IGI Logo

Fortis Healthcare (FORH) reported strong quarter with Revenue/EBITDA growing 12%/26% YoY and beat our estimates by 3%/2% respectively. The Hospital business grew 14.4% YoY to INR 15.5 bn and was driven by 9.7% increase in ARPOBs and an increase in occupancy (67% vs. 64% in 1Q24). The company is on track to add 700 beds in FY25 through brownfield expansion (except Manesar), this will likely lead to faster ramp-up and improved profitability through operating leverage. In the diagnostics segment, Agilus reported flat revenue growth YoY at INR 3.4bn, management mentioned that FY25 will be a year of consolidation, post which industry level growth is the target. FORH will acquire the 31% stake from existing PE investors for INR ~18bn in the coming week and expect the transaction to close over the next two months. FORH’s focus on brownfield heavy expansion, cost optimisation across key hospitals and improving EBITDA/occupied bed make it an appealing proposition. We prefer FORH as our ‘top pick’ in the sector and value Fortis Hospitals at 25x Jun’26 EV/EBITDA and Agilus Diagnostics at 20x to derive a Jun’25 TP of INR 595. Maintain BUY.

* Hospital business: Revenue grew +14% YoY/+4% QoQ to INR 15.5bn. The main driver was 9.7% YoY increase in ARPOB. Medical travel grew 11% YoY to clock INR 1.3bn. ARPOBs came in at INR 24.1mn p.a. (vs INR 21.9mn YoY). The surgical mix was at 61% for the quarter and was similar YoY. Improvements in focus specialties, which grew 15.7% YoY and contributed 63% to overall hospital business revenues, were key to strong ARPOB performance. Occupancy for the quarter stood at 67% (vs. 64% in 1Q24). International Patient revenues grew 11% to INR 1.3bn vs INR 1.2bn in 1QFY24. The operating EBITDA margins for the quarter were sequentially lower on account of one-off expenses (0.5%) and change in specialty mix (2%). The management re-iterated margin guidance of 20% for the full year.

*  Expansion progress: The company is on track to add 700 beds in FY25. Key to which his the operationalisation of the Manesar facility (100 beds in 2Q).Further, the new tower (50 beds) at the Faridabad facilty is expected to be operational in 2HFY25, Phase 1 of the new tower in Noida is expected in operationalise in the same period. Apart from these three facilities, FORH will add 270 beds in FY25 across its BG Road, Shalimar Bagh, Anandpur, FMRI and NBV facilities. The new additions (except Manesar) are brownfield in nature this will likely lead to faster ramp-up and improved profitability through operating leverage.

* Diagnostics business: Agilus gross revenue was flat YoY at INR 3.4bn and EBITDA declined 17% YoY with margins contracting 16.1% (vs 19.4% YoY) due to rebranding expenses and one-off provisions. During the quarter, Agilus conducted 9.92mn tests (vs 9.95mn YoY, 9.61mn QoQ). Agilus’ B2C: B2B revenue mix stood at 54:46 for the quarter (vs 53:47 YoY). The company increased the share of wellness and specialised tests YoY which helped the company increase its average realisation per patient to INR 846 (vs. INR 829 YoY). However, FY25 will be a year of consolidation for the company as they continue promotional campaign (including discounted pricing) and rebranding exercise (INR 500mn expense in FY25) which will limit topline growth in FY25. They believe that FY26 onwards industry level growth can be achieved.

* Agilus put-option: The existing PE investors (IFC, NYLIM Jacob Ballas, Resurgence) will likely exercise their put option in the coming week, per the management. An independent firm, appointed by the company, values the 31% stake at INR 17.8bn. This stake will be debt funded and the management are comfortable with net debt at 1.5x EBITDA (post fund raise). The incremental interest cost from this fund raise could impact FY26/27 PAT by 6-8%. The transaction is likely to be completed over the next two months post which FORH will hold an 88% stake in Agilus.

* Key Financials:

* Revenue/EBITDA/PAT of INR 18.6bn/3.4bn/1.7bn grew 12%/26%/49% YoY and were +3% /+2%/+17% vs. our estimates.

* Gross margin was declined 30bps YoY to 75.6% (JMFe: 76.7%).

* EBITDA margin expanded 200bps YoY at 18.4% (vs. 16.4% YoY; JMFe: 18.5%).

* EPS was 2.2 (vs. 1.5 YoY).

* ARPOB for the quarter was INR 24mn (vs. INR 23mn QoQ: INR 22mn YoY).

* Occupancy was 67% (vs. 66% QoQ; 64%YoY).

* Agilus conducted 9.92mn tests was flat YoY primairily. Realisation per test stood at INR 341 (vs. INR 344 YoY)

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361