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Legal setback, but no fundamental change

The Supreme Court of India (SC) has announced its judgement in the Daiichi Sankyo-Fortis-IHH case. Excerpts from the judgement: (i) stay order on the open offer of 26% post Fortis-IHH deal in FY19 continues; (ii) pronounces jail term of six months for the Singh brothers; (iii) remands the issue to Delhi High Court (HC); and (iv) directs Delhi HC to consider a forensic audit for the Fortis-IHH deal. Fortis will seek legal advice on the matter.

As legal battle ensues, IHH remains the majority stakeholder (~31%) of Fortis and shall continue to operate the business as usual. Hence, we believe the stock holds fundamental value with recovery in growth, cost optimization and potential for operating leverage in both its verticals (hospitals and diagnostics).

Following are the key events that have transpired in the legal battle over the last few years:

* Outlook: We expect revenue and EBITDA CAGRs of 12.6% and 10.5% over FY22- FY24E for Fortis. However, EBITDA margins would likely remain stable at ~17-18% with declining contribution of covid-led revenues, largely offset by continuous growth in the hospital business, recovery in SRL (non-covid business), operating leverage and cost rationalisation.

* Valuations and risks: Maintain ADD with a target price of Rs299/share based on FY24E SoTP valuation. Key downside risks: Ongoing regulatory concerns with any adverse ruling in the case and delay in margin recovery.

Valuations

We expect EBITDA to register a CAGR of 10.5% over FY22-FY24E driven by revenue CAGR of 12.6%. Margin is expected to contract to ~18% by FY24E from 18.7% in FY22 with declining contribution of covid-led revenues, which will be largely offset by continuous growth in the hospital business, recovery in SRL (non-covid business), operating leverage and cost rationalisation. The stock currently trades at EV/EBITDA of 18.1x FY23E and 15.0x FY24E. We remain optimistic on the outlook considering strong growth in hospitals with increasing occupancy and ARPOB, inherent traction in the diagnostic industry for SRL, and costcontrol initiatives employed by the current management. Maintain ADD on the stock with a target price of Rs299/share based on SoTP valuation of FY24E.

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