3 63.3 68.45 Number of Medical Colleges 146 189 242 314 Number of Dental Colleges 57 149 205 289 Number of Government Allopathic Hospitals 6,804 4,292 7,008 12,760 Number of beds in Government Allopathic Hospitals 569,495 422,000 469,672 576,793 Number of Community Health Centres 2,070 3,043 3,222 4,510 Number of Allopathic Doctors Registered with MCI ('00) 3,936 5,756 7,675 8,000 Number of Doctors per 100,000 Population 47 56 70 142 Number of Dentists Registered with Dental Council of India 10,751 39,105 77,421 104,603 Number of Dentists per 100,000 Population 1.3 2.9 4.5 10.0 Number of Registered General Nursing Midwife with Nursing Council of India 340,208 776,355 865,135 1,073,638

Source: Central Bureau of Health Intelligence, Govt. of India

National Health Accounts Indicator for India

Health Indicators 2003 2004 2005 2006 2007 2008

Total Expenditure on Health as % GDP 4.2 4.0 3.8 3.6 4.1 4.2 General Government expenditure on health as % of total expenditure on health 20.4 20.9 22.4 25.0 26.2 32.4 Private Expenditure on Health as % of total expenditure on health 79.6 79.1 77.6 75.0 73.8 67.6 General Govt Expenditure on Health as % of total government expenditure 3.0 3.0 3.2 3.4 3.7 4.4 External Resources for Health as % of total expenditure on health 0.6 0.7 0.5 1.0 1.4 1.6 Social Security Expenditure on Health as % of general government expenditure on health 5.8 5.8 5.2 4.9 17.2 17.2 Out of Pocket expenditure as % of private expenditure on health 92.4 92.3 91.9 91.4 89.9 74.4 Private Prepaid Plans as % of private expenditure on health 1.0 1.0 1.1 1.1 2.1 2.3

Source: World Health Statistics 2011

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Differentiation among hospitals By complexity of care

Primary Care – First point of consultation for

most patients and most accessible. Primary care

hospital offer basic point of contact medical

services and healthcare prevention services in an

out patient setting. They usually do not have

operation theatres or ICUs (intensive care units).

Secondary Care – Range of services expands to

complex procedures including surgical and

diagnostic capabilities. It also includes services

related to childbirth, intensive care and medical

imaging. Typically a hospital will have one

central laboratory, radiology and imaging center,

emergency care and beds reserved for ICUs.

Secondary hospitals may also cater to specialist

needs and offer higher proportion of beds towards

specialty care.

Tertiary Care – Specialized consultative

healthcare usually a part of referral from primary

or secondary source. A tertiary care hospital

provides a full range of basic and sophisticated

diagnostic treatment services including many

specialized services. Examples include cancer

management, neurosurgery, cardiac surgery,

plastic surgery, burns care, and neonatal care.

Quaternary Care – Extension of tertiary care to

highly specialized services that are not widely

accessed. A quaternary hospital provides sub-

specialty services, such as advanced trauma and

transplantation.

The above distinctions however are often blurred,

as many hospitals tend to expand their scope of

services over time.

By provider of care

Public sector hospitals – include those which are

government managed, city administered and

community supported. These typically would

provide services free of charge and operate on a

budget. They are also referred to as “not for

profit” hospitals. The term however is misleading

as it is not the case that public hospitals do not

make profits.

Private sector hospitals are run by trust, charity

and religious organizations. Though they typically

do not have objective to earn profits, the sub-class

of specialized large-sized, single-multi specialty

hospitals that offer high technology and superior

quality often are “for profit” earning and are run

by professional management.

By location

Urban hospitals are located in metro cities. The

strategy in urban market is to occupying cluster of

facilities in major towns/cities, rationalize the

services and negotiate the provider arrangements

with local payors to increase market share. The

idea is to attract incremental volumes from weak

local competitors. The majority of market share

gains are driven by capital improvements,

physician retention and recruiting and delivering

quality care.

Rural hospitals tend to be the sole providers of

care in such areas. Typically a rural hospital will

focus on providing low acuity primary and

secondary care and refer patients to a large

hospital in nearby town for higher tertiary care

needs. Non urban hospitals are typically smaller,

face limited competition, have a lower cost

structure and much lower share of high

income/insured patients. Currently the focus for

most players is to attract large volumes from rural

market and obtain new referrals for tertiary care

hospitals in urban setting. Nonetheless, many

rural hospitals are able to offer a breadth of

services including common cardiac procedures

including bypass surgeries.

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Budget 2012-13 highlights Deduction in respect of capital expenditure on specified business

As per the recent Union Budget, it is proposed

that the following specified businesses

commencing operations on or after the 1 April,

2012 shall be allowed a deduction of 150% of the

capital expenditure under section 35AD of the

Income-tax Act, namely:

Setting up and operating a cold chain facility

Setting up and operating a warehousing

facility for storage of agricultural produce

Building and operating, anywhere in India, a

hospital with at least one hundred beds for

patients;

Developing and building a housing project

under a scheme for affordable housing framed

by the Central Government or a State

Government, as the case may be, and notified

by the Board in this behalf in accordance with

the guidelines as may be prescribed; and

Production of fertilizer in India.

This amendment will take effect from 1 April

2013 and will, accordingly, apply in relation to

the assessment year 2013-14 and subsequent

assessment years.

Increase in allocation under NRHM

Government of India has resolved to launch the

National Rural Health Mission (NRHM) to carry

out necessary architectural correction in the basic

health care delivery system. It aims at

mainstreaming the Indian systems of medicine to

facilitate health care. The allocation towards this

mission has been increased from INR181.2bn to

INR208.2bn in 2012-13.

Additionally, National Urban Health Mission is

being launched to encompass the primary healthcare

needs of people in the urban areas. The Pradhan

Mantri Swasthya Suraksha Yojana (PMSSY) is

aimed at setting up of AIIMS-like institutions and

upgradation of existing government medical

colleges to enhance the availability of affordable

tertiary health care in the country.

Healthcare in 12th Five-year Plan The Planning Commission recently approved a

health ministry proposal to increase the allocation

on public health to INR4.04trn in the 12th Plan

starting 1 April 2012, from INR709bn in the

preceding five-year period. Given that health is a

state subject, the ministry has suggested that two-

thirds of the expenditure on public health be borne

by the state governments.

Some of the key proposals are as follows:

The 11th Five-Year Plan (2007-2011) aimed

to raise share of public expenditure on health

from less than 1% of GDP in FY06 to 2-3%

of GDP over the planned period. By the end

of 11th Five-Year Plan, it is estimated that

public health expenditure has reached 1.4% of

GDP, falling behind the target. By the end of

12th Five-Year Plan, public health

expenditure is expected to grow to 2.5% of

total GDP.

The National Rural Health Mission (NRHM)

was launched in 2005 aimed at strengthening

the healthcare expenditure in rural areas;

NRHM was mainly focussed on child birth

and pre-natal care. Under the 12th Five-Year

Plan, NRHM is expanded to cover broader

range of conditions, including both

preventative and curative services.

The 12th Five-Year Plan is prioritising

convergence among all the existing National

Health Programs under the NRHM umbrella,

namely those for mental health, AIDS control,

deafness control, cancer control, cardio

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vascular diseases, oral health, elderly care,

tobacco control, human rabies control,

leptopirosis and information, education and

communication

The 12th Five-Year Plan aims to increase

teaching institutions for doctors, nurses and

paramedics to fill the gap between existing

and required human resources; it proposes to

develop each of the district hospitals into

knowledge centres, and community health

centres (CHCs) into training institutions. To

ameliorate shortage of healthcare

professionals in rural areas, vacancies are

filled through Plan schemes.

Several experimental projects are in

operations to allow private sector

participation in public financing of healthcare.

The Rashtriya Swasthya Bima Yojana

(RSBY) is one such program, which provides

health insurance scheme to poor groups for a

nominal registration fees and the central

government and the state governments share

the insurance premium.

Allocation towards healthcare has increased over each five-year plans of India

0

5,000

10,000

15,000

20,000

25,000

1st

2nd

3rd

4th

5th

6th

7th

8th

9th

10th

11th

0%

2%

4%

6%

8%

Total plan inv estment outlay (INR bn)-LHS

% Healthcare sector allocation-RHS


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History of private equity deals in India’s healthcare sector

Recent healthcare deals in India

Date Target Acquirer Deal value (USDm)

Jun-12 Medica Synergie Pvt Ltd I-ven India Pvt Ltd May-12 CARE Hospitals Advent India Pvt Ltd 110 Apr-12 Vrindavan Hospitals Shalby Hospitals Oct-11 Max Healthcare Life Healthcare 110 Jun-11 Angels Health Pvt Ltd Housing Development Finance Corp Jun-11 Vaatsalya Healthcare Solutions Aquarius India & Seedfund 10 May-11 Jeevanti Healthcare Seedfund 2.2 May-11 Super Religare Laboratories Sabre Partners 11.2 Apr-11 Super Religare Laboratories Avigo Capital Partners 22.5 Mar-11 MedPlus Health Services Mount Kellett, TVS Capital, & Ajay Piramal Group's healthcare fund 88.4 Jan-11 Global Healthcare Sequoia Capital and Elevar Equity 3.3 Jan-11 Integrated Health and Healthcare Services Halcyon Finance & Capital Advisors 44.4 Dec-10 BSR Super Speciality Hospitals Aureos Capital 10 Nov-10 Medfort Hospitals TVS Shriram Capital & ePlanet Ventures 13.1 Aug-10 Dr Lal PathLabs TA Associates 34.8 Jun-10 Metropolis Health Services Warburg Pincus 84.9 May-11 Nova Medical Centres GTI Group and New Enterprise Associates 5.3 Apr-10 Manipal Health Systems Kotak PE 33.5 Feb-10 HealthCare Global Enterprises Milestone Religare Advisors 10 Nov-09 Krishna Institute of Medical Sciences Milestone Religare Advisors 12.9 Mar-09 Vaatsalya Healthcare Solutions Oasis Fund and Seedfund 3.7 Feb-09 Kavery Medical Centre and Hospitals India Venture Advisors 17.8 Jun-08 CARE Hospitals Ashmore Group 23 Sep-07 Apollo Hospitals Enterprise Apax Partners 104.3 Mar-07 Fortis Healthcare India Trinity Capital 19.7


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India physician and nursing density well below world average

Healthcare personnel per 10,000 population

0 20 40 60 80 100 120 140 160 180

AfghanistanAustralia

BrazilChinaEgy pt

FranceGermany

GhanaIndiaIranItaly

Kuw aitLiby aMalta

MongoliaPakistan

PeruRom ania

RussiaSaudi Arabia

SingaporeSpain

Sw itzerlandUK

United States

Phy sicians density per 10,000 population Nursing and midw ifery personnel density per 10,000 population

Pharmaceutical personnel per 10,000 population

52.1225.2

Source: World Health Organization (*vertical lines denote average of 25 countries on left axis)

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Healthcare infrastructure in India Government hospitals and beds status in India, 2010

State/Union Territory _______ Rural hospitals________ _______Urban hospitals________ _______Total hospitals_________ No. Beds No. Beds No. Beds

India 6,795 149,690 3,748 399,195 12,760 576,793 Andhra Pradesh 143 3,725 332 34,325 475 38,050 Arunachal Pradesh 146 1,356 15 862 161 2,218 Assam 108 3,240 45 4,382 153 7,622 Bihar NA NA NA NA 1,717 22,494 Chattisgarh 119 3,270 99 6,158 218 9,428 Goa 7 298 13 2,388 20 2,686 Gujarat 282 9,619 91 19,339 373 28,958 Haryana 61 1,212 93 6,667 154 7,879 Himachal Pradesh 95 2,646 47 5,315 142 7,961 Jammu & Kashmir 61 1,820 31 2,125 92 3,945 Jharkhand NA NA NA NA 500 5,414 Karnataka 468 8,010 451 55,731 919 63,741 Kerala 281 13,756 105 17,529 386 31,285 Madhya Pradesh 333 10,040 124 18,493 457 28,533 Maharashtra 735 13,376 1,037 36,627 1,772 50,003 Manipur 27 744 4 1,574 31 2,318 Meghalaya 29 870 10 1,967 39 2,837 Mizoram 21 801 4 710 25 1,511 Nagaland 23 705 25 1,445 48 2,150 Orissa 1,629 10,172 80 5,708 1,709 15,880 Punjab 72 2,180 159 8,440 231 10,620 Rajasthan 347 11,850 128 20,217 475 32,067 Sikkim 30 730 3 830 33 1,560 Tamil Nadu 533 25,078 48 22,120 581 47,198 Tripura 14 950 18 2,082 32 3,032 Uttar Pradesh 515 15,450 346 40,934 861 56,384 Uttarakhand 666 3,746 29 4,219 695 7,965 West Bengal 14 2,399 280 52,360 294 54,759 A&N Island 7 385 1 450 8 835 Chandigarh 1 50 3 570 4 620 D&N Haveli 1 50 1 231 2 281 Daman & Diu 0 0 4 200 4 200 Delhi 21 972 109 22,886 130 23,858 Lakshadweep 5 160 0 0 5 160 Puducherry 1 30 13 2,311 14 2,341


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Number of allopathic doctors in India registered with recognized medical council by state

State Medical Councils 2005 2006 2007 2008 2009 2010

Andhra Pradesh 49,932 51,973 55,566 58,314 62,349 62,349 Arunachal Pradesh 0 0 143 205 272 325 Assam 16,581 16,980 17,436 17,904 18,494 19,116 Madhya Pradesh 22,309 23,094 24,004 24,958 25,662 26,589 Bihar 33,579 34,235 35,081 35,943 36,559 37,233 Chhattisgarh 470 657 1,252 2,083 2,746 3,156 Goa 2,296 2,391 2,501 2,605 2,716 2,818 Gujarat 38,776 40,366 41,877 43,419 45,058 46,439 Haryana 1,806 2,087 3,272 3,811 4,132 4,132 Himachal Pradesh 1 134 269 432 705 847 Jammu & Kashmir 8,683 9,349 9,908 10,314 10,906 11,240 Jharkhand 599 802 1,000 1,691 2,933 3,081 Karnataka 69,710 72,531 75,841 79,456 83,177 87,320 Travancore-Cochin 33,025 33,947 35,109 36,344 37,835 39,180 Maharashtra 118,814 122,729 126,989 130,977 134,859 137,824 Orissa 15,216 15,570 16,008 16,339 16,734 16,786 Punjab 34,355 35,585 36,550 37,391 38,434 38,434 Rajasthan 22,861 24,192 25,301 26,457 27,654 28,513 Sikkim 0 0 277 461 558 603 Tamilnadu 73,881 76,085 78,574 81,533 84,525 86,822 Uttar Pradesh 48,810 50,468 51,978 53,389 55,355 57,944 Uttaranchal 404 668 1,240 2,750 3,085 3,334 West Bengal 54,134 55,009 56,029 57,022 58,059 58,872 MCI Delhi 26,164 28,153 30,840 32,581 34,655 36,999 Delhi 2,969 3,694 7,550 8,206 8,999 9,829 Total 675,375 700,699 731,439 761,429 793,305 816,629

Source: Medical Council of India

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Registered nurses and pharmacists in India

State/Union Territory ___________Total No. of Registered Nurses in India as on 12.31.2009 __________ Auxiliary Nurse Midwives General Nursing and

MidwivesLady Health Visitors

Total no of Pharmacists as on 12.31.2010

Andhra Pradesh 112,269 136,477 2,480 43,958 Arunachal Pradesh NA NA NA 347 Assam 19,685 NA 118 2,429 Bhopal NA NA NA 1,381 Bihar 7,501 NA 511 4,163 Chhattisgarh 1,900 NA 1,352 NA Delhi 2,160 NA NA 22,010 Goa NA NA NA 466 Gujarat 36,427 88,258 NA 20,948 Haryana 13,727 17,821 694 7,249 Himachal Pradesh 10,152 8,550 491 2,818 Jharkhand 3,405 1,998 137 NA Karnataka 48,509 136,421 6,839 79,508 Kerala 28,378 85,624 7,897 17,634 Lakshadweep NA NA NA 3,082 Madhya Pradesh 27,566 96,574 1,542 NA Maharashtra 33,158 93,032 566 106,220 Meghalaya 783 1,938 105 269 Manipur 217 635 NA NA Mizoram 1,680 1,956 NA 398 Nagaland NA NA NA 1,553 Orissa 49,170 63,167 238 14,312 Pondicherry NA NA NA 1,716 Punjab 18,152 45,801 2,584 35,290 Rajasthan 22,239 37,667 850 18,214 Tamil Nadu 54,124 186,972 11,111 151,973 Tripura 1,010 1,143 148 257 Uttar Pradesh 27,328 21,042 2,763 30,276 Uttarakhand 700 92 11 NA West Bengal 56,302 48,470 11,938 89,630 Total 576,542 1,073,638 52,375 656,101

Source: Indian Nursing Council, Pharmacy Council of India

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Girish Bakhru

Important disclosures

Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 06 July 2012, the distribution of all ratings published is as follows: Overweight (Buy) 50% (26% of these provided with Investment Banking Services)

Neutral (Hold) 37% (26% of these provided with Investment Banking Services)

Underweight (Sell) 13% (17% of these provided with Investment Banking Services)

HSBC & Analyst disclosures Disclosure checklist

Company Ticker Recent price Price Date Disclosure

APOLLO HOSPITALS APLH.BO 650.00 05-Jul-2012 6Source: HSBC

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3

months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 31 May 2012 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 31 May 2012, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or

paid compensation to HSBC in respect of investment banking services. 6 As of 31 May 2012, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or

paid compensation to HSBC in respect of non-investment banking-securities related services. 7 As of 31 May 2012, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or

paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed

below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as

detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures 1 This report is dated as at 09 July 2012. 2 All market data included in this report are dated as at close 05 July 2012, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer * Legal entities as at 12 June 2012 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; ‘GR’ HSBC Securities SA, Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR

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