Stock corner: Cutting Fortis target price to Rs 159 on lower EBITDA estimate – Nomura

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Published: June 22, 2019 12:41:50 AM

The previous fiscal was challenging for FORH, with uncertainties surrounding ownership and tight liquidity conditions. FORH’s hospital business recorded an EBITDA decline of 33% in FY19.

The company’s financial performance, however, improved in 4QFY19 as liquidity eased following the takeover by IHH.

The previous fiscal was challenging for FORH, with uncertainties surrounding ownership and tight liquidity conditions. FORH’s hospital business recorded an EBITDA decline of 33% in FY19. The company’s financial performance, however, improved in 4QFY19 as liquidity eased following the takeover by IHH. In addition, ownership/leadership issues have now been resolved. We expect a gradual improvement in both the hospital and diagnostic businesses as asset utilisation improves. We forecast FY19-22F in hospital business revenue CAGR of 8.9% on the back of 5% CAGR in volumes.

We forecast a 670-bps improvement in hospital EBITDA margin by FY22F supported by higher volumes and 180bp contribution from synergies and cost control. We estimate SRL revenue to post 9-10% growth over the next three years vs 7% CAGR in the past three years.

SRL asset utilisation is much lower than peers; hence, higher volumes could drive expansion in EBITDA margins.

FORH’s capex intensity is likely to remain low as most of the future expansion likely lies within the existing set-up (brownfield expansion). FORH’s current operating beds at 3,780 comprise 86% of installed capacity and only 61% of potential capacity. Importantly, the brownfield expansion likelihood is high for the more profitable hospitals (e.g., FMRI, Noida, Shalimar Bagh, Mohali, Mulund and BG Road).

Thus, we think FORH is well positioned to capture future demand without significant investments. We cut our TP to Rs 159 based on 17x (unchanged) FY21F EV/EBITDA after factoring in the impact of a potential open offer. The lower TP is due to our new, lower EBITDA estimates. We cut FY20/21F earnings by 13%/33% as we factor in FY19’s lower base and a slower recovery.

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