Despite the best-in-class contribution margins of 79%, as per our estimates, Fortis is among the lowest in terms of manpower productivity.
After two turbulent years, which ended with the ousting of Singh brothers from Fortis Healthcare (Fortis), IHH is in control of the board. Recently appointed MD & CEO Dr. Ashutosh Raghuvanshi has his task clearly cut out—to revive past peak performance and achieve industry-leading profitability.
Management’s first goal is to achieve 73-75% occupancy, from the slide to 65% over the past two years, by: i) adding new specialties like interventional radiology and oncology; ii) upgrading existing infrastructure; and iii) improving market share in the cash market. The company also intends to save upwards of `100 crore in operational efficiencies and lift EBITDA margin by about 600bps to 16% by FY22. Additionally, the upcoming open offer at `170 implies an upside potential of 30% to CMP and 75% to our `162 TP. Maintain ‘buy’.
Despite the best-in-class contribution margins of 79%, as per our estimates, Fortis is among the lowest in terms of manpower productivity. This is primarily due to personnel costs, which include clinicians’ cost, and other expenses, mainly promotional costs, which are also the highest among peers. Hence, the foremost task for management is to instill cost discipline, which is the focus area for the new CEO, who is targeting more than `100 crore in savings over the next 18–24 months. Cost savings, coupled with improvement in occupancy, would drive up margins by about 600 bps over next the three years.
Going forward, IHH expects to launch an open offer at INR170 per share after the Supreme Court hearing, which is expected in July 2019. An open offer at `170/share assuming 38% acceptance and a market price of `122 per share implies effective cost of INR93/share for an investor buying the share around current levels.
This implies a 31% upside potential to current market price and 75% to our target price.Over the past two years, the hospital industry had been impacted by extraneous factors such as demonetisation, pricing cap on stents and knee caps, implementation of the GST and an overall decline in public faith in the private healthcare system.