Fortis Healthcare (FHL) reported a healthy Q3FY20 performance, albeit marginally lower than our estimates.
New management’s efforts are bearing fruit; ‘Buy’ maintained with TP of Rs 182
Fortis Healthcare (FHL) reported a healthy Q3FY20 performance, albeit marginally lower than our estimates. Revenue grew 6.0% y-o-y to Rs 11.7 bn
(I-Sec: Rs 12.0 bn) with hospitals growing 7.3% while SRL (diagnostics) grew moderately at 2.7%. Operational metrics continue to improve as hospital and SRL (diagnostics) margins grew 160bps and 90bps y-o-y, respectively. Adjusted Ebitda margin improved 1000bps y-o-y to 13.4%.
Company has shown consistent operational improvement in terms of occupancy and ARPOB at hospitals with Ebitda margin expansion in hospitals as well as diagnostics led by cost rationalisation and operating leverage. We believe these margins are sustainable and revenue growth would improve gradually with capacity addition. Maintain Buy.
ARPOB drives revenue growth: In a seasonally weak quarter, the company managed to maintain occupancy levels in its hospital segment and achieve 7.3% growth in ARPOB. Management has guided for gradual capacity addition. This would help improve the growth rate and we expect >12% (in line with peers) revenue growth from FY21 onwards. Revenue from diagnostics business (SRL) grew moderately at 2.7% y-o-y with slow ramp-up in B2C segment due to weak seasonality and contract expiration in B2B segments. We expect growth in SRL to pick up from FY21e onwards.
Outlook: The new management has been focusing on stabilising the operations and cost rationalisation, which are bearing fruit over the past six months. We expect business improvement to continue and estimate revenue, Ebitda and PAT CAGRs at 10.4%, 65.3% and 40.7%, respectively over FY19-FY22e. We expect 1200bps improvement in Ebitda margin (excluding BT cost). Supreme Court hearing on open offer (at Rs 170/share) by IHH is deferred to 16th March, 2020.
Valuations and risks: We marginally revise our estimates to reflect the current quarter. Maintain Buy and value stock at Rs 182/share based on EV/Ebitda of 16x hospital business and 20x SRL on Sep’21e. Downside risks are: ongoing regulatory concerns and delay in margin recovery.