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Hospital Industry - Health is Wealth

Updated: Jan 13, 2023


Part 1: Industry Analysis (Saving Lives)

“It is health that is the real wealth, and not pieces of gold and silver.”

– Mahatma Gandhi

The healthcare sector has been one of the most promising sectors within the Indian economy.

We have had an increase in life expectancy, a reduction in fertility rates, and a reduction in maternal & child mortality rates. The burden of communicable diseases like tuberculosis and malaria has come down but is still high as compared to other developing countries like China or developed countries. Simultaneously, the incidence of non-communicable diseases like cancer, diabetes, etc. has been increasing rapidly.

India’s healthcare spending remains abysmally low even as compared to other developing countries like Brazil and South Africa. Healthcare spending in the west (ex-US) is supplemented with other social schemes that cause better living standards and overall health, leading to a reduced level of healthcare spending. India spends ~3.5% of GDP on healthcare vs the world average of ~10%; developed countries like the US at 17%, France & Germany at ~11%; developing countries like Brazil at ~10%, South Africa at ~8%, and China at ~5%.

The broader healthcare sector comprises various industries such as hospitals, diagnostics, pharmaceuticals, and medical devices. The healthcare industry in India has seen outstanding growth over the past few years. The industry is expected to grow at a CAGR of 17% during the period 2018-to 2025. The expansion may be attributed to factors such as population (including aging), economic development, and the adoption of recent technologies.

As per CRISIL Research, in FY20, the hospital industry had the highest revenue contribution towards the healthcare sector at ~60%, followed by domestic pharmaceuticals at 20%, diagnostics at 10%, and medical devices at ~10%.

Within hospitals, we have a unique situation in India, where the tertiary care institutions are serving a major proportion of primary and secondary care requirements as well. Due to a relatively weak primary care system and broken referral pathways, tertiary care public health facilities are often overburdened with primary and secondary care patients.

Key characteristics of the Indian Hospital industry are:

  • Health Indicators – Still high number of years lost due to disease burden. The proportion of communicable diseases is coming down and non-communicable diseases like cardiovascular, diabetes, cancer, etc. are increasing

  • Private Players to drive growth

    • High growth driven by rising income levels, increasing awareness, and an aging population

    • A significant proportion of the health needs (OPD and IPD) of the population is served by the private sector

  • Affordability of healthcare could be a challenge and a major contributor to the healthcare expenditure remains Out of Pocket Expenses (OOPE) at ~60%

  • Human Resources - Hospitals face challenges in terms of shortage of doctors and other healthcare professionals

  • Medical Tourism – India is an established place for medical tourism. It is no wonder that Akshay Kumar’s movie (Baby) used the premise to bring the dreaded terrorist to India from Saudi Arabia

Health Indicators

The disability-adjusted life year (DALY) could be a measure of overall disease burden, expressed as the number of years lost because of ill-health, disability, or early death. It has been developed in the 1990s as a way of comparing the general health and life expectancy of various countries.

DALYs from all causes (communicable and non-communicable diseases) remains high for India as compared to the international benchmark.

The disease category in India is as follows:

As can be seen from the above table, the share of communicable diseases has fallen from ~60% in 1990 to ~33% in 2016 with a sharp fall in diarrhea, cold cough, and other common infections. On the other hand, there is an increase in lifestyle-related ailments like cardiovascular diseases, diabetes, and cancer.

Cardiac care will continue to dominate healthcare spending in India, thanks to better diagnostic facilities and the prevalence of cardiac diseases. Most of the healthcare spending in cardiac care is driven by spending on heart surgeries.

India is said to be one of the diabetes capitals of the world, and diabetes cases will continue to account for a large chunk of its healthcare spending.

The prevalence of cancer is increasing worldwide, and India is unlikely to stay untouched. As early cancer diagnosis improves thanks to scientific advancements, spending on cancer-related surgeries and medicine will also increase. Despite having a low number of hospital cancer cases, the price of cancer treatment is almost similar to that for cardiac cases, due to high treatment/medicine costs.

Private Players drive hospital industry growth

The Indian hospital industry has grown over the years driven by an increase in per capita income, rising awareness of diseases and their impact, and changing lifestyles. However, the overall spending on healthcare is still way lower compared to global standards primarily due to limited government participation and an inadequate number of qualified healthcare professionals. To satisfy the requirements of its 1.3 billion people, India needs to develop its healthcare infrastructure quickly and efficiently.

Moreover, with renewed impetus from schemes like Pradhan Mantri Jan Aarogya Yojana (PMJAY) and also the government’s sharpened focus on healthcare, the sector is anticipated to grow at ~16% CAGR to INR 8 lakh crore in FY25.

The government has limited resources to drive growth in the hospital sector and hence, it’s encouraging the participation of private players. Private participation within the healthcare sector is estimated at 58% in FY21 and projected to jump to 66% by FY22 and to 73% by FY25.


Affordability of healthcare is an important factor affecting universal health coverage. 7% of the Indian population fall below the poverty level because of indebtedness for health expenditure (Source: Ravi, Ahluwalia, & Bergkvist, 2016). The share of OOPE is around 60% (in 2017) of total healthcare expenditure and is the highest in the world. However, the OOPE share is coming down – it was ~70% around 2005.

The government has introduced Ayushman Bharat- Pradhan Mantri Jan Arogya Yojana to provide free health coverage at the secondary and tertiary level to India’s bottom 40% poor population. However, an outsized portion of the population (non-poor or near-poor) which includes those working in the informal sector are missed out. These informal non-poor represent the “missing middle” that continues to be without financial protection and gets neglected.

Human Resources

In India, there are 0.91 doctors available per 1,000 people, which is low compared to the WHO recommendation of a 1:1000 doctor-population ratio (MoHFW, 2020). The US has a ratio of 2.44 and China has 1.49. There is also a need for 44.5:10,000 numbers of health care workforce: population ratio as achieving health care outcomes involves a multi-disciplinary approach. India has a shortage of 6,00,000 doctors and a couple of million nurses (Centre for Disease Dynamics, Economics and Policy, 2019).

Medical Tourism

India is emerging as a significant medical tourist destination, given the relatively low cost of surgery and critical care in the country. Indian doctors are one of the most skilled in the world given the amount and variance of patient load which they have to cater to. Most key medical procedures are performed at cheaper rates in India vis-à-vis developed and a few developing countries. India is additionally an attractive destination because of the presence of technologically advanced hospitals with specialized doctors and facilities. As per the Ministry of Tourism, of India’s total foreign tourist arrivals, the proportion of medical tourists grew from 2.2% (1.1 lakh tourists) in 2009 to 6.4% (6 lakh) in 2019.

The government has also constituted a National Medical and Wellness Tourism Board which can provide financial assistance of INR 6 lakh to medical tourism service providers under market development assistance (MDA) to develop medical tourism in India.

[End of Part 1]


Part 2: Narayana Hrudayalaya (Affordable Healthcare Service Provider)

  • Company Name – Narayana Hrudayalaya Limited (NH)

  • Current Share Price – INR 676 (May 13, 2022)

  • Market Cap – INR 13,821 cr

A. What is interesting about the stock?

“Simplification is one of the most difficult things to do” … Jony Ive

Working closely with Steve Jobs during their tenure together at Apple, Ive played a vital role in the designs of the iMac, Power Mac G4 Cube, iPod, iPhone, iPad, MacBook, and parts of the user interface of Apple's mobile operating system iOS, among other products. One of the best parts of Apple products is its simplicity in design.

What’s the connection between simplification and NH?

Dr. Devi Shetty, the founder of NH, has made even complex cardiovascular procedures simple and akin to a factory assembly line, that increases the number of operations per doctor per day while reducing the cost of the doctor as the procedure would not need “star” doctors. This leads to better procedure quality and lower cost, which is passed on to the patients. NH has an ARPOB (average revenue per operating bed or a measure of cost for a patient) 30-40% lower than the competition.

Narayana Hrudayalaya Limited is a healthcare service provider that operates a chain of multi-specialty hospitals in India and the Cayman Islands. NH has a network of 47 healthcare facilities including 21 owned/operated hospitals (multi-specialty and super-specialty healthcare facilities which provide tertiary care), 2 managed hospitals, 5 heart centers (super-specialty units which are set up in a third-party hospital), and 19 primary care facilities (including clinics and information centers). Company has a 6,845-bed capacity with ~6,200 operational beds and 30+ specialties. The Company has a strong track record of providing quality healthcare services at an affordable cost. NH was founded by Dr. Devi Shetty in 2000 and is headquartered in Bengaluru. The Company has an established presence and strong brand recognition in two geographical clusters, southern (Karnataka) and eastern India (which account for ~70% of its revenues), with some presence in western, central, and northern India (especially in Tier I cities). The Company has established a strong position on Cayman Island, where it is planning to set up an additional multi-specialty center and an oncology unit. NH had started Cayman Island unit to provide affordable quality care to US patients but that hasn’t panned out as planned, and the Company is now focusing on addressing the local needs.

The asset-light model has enabled the company to have one of the lowest average effective costs per bed among its peers. The average effective capital cost per operational bed is INR 33 lakh vs the Industry average of INR 1 cr for Tier 1 city and INR 50 lakh for Tier 2 city.

NH’s centers provide advanced levels of care in over 30 specialties, including Cardiology and Cardiac Surgery, Cancer Care, Neurology and Neurosurgery, Orthopaedics, Nephrology and Urology, and Gastroenterology. Company was predominantly focused on Cardiology in FY13 with 62% of revenue and has subsequently diversified with its revenue coming down in Q3FY22. The mix of revenues from various specialties in Q3FY22 is:

  • Cardiac – 35%

  • Gastro – 13%

  • Oncology - 13%

  • Renal – 9%

  • Neuro – 8%

  • Ortho – 8%

  • Others – 22%

Cayman Islands contributed to ~25% of revenue in Q3FY22. Indian operations cluster wise revenue mix in Q3FY22:

  • South - Bangalore:34%, Others: 7%,

  • East - Kolkata: 26%, Others 5%

  • Western: 15%

  • Northern: 13%

Future Prospects

The industry is expected to grow at a CAGR of 17% during the period 2018-to 2025. I would expect NH to grow at a CAGR of 15-20% for the next few years driven by:

  • Industry-wide factors like economic development leading to more lifestyle-related ailments, population aging, and an increase in affordability (rise in per capita income and health insurance levels)

  • Increase in occupancy levels as the recently opened hospitals mature

  • Medical tourism to come back after international travel becomes easier, post COVID-19

Management Background

Dr. Shetty is the chairman and founder of NH. He has performed more than 16,000 heart operations. In 2004 he was awarded the Padma Shri, the fourth highest civilian award, followed by the Padma Bhushan in 2012, the third-highest civilian award by the Government of India for his contribution to the field of affordable healthcare. The Wall Street Journal newspaper has described him as "the Henry Ford of heart surgery". Surgeons in his hospital perform 30 to 35 surgeries a day compared to one or two in a US hospital.

Strengths (Why invest in NH?)

  • Strong brand equity of Dr. Shetty

  • Asset light model – Company can roll out faster with lower capex per bed. NH also looks for alliances like Heart Centers where all capex is funded by the owner and operator. This model is quite similar to the franchisee model in the hospitality industry

  • High ROE (~30% based on TTM numbers) even at a low occupancy level of ~50%. A jump in occupancy level will lead to higher ROEs

  • Robust financial position (high ROE, low D/E ratio of 0.5x, negative working capital)


  • Lot of competition in the industry from large players like Apollo, Fortis and other players like Max, Manipal, HCG, KIMS, Medanta, etc

  • Execution risk in the new projects or ramping up of recently opened hospitals

  • High dependence on leases – a side effect of having an asset-light approach. Any disruption (discontinuation or increase in lease rent) can create challenges for the business

B. Key Historical Financials

  • Company suffered in FY21 as elective surgeries were being postponed due to COVID-19 – occupancy fell to 34%

  • Occupancy recovered in the last few months as reflected in TTM results – pent-up demand for elective surgeries has led to the occupancy level of ~53% in Q3FY22 vs typical ~49% in FY17-20. This has partly led to higher EBITDA margins (TTM EBITDA margin at 17% vs FY20 at 14%)

  • CFO/EBITDA has been around 95-100% in FY19 and FY20, which is quite healthy

Cash Flow Analysis

NH has been doing capex of ~INR 100-200 cr over the last few years which has been fully funded from internal accruals. The Company took a loan to fund the balance stake acquisition in the Cayman Islands' hospital in FY18 that it has been paying down over the last 2-3 years. Company has announced an expansion in Cayman (~ USD 100mn) for the 50-bed facility which would focus mainly on providing oncology, critical care, and daycare services. The Company will be spending INR 400-450 cr capex in FY22 and FY23, which would be funded from internal accruals – annual EBITDA of around INR 600-700 cr based on the current run rate and CFO/EBITDA ratio of ~100%. Excess-generated cash could be used to pay down debt and possibly a small dividend too.

C. What is my view on company valuation?

Company share price has jumped ~3x since March 2020 with PAT increasing by ~3x (FY20 – INR 119cr to TTM – INR 341cr). So, the share price increase has been supported by fundamentals.

NH trades at a P/E (TTM) multiple of ~40x vs Apollo at ~60x, Fortis at ~50x, Max Healthcare at ~130x and KIMS at ~30x. Valuation compared to peers does not seem to be high.

As the company’s business fundamentals are strong and ROE is quite attractive with negative working capital and an asset-light model, We can use a PEG ratio of 2x. If the revenue grows at a 15-20% rate for the next few years and the margin remains stable, the PAT can grow at ~17.5% implying a P/E ratio of 35x. With some margin of safety, stock can be evaluated at a P/E (TTM) of ~30x.

Company looks very interesting for the long term and investors can evaluate entering at lower levels.

D. What are the risks to the investment analysis?

Risks to the analysis are:

  • New COVID-19 wave can disrupt the operations

  • Forex exchange rate risk for ~25% of the business (Cayman Hospital)

  • Regulatory risk from changes in government policies – The National Pharmaceutical Pricing Authority (NPPA) imposed a ceiling price on coronary stents in February 2017. This impacted the Company’s profitability

  • Recruitment and retaining medical talent – India has a scarcity of medical talent in terms of quantity and quality. Competition could pose a challenge in recruitment and retaining such talent

[End of Part 2]


Part 3: HCG (Cancer Specialist)

  • Company Name – HealthCare Global Enterprises Limited (HCG)

  • Current Share Price – INR 261 (May 13, 2022)

  • Market Cap – INR 3,629 cr

A. What is interesting about the stock?

Reading about HCG (cancer) evoked strong feelings. Fear of the unknown, loss of loved ones…

What is Cancer?

Cancer is a large group of diseases that can start in almost any organ or tissue of the body when abnormal cells grow uncontrollably, go beyond their usual boundaries to invade adjoining parts of the body, and/or spread to other organs.

Cancer is the second leading cause of death globally. Lung, prostate, colorectal, stomach, and liver cancer are the most common types of cancer in men, while breast, colorectal, lung, cervical, and thyroid cancer are the most common among women.

“Cancer” is a powerful word that evokes strong feelings as it did in me. It’s a word associated with a lot of fear, but it shouldn’t be. Most people have preconceived notions about cancer that are inaccurate — and often scarier than the reality they face. Most forms of cancer, depending on when they’re caught, are treatable and curable. Some forms of cancer are curable even at advanced stages.

The following risk factors and mechanisms have been proposed as contributing to cancer:

  • Lifestyle factors like smoking, a high-fat diet, and working with toxic chemicals

  • Family history, inheritance, and genetics may play an important role in some childhood cancers

  • Some genetic disorders

Cancer prevalence has jumped 100% in India since the 1990s on a DALY basis (based on the data provided in our hospital note). Disability-adjusted life year (DALY) is a measure of overall disease burden, expressed as the number of years lost because of ill-health, disability, or early death. However, its prevalence is still 1/3rd of the cardiovascular diseases. As early cancer diagnosis improves, thanks to scientific advancements, spending on cancer-related surgeries and medicine will also increase.

Established in 1989, Healthcare Global Enterprises Limited (HCG), is present primarily in the oncology field with the largest cancer care network. It is promoted by Dr. B.S. Ajaikumar, who is a practicing radiation and medical oncologist with over 30 years of experience. Originally established with a single cancer care center, the Bangalore Institute of Oncology (BIO), at Bangalore by Dr. B.S. Ajai Kumar and four other oncologists, the Company has rapidly expanded its presence to Ahmedabad, Chennai, Nasik, Ranchi, Rajkot, Cuttack, Hubli, Mumbai, Nagpur, Vizag, and Vijayawada, among others. The Company is now present across the oncology value chain, offering services from prevention, screening, diagnosis, and treatment to rehabilitation, supportive care, and palliative care. CVC group owns ~57% stake on a fully diluted basis, after equity infusion and open offer in 2020.

The Company operates 22 comprehensive cancer centers, 4 multi-specialty hospitals, and 7 fertility centers and has over 1,700 operational beds. Almost 95% of its revenues come from HCG Centres, which are cancer care centers.

As most of its centers are located in Karnataka, Gujarat, and Maharashtra, the revenue contribution from these states is higher. Revenue split in Q3FY21 was:

  • Karnataka – 37%

  • Gujarat – 25%

  • Maharashtra – 16%

  • East India – 9%

  • South India (other than Karnataka) – 10%

  • North India – 3%

The Company uses the hub-and-spoke model to create an integrated approach to cancer care. HCG can successfully reach patients across India through the spokes located in smaller cities and Tier 2/3 towns. The Company is the number 1 player in these smaller cities and Tier 2/3 towns, Centre of Excellence in Bangalore serves as the hub, which provides access to centralized quality control and assurance services, establishes treatment protocols across the network, provides centralized treatment planning services and teleradiology services and provides access to advanced technologies and specialized procedures.

Capital allocation has been a challenge for the Company with a large capex plan in the last few years, which was funded by debt. Additionally, cancer treatment is an evolving field in medicine so the capital expenditure on cutting-edge technology equipment is high. The situation became more difficult during the COVID-19 period. The Company has done the following to address the issue:

  • Raised capital from CVC – INR 650 cr

  • Monetized 38% equity stake in Strand Life Sciences (JV) resulting in a net cash inflow of INR 75 cr

  • Acquired balance stake (49.9%) in BACC Health Care Private Limited (Milann fertility business) for INR 68 cr – HCG will look to sell the fertility business which is unrelated to the core cancer business. Owning 100% makes the transaction easier

  • Prepayment of existing term loans of ~INR 240 cr

  • Stopped greenfield project in Gurugram and wrote off ~INR 47 cr

Future Prospects

The Company is expected to focus on business consolidation in the next few years with no rollout of greenfield projects. We can expect a growth rate of 10-15% in revenue and expansion of EBITDA margin. The Company is expected to become profitable at the PAT level driven by higher EBITDA margins and lower interest costs from deleveraging.

Management Background

  • Dr. BS Ajaikumar is the Executive Chairman and Founder of HCG. He served as the CEO from 2005 to Jan 2021. Dr. Ajaikumar has been a practicing oncologist in the US and India for over three decades.

  • Raj Gore is the current CEO. He has more than 21 years of experience in the hospital space with players like Apollo Hospitals and Fortis. Raj joined after CVC took a majority stake in HCG

Strengths (Why invest in HCG?)

  • Leading cancer specialist hospital chain. Incidence and delectation of cancer expected to increase

  • Hub and spoke model – makes the business relatively asset-light

  • Business turning around with professional management and CVC as a shareholder


  • High competition from multi-specialty players – they get operating leverage as the hospital size (number of beds) could be bigger in a multi-specialty setup vs a standalone cancer hospital

  • Operational turnaround of new centers could be challenging

B. Key Historical Financials

  • Company had flat revenue in FY20 and FY21 with growth coming back in the last few quarters as the business got impacted by COVID-19

  • EBITDA margin has been steadily increasing due to focus on turnaround

  • HCG is close to break-even on PAT level in Q3FY22 (excluding one-offs)

  • Net D/E ratio has come down after equity infusion by CVC

Cash Flow Analysis

Working capital in the business is low so HCG would have high cash flow convertibility from EBITDA. I would expect Company to have an EBITDA of INR 240-300 cr in the next few years with cash outflow (CFI) predominantly for the replacement or maintenance capex. This would lead to cash available to reduce the debt level in the Company. The sale of the fertility business is expected to help in cash generation as a one-time.

C. What is my view on company valuation?

The Company share price has run up ~4x since March 2020 reflecting optimism about the business turnaround. CVC invested at the share price of INR 130 in Jun 2020 vs the current price of INR 261.

HCG trades at an EV/EBITDA ratio of ~20x vs Apollo Hospitals of 24x and Narayana Hrudayalaya at 22x. Valuation looks quite rich for a business that is expected to grow at 10-15% on revenue level and has weak ROE/ROCE (vs competition).

The opportunity looks interesting for the long term with the expected increase in cancer cases. However, it may be better to look at multi-specialty players with a diversified business model and better/stable operating economics.

D. What are the risks to the investment analysis?

Risks to the analysis are:

  • CVC will look to exit the investment in medium/long-term players. Shareholders could benefit from any acquisition premium paid by the buyer

  • Adverse government regulations

  • Limited availability of medical staff – could lead to an increase in cost pressure for quality resources

[End of Part 3]


Part 4: Fortis (Change in ownership stuck in litigations)

  • Company Name – Fortis Healthcare Limited (Fortis)

  • Current Share Price – INR 236 (May 13, 2022)

  • Market Cap – INR 17,817 cr

A. What is interesting about the stock?

Fortis was the crown jewel of the erstwhile promoters, Shivender Singh and Malvinder Singh (Singh brothers), who started the company in 1996. Singh brothers were also owners of Ranbaxy, India’s largest pharma company, which they sold to Daiichi Sankyo, one of the largest pharma companies in Japan. Mired by corporate governance issues, personal debt & litigations, the brothers lost control of Fortis. This story is a Bollywood potboiler.

Fortis Healthcare Limited (FHL) – an IHH Healthcare Berhad company – is a leading integrated healthcare services provider in India. It is one of the largest healthcare organizations in the country with 23 operational healthcare facilities in India and ~3,900 operational beds as of December 31, 2021. Fortis offers services to patients in Cardiac Care, Orthopedics, Neurosciences, Oncology, Renal Care, Metabolic diseases care, and mother and childcare. Healthcare verticals of the company primarily comprise day care specialty, diagnostics, and tertiary and quaternary care. The Company has entered women and child health and well-being segments through its brand, ‘La Femme’. SRL, a subsidiary of Fortis Healthcare, is among the leading diagnostic laboratory chains with 4 reference labs and 428 networking labs with 6,500 collection points.

The erstwhile promoters, the Singh brothers, who were involved in the diversion of funds and misrepresentation of financial statements, were forced to reduce their stake to less than 1% (Feb 2018) after the Supreme Court allowed lenders to invoke the pledge against shares of Fortis held as security. Thereafter, the search for a new promoter began, and bids were invited from investors. IHH was the winning bidder and became the new promoter, investing around INR 4,000 crore in the company against fresh issuance for around 31.1% stake at a share price of INR 170. IHH also plans to bring an open offer for acquiring up to a 26% stake in Fortis, subject to the subscription by the minority shareholders to the open offer. The open offer has not moved forward due to ongoing legal proceedings concerning the transaction. The apex court blocked the open offer on a plea filed by Japanese drugmaker Daiichi Sankyo, which is trying to enforce an INR 3,500 crore arbitration award it won in a Singapore tribunal against Fortis’ erstwhile promoters, the Singh brothers.

To reinforce complete dissociation with erstwhile promoters, the board has proposed to rename the Fortis brand as ‘Parkway’, which is a strong international brand belonging to IHH, while a neutral name will be considered for SRL. Change of change has not been implemented. Life has come full circle. In 2010, Fortis had acquired a 23% stake in Parkway Holdings from TPG Capital, which they sold to IHH after a failed takeover battle.

Hospital business contributed to ~75% of the revenue in Q3FY22 and surgical revenue was ~57% of the hospital revenue. Specialty mix in the hospital revenue in Q3FY22 was:

  • Cardiac – 20%

  • Onco – 11%

  • Neuro – 9%

  • Ortho – 8%

  • Renal – 7%

  • OPD – 12%

  • Others – 31%

Future Prospects

The new promoter is looking to turn around the operations, as it is generating returns below the cost of capital. IHH is also looking to avail synergies with key equipment suppliers, vendors, and lenders. The company has acquired RHT Health Trust which was created as a business trust listed in Singapore to own hospital assets. This would help in streamlining the operations.

However, turning around operations would be challenging for the new owner, with constant distraction from the litigation by Daiichi Sankyo.

Management Background

Dr. Ashutosh Raghuvanshi is a cardiac surgeon turned management leader. He joined Fortis in 2019 after IHH became a promoter. Over the last 26 years, he has been associated with the Bombay Hospital, Apollo Hospitals, Vijaya Heart Foundation, and Manipal Heart Foundation. Before joining Fortis, he was last working with Narayana Health as Vice Chairman, Managing Director & Group CEO and was responsible for the operations of all the group hospitals across India and internationally.

Vivek Kumar Goyal also joined in 2019. Before joining Fortis, Vivek was the Chief Finance Officer with the Tata Housing and Development Company in April 2015. He has previously worked with Ballarpur Industries, Saw Pipes, and Indo Asian Fusegear.

Strengths (Why invest in Fortis?)

  • Strong brand name in hospital and diagnostic business

  • New promoter is a premium healthcare provider operating in the home markets of Malaysia, Singapore, Turkey, and India. The group also has a growing presence in Greater China and an expanding network across Asia, and Central and Eastern Europe

  • Robust balance sheet after infusion of capital by the new promoter


  • Litigation in the Supreme court is a distraction for the company and new promoters

  • Highly competitive industry

  • Regulatory actions like price capping or Government-mandated services can affect profitability

B. Key Historical Financials

  • Company saw revenue fall in FY21 but growth came back in the last few quarters, as the business got impacted by COVID-19

  • EBITDA margin has been steadily increasing due to focus on turnaround

  • PAT growth has been aided by debt repayment leading to lower interest cost

  • ROE and ROCE are below the cost of capital

Cash Flow Analysis

Working capital in the business is low so HCG would have high cash flow convertibility from EBITDA. I would expect Company to have an EBITDA of INR 240-300 cr in the next few years with cash outflow (CFI) predominantly for the replacement or maintenance capex. This would lead to cash available to reduce the debt level in the Company. The sale of the fertility business is expected to help in cash generation as a one-time.

C. What is my view on company valuation?

The company share price has run up ~2x since March 2020 reflecting optimism about the business turnaround. IHH invested at the share price of INR 170 vs the current price of INR 236.

Fortis trades at an EV/EBITDA ratio of 17x vs Apollo Hospitals of 24x and Narayana Hrudayalaya at 22x.

Fortis trades at a P/E (TTM) multiple of ~50x vs Apollo at ~60x, NH at ~40x, Max Healthcare at ~130x and KIMS at ~30x.

Valuation looks quite rich for a business that is expected to grow at 10-15% on revenue level and has weak ROE/ROCE (vs competition) with a difficult path to reach the cost of capital with occupancy level close to competition.

Investors should look for additional triggers for the turnaround before looking to invest in the Company.

D. What are the risks to the investment analysis?

Risks to the analysis are:

  • Litigation overhang in the stock – distraction for the management and promoter

  • Minority shareholders, with a 31.5% stake in SRL, hold a put option of around INR 1,500 cr which could be due after February 2024

  • The Securities and Exchange Board of India (SEBI) and the Serious Fraud Investigation Office (SFIO) are investigating alleged financial irregularities at the company. Furthermore, on November 20, 2020, SEBI issued a show-cause notice to Fortis for alleged involvement in the diversion of funds by the erstwhile promoters and misrepresentation of the financials, thereby not safeguarding investor interests

  • Adverse government regulations

  • Limited availability of medical staff – could lead to an increase in cost pressure for quality resources

[End of Part 4]


Part 5: Shalby (Knee Replacement Specialist)

  • Company Name – Shalby Limited (Shalby)

  • Current Share Price – INR 107 (May 13, 2022)

  • Market Cap – INR 1,155 cr

A. What is interesting about the stock?

I didn't think my knee replacement surgery would help. I stand corrected.

The concept of knee replacement cost in India and surgeries have become very common all around the world. It acts as a permanent solution to prolonged knee illnesses and pain. The success rate for this kind of surgery is almost 100% and thus attracts many people to undertake this surgery and get a permanent solution to their knee joint disorder and pain.

The reason for undergoing this surgery can be varied. Age is one of the factors, but the major reason is the excessive wear and tear of the knee joint due to any reason. Though the illness is common in older people, teenagers, as well as adults, can also undergo this surgery depending upon the degree of wear and tear of their knee joints and the extent of their disability as described by the doctor.

Arthroplasty, the medical name of the knee replacement procedure is performed to repair the damage that is caused to the knee joints. The damage is triggered by Osteoarthritis or rheumatoid arthritis, which are the two most common and severe forms of arthritis.

In simple words, if you are someone who’s having trouble walking straight, climbing stairs, and getting in and out of chairs, then you should consult a knee replacement doctor because maybe, you need knee replacement surgery to get over this problem.

Shalby is promoted by the arthroplasty specialist, Dr. Vikram Shah, who commenced hospital operations under the company with a six-bed facility at Ahmedabad in 1994. Shalby currently operates a chain of multi-specialty healthcare facilities with ~2,012-bed capacity and a potential to reach ~2,400 beds in the coming 2-3 years. Shalby has a strong presence in western and central India with 11 operational hospitals in Ahmedabad, Vapi (Gujarat), Surat (Gujarat), Jaipur, Indore (Madhya Pradesh), Jabalpur (Madhya Pradesh), Mohali (Punjab), and Mumbai. Shalby also operates 50 OPD centers across India and seven clinics in Africa (Kenya and Tanzania). Operations were initially focused on arthroplasty procedures (knee and hip replacements), following which the Company expanded into other specialties such as oncology, bariatrics, cardiology, neurosurgery, etc. over the last few years.

The existing revenue mix between arthroplasty and other specialties is 45:55 (FY20).

Shalby has acquired the implant assets from US-based Consensus Orthopedics, in May 2021, for a consideration of USD 11.5 million. The acquired assets are primarily comprised of inventory and plant and equipment. Product inventory includes knee systems, mobile bearing knee systems, hip systems and revision knee systems. The manufacturing plant and equipment consists of machining & finishing (60,000 components per annum), inspection (75,000-80,000 components per annum) and cleaning, packaging & sterilization (1,50,000 components per annum). This will allow Shalby to procure quality implants at a competitive price for captive consumption.

Future Prospects

Shalby has plans to set up new hospitals through a calibrated expansion strategy. It is pursuing an asset-light model of expansion through franchise route for orthopedics and for joint replacement to expand its pan-India presence. Management has guided towards opening 50 hospitals using the franchise route in the next three years.

Management Background

Dr. Vikram Shah is the founder Chairman & Managing Director of Shalby. Dr. Vikram Shah is known for popularizing Total Knee Replacement (TKR) through his surgical process innovation which reduces surgery time from hours to 8 to 10 minutes with added advantages of minimal incision, minimal blood loss, reduced infection rate, and speedy recovery which enables patients to start walking within few hours after surgery.

Strengths (Why invest in Shalby?)

  • Leader in Arthroplasty (joint replacement surgery): Shalby is a leader in joint replacement surgery in India with a 15% market share in India (highest among private hospitals). It is the top player worldwide for knee replacement surgery.

  • Asset light expansion model

  • Backward integration with the acquisition of implant assets from Consensus Orthopaedics


  • High dependence on the flagship hospital at SG Highway: Company derived 33% of the total revenue and 57% of the total operating profit from this hospital in FY20

  • Low occupancy (the mid-30s vs competition operating in the 50-60% range) and ROE

  • Price regulation by the government

  • Very high keyman risk on Dr. Shah

B. Key Historical Financials

  • Company saw revenue fall in FY21, but growth came back in the last few quarters, as the business got impacted by COVID-19. Patients were postponing elective surgeries

  • Revenue fell in Q3FY22 vs Q2FY22 due to festivities and a surge in COVID-19 (Omicron variant)

  • EBITDA has been stable in the 17-20% range since FY19. Business faced pressure in Q2FY22 and Q3FY22, mainly due to an increase in employee and other expenditure

  • CFO/EBITDA has been poor in FY19 and FY20 with recovery in FY21

  • ROE and ROCE are below the cost of capital – both haven’t shown any improvement. FY22 seems to be better based on TTM results

Cash Flow Analysis

Working capital in the business is higher as compared to the other hospitals as it needs to maintain an inventory of joints that are replaced in the surgeries. I would expect Company to have an EBITDA of INR 120+ cr in the next few years with cash outflow (CFI) predominantly for the working capital (inventory), turning around US business, and opening new hospitals.

C. What is my view on company valuation?

The Company did its IPO in December 2017 at a share price of INR 248. It has never traded above its issue price since listing. The current share price is at more than a 50% discount from the IPO issue price.

Shalby trades at an EV/EBITDA ratio of 9x vs Apollo Hospitals of 24x and Narayana Hrudayalaya at 22x.

Shalby trades at a P/E (TTM) multiple of ~22x vs Apollo at ~60x, Fortis at ~50x, NH at ~40x, Max Healthcare at ~130x and KIMS at ~30x.

Valuation looks reasonable vs competition but Company has weak ROE (vs competition) with a difficult path to reach the cost of capital (it needs to double the profitability).

Shalby could be an interesting acquisition target for a larger multi-specialty hospital.

D. What are the risks to the investment analysis?

Risks to the analysis are:

  • Any surge in COVID-19 can lead to deferment of elective surgeries impacting business

  • Many large multi-specialty players and local hospitals have started developing expertise in Arthroplasty – increasing the competitiveness in the space

  • Adverse government regulations

  • Limited availability of medical staff – could lead to an increase in cost pressure for quality resources

[End of Part 5]


Part 6: KIMS (Strong Regional Player)

  • Company Name – Krishna Institute of Medical Sciences Limited (KIMS)

  • Current Share Price – INR 1,249 (May 13, 2022)

  • Market Cap – INR 9,995 cr

A. What is interesting about the stock?

Founded by Dr. Bhaskar Rao, a renowned cardiothoracic surgeon, KIMS operates a chain of multispecialty hospitals in Andhra Pradesh and Telangana, with a focus on tertiary and quaternary healthcare. It began its journey with a 300-bed hospital in Secunderabad. Today, KIMS is one of India's leading multi-disciplinary integrated private healthcare service providers offering comprehensive healthcare services across specialties and super specialties.

The flagship hospital of the Company in Secunderabad has a capacity of 1,000 beds. Spread across eight cities in the states of Andhra Pradesh and Telangana, KIMS has a total bed capacity of ~3,700 beds and an established presence in the southern part of India.

KIMS’ first hospital in the network was established in Nellore in 2000 and subsequently, the company added 4 more hospitals in Rajahmundry, Secunderabad, Srikakulam, and Kondapur by 2014. These 5 hospitals are mature hospitals for KIMS, with the Secunderabad being the flagship hospital for the company. Secunderabad hospital accounted for ~50% and ~60% of KIMS’ overall revenue and EBITDA in FY21.

KIMS has also significantly expanded its hospital network in recent years through its acquisition of hospitals in Ongole in FY17, Vizag and Anantapur in FY19, and Kurnool in FY20. Given these were operating with EBITDA losses at the time of acquisition, KIMS was able to acquire these 4 hospitals at relatively cheap valuations of INR 27 – 30 lakh EV per bed vs. greenfield capex of usually INR 50-60 lakh per bed (excluding land cost) for hospitals in tier 2/3 markets.

At present, Dr. Bhaskar Rao and his associates have a 38.8% stake in KIMS, General Atlantic Partners, a PE fund, holds 17%, and the balance is held by institutional investors and the general public, including doctors. In June 2018, General Atlantic Partners invested over USD 130 million, in a combination of primary capital and secondary purchases, to acquire a significant minority stake of 42.6% in KIMS. This included the takeover of a 30% stake from India Advantage Fund, India's largest private equity fund managed by ICICI Ventures. General Atlantic sold part of its stake (18%) in the IPO with the remaining stake being diluted due to primary issuance in the IPO.

In October 2021, KIMS has also announced the acquisition of Sarvejana Healthcare Private Limited (part of Sunshine hospital group), which is expected to result in KIMS having a total of 12 hospitals, across 9 cities with more than ~3,700 beds.

Future Prospects

KIMS intends to drive growth in its existing hospitals by further deepening its specialty mix beyond its key specialties of cardiac, neuro, renal, ortho, and gastric. KIMS will look to add organ transplantation, oncology, and mother & child care specialties across most of its hospitals. Given that KIMS has operationalized only ~3,200 beds out of its existing capacity of ~3,700 beds (including Sunshine), the company has the opportunity to operationalize ~15% incremental beds from its existing capacities.

KIMS is also targeting to expand its hospital network into newer, adjacent markets of Karnataka (Bangalore), Tamil Nadu (Chennai), and Maharashtra (Mumbai) through greenfield hospitals in these markets.

Management Background

Dr. Bhaskar Rao is the founder of KIMS and is one of the very few Cardio-Thoracic Surgeons in the country, who has performed over 30,000 surgeries in his career spanning the last 25 years. Dr. Rao started his career in 1990, before turning into a healthcare entrepreneur. He started his entrepreneurial journey at "Mahavir Cardio Vascular Centre" in 1996 in Hyderabad with 50 beds.

Strengths (Why invest in KIMS?)

  • Established market position

  • Cluster approach and experience of turning around acquisitions in Tier 2/3 cities

  • Higher occupancy (60%+ in 9MFY22) – leading to higher ROE/ROCE vs competition

  • Affordable pricing (APROB at ~ INR 25,000 vs competition at more than INR 35,000)

  • Doctor equity model – reduces attrition and lowers doctor cost

  • Healthy financial position – strong cash flow generation and net debt close to zero


  • Geographic concentration

  • Highly competitive industry with national players trying to take away a market share of regional players

B. Key Historical Financials

  • Unlike most of the hospital chains, KIMS didn’t see a fall in revenue in FY21. FY22 is on track for strong growth in revenue

  • Revenue fell in Q3FY22 vs Q2FY22 due to festivities

  • EBITDA margin has expanded from FY18 – driven by the turnaround of the acquired hospitals. Margin expansion has continued in the last few quarters

  • Cash Flow Convertibility (CFO/EBITDA) has improved in FY21

  • ROE and ROCE are ~30% - exceptional as compared to the competition

Cash Flow Analysis

Working capital in the business is low. I would expect Company to have an EBITDA of INR 500+ cr and most of this gets converted into cash flow from operations (CFO), enough to fund the growth plans.

C. What is my view on company valuation?

The Company did its IPO in July 2021 at a share price of INR 825. It got listed at a 20%+ premium.

KIMS trades at an EV/EBITDA ratio of ~19x vs Apollo Hospitals of ~24x and Narayana Hrudayalaya at ~22x.

KIMS trades at a P/E (TTM) multiple of ~30x vs Apollo at ~60x, Fortis at ~50x, NH at ~40x, Max Healthcare at ~130x and Shalby at ~22x.

Valuation looks reasonable vs competition as the Company has better ROE/ROCE levels. Growth could be the only challenge for KIMS.

General Atlantic Partners (PE fund) owns a 17% stake in the Company, and any stock market exit for them could create an overhang. However, they might also exit alongside the Promoter in a strategic sale to a national chain or an international player.

D. What are the risks to the investment analysis?

Risks to the analysis are:

  • Any surge in COVID-19 can lead to deferment of elective surgeries impacting business

  • Adverse government regulations

  • Limited availability of medical staff – could lead to an increase in cost pressure for quality resources

[End of Part 6]


About the Author

I have over 15 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.

I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).

I am an Insignificant Investor in the public market and co-founder of SocInvest.


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.



Sankar Gangopadhyay
Sankar Gangopadhyay
May 17, 2022

What is your view about Max Healthcare future prospect.

SocInvest Support
SocInvest Support
May 30, 2022
Replying to

I haven’t studied Max Healthcare. What’s your view?

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