Fortis Healthcare's Q1FY18 results (Outperformer) - Below estimates; Positive outlook

Q1FY18 result highlights

• Consolidated revenues came at Rs11.7bn (up 3.2% yoy) below est of Rs11.8bn. India hospital revs were up 3.2% yoy (est +7% yoy) at Rs9.4b while diagnostic revenues grew +10% yoy to Rs2.1b – in line.
• Hospital EBITDAC came at 13.5% (12.2% in Q4FY17) vs est of 14% at Rs1.27b (Rs1.1b in Q4FY17). Mgt guided to further pickup in H2
• Operating profit came in lower at Rs957mn (up +14% qoq) below est of Rs1.1bn. Domestic hospital EBITDA net of service fee came in higher at Rs593m (Rs472m in Q4FY17) vs est of Rs 718m. Diagnostics EBITDA came at Rs390m (+18.4% margins) in line.
• FHL reported profit of Rs59m vs vs our est of Rs79m

Key positives: Strong healthcare services growth guidance; other income

Key negatives: Lower healthcare services EBITDAC

Impact on financials: We have reduced our FY18/19 EBITDA estimates by 10% / 11%

Valuations & view

Post a prolonged process of cleaning up its balance sheet through divestment of the international assets, FHL is now a nearly debt free and domestic focussed franchise. Post a strong operating performance in H1FY17, a dip in last 2-3 quarters has been disappointing but we remain hopeful on a turnaround. Mgt commentary adds to the comfort. FHL’s decision to buy 51% stake in FMRI and SB hospitals has boosted hospital services EBITDA. However, it has also sharply increased FHL’s debt burden yet again though mgt has guided to reducing debt through some non-core sales. The same needs to be seen. Given the maturity of FHL’s network, at 15-16% hospital EBITDAC and ~20% diagnostic EBITDA, there is significant scope to expand profitability. Maintain Outperformer with SOTP based price target of Rs197.