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Hospitals strong; Diagnostics drag

Diagnostics – Margin drags again

Fortis Healthcare’s (FORH IN) Q3 revenue and EBITDA missed our estimates by 7% and 10%, respectively. The Hospitals segment performed marginally better than our estimates, while poor performance by the Diagnostics segment led to an overall miss.

Hospitals – Margin stabilizes; looking up

Revenue for the Hospital segment grew 9.6% YoY, marginally slower than our expectations, with near-equal contribution from occupancy and ARPOB. Sustained high margin (18% at EBITDA level) led to Q3 EBITDA 5% better than our estimate. We share management’s confidence of gradual margin improvement– we are building in 200bps margin improvement in the next few years.

Better clarity on large brownfield expansion plan

The management, for the first time, shared a detailed plan around its large, brownfield, 2,200-bed expansion plan in the next four years. Except for the 350 beds acquired at Medeor, Manesar, this is entirely brownfield. On the back of this expansion and better margin visibility, we raise our FY24E-26E EBITDA estimate for the hospital segment by 4-11%.   

Diagnostics: Performance, a concern; await Agilus Diagnostics’ IPO

Revenue for the Diagnostics business was flat YoY and EBITDA margin was 10% versus 17.3% in Q2FY24 and 19.7% in Q3FY23. The management refused to comment in detail given the limitations imposed by the proposed IPO of the entity but still mentioned that there are some one-off hits to margin. Still, we lower our EBITDA estimate by ~20% for FY24E-26E, on lower growth and margin assumptions.   

Valuations: Maintain Accumulate with higher TP of INR 488

We trim FY24E core EPS by 2% but raise FY25E-26E core EPS by 5-8%. FORH trades at 48.5x FY25E core earnings. We raise our TP from INR 390 to INR 488, which is 42x FY26E core EPS plus cash per share. High earnings growth from brownfield expansion and margin improvement in the hospital segment justify high multiple. Delay in bed additions and further cost escalation are key risks.

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