We upgrade Fortis Healthcare to a Buy, with a revised target price of R215. We expect its strategy to quit its international business and focus on India would improve its profitability and cash flows. We expect revenue from its India business to register a 16% CAGR over FY15-17, with PAT turning positive in FY16 and touching R340 crore in FY17.
We expect revenue growth to be driven equally by its hospitals and diagnostics (SRL) businesses. Hospitals would be its key growth driver, where we expect a 16.1% revenue CAGR fuelled by 400 increase in the number of beds annually and a steady rise (10%) in average revenue per operating bed (ARPOB).
We expect strong improvement in its Ebitda margin and cash flows considering its re-focus on India (a high-margin business) and no major capex planned in the near to mid-term. No new greenfield project planned for the next three years would result in increasing maturing of beds and, thereby, expansion of margins and return ratios. We expect the Ebita margin to improve to 9.5% in FY17 (from 3.2% at present).
Ee upgrade our recommendation on Fortis from a ‘hold’ to a ‘buy’. We also raise our target price to Rs 215 (earlier Rs 150) based on 18x one-year-forward Ebitda and Rs 23 a share for the stake in RHT. Further, value un-locking in the SRL subsidiary (its diagnostics business) through an IPO or other means could provide the further upside.
For Updates Check Stock Market News; follow us on Facebook and Twitter