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Buy Fortis Healthcare Ltd For Target Rs.282

Solid performance, turnaround in progress

Fortis Healthcare (FHL) reported Q1FY22 performance better than estimates driven by business recovery across hospitals & diagnostics, continued focus on cost optimisation and incremental upside from covid-19 tests. We expect the performance improvement to continue in coming quarters and estimate strong growth in FY22E. Revenue grew 133% YoY to Rs14.1bn (I-Sec: Rs13.4bn) with hospitals growing 106% and SRL (diagnostics) growing 244%.

EBITDA margin improved 370bps QoQ led by higher revenue driving operating leverage and cost control. Management has taken steps to reduce personnel and S,G&A costs and the benefits are visible from last few quarters. We remain positive on growth recovery, cost optimisation efforts and potential operating leverage outlook. Retain BUY with a revised target price of Rs282/share (earlier: Rs268/share).

* Revenue recovery strong: Revenue grew at 2-year CAGR of 11.3% with a growth of 5.0% in hospitals and 15.3% in ex-covid diagnostics during the quarter. This hospital business growth was primarily driven by increase in occupancy, though the ARPOB was lower due to higher covid-19 patients. The recovery has begun and we expect the occupancy to remain above 65% in coming quarters.

Fortis will add 1,300 beds in existing hospitals over next few years which would add revenue growth. The diagnostic business growth was led by 26% contribution from covid-19 tests and strong recovery in non-covid tests (+33.3% QoQ). We estimate positive growth in non-covid diagnostics business to continue and expect a strong 60% growth in FY22E including acquisition of DDRC, Kerala.

* Cost optimisation initiatives driving benefits: EBITDA margin in Q1FY22 was at 19.5%, up 370bps QoQ mainly due to operating leverage from higher revenue and cost control. The company has taken various cost control measures to reduce personnel and S,G&A expenses and benefits are accruing. We believe the cost control measures along with gradual revenue growth recovery would help in improving EBITDA margin by 820bps over FY21-FY23E to 18.3%.

* Outlook: We raise revenue/EBITDA estimates by 3-4%/6-7% for FY22E-FY23E to factor in strong recovery in diagnostics and higher covid-19 tests revenue. We believe base business has normalised and estimate revenue and EBITDA CAGRs at 26.0% and 69.9% respectively over FY21-FY23E. Supreme Court judgement on the pending open offer by IHH is still awaited. Fortis is administering the approved vaccines currently at its hospitals which may drive further upside.

* Valuations and risks: We remain positive on the stock and maintain BUY considering healthy margin recovery and potential upside from vaccines. We raise our target price to Rs282/share based on EV/EBITDA of 20x hospital and 26x diagnostics business on FY23E EBITDA (earlier Rs268/share). Key downside risk: ongoing regulatory concerns with any adverse ruling in Supreme Court case and delay in margin recovery.

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