Buy Fortis Healthcare Ltd For Target 1,050 by Prabhudas Liladhar Capital Ltd
Lingering legal overhang
With the latest order by Delhi HC for forensic audit, we see no impact on Fortis Healthcare (FORH) operating trajectory, with capex, brownfield expansion plans likely to be unaffected as also cited by management. FORH–Gleneagles integration will continue to remain a potential future consideration. The timing of this event will be key monitorable (street was expecting closure in FY27) as it will increase IHH stake in FORH and thereby may put aside concerns of IHH commitment to increase stake in FORH. The forensic audit involves four key areas and six months’ timeframe to submit reports by auditor.
FORH reported hospital margin improvement by 530bps over FY23-FY26 to 22.2%, we see further scope for improvement aided by 1) improving case and payor mix, 2) cost rationalization initiatives and ramp-up of Manesar and Greater Noida unit, and 3) new brownfield bed additions. Additionally, we expect margin to expand further, driven by the recent acquisition of People Tree Hospital, Shrimann Hospital and the O&M agreement with Gleneagles. We expect FORH to clock 20% EBITDA CAGR ex ESOP over FY26-28E. At CMP, the stock is trading at 24.4x EV/EBITDA on FY28E, adjusted for Agilus stake and ESOP. Maintain ‘BUY’ rating with revised TP of INR 1,050/ share; valuing at 28x EV/EBITDA (30x earlier) for hospital segment on FY28E.
Forensic audit has four key areas:
(1) reconstruction of FHHPL’s shareholding evolution during FY16–18
(2) review of IHH/NTK’s acquisition of control in FORH and subsequent use of proceeds for the RHT Health Trust acquisition
(3) examination of any role of FORH/KMPs in the erstwhile promoters’ share-dissipation transactions
(4) role of the 17 banks/FIs involved in dissipation of shares in FORH
Tokyo litigation; IHH/NTK vs Daiichi Sankyo:
IHH’s Singapore subsidiary, Northern TK Venture (NTK), has sued Daiichi Sankyo in the Tokyo District Court, alleging that Daiichi obstructed IHH’s proposed acquisition of a controlling stake in FORH. NTK, which acquired ~31% of FORH in 2018, is seeking ~JPY200bn (~INR118.5bn) in damages, revised from JPY20bn, for alleged interference and related losses. The Tokyo court has completed hearings, with the judgment scheduled for 10 Sep’26. A favourable ruling for IHH/NTK could improve prospects for resolving the long-pending dispute and completing IHH’s ~26% open offer, while an adverse ruling could strengthen Daiichi’s position in the ongoing Indian proceedings. Resolution of the litigation remains a key overhang for IHH’s move to majority ownership of FORH and a potential catalyst for the stock.
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