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Fortis Healthcare Limited delivered a strong quarterly performance with all round improvement in hospital and diagnostic business. Hospital business occupancy reached 64% during the quarter vs 57% in Q2 FY21 due to improvement in non-covid occupancy and patient returning to elective surgery. ARPOB/ALOS has improved sequentially from 1.49cr/3.86days to 1.58cr/3.81days.Diagnostic business has seen steady improvement with covid related tests revenue fell to 24% during the quarter. Diagnostic business conducted 6.67mn tests during the quarter vs 5.92mn tests in Q2FY21. Diagnostic business reported highest ever revenue and EBITDA during the quarter. We maintain buy recommendation on Fortis Healthcare with a target price of INR 215, valuing hospital business at 18x of FY23 EV/EBITDA and diagnostic business at 35x of FY23 EV/EBITDA.

Hospital business recovered well post Covid

Hospital revenue has improved as Covid infection has come down, with vaccine rolled out since mid-january business is expected to improve further. Hospital occupancy saw a steady improvement with encouraging increase in non-covid occupancy partly offset by reduction in Covid related occupancy. Overall occupancy improved to 64% (57% in Q2FY20), Non-Covid occupancy was at 46% in Q3 vs 38% in Q2 FY21. Patients returning for elective surgery treatments have led surgical volumes growth reflecting normalization; elective surgery revenues have grown 33% QoQ. ARPOB/ALOS has improved sequentially from 1.49cr / 3.86days to 1.58cr / 3.81days. Medical tourism revenue contributed 5.0% to total revenues as compared to 1.3% in Q2FY21 and 10.7% in Q3FY20. We have upgraded our forecast for revenue growth and EBITDA margin, leading to EBITDA of INR 7,393mn in FY23.

Diagnostic business continue to post strong growth

Diagnostic business has seen steady improvement, though Covid related tests revenue fell during the quarter. B2B and B2C, both segment reported strong growth during the quarter, while home collection revenue surged 141% YoY. Diagnostic business conducted 6.67mn tests during the quarter vs 7.45mntests in 3QFY20 and 5.92mn tests in Q2FY21.Covid test volumes i.e. RT-PCR tests for the quarter were 8.38 lakh versus 5.17 lakh (including JVs) in Q2FY21. The business continues to focus on improving the B2C:B2B revenue mix and executing on its channel and product strategy in order to further accelerate business momentum.

Sector tailwind will continue to support

Fortis Healthcare spend has strong tailwind to grow at 14-15% annually due to increase in spending power and rising lifestyles related diseases. India availability of doctor/bed is significantly lower to WHO benchmark. India healthcare spend at 3.6% of GDP way behind OECD developed and emerging economies. Diagnostic business is ripe for strong decadal growth as spend on preventive tests increases, organized players will gain market share. Diagnostics accounts for ~5% of the total health system cost, but it influences 95% of the remaining costs.70% of the medical decision on treatment as based on lab based results, ensuring sustainable growth for diagnostic industry.

Valuation and Outlook

We have upgraded our valuation for hospital business to18x of FY23 EV/EBITDA (Valued INR 162/share), due to linear business recovery post Covid, factoring in assets heavy nature of business. Diagnostic business continue to be valued at 35x FY23 EV/EBITDA (valued INR 51/share), is an asset light business with opportunity to market share gain and rising spending from customers. We have also considered 20% hold co discount in SRL, keeping in view of separate minority interest at the operating entity. We maintainBUY recommendation on with a target price of 215 (earlier TP 200).

Key Risks

Key Risks include government interfering with price charged by private hospital on critical medical treatment. Earlier, government has asked hospitals to lower prices for stent and knee transplant. Any untoward outcome from Supreme Court on IHH investment in Fortis poses key risks to our recommendation.

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