Fortis tames debt burden, but at a cost

In two years, India's second largest health care company has reduced its debt from a high of Rs 7,000 crore to less than Rs 1,200 crore. But, in the process, promoters Malvinder and Shivinder Mohan Singh had to sacrifice their international dreams

Published: Sep 10, 2015
Fortis tames debt burden, but at a cost
Image: Amit Verma
Fortis promoters Malvinder (left) and Shivinder Singh. Jittery investors have forced the brothers to keep the hospital chain an India-focussed player

A giant ivory-coloured smiling baby with a stethoscope dangling from its ears sits in the middle of the lobby at Fortis Memorial Research Institute in Gurgaon near Delhi. The diaphragm of the stethoscope rests firmly on the ground. The sculpture had been commissioned by brothers Malvinder and Shivinder Mohan Singh, the founders of India’s second-largest hospital chain, Fortis Healthcare Ltd. The baby represents Fortis, and the stethoscope signifies its grounded approach to the business of health care. “We had asked artist Jitish Kallat to do a marquee piece for us for our ninth anniversary (in 2010),” says 40-year-old Shivinder, the younger of the two brothers and executive vice chairman of the company. “We [Fortis] have become very large, but are child-like in our approach to health care because we still have our ear to the ground.”

Five years have gone by since the installation of the sculpture, during which time Fortis’s revenue has increased 341 percent from Rs 938 crore in FY2010 to Rs 4,140 crore in FY2015. Shivinder jokes that the baby, too, should have grown in size. “Maybe we need to give it some clothes and shoes,” he laughs. Almost immediately, the mirth fades and he adds solemnly: “But we did sell a lot of our international assets as well, so that reduced our size.” And this sums up Fortis Healthcare’s 14-year-old journey, which started in 2001 with a single hospital in Mohali, Punjab.

In a little over a decade, the company has seen one too many flip-flops. It set up 55 hospitals across 15 states in India; then from 2010, it began expanding to Singapore, Dubai, Vietnam, Hong Kong and Australia, only to sell off most of its overseas assets by 2015. The reason for this U-turn was the company’s huge debt pile, which at its peak in 2013, stood at Rs 7,000 crore. In our August 9, 2013 issue—when Fortis had just started offloading its excess foreign baggage—Forbes India had written about the health care group’s ‘acquisition madness’ and its decision to trim losses (‘Fortis Has a Renewed Focus on India’).

Contrast this to its closest rival and market leader, Apollo Hospitals, which has chosen a more calibrated approach to international expansion. While Apollo does have one hospital in Dhaka, Bangladesh, it focuses on attracting medical tourists to India.

In May this year, Fortis sold diagnostics company RadLink-Asia Pte Ltd in Singapore and, in doing so, has erased the multinational label it had once aspired to wear (see box ‘International businesses acquired and sold’).

With the sell-offs, Fortis has managed to reduce its net debt to Rs 1,183 crore (as of FY2015). Its interest outgo has also dropped from Rs 178 crore in Q1FY13 to Rs 32 crore in Q1FY16.

Was it a case of the baby learning to walk before it could crawl? Shivinder and Malvinder—who are known for their ambition, aggression and penchant for growth through acquisitions—have no regrets. “We have invested a fair amount of capital because we are a young company. We have been aggressive in our expansion and now we need to milk that to generate returns,” says 42-year-old Malvinder, executive chairman of Fortis.

He and his brother have been playing in this field for many years, having sold their stake in Ranbaxy Laboratories to Daiichi Sankyo for $4.6 billion in 2008 and acquiring 10 hospitals from Wockhardt in 2009. “We have done this by keeping in mind the feedback we received [from investors],” says Shivinder, defending the decision to divest Fortis’s international portfolio. The hospital chain’s debt-to-equity ratio is currently down to less than 0.25 from 1:1 in the previous financial year.

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This hasn’t done much for its profitability though. In FY2015, the company reported a loss of Rs 144 crore on revenues of Rs 4,140 crore. The Singhs have a plan to remedy this so that the hospital chain will become PAT-positive in FY2016. They have mapped out an ambitious but achievable target given that India’s health care market, estimated to be $119.6 billion, is growing at a compound annual growth rate (CAGR) of 15 percent.

Today, 99 percent of Fortis’s revenue comes from India. Over the next three years, Fortis aims to increase its CAGR from the current 14 percent to 20 percent, and take its return on capital employed (ROCE) to double digits. It also expects its profit margins in the diagnostics business—through SRL Diagnostics which has 260 centres in 450 towns and cities in India—to grow from the current 18 percent to 30 percent by 2018. (The May 2011 acquisition of SRL was one of Fortis’s better acquisitions.)

It wouldn’t be amiss to say that Fortis is trying to prove a point to its investors who, in the past, have been critical of its international expansion. It wants to show that it can turn profitable without spending money. “We need to become PAT positive,” says Malvinder.

Till the time Fortis returns to profitability, it will neither set up new hospitals nor initiate mergers and acquisitions. Essentially, if the last few years at Fortis were about trimming unnecessary fat, then the next few will be about internal growth.  

Making beds
The mandate could not be clearer: Future growth will come through existing hospitals, which is quite a shift from the days when Fortis would launch a facility every year. “Our last set of [two] hospitals is coming through this year, after which we will consolidate our existing hospital network,” says Shivinder.

Fortis currently has 4,200 beds in its network of 55 hospitals. The Singhs feel that the health care chain can add up to 500-600 beds every year over the next three years at its existing facilities in Mumbai, Amritsar, NCR, Kolkata, Jaipur, Bengaluru and Ludhiana. “We have a clear agenda in India where we can more than double our bed capacity through expansion of our existing network,” says Malvinder.

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It is a cost-effective plan. Installing a bed in a new hospital can set a company back by Rs 80 lakh to Rs 1 crore, but adding one in an existing facility costs only half the amount. “In a business trust-owned existing hospital, it will cost even less, about Rs 25 lakh a bed, because the trust owns the land and building for the hospital,” says Shivinder. This works to Fortis’s benefit as almost half of its beds in India are owned by Religare Health Trust, an indirect wholly-owned subsidiary of Religare Enterprises Ltd—a diversified financial services group. (Though the brothers are not on the board of Religare Enterprises, together, they have a 50.3 percent stake in the company.)

The plan will increase the company’s profits while simultaneously ensuring that capital expenditure is low. Fortis will add beds by building a floor or two or even a new tower. “From all the discussions we have had with Fortis’s promoters, we believe they have the permissible FSI (floor space index) to add floors at their existing facilities,” said an analyst who did not want to be named.

This time around, the Singhs are playing it safe. Beds will be added in hospitals where there is existing demand rather than going to a new location where demand is uncertain. “The gestation period becomes much shorter, so you don’t dip your bottomline,” says Shivinder. “In a new facility, it takes five years to get to a stable state. If you add to an existing facility you can get to that state in a year or six quarters.”

Muralidharan Nair, a partner at consultancy firm Ernst & Young, says these measures should have been adopted by Fortis from the very beginning. “There is a lot of value to be unlocked within the existing hospital network,” he says. “Its bottomline performance has been quite bad. It has gone through one cycle of leveraged balance sheet and now it has come to some level of decent growth. The best return on investment for it will come from focusing on operations.”

Shivinder hopes to multiply Fortis’s bottomline growth, which has been muted in the last couple of years because of its international expansion. “Last year, our Ebitda (earnings before interest, taxes, depreciation and amortisation) grew by 50 percent because we have executed this strategy of growing through existing hospitals,” he says. “We believe a similar trend will play out in the next few years. Between FY14 and FY17, our Ebitda will grow threefold.” And perhaps by next year, Fortis would have made enough money to pay dividends to its investors. “We want to be in a position to pay dividends. Whether we will pay or not will be decided later, but we want the ability to do so,” says Shivinder.

Investors have given their approval to this strategy. Since the implementation of this growth plan around two years ago, Fortis has seen an 84 percent increase in its share price—from Rs 95 on August 7, 2013 to Rs 174.80 on August 21, 2015 on BSE.

Bed Rest
Fortis will enjoy another advantage by increasing the number of beds in its existing hospitals. Shivinder notes that one financial ratio that has added to the company’s earnings, but is not highlighted enough, is the average revenue per occupied bed (ARPOB). “The number of operating beds we have is 30 percent lower than that of Apollo’s, but our revenue per bed is higher than theirs,” he says. ARPOB, which for Fortis is at Rs 1.31 crore per year, grew 13 percent year-on-year in FY2015. Compare this with Apollo, which has 6,321 beds and an ARPOB of Rs 27,339 per day, which works out to about Rs 99.78 lakh annually.

The hospital chain has improved the ARPOB metric by ensuring that the average length of a patient’s stay is kept low—3.64 days compared to Apollo’s 4.43 days. “We want to have you as a patient for as little [time] as possible. This is contrary to how Indian hospitals are perceived,” says Shivinder.

He admits that doctors and the management often clash on this.

 “We fight with that table a lot on getting patients out faster,” says Shivinder, pointing to a group of doctors sitting at a table.

But by reducing patient stay, Fortis frees up capacity, increases the number of patients it treats and the revenue per bed as well. For example, when it took over Escorts Heart Institute in Delhi in 2005, the hospital’s average patient stay was 7.5 days. “Cardiac institutions tend to have a higher average length of stay. We spent a lot of time trying to figure out how to change that. Now, it is 4.8 days,” says Shivinder, adding that the gain from shorter stays has come from improved efficiencies in the operating system, introducing best practices and also updating the skills of its personnel.

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The internal tag line at Fortis is: ‘We would rather have the hospital bed lie empty than you lie on it’. Ernst & Young’s Nair says that it is a good strategy to follow because in the health care industry, 50 percent of costs of care are fixed costs. “If they [hospitals] can reduce average length of stay, I can imagine the impact it will have on margins. It is an important driver for profits,” he says.

The Singhs, however, tell Forbes India that they don’t want to grow rich by over-pricing their beds. The health care chain claims its beds are priced 10-15 percent lower than that of competitors. This allows it to reach out to a larger market base.
 
In a way, Fortis’s inward-looking path validates the popular consensus that health care, much like retail, is a local play. According to Nair, the industry demands health care chains to think like retailers and have a model that services a particular location. “Even within India, it is local,” he argues. “There is no pan-India chain. Apollo is big in the South, but it hardly has a presence in Mumbai or Delhi. In Mumbai, locals still call the chain’s Mulund hospital Wockhardt even though Fortis has been in the city for the last eight years.”

Malvinder, however, does not agree with this analysis. “We believed there was an opportunity in Asia. Parkway was the first port of point for us,” he says, referring to Fortis’s first international acquisition in March 2010 when it bought almost 24 percent of Singapore’s hospital chain Parkway Holdings for about Rs 3,000 crore.

By 2012, Fortis had a presence in 10 countries and its revenue of $1 billion was almost equally coming from Indian and global operations. “There was a good platform to build a good Asia presence. Our belief in opportunity in Asia persisted and so we made investments in companies in Asia,” says Malvinder. Of course, Fortis’s investors didn’t share his belief.

The international dream
The question is whether the Singh brothers will ever revisit their agenda to make Fortis an international brand. They had hoped to create a global supply chain through Fortis and achieve cost savings through collective procurement of medical equipment, medical supplies and drugs for all of its facilities. It was an audacious plan—one that they still feel would have worked had the global markets been stable. “While businesses we acquired internationally were good, the question was whether we could scale them,” says Malvinder. “When we felt we couldn’t, we decided to exit and focus our energy on India.”

So will they try to cross borders again? “That is a question for the next interview,” says Malvinder, only half in jest.

His less taciturn younger sibling is more forthcoming: “Do we think the opportunity internationally has gone away? No. But let the organisation take a call when the time comes. There is a difference between the DNA we bring to the table as promoters versus the DNA of the organisation. This is the trajectory we have set for Fortis,” says Shivinder.

One compelling reason for the international exits was a case of jittery investors. “Even though we held 80 percent shareholding, when we were engaging with minority shareholders they were clearly of the view that they wanted us to be an India-focussed player,” Shivinder adds. “Their argument was that when there is so much happening in India, why should we be taking on debt and more risk and going into uncharted territory.”

But Malvinder and Shivinder will not simply put aside their desire to grow. “In our capacity as promoters of other businesses, we will look at acquisitions,” says Malvinder. Rumour has it that they are looking at selling their 50.3 percent stake in Religare Enterprises, but the brothers are tight-lipped about it.

Shivinder points to the baby sculpture and says, “I think the baby could be a measure of our organisation’s growth. Maybe when we turn profitable, we will make the baby wear a suit and a tie,” he laughs.
 

(This story appears in the 18 September, 2015 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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  • Lalitmawkin

    I read your article on Fortis with interest since I worked with the group at its inception stage 2001-04.Dr Parvinder Singh had taken Ranbaxy from being a leading domestic company to an International player .I always wished that Shivinder had talent and ambition to take Fortis to International shores. He is young and can go International any time ..but right now bottom line is a major concern and I appreciate the group's step to move back and then fly out at a much greater pace. I wish Fortis all the best ..You cannot compare Fortis with Apollo ...Fortis has much stronger fundamentals and young shoulders to bear any strain ...which Apollo does not have.

    on Sep 10, 2015
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