Fortis Healthcare rebounded with good Q1FY18 numbers post being impacted by demonetisation in previous quarter. Revenue and EBITDA grew by 3% and 38%, respectively. Price control on stents was absorbed and business was back to normal. Management believes that growth trajectory will improve to double digit in H2 and EBITDAC margin will expand to 16% by year end. Stock has corrected by 25% in the last 1 quarter hit by leverage issue at promoter’s end. It is now trading at 13.4x FY19E EBITDAC versus average sector multiple of 18x. We believe Fortis is at the cusp of unlocking significant value by demerging its 56% subsidiary SRL can unlock Rs 53/share. Maintain ‘buy’ with SoTP target price of Rs 230.
Revenue of hospital business (82% of total) grew 3%, despite being impacted by price control on stents and demonetisation. While occupancy declined y-o-y due to high base (71% versus 74% in Q1FY17), ARPOB grew 3% y-o-y. EBITDA grew 38% benefiting from lower BT fee post the FHTL transaction. Diagnostic business (18% of total) grew 10% y-o-y, driven by higher volumes, but margins remained under pressure due to product mix, higher promotion spends (20% higher) and staff cost.
Interest cost jumped 53% y-o-y due to 100% consolidation of FHTL’s CCDs and transaction related borrowings. Management expects growth to revive during rest of the year with strong double digit growth in hospital business in H2FY18. They reiterated focus on brown·field expansion, cost management and clinical excellence, hinging on which it expects to improve hospitals’ EBITDA margin to 20%.
They are also confident of improving SRL margins post the temporary blip in Q1FY18. Fortis has multiple levers in place to unlock significant value· partially unwinding capital structure of RHT, which we believe is inefficient, and by demerging SRL, its subsidiary, which can unlock Rs 53/share. We forecast hospital revenue CAGR of 11% to drive 18% EBITDAC CAGR over FY17·19. We envisage free cash flow generation FY19 onwards to lead to re·rating. We maintain ’BUY/SO’ with TP of Rs 230.