Buy Fortis Healthcare Ltd For Target Rs.1,206 By JM Financial Services
Management meet: Expansion and operational efficiency to support earnings
We met with management of Fortis Healthcare (Fortis) represented by MD & CEO Dr Ashutosh Raghuvanshi and CFO Mr Vivek Kumar Goyal. The company continues to benefit from sustained efforts to improve operational efficiency along with brownfield-led bed expansion. Fortis intends to increase capacity to about 10,000 beds over four–five years (M&A + brownfield), from currently ~6,000 beds, which includes addition of Gleneagles Hospitals. The company aims to bring the profitability of Gleneagles hospitals in line with the Fortis network within 18 months while any merger-related decision will be made by IHH Healthcare, if required. Similar to the hospitals business, Agilus Diagnostics is returning to double-digit growth, which the company expects to drive by increasing market share in existing markets. Overall, we maintain FY26–28E revenue/EBITDA/PAT CAGR of 18%/24%/33%. We believe the benefits of brownfield expansion and the potential Gleneagles merger are not yet fully reflected in the current valuation while the company is on track to improve EBITDA/bed to about INR 7mn by FY28E, on a par with Max Healthcare Institute. We roll forward the SotP-based valuation to Mar-27E, yielding a TP of INR1,206 (earlier INR1,093 on Dec-26E).
* Growth strategy – Preference for brownfield and M&A: The company continues to prioritise acquisitions and brownfield expansion over the O&M model as its preferred growth strategy. Management believes O&M arrangements carry higher operational risks since control over the P&L is often limited. While the company had earlier experimented with a leased model in Gurgaon for nearly two years, the focus is now shifting away from such structures. Instead, the company considers brownfield expansions and acquisitions as more predictable and reliable avenues for scaling up capacity and strengthening market presence
* Gleneagles integration plan: The O&M structure for Gleneagles was undertaken due to the presence of a common promoter. Management has set a target to bring profitability of the Gleneagles hospitals in line with Fortis’s over the next 18 months. Currently, some infrastructure and operational challenges are affecting performance at these hospitals and efforts are underway to address the issues. The Mumbai Hospital has not yet been included in the integration plan due to the presence of a minority investor, though this could be evaluated in the future. A potential merger of Gleneagles with Fortis remains an option, but the final decision will be made by IHH.
* Debt position and capex plan: The company currently carries debt of about INR 26bn, which management considers comfortable given its operating performance. The debt-to-EBITDA ratio remains healthy and FCF has been improving. The company continues to remain open to brownfield expansion opportunities as part of its growth strategy. Annual capex is expected to be about 50% of EBITDA, translating to roughly INR 10bn, with approximately 60% allocated toward growth initiatives and the remaining 40% toward maintenance capex.
* Cost inflation outlook: Human resource costs across the hospital industry are seeing upward pressure. However, management believes the impact can be managed through improvements in case mix, better payor mix and periodic price revisions. As a result, the company does not expect cost inflation to become a major constraint over the next three–four years
* Insurance pricing discussions: The company is currently engaged in discussions with the insurance regulator IRDA regarding pricing structures. Management does not expect any immediate price regulation, as such measures may not be legally sustainable. Parallel discussions with insurance companies are underway to address pricing-related concerns.
* Operational and Digital Initiatives: Digital channels are becoming increasingly important for hospital operations and patient engagement. The company is focusing on improving operational efficiency and enhancing the patient experience through technology investments. These initiatives include improving post-discharge engagement, enabling faster response times and optimising hospital operations such as bed occupancy and surgical throughput. Overall, the digital initiatives are aimed at improving both productivity and clinical outcomes.
* Geopolitical impact on international patients: International patients currently contribute 8–9% to Fortis’s revenues. Patient inflows from Eastern Africa remain stable supported by direct flight connectivity from countries such as Kenya and Ethiopia. While there could be some moderation in patient inflows from parts of the Middle East or Africa due to geopolitical factors, management believes this could be partially offset by increased patient inflow from Bangladesh.
* CGHS rate revision impact: The recent revision in CGHS rates is broadly positive for the company. However, the overall financial impact is expected to remain limited as some areas, such as chemotherapy pricing, may see adverse adjustments that offset part of the benefit.
* Agilus Diagnostics’ growth plan: Agilus Diagnostics is targeting growth of high single-digit to low teens. The strategy focuses on strengthening presence in key markets such as Maharashtra, Delhi, Kolkata, Punjab and Bangalore. Expansion will primarily involve adding more patient service centres and collection centres to deepen penetration in these regions.
* Cluster-based M&A strategy: The company is pursuing a cluster-based acquisition strategy, focusing on opportunities in existing geographic clusters. This approach enables better productivity by allowing hospitals in the same cluster to share resources such as clinical talent, operational infrastructure and pharmacy networks. Strong clusters already exist in markets such as the Delhi NCR and Punjab, wherein management has begun realising operational synergies.
* IHH commitment to India: IHH continues to be committed to the India business, which is currently the fastest-growing market in its global portfolio. The strong growth outlook in the Indian healthcare market is a key driver behind this commitment. IHH will also become eligible to make further investments in the company once the six-month mandatory open offer period expires.
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SEBI Registration Number is INM000010361
