MOSL: FORTIS HEALTHCARE (Buy)-Weak 4Q-margin improvement is key
​Fortis Healthcare: Weak 4Q; margin improvement is key
(FORH IN, Mkt Cap USD1.6b, CMP INR198, TP INR240, 21% Upside, Buy)
- FORH reported weak 4QFY17 results. Sales increased 3.2% YoY to INR11.2b (est. of INR11.3b). EBITDA came in at INR790m (est. of INR1.1b), as against loss of INR288m in 4QFY16, attributed to muted EBITDA margin at Hospital (5%) and SRL (20%). Demonetization, coupled with stent price control, led to the miss in numbers.
- Demonetization and stent price control impacted numbers: Hospital revenue stood at INR9.1b (+5%YoY) and EBIDTAC at INR1.1b with margin at 12% (-280bp YoY). Occupancy levels stood at ~70% v/s 73% in 3QFY17 and 71% in 4QFY16. Diagnostics EBITDA margin contracted 300bp YoY (flat QoQ) to 19.9% due to new lab addition, high marketing expense and change in business mix. Cardiac accounts for ~25% of sales, and stent price control impacted Hospital EBITDA by ~INR100-150m in 4Q. We expect stent price control impact to fade in coming quarters as volumes pick up and price increases in other related areas.
- In case of RHT buyback, TP will increase by >20%: At current market cap, RHT trades at 10.75x FY19E EV/ EBITDA, significantly below Hospital asset valuation of 20-22x forward EV/EBITDA. We believe the acquisition of RHT will increase EV of Fortis by ~INR60b. FORH owns ~30% stake in RHT and thus will have to buy back remaining stake (worth INR25b), for which it may look to raise fresh equity. Even after assuming dilution through fresh equity (share count increasing from 523m to 642m), our TP for FORH will increase from ~INR250 currently to INR300.
Fortis Healthcare Limited is an integrated healthcare delivery service provider. The Company is engaged in establishing, maintaining, operating, running, managing or administering hospitals, medicare, healthcare, diagnostic, health aids and research centers. The Company operates through the Clinical Establishments Division and the Medical Services Division. The Clinical Establishments Division owns, maintains and operates clinical establishments (being fully air conditioned institutions established, and specifically customized and duly fitted with all fixtures, fittings, certain medical equipment and infrastructure required for running and operating the hospitals), as well as provides services under outpatient division and radio-diagnostic services. The Medical Services Division undertakes the business of running the hospital operations, including in-patient services and emergency services. The Company operates its healthcare delivery services in India, Dubai, Mauritius and Sri Lanka.
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