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Recovery ahead of expectations

Fortis’s Q2FY22 revenue/EBITDA beat estimate by 6%/29%. Return of surgical work at hospitals (56%; 41% in Q1FY22) led to record-high ARPOBs at ~INR18.7mn, translating to an impressive 16.7% margin. SRL clocked highest quarterly revenue with a healthy 25% margin.

Fortis’s all-round strength reinforces our conviction on its robust execution. Brownfield expansion and a sustained uptick across businesses should spur long-term growth. Continued focus on cost optimisation adds to positives. SRL remains a re-rating candidate given renewed focus on B2C penetration and expansion of collection centres and test mix. We are increasing FY22/23E EBITDA by 16%/10%. Retain ‘BUY’ with a revised TP of IN335 as we also roll over to Mar-23E.

Q2FY22 takeaways: All-round performance; margin impressive

Hospitals revenue of INR10.98bn +9% QoQ was driven by high ARPOBs and higher non-covid occupancy partially benefitting from pent-up demand. The ARPOBs stood at ~INR18.7mn, which should moderate once other specialties come in. Hospitals clocked 16.7% margin (~18% excluding startup costs), and the company expects positive impact from the upward revision in GIPSA rates and uptick in international patients. Management plans to add 250 beds in FY22 and also remains on track to add 1200–1300 beds over the next three years. SRL’s non-covid sales remained robust and margin at a healthy 25%, which the company expects to maintain.

Entering into long-term profitable growth phase

Fortis has embarked on an expansion journey along with turning around its lagging facilities. A sustainable turnaround in Fortis Escorts (now in 10-15% margin) remains to be seen, which should spur margin expansion. Addition of 1,200–1,300 beds in a phased manner over the next two–four years will fuel growth. The addition of new specialties such as interventional radiology and oncology, upgrading the existing infrastructure and disciplined cost control add to its positives. In diagnostics, increased specialty test mix and focused B2C penetration, improved home collection services and expansion of collection centres are likely to set off SRL on a growth path.

Outlook and valuation: Turning around; maintain ‘BUY’

The increased focus on health coupled with growth initiatives and B2C focus augur well for Fortis. The improved performance allays our concern over its execution capability. We are raising FY22/23E EBITDA by 16%/10%. Retain BUY/SO’ with a revised TP of INR335 (Mar-23E) (earlier INR305).

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