He talks to BT about the company’s strategy to ensure sustained profitability, and the evolving valuations in the M&A space

Fortis Healthcare plans to maximise the potential of its existing hospitals, expand bed capacity, and refine specialties. In an interview, Ashutosh Raghuvanshi, CEO of Fortis, highlighted the company’s strategy for sustained profitability, discussed evolving valuations in the M&A space, and emphasised competition’s role in promoting transparency and clinical excellence. Edited excerpts:

BT: You have played a key role in the transformation of Fortis over the last 4 years. How are you ensuring sustained profitability through strategic actions? 

AR: Profitability comprises two key elements: realisations and the bottom line. It’s crucial to take multiple strategic actions to sustain profitability. One such strategy I identified early on was to focus on existing hospitals rather than expanding into new areas where we lack presence.

This strategy stemmed from resource constraints that prevented us from acquiring or building new facilities. However, many of our existing hospitals had untapped potential for growth, despite being relatively small in size. Over the years, I’ve learned that scale plays a critical role in profitability. Comparatively, larger hospitals tend to perform better financially, often with 400 to 500 beds.

Our flagship hospital had only 300 beds, so we embarked on enhancing bed capacity across our facilities. This initiative is progressing well, with projects to expand beds or build new blocks underway.

The increased scale will significantly improve unit-level economics, driving future profitability. Additionally, we are focusing on core specialties, with a notable emphasis on oncology, which has experienced rapid growth. While we report oncology’s contribution at 13% of revenue, it’s likely higher due to certain revenue recognition practices. This growth mirrors changes in disease profiles, although cardiac sciences will remain a substantial revenue contributor due to our heritage in this area.

We are investing in advanced medical equipment such as the LINAC and Gamma Knife, with plans for commissioning them soon. Bed expansions are also in progress across various locations like Shalimar Bagh, Noida, Faridabad, Kolkata, Mulund in Bombay, BG Road, Mohali, Amritsar, and Ludhiana, ensuring our growth trajectory remains on track.

BT: Could you provide more details about your plans for acquisitions and divestments?

AR: Currently, our focus is on consolidating our presence in existing clusters. Punjab, particularly in Tier 2 and Tier 3 cities, holds significance due to our positive experience and the company’s origin in that region. Our hospitals in Amritsar, Ludhiana, and Mohali are performing well, and we aim to maintain our focus there. Additionally, we are prioritising urban clusters over metro clusters. However, we are open to establishing another cluster in larger cities, possibly tier two or tier three cities, although it would not be a greenfield project. Instead, we would consider acquisitions, whether cancer-specific or multi-specialty, to expand our reach strategically.

We have divested two hospitals in Chennai, with the sale process expected to conclude by the end of January. These hospitals were underperforming and had a minimal contribution to our overall revenues, so their divestment is not expected to significantly impact our revenue. However, it will positively impact our profitability by approximately 0.8% on our EBITDA, as they were not operating at a loss.

While Chennai remains a valuable market, these specific assets had issues that prevented them from meeting our standards. Maintaining a suboptimal presence in any location is not aligned with Fortis’ commitment to excellence in clinical delivery. Therefore, we made the strategic decision to address these issues.

Looking ahead, we are focused on our growth plans, which include adding approximately 1800 beds over the next three financial years. Additionally, we have acquired a hospital in Manesar with 350 beds, effectively replacing the capacity we have divested.

BT: Can you explain the rationale behind focusing on brownfield expansions within existing hospitals?

AR: Apart from the 350 beds in Manesar, all other additions are brownfield expansions within our existing hospitals. Most of these expansions are focused in the North, particularly in Punjab, with a strong emphasis on the NCR region. Additionally, we are adding 82 beds in Kolkata.

BT: How do you anticipate valuations evolving in the M&A space, and what opportunities do you foresee for Fortis in this context?

AR: Valuations are expected to become more challenging due to increased activity in the M&A space, which is a natural trend. However, opportunities will arise, especially with standalone hospitals where the second generation may not be interested in continuing operations. While acquiring larger chains may pose challenges, there will still be opportunities for selective evaluation. Given that only about 8–9% of beds are in the organised sector, there is significant potential for further consolidation. While valuations may remain challenging for a while, there will be opportunities for strategic evaluations.

BT: Could you elaborate on Fortis’ technology initiatives?

AR: There are three crucial areas of technology in hospitals today. Firstly, the electronic backbone includes operating systems, records management, electronic medical records (EMR), HIS systems, billing systems, and vendor interactions. We are currently implementing EMR, which will transition us to a fully digital interface and paperless operations within approximately a year and a half.

Secondly, technology includes equipment advancements. We are heavily invested in robotic surgery and expanding our radiation oncology capabilities. We have acquired six robots, including four orthopaedic robots, in the past two years, and plan to double this capacity over the next 2-3 years. Our annual spending on equipment and IT initiatives averages around 400 to 500 crores, including infrastructure upgrades.

Thirdly, digital patient interfaces are crucial. We have developed an in-house app that allows patients to access their records, schedule appointments, engage in teleconsultations, and more. This seamless integration aims to enhance efficiency and the patient experience.

In terms of investment, we allocate approximately half of our annual budget to new initiatives and the other half to replacements. With ongoing investments in technology and infrastructure, we anticipate organic growth of at least 10% year over year.

BT: In what ways do you believe competition in the healthcare industry benefits Fortis?

AR: Competition in any industry is beneficial, especially in healthcare. As data on hospital outcomes becomes more transparent, similar to practices in the US and other developed nations, Fortis is prepared to publish outcomes comprehensively. We believe in transparency and aim to expand our reporting outcomes significantly.

Regarding Delhi NCR’s capacity, I am optimistic about its ability to absorb another 2000–3000 beds. The city’s rapid growth continues to attract both domestic and international patients, ensuring that such capacity will be utilized. While competition is not a concern, we have established a robust clinical governance system at Fortis. This includes the Fortis Medical Council overseeing major medical policy decisions, hospital-level medical councils, and rigorous risk management processes. These measures are integral to improving healthcare standards and managing competitiveness effectively.

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